Concept

Insurance is about sharing risk. At the balance sheet of any insurance
company the technical provisions is likely to be an important item. Both in
terms of size and in terms of uncertainty. Increasing or decreasing IFRS technical
provisions has a direct impact on the company’s result.

There is plenty of research done on how to calculate technical provisions.
There are both simple and practical approaches and complex scenarios
software available.

In a general insurance company the reserves usually consists of
– A reserve for outstanding claims
– An Incurred but Not Reported reserve (IBNR)

Models

From a model point there are generally two ways to go about it
– Deterministic models (straight forward, calculated by hand)
– Stochastic models (usually runs through a software)

Some of the most common ones in the former category is:
 Average cost
 Link ratio / basic chain ladder
 Loss ratio
 Bornhuetter-Ferguson

whilst methods specifically suited to estimate the IBNR is:
 Average cost
 Link ratio / basic chain ladder

We will tackle the methods one by one in upcoming posts!