Cash-Flow Valuation and Value at Risk |
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| Authors: | Allan Brender FSA FCIA PhD |
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| Institution: | 1. Risk, Finance, &2. Insurance Consulting , William M. Mercer Limited , BCE Place, 161 Bay Street, P.O. Box 501, Toronto, Ontario, Canada M5J 2S5 E-mail: allan.brender@mercer.ca |
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| Abstract: | The cash-flow valuation method (CFVM) has been developed in Canada for the valuation of insurance company annuity products. Its range of application is expected to be extended shortly to the valuation of most other life insurance company products. The CFVM is based on the use of “best-guess” assumptions, supplemented by specific provisions for adverse deviations. In this paper, special attention is paid to the calculation of the provision for adverse deviations with respect to the interest rate risk. We show that the determination of this provision is the analog for life insurance and annuity policy liabilities of the calculation by banks of Value at Risk (VaR) with respect to portfolios of securities held for trading. |
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