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ONE-YEAR PREMIUM RISK AND EMERGENCE PATTERN OF ULTIMATE LOSS BASED ON CONDITIONAL DISTRIBUTION

Published online by Cambridge University Press:  05 May 2020

Łukasz Delong  and
Marcin Szatkowski
Łukasz Delong*
Affiliation:
SGH Warsaw School of Economics, Institute of Econometrics Niepodległości 162, Warsaw 02-554, Poland E-mail: [email protected]
Marcin Szatkowski
Affiliation:
SGH Warsaw School of Economics, Institute of Econometrics Niepodległości 162, Warsaw 02-554, Poland and Risk Department, STU ERGO Hestia SA Hestii 1, Sopot 81-731, Poland E-mail: [email protected]
*
E-mail: [email protected]
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Abstract

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We study the relation between one-year premium risk and ultimate premium risk. In practice, the one-year risk is sometimes related to the ultimate risk by using a so-called emergence pattern formula which postulates a linear relation between both risks. We define the true emergence pattern of the ultimate loss for the one-year premium risk based on a conditional distribution of the ultimate loss derived from a multivariate distribution of the claims development process. We investigate three models commonly used in claims reserving and prove that the true emergence pattern formulas are different from the linear emergence pattern formula used in practice. We show that the one-year risk, when measured by VaR, can be under and overestimated if the linear emergence pattern formula is applied. We present two modifications of the linear emergence pattern formula. These modifications allow us to go beyond the claims development models investigated in the first part and work with an arbitrary distribution of the ultimate loss.

Keywords

One-year riskultimate riskpremium riskemergence patternSolvency IIclaims development process
Type
Research Article
Information
ASTIN Bulletin: The Journal of the IAA , Volume 50 , Issue 2 , May 2020 , pp. 479 - 511
Creative Commons
Creative Common License - CCCreative Common License - BY
This is an Open Access article, distributed under the terms of the Creative Commons Attribution licence (http://creativecommons.org/licenses/by/4.0/), which permits unrestricted re-use, distribution, and reproduction in any medium, provided the original work is properly cited.
Copyright
© Astin Bulletin 2020

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