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The Solvency of a General Insurance Company in Terms of Emerging Costs

Published online by Cambridge University Press:  29 August 2014

C. D. Daykin ,
G. D. Bernstein ,
S. M. Coutts ,
E. R. F. Devitt ,
G. B. Hey ,
D. I. W. Reynolds  and
P. D. Smith
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Abstract

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The authors challenge the traditional balance sheet concept of the solvency of a general insurance company and put forward an emerging costs concept, which enables the true nature of the assets and liabilities to be taken into account, including their essential variability. Simulation is suggested as a powerful tool for use in examining the financial strength of a company. A simulation model is then used to explore the resilience of a company's financial position to a variety of possible outcomes and to assess the probability that the assets will prove adequate to meet the liabilities with or without an assumption of continuing new business. This suggests the need for an appropriate asset margin assessed individually for each company. The implications for the management and supervision of general insurance companies are explored. The suggestion is made that the effectiveness of supervision based on the balance sheet and a crude solvency margin requirement is limited. More responsibility should be placed on an actuary or other suitably qualified professional individual to report on the overall financial strength of the company, both to management and to the supervisory authorities.

Keywords

Solvencyfinancial strengthasset marginemerging costssimulationprofessional report
Type
Workshop
Information
ASTIN Bulletin: The Journal of the IAA , Volume 17 , Issue 1 , April 1987 , pp. 85 - 132
Copyright
Copyright © International Actuarial Association 1987

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