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Modelling reserve risk using the re-reserving approach

Modelling reserve risk using the re-reserving approach leads to results in line with the calendar risk period. Chain ladder re-reserving risk can be calculated using the Wüthrich (et. al.) method. Finally reinsurance contracts on reserves can be analysed.

In general modelling reserve risk seems to be complicated. Several underwriting years and their development years have to be assessed. A full model may contain many random variables or Diriclet type distributions. Is there an easier option?

Yes, there it is. Let us try a stochastic re-reserving approach. The approach looks at the changes of the loss development due to the new information gathered within one period. The incremental paids or incurreds may differ from what the expected and additionally this leads to different estimates from the re-reserving at the end of the period. The fitting of  the calendar year risk can be done using the results of the paper "Uncertainty in the claims development result in the chain ladder method." (M. Wüthrich, et. al., 2009).

The PODRA model in PillarOne.RiskAnalytics offers the option to feed the fitted model to the reserve risk section. Adding premium risks to the model and running the aggregation process we can obtain integrated results for premium and reserve risks. 

When optimizing reinsurance structures try out reinsurance contracts on reserves like loss portfolio transfer or adverse development cover.

-- Jörg

 

 

 

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Example

Posted by Markus Meier at 02.06.2010 05:22
This sounds very interesting and makes me curious to see an example. Could you please provide one for this approach here:

(...) The incremental paids or incurreds may differ from the expected and additionally this leads to different estimates from the re-reserving at the end of the period. The fitting of the calendar year risk can be done using the results of the paper "Uncertainty in the claims development result in the chain ladder method." (...)

Markus M.