Financial technique that converts future cash flows to their equivalent present value, by dividing by a compounding factor.
Discounting is the inverse of compounding: it calculates the present value (PV) of a future cash flow F expected in n periods at discount rate r. Formula: PV = F / (1 + r)^n. It rests on the principle that 1 EUR in the future is worth less than 1 EUR today (time preference, inflation risk, opportunity cost). In actuarial science, claims reserves may be discounted to reflect the time value of money (required under Solvency II). In life insurance, unit-linked liabilities and annuities are discounted at the technical rate. The choice of discount rate is critical: a higher rate reduces reserves but increases risk if future rates turn out lower.
Expected claim payment in 5 years: 1,000,000 EUR. Discount rate 3%: PV = 1,000,000 / 1.03^5 ≈ 862,609 EUR. The discounted reserve is 137K EUR below the undiscounted reserve.
discounting, valeur actuelle, present value, valeur actualisée, PV