Reserving Techniques – Chain-Ladder

The Chain-Ladder is an reserving technique often used to predict future claims for an insurance company. It uses run-off triangle of paid or incurred losses. There are several considerations as not to distort the numbers, for instance changes in premium. This subject can be made arbitrary complex however for the purpose in this text we assume that this has been handled and we focus on the practical steps to be…


IFRS 9 – Financial Instruments

IFRS 9 is in force as at 1 January 2018. IFRS 9 establishes principles for the financial reporting of financial assets and financial liabilities. At the moment you start selling on credit and issue invoices, you acquire the financial instruments – trade receivables.And IFRS 9 applies. - IFRS 9 does not define financial instruments. - IFRS 9 does not deal with your own equity instruments like your own shares, issued…


Solvency II – The Directive

Solvency capital requirements are part of the Solvency II Insurance Directive issued by the European Union (EU) in 2009. The directive aims to coordinate laws and regulations of the 28 EU members as they relate to the insurance industry. If the supervisory authorities determine that the requirement does not adequately reflect the risk associated with a particular type of insurance, it can adjust the capital requirement higher. Solvency II bring a market-consistent and risk-based…


SCR – Solvency Capital Requirement

The SCR – Solvency Capital Requirement - is the higher of the two capital requirements under Solvency II. The lower is the MCR. In most cases the Standard Formula is used to calculate the SCR. Once the SCR is calculated it is usually presented as a ratio of Own Funds. The five major components of the SCR is: Market Risk Underwriting risk for life, non-life and health Counterparty Default Risk…


LAT – Liability Adequacy Test

International Financial Reporting Standard 4 required liability adequacy testing (LAT). In non-life insurance, the most important components of LAT are run off analysis for claims provisions and unexpired risk reserve (URR) calculation. URR is defined as a prospective assessment of the amount that needs to be set aside in orders to provide for the claims and expenses which will emerge from unexpired risks and which is over and above the unearned premium reserve…


Q&A on Regulation

EIOPA has published a new set of Q&A on the Solvency II regulation. Among the content is: (EU) No 2015/2450 with regard to the templates for the submission of information to the supervisory authorities 29-Jun-2017 Commission Delegated Regulation (EU) 2015/35 supplementing Directive 2009/138EC Have a look at the link at the top in this post for the latest updates on regulation from EIOPA.


IFRS Reserving – Life

Life insurance reserves are generally longer term than non-life reserves. It is also common that they include a savings element. Meaning that the future liabilities are offset by for instance the value in a fund, accounted for on the asset side of the balance sheet. Savings contracts Withing life insurance there are many different kinds of contracts. For instance the straight forward 1-year deaths policies or longer contracts as the…


Unallocated or Allocated

ULAE vs. ALAE Definition Loss adjustment expense is the cost incurred by the insurer at the time of settling claims. Description These expenses arise since insurers need to prove the truthfulness of the event that has caused the insured to ask for claim. Insurers then need to investigate and verify the event before settling claims. This is a pivotal component as the absence of such a mechanism can lead to…


Correlation Matrix

What is a Correlation Matrix? A correlation matrix is a table showing correlation coefficients between variables. Each cell in the table shows the correlation between two variables. Most often the matrix is symmetric. Further to that a ratio of 100% means perfect correlation whereas 0% means no correlation. Regarding Solvency II purposes the official source is the Commission Delegated Regulation 2015/35, and the reason that these are used under Solvency II…


Embedded Value – EV

Embedded Value (EV) or Market Consistent Embedded Value (MCEV) describes the value embedded in the business. This is typically mostly used in the life business because of the longer term of the insurance contracts. The traditional measures are not always accurate. Hence the need for MCEV. Balance sheet The balance sheet measure assets & liabilities. Because of that it does not really take into account unrealised gains and losses. Profit…

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