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PROBABILITY OF SUFFICIENCY OF SOLVENCY II RESERVE RISK MARGINS: PRACTICAL APPROXIMATIONS

Published online by Cambridge University Press:  15 June 2017

Eric Dal Moro  and
Yuriy Krvavych
Eric Dal Moro*
Affiliation:
Actuarial Reserving, SCOR 26 General Guisan-Quai, CH-8022 Zurich, Switzerland
Yuriy Krvavych
Affiliation:
Actuarial and Insurance Management Solutions, PwC UK, 7 More London Riverside, London SE1 2RT, UK E-Mail: [email protected]
*
E-Mail: [email protected]
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Abstract

The new Solvency II Directive and the upcoming IFRS 17 regime bring significant changes to current reporting of insurance entities, and particularly in relation to valuation of insurance liabilities. Insurers will be required to valuate their insurance liabilities on a risk-adjusted basis to allow for uncertainty inherent in cash flows that arise from the liability of insurance contracts. Whilst most European-based insurers are expected to adopt the Cost of Capital approach to calculate reserve risk margin — the risk adjustment method commonly agreed under Solvency II and IFRS 17, there is one additional requirement of IFRS 17 to also disclose confidence level of the risk margin.

Given there is no specific guidance on the calculation of confidence level, the purpose of this paper is to explore and examine practical ways of estimating the risk margin confidence level measured by Probability of Sufficiency (PoS). The paper provides some practical approximation formulae that would allow one to quickly estimate the implied PoS of Solvency II risk margin for a given non-life insurance liability, the risk profile of which is specified by the type and characteristics of the liability (e.g. type/nature of business, liability duration and convexity, etc.), which, in turn, are associated with

  • • the level of variability measured by Coefficient of Variation (CoV);

  • • the degree of Skewness per unit of CoV; and

  • • the degree of Kurtosis per unit of CoV2.

The approximation formulae of PoS are derived for both the standalone class risk margin and the diversified risk margin at the portfolio level.

Keywords

IFRS 17IFRS confidence level of Solvency II risk marginscost of capital approachprobability of sufficiencyapproximations
Type
Research Article
Information
ASTIN Bulletin: The Journal of the IAA , Volume 47 , Issue 3 , September 2017 , pp. 737 - 785
Copyright
Copyright © Astin Bulletin 2017 

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