Insurance valuation: A two-step generalised regression approach

DOI10.1017/ASB.2021.31zbMATH Open1484.91371arXiv2012.04364OpenAlexW3112406974MaRDI QIDQ5067889FDOQ5067889

Authors: Karim Barigou, Valeria Bignozzi, A. Tsanakas 

Publication date: 4 April 2022

Published in: ASTIN Bulletin (Search for Journal in Brave)

Abstract: Current approaches to fair valuation in insurance often follow a two-step approach, combining quadratic hedging with application of a risk measure on the residual liability, to obtain a cost-of-capital margin. In such approaches, the preferences represented by the regulatory risk measure are not reflected in the hedging process. We address this issue by an alternative two-step hedging procedure, based on generalised regression arguments, which leads to portfolios that are neutral with respect to a risk measure, such as Value-at-Risk or the expectile. First, a portfolio of traded assets aimed at replicating the liability is determined by local quadratic hedging. Second, the residual liability is hedged using an alternative objective function. The risk margin is then defined as the cost of the capital required to hedge the residual liability. In the case quantile regression is used in the second step, yearly solvency constraints are naturally satisfied; furthermore, the portfolio is a risk minimiser among all hedging portfolios that satisfy such constraints. We present a neural network algorithm for the valuation and hedging of insurance liabilities based on a backward iterations scheme. The algorithm is fairly general and easily applicable, as it only requires simulated paths of risk drivers.

Full work available at URL: https://arxiv.org/abs/2012.04364

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zbMATH Keywords

quantile regressionSolvency IImarket-consistent valuationdynamic risk measurementcost-of-capital

Mathematics Subject Classification ID

Nonparametric regression and quantile regression (62G08) Actuarial mathematics (91G05) Applications of statistics to actuarial sciences and financial mathematics (62P05)

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Cited In (4)

• Parametric expectile regression and its application for premium calculation
• The 3-step hedge-based valuation: fair valuation in the presence of systematic risks
• New challenges in the interplay between finance and insurance. Abstracts from the workshop held October 1--6, 2023
• Two-step risk analysis in insurance ratemaking

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