Property liability insurance loss reserve ranges based on economic value
Download
1 / 23

Property-Liability Insurance Loss Reserve Ranges Based on Economic ... - PowerPoint PPT Presentation


  • 93 Views
  • Uploaded on

Property-Liability Insurance Loss Reserve Ranges Based on Economic Value. Alfred Au and Liang Zhang. Overview. Background of research Methodologies Results Feedback. Background. Traditional loss reserving methods Nominal, undiscounted, for statutory requirements

loader
I am the owner, or an agent authorized to act on behalf of the owner, of the copyrighted work described.
capcha
Download Presentation

PowerPoint Slideshow about 'Property-Liability Insurance Loss Reserve Ranges Based on Economic ...' - jana


An Image/Link below is provided (as is) to download presentation

Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author.While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server.


- - - - - - - - - - - - - - - - - - - - - - - - - - E N D - - - - - - - - - - - - - - - - - - - - - - - - - -
Presentation Transcript
Property liability insurance loss reserve ranges based on economic value

Property-Liability Insurance Loss Reserve Ranges Based on Economic Value

Alfred Au and Liang Zhang


Overview
Overview Economic Value

  • Background of research

  • Methodologies

  • Results

  • Feedback


Background
Background Economic Value

  • Traditional loss reserving methods

    • Nominal, undiscounted, for statutory requirements

    • Impacts of inflation on traditional methods


Background1
Background Economic Value

  • Recent Developments

    • ALM

    • FASB & IASC: “Fair Value”

    • CEA: Solvency II

    • S&P criticism


Trends in inflation
Trends in Inflation Economic Value


Trends in inflation1
Trends in Inflation Economic Value

  • Increasing oil prices

  • Depreciation of the dollar

  • Sub-prime mortgage, credit crunch

  • Fed lowered discount rate


Trends in inflation2
Trends in Inflation Economic Value


Methodologies
Methodologies Economic Value

  • Loss generation model

  • Loss decay model

  • Inflation model

    • Ornstein-Uhlenbeck

  • Real interest rate model

    • 2 factor Hull-White

  • Fixed claim model

    • D’Arcy & Gorvett


Loss generation model
Loss Generation Model Economic Value

  • Nominal values:

    • Normally generated losses compounded by the nominal interest rate

  • Economic values:

    • Nominal losses discounted by the inflation rate


Fixed claim model
Fixed Claim Model Economic Value


Fixed claim model1
Fixed Claim Model Economic Value

  • Discrete approximation of continuous function

  • Impact of inflation on fixed claim model

  • ICA


Demonstration
Demonstration Economic Value

  • Demo of model


Results
Results Economic Value

  • Constant (Case A) vs. stochastic real interest rate (Case B)


Results1
Results Economic Value

  • Taylor method (Case B) vs. Fixed claim model (Case C, base case)


Results2
Results Economic Value

  • Impact of time step: monthly (Case D)


Results3
Results Economic Value

  • Periods of high & volatile inflation (Case E)


Summary
Summary Economic Value

  • Traditional loss reserving methods do not reflect the economic value of loss reserves

  • Economic value ranges are smaller than the nominal value ranges


Sensitivity analysis
Sensitivity Analysis Economic Value

  • Sensitivity of results from adjusting the number of claims and number of simulations


Feedback
Feedback Economic Value

  • Decoupling of nominal interest rate and inflation

    • Observed correlation was ~80-90%

    • From assignment 1…

    • Correlation between nominal interest rate and inflation was ~40%

    • New model controls for correlation


Feedback1
Feedback Economic Value

  • ALM

    • Companies do not fully duration match their liabilities

    • Duration matching sacrifices yield

    • Impact of duration-mismatch on reserves

    • Outside scope of research


Feedback2
Feedback Economic Value

  • Fisher Formula in a short-rate, stochastic modeling context

    • Found it to be appropriate

  • CPI as a proxy for claims inflation not appropriate

    • Masterson claims cost index


Feedback3
Feedback Economic Value

  • Discrepancies in results with different time steps

    • Indication of improper discretization

    • Use monthly time step


Ongoing work
Ongoing work… Economic Value

  • Incorporation of suggestions

    • Changes the results

    • Economic value CI becomes larger than nominal value CI

    • Changes supporting motivation of smaller reserve ranges


ad