Economic Valuation Models for Insurers

Economic Valuation Models for Insurers

David F. Babbel, Craig Merrill
Financial Services

Much of the literature on valuation has focused on the strengths and shortcomings of the various models. Some of the work has addressed larger questions, but in our view it is useful and necessary to provide a taxonomy of approaches and evaluate them in a systematic way in accordance with how well they achieve their aims.

In this paper from the the North American Actuarial Journal (Vol. 2, No. 3), we focus primarily on the economic valuation of insurance liabilities, although we do address some valuation issues for assets. We begin by defining insurance liabilities in Section I. Next, in Section II we discuss the criteria for a good economic valuation model and provide a taxonomy of valuation models in Section III. In Section IV, we examine insurance liabilities in the context of this taxonomy and identify the minimum requirements of an economic valuation approach that purports to value them adequately. An illustration of the application of a modern valuation model is given in Section V. We conclude in Section VI by discussing some limitations of our analysis and offer some recommendations for implementation.

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