The Valuation of Assets and Liabilities of (Re)Insurance Undertakings Under Solvency II

The core business of (re)insurance undertakings is to pool funds from policyholders and channel them to financial markets. In this context, the assessment of the financial condition and the overall solvency of these undertakings is directly associated with the level of assets held to fulfil their promises, as well as with the level of those promises. The valuation of assets and liabilities of (re)insurance undertakings is at the heart of Solvency II. The objective of this paper is to discuss the underlying principles and assumptions of valuation under Solvency II and to analyse concepts such as the best estimate and the cost-of-capital risk margin, hedgeable and non-hedgeable risks, market value of risk, as well as economic capital and expected and unexpected losses