On the Market-Consistent Valuation of Health Insurance Liabilities

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The paper is primarily focused on insurance liability valuation under Solvency II regulation, not on trading strategies or market microstructure. However, it has tangential relevance to quantitative finance through its use of stochastic interest rate modeling, the foreign-currency analogy for inflation, zero-coupon bond pricing, and the construction of basis financial instruments (real zero-coupon bonds combined with interest rate swaps). The valuation portfolio concept and efficient Monte Carlo methods could be of interest to practitioners in insurance-linked securities or structured products. The paper does not address trading, market making, or algorithmic execution.

Implementation requires expertise in: (1) stochastic interest rate and inflation modeling with equivalent martingale measures, (2) actuarial mathematics including the equivalence principle and technical provisions, (3) Monte Carlo simulation for pricing basis financial instruments, (4) Solvency II regulatory framework. The decomposition itself is mathematically elegant but requires careful handling of the inductive coefficient calculations (Proposition 5.2). The main computational advantage is realized for large portfolios where the decomposition avoids per-policy scenario tracking. Handling premium adjustment caps (which break the decomposition) adds significant complexity.

The paper is fully theoretical with complete mathematical proofs and derivations. All equations, propositions, and corollaries are self-contained. However, no code, numerical experiments, or real data are provided. Reproduction requires implementing the stochastic interest/inflation models and Monte Carlo simulations independently. The toy model (Section 2) and the decomposition framework (Section 5) are fully specified mathematically, enabling theoretical reproduction. Figure 6.1 uses illustrative parameters but no dataset is provided.