In chapter 36 on valuing liabilities, the assertion is made that an adjustment for risk can be made when valuing a liability by either adjusting the future cashflow amounts or adjusting the risk discount rate. This adjustment is said to depend on:
amount of the risk (which I assume is subjective figure)
cost of the risk implied by market risk preferences
I'm struggling to wrap my head around that second part.
I'm thinking more along the lines of an insurer pricing a new product and then valuing the liability of this new book of business based on some initial assumptions. After some time, the experience might mean that the cost of insurance has actually changed. this could for example be that the market becomes less risk averse, which means that less insurance is being taken out. This will then be reflected by a new (likely lower) liability value being calculated. This also all assumes that we are reporting only fair values.
Is this a reasonable interpretation?