This thesis is divided into two parts. The first part involves the new solvency directive for the insurance industry in the European Union, Solvency II, which will be implemented in 2012. The second part involves valuation strategies under the new directive.
First, I investigate the concept of solvency and introduce the current solvency directive, the Solvency I directive. Then I investigate the Solvency II directive especially for life insurance undertakings within the European Union, which Norway have agreedto follow. I describe the technical specifications of the Solvency II directive, including its definitions and formulas, and discuss modifications which have to be implemented for Norwegian life insurance undertakings.
The Solvency II directive requires that the undertakings valuate both the asset side, and liability side in a market consistent way. I therefore investigate a method of achieving a market consistent valuation of both sides. This method links the insurance cash flow to financial instruments. Then by finding the market values of the financial instruments, I can find the value of the insurance portfolio.