The Fair Value of Insurance Liabilities

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Edward McEllin, Australia
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Summary:
The fair value of insurance liabilities is currently a highly disputed topic around the globe, particularly among US property and casualty insurers. Interest in the topic was sparked by the release of FAS115 [1993], a ruling which resulted in inconsistent accounting measurement of assets and liabilities in the USA. While assets are measured at market value, liabilities are recorded at historical cost under FAS115.~This paper seeks to review the concept of fair valuation from a life insurance perspective. Two methods of fair valuation are considered: the embedded value methodology and the options pricing technique. Although algebraically reconcilable, the practical equivalence of the two methods is questioned. In considering the two methodologies, consideration is given to the treatment of risk, the choice of discount rate and the impact of an insurer’s credit rating in a fair valuation.
 
Date: 1 June - Time: 11:00 to 12:30 - Room: 341
Theme: 1.B. Solvency measurements and asset-liability management