Risk Margin for a Non-Life Insurance Run-Off

The final version of this article has appeared as: Wuethrich M. V., Embrechts, P., Tsanakas, A. (2011), 'Risk margin for a non-life insurance run-off', Statistics & Risk Modeling, 28, p. 299-317.

Posted: 15 Aug 2011 Last revised: 3 Jan 2014

See all articles by Mario V. Wuthrich

Mario V. Wuthrich

RiskLab, ETH Zurich

Paul Embrechts

Swiss Federal Institute of Technology Zurich; Swiss Finance Institute

Andreas Tsanakas

City University London - Cass Business School

Date Written: August 15, 2011

Abstract

For solvency purposes insurance companies need to calculate so-called best-estimate reserves for outstanding loss liability cash flows and a corresponding risk margin for non-hedgeable insurance-technical risks in these cashflows. In actuarial practice, the calculation of the risk margin is often not based on a sound model but various simplified methods are used. In the present paper we properly define these notions and we introduce insurance-technical probability distortions. We describe how the latter can be used to calculate a risk margin for non-life insurance run-off liabilities in a mathematically consistent way.

Keywords: claims reserving, best-estimate reserves, run-off risks, risk margin, market value margin, one-year uncertainty, claims development result, market-consistent valuation

JEL Classification: G12, G18

Suggested Citation

Wuthrich, Mario V. and Embrechts, Paul and Tsanakas, Andreas, Risk Margin for a Non-Life Insurance Run-Off (August 15, 2011). The final version of this article has appeared as: Wuethrich M. V., Embrechts, P., Tsanakas, A. (2011), 'Risk margin for a non-life insurance run-off', Statistics & Risk Modeling, 28, p. 299-317.. Available at SSRN: https://ssrn.com/abstract=1909742 or http://dx.doi.org/10.2139/ssrn.1909742

Mario V. Wuthrich (Contact Author)

RiskLab, ETH Zurich ( email )

Department of Mathematics
Ramistrasse 101
Zurich, 8092
Switzerland

Paul Embrechts

Swiss Federal Institute of Technology Zurich ( email )

ETH-Zentrum
CH-8092 Zurich
Switzerland

Swiss Finance Institute

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4
Switzerland

Andreas Tsanakas

City University London - Cass Business School ( email )

106 Bunhill Row
London, EC1Y 8TZ
United Kingdom

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