Best-estimate claims reserves in incomplete markets (Q2356237)

In the Solvency II framework, one has to find best estimates for the reserves. But there is no directive telling how to give these estimates in an incomplete market. The authors give two approaches to best prices: local risk minimisation and global risk minimisation. They model a financial market in discrete time, and consider the insurance risk as a financial obligation. For local risk minimisation, the expected square of a loss/gain is minimised over all portfolios in the next trading interval. For global risk minimisation, one minimises the expected square of a loss/gain in the whole multi-period trading interval over all possible portfolio strategies. If a cash-flow with payments at different times has to be met, it is not clear how global risk minimisation has to be generalised. The local approach has a natural extension. That is, in each trading period one minimises the sum of the payment due at the end of the period and the reserves for the future liabilities. It turns out that one just has to add the single reserves of the liabilities. The best-estimates have a simple representation using state-price deflators. A special model is considered. Two independent filtrations are used for the financial market and for the insurance market. A subfiltration is used for hedging, where the insurance market will be observed later than the financial market.