Stochastic Dynamics of Asset-Liabilty Ratios for Insurance Companies

J. Mukuddem-Petersen, M.A. Petersen, and A.B. Tau (South Africa)


Stochastic Models; Insurer Assets, Liabilities and Share holders’ Equity.


Our paper describes a procedure for computing the asset-liability ratio of an insurance company in a stochastic dynamic setting. In essence, this ratio com pares the assets that an insurer holds to the level of its li abilities. In particular, our models incorporate market and claims risk that involve the potential losses resulting from unfavourable returns from invested assets in the financial market and the uncertainty associated with the fluctuation in claims from the insurer, respectively. In addition, we provide a stylized example for insurer risk-taking that can be used to compare the regulation of insurers with low and high-risk portfolios. The accompanying discussion is done within the context of proposed new solvency regu lation for the European insurance industry. Throughout, the aforementioned example, realistic situations associated with the eliciting of equity, capital constraints, social value and shirking incentives are brought to bear on the overall analysis of insurance risk.

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