Report of Working Party on Fluctuation Reserves

Document description

The incidence and size of claims varies over time and part of this variation will be of the form of statistical fluctuations which do not affect the long-term outcome of the business but do have significant short-term effects on the claims experience. A fluctuation reserve is a reserve set up in the profitable years to meet the excess claims in the worse years. Obviously, one must also consider the question of solvency because claim fluctuations are part of the variation supposed to be covered by the solvency margin. The general approach used in this report is: 1) Consideration of risk theory and its application in practice. 2) Reference to studies preceding the setting up of the EEC solvency margin to determine the allowance made for claim fluctuations. A number of European papers updating and suggesting alternative methods of calculating the solvency margin have been considered. 3) A detailed examination of the systems in those countries, principally Germany and Finland, which already have legislation regarding fluctuation reserves. 4) Mention of some of the practical aspects such as taxation and reinsurance and consideration of further work required on this subject.