Taking the One-Year Change from Another Angle

35 Pages Posted: 25 Jun 2016

See all articles by Michel M. Dacorogna

Michel M. Dacorogna

PRS Solutions

Alessandro Ferriero

SCOR Global P&C SE Reinsurance (Zurich Branch)

David Krief

Université Paris VII Denis Diderot - Laboratoire de Probabilités et Modèles Aléatoires (LPMA)

Date Written: June 21, 2016

Abstract

We study the dynamics of the one-year change in P&C insurance reserves estimation by defining a simple but realistic process that leads to the ultimate. The random variable at ultimate is supposed to follow a binomial distribution. We compute explicitly various quantities of interest, in particular the Solvency Capital Requirement for one year change and the Risk Margin using the characteristics of the underlying model. We then compare them with the capital obtained with existing risk estimation methods. In particular, our study shows that if the assumptions on the process are misspecified, the traditional methods can lead to very wrong results. This is due to a multiplicative error assumption. Instead, our model assumes an additive error propagation as is often encountered in practice.

Keywords: one-year risk, stochastic process, chain ladder, Solvency II, Solvency Capital Requirement

JEL Classification: c15,c52,g22

Suggested Citation

Dacorogna, Michel M. and Ferriero, Alessandro and Krief, David, Taking the One-Year Change from Another Angle (June 21, 2016). Available at SSRN: https://ssrn.com/abstract=2799286 or http://dx.doi.org/10.2139/ssrn.2799286

Michel M. Dacorogna (Contact Author)

PRS Solutions ( email )

Raingässli 1
Zug, Zug 6300
Switzerland

Alessandro Ferriero

SCOR Global P&C SE Reinsurance (Zurich Branch) ( email )

Zurich
Switzerland

David Krief

Université Paris VII Denis Diderot - Laboratoire de Probabilités et Modèles Aléatoires (LPMA) ( email )

5 Rue Thomas Mann
Paris, 75013
France

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