Measuring and Managing the Economic Risks and Costs of With-profits Business

The approaches to liability valuation, assessment of prudential capital and measurement of profit for life offices are undergoing radical change. A common thread runs through all of these proposed changes ö each change represents a move away from traditional actuarial approaches towards a more economically coherent, market-consistent approach. These changes should encourage a general improvement in the life industry's risk management processes. However, they will come at a cost. The measurement of the economic risks generated by the complex guarantees written by life offices is far more difficult than applying the latest resilience test equity fall. This will require a step change in the sophistication of life offices' risk and capital measurement and management know-how. The measurement of value, risk and capital will soon demand the application of `stochastic' modelling tools. In this paper, we explore some of the issues raised by the application of these approaches to the valuation and risk management of with-profits business.