Analytical Validation Formulas for Best Estimate Calculation in Traditional Life Insurance

TL;DR

This paper derives model-independent formulas to validate best estimate calculations in traditional life insurance, providing practical tools for model validation and a lower bound for future discretionary benefits.

Contribution

It introduces analytical validation formulas for best estimate calculation and a lower bound for future discretionary benefits applicable across portfolios.

Findings

Formulas are model-independent and applicable to any portfolio under run-off assumptions.

The lower bound for future discretionary benefits is demonstrated using real insurance data.

The formulas can be used for practical validation of Solvency II best estimate models.

Abstract

Within the context of traditional life insurance, a model-independent relationship about how the market value of assets is attributed to the best estimate, the value of in-force business and tax is established. This relationship holds true for any portfolio under run-off assumptions and can be used for the validation of models set up for Solvency~II best estimate calculation. Furthermore, we derive a lower bound for the value of future discretionary benefits. This lower bound formula is applied to publicly available insurance data to show how it can be used for practical validation purposes.