June 13th, 2011, 6:33 pm
QuoteOriginally posted by: MarsdenDifferent way of going about things, but should lead to same answers when asking the same questions. Actuarial is generally p(x,0)=E(x,t)*v(x,t) as opposed to (essentially) having building block prices based on derivatives with respect to time and an underlying. Actuarial methods are usually sloppier about including risk premium in interest rates, and in practice actuarial methods are generally used to produce prices based upon assumptions while financial mathematics tends to take prices as inputs.Samsaveel, look at Marsden answer. Simply speaking the acturial way is to price assets and insurance policies as discounted cashflow and build some premium into. Thus it is mainly cash flow mapping subtracting costs. The current value of assets and liabilities were secondary as long as servicing insurance policies is working. However, in the near future all the other financial risks have to be considered in Solvency II (=a good demonstration that many rationals from the financial world are not working well for insurance supervisory = a big field experiment). the difference is that insurance firms need to value insurance policies (life, health, casualty) and banks financial contracts (loans, bonds, etc.) on their liability side. you rarely sell your insurance policies thus it is highly illiquid, long dated, or more like "real options". Risk are simply linked to the things you are insuring (actions and being of people, nature, etc.) and to lesser degree to market fluctations, bankcruptcy, funding risk or whatever (What happens if an insurance firm is closed? It will run off...).