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ALLOWING FOR ASSET, LIABILITY AND BUSINESS RISK IN THE VALUATION OF A LIFE OFFICE

S. J. B. Mehta
Journal of the Institute of Actuaries (1886-1994)
Vol. 119, No. 3 (DECEMBER 1992), pp. 385-455
Stable URL: http://www.jstor.org/stable/41141076
Page Count: 71
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Since scans are not currently available to screen readers, please contact JSTOR User Support for access. We'll provide a PDF copy for your screen reader.
ALLOWING FOR ASSET, LIABILITY AND BUSINESS RISK IN THE VALUATION OF A LIFE OFFICE
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Abstract

The theme of this paper is that life office valuation can be based on an analysis of the characteristics of the individual cash flows which form the net cash flow of an office. These cash flows may be compared with the income and gains derived from traded securities such as equities and gilts in order to assess their values. Standard asset pricing models of modern portfolio theory enable one to allow for lapse, mortality and other risks. The methodology outlined in the paper is illustrated by reference to the very different types of revenue generated by non-profit, unit-linked and with-profits products. It is also used, in the valuation of future new business, to allow for the risks that expected sales volumes and profitability levels will not be achieved. The paper provides a rationale for the choice of discount rates used in the valuation of a life office and facilitates the comparison of life office and alternative investment opportunities.

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