1. Practical valuation of long-term guarantees in inactive financial markets
- Author
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Norbert Quapp, Jens Winter, Nils Dennstedt, Thorsten Pauls, Holger Bartel, Jürgen Bierbaum, Karol Musialik, Tobias Dillmann, Wolfgang Engel, and Marcus Keller
- Subjects
Statistics and Probability ,Economics and Econometrics ,Solvency ,Actuarial science ,business.industry ,media_common.quotation_subject ,Mathematical finance ,Financial market ,Implied volatility ,Interest rate ,Economics ,Yield curve ,Statistics, Probability and Uncertainty ,business ,Financial services ,media_common ,Valuation (finance) - Abstract
In this paper we address certain issues in the valuation of long-term (insurance) guarantees from a practical point of view. These issues arise, because markets are incomplete or inactive. We provide a general, arbitrage-free valuation approach in this context and discuss the following topics in more detail: extrapolation of interest rates, treatment of interest rate spreads and counter-cyclical measures in distorted markets. By deriving solutions from a practitioner’s point of view this paper aims to contribute to an effective regulation under Solvency II. Moreover, we hope to provide a starting point for an in-depth academic analysis of these problems.
- Published
- 2014