Calculating Loss Reserves in a Multistate Model for Income Insurance

Abstract:     
This article proposes a method to estimate a sufficient loss reserve for insurance companies, such that they can cover income insurance claims filed by self-employed workers. The first step involves a multistate mixed proportional hazards (MPH) approach to model self-employed workers’ disability durations, together with changes in their health conditions during their incapacity. Combining the multistate MPH model with Monte Carlo simulations reveals risk-based estimates of loss reserves for claim portfolios. To assess the quality of the estimated loss reserves, this study quantifies the amount of process and parameter uncertainty involved with the estimates and performs an out-of-sample prediction exercise.

Number of Pages in PDF File: 47

Keywords: multistate model, income insurance, loss reserves, disability duration, parameter and process uncertainty, proportional hazards model

JEL Classification: I19, C41, G22

working papers series