Solvency capital requirement for insurance products via dynamic cash flow matching under lattice models

摘要

Purpose - The purpose of this paper is to propose a framework based on cash flow matching for computing the Solvency Capital Requirement under Solvency Ⅱ. Design/methodology/approach - The time horizon of the insurance liabilities is typically longer than the maturities of bonds available in the market. With the assumption that a collection of bonds will be available for purchase in the future, the authors study the cash flow matching program under interest rate lattice models. Findings - The solution can be interpreted as the worst-case cost and the economic capital can be found accordingly. Originality/value - The paper illustrates the methodology of computing the Solvency Capital Requirement using a dynamic cash flow matching framework under lattice models. The proposed method is particularly useful for insurance products with a typical long time horizon when most duration matching techniques are not easily applicable.