A15: Risk adjustment for loss reserving by a cost capital technique - paper

Document description

Primarily, Solvency II concerns the amount of capital that EU insurance companies must hold to reduce the risk of insolvency. Determining this risk involves a best estimate of insurance liabilities and an associated risk margin. There are two approaches to determining the risk margin. The percentile approach involves setting a margin above best estimate liabilities so that, to a specified probability, the provisions will eventually prove to be sufficient to cover the run-off of claims. The cost of capital approach determines a risk margin in a way that enables the (re)insurance obligations to be transferred. It involves computing a fair value, which is the amount for which liabilities may be settled, between knowledgeable, willing parties in an arm's length transaction. In this paper we suggest how such a fair value may be computed.