On the Lifetime and One-Year Views of Reserve Risk, with Application to IFRS 17 and Solvency II Risk Margins
31 Pages Posted: 15 Mar 2018 Last revised: 30 May 2019
Date Written: March 16, 2018
This paper brings together analytic and simulation-based approaches to reserve risk in general (P&C) insurance, applied to the traditional actuarial view of risk over the lifetime of the liabilities and to the one-year view of Solvency II. It also connects the lifetime and one-year views of risk. The framework of the model in Mack (1993) is used throughout, although the results have wider applicability.
The advantages of a simulation-based approach are highlighted, giving a full predictive distribution, which is used to estimate risk margins under Solvency II and risk adjustments under IFRS 17. We discuss methods for obtaining capital requirements in a cost-of-capital risk margin, and methods for estimating risk adjustments using risk measures applied to a simulated distribution of the outstanding liabilities over their lifetime.
Keywords: Stochastic Reserving, General Insurance, Bootstrap, Chain-Ladder, Prediction Error, Mean Square Error of Prediction, Cost-of-Capital, Risk Margin, Risk Adjustment, Solvency II, IFRS 17, Value-at-Risk, Tail Value-at-Risk, One-Year View, Proportional Hazards Transform, Coherent Risk Measure
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