The main business of Life
Insurers is Long Term contractual obligations with a typical lifetime of 20 - 40
years. Therefore, the Solvency metric is defined by the adequacy of capital to
service the cash flow requirements arising from the said obligations. The main
component inducing volatility in Capital is market sensitive Assets, such as
Bonds and Equity. Bond and Equity prices in Sri Lanka are highly sensitive to
macro-economic elements such as investor sentiment, political stability, policy
environment, economic growth, fiscal stimulus, utility environment and in the
case of Equity, societal sentiment on certain companies and industries.
Therefore, if an entity is to accurately forecast the impact on solvency
through asset valuation, the impact of macro-economic variables on asset
pricing must be modelled mathematically. This paper explores mathematical,
actuarial and statistical concepts such as Brownian motion, Markov Processes,
Derivation and Integration as well as Probability theorems such as the
Probability Density Function in determining the optimum mathematical model
which depicts the accurate relationship between macro-economic variables and
asset pricing.
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