Modelling Asset Variability in Assessing Insurer Solvency

A considerable amount of research in the development of methods to evaluate the probability that an insurer will become insolvent has been performed by the British Solvency Working Party and the Finnish Working Patty on solvency. The result of the work of each of these two groups is a comprehensive model which simulates the future cash flows of an insurance company. Procedures to model the variability of asset values and asset cash flows are an integral part of these models. In this paper the models used by the British Working party and the Finnish Working Party to model asset values and asset cash flows will be introduced. The paper will describe how these models can be applied in the United States. Application of the models will be illustrated using historical stock and bond return data.