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2 - Technical reserves and market values

Published online by Cambridge University Press:  13 August 2009

Thomas Møller
Affiliation:
PFA Pension, Copenhagen
Mogens Steffensen
Affiliation:
University of Copenhagen
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Summary

Introduction

This chapter deals with some aspects of valuation in life and pension insurance that are relevant for accounting at market values. The purpose of the chapter is to demonstrate the retrospective accumulation of the technical reserve and to formalize an approach to prospective market valuation. We explain and discuss the principles underpinning this approach.

The exposition of the material distinguishes itself from scientific expositions of the same subject, see, for example, Norberg (2000) or Steffensen (2001). By considering firstly the retrospective accumulation of technical reserves, secondly the prospective approach to market valuation and thirdly the underpinning principles, things are turned somewhat upside down here. The aim is to meet the practical reader at a starting point with which he is familiar.

The terms prospective and retrospective play an important role. The idea of a liability as a retrospectively calculated quantity needs revision when going from the traditional composition of the liability to a market-based composition of the liability. This is an important step towards comprehending both the market-valuation approach presented here and the generalization and improvement hereof, taking into consideration more realistic actuarial and financial modeling.

Throughout the chapter, we consider all calculations pertaining to the primary example of an insurance contract. This primary example is an endowment insurance with premium intensity π, pension sum guaranteed at time 0, ba (0), and guaranteed death sum, bad. Bonus is paid out by increasing the pension sum.

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Publisher: Cambridge University Press
Print publication year: 2007

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