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Stochastic model to evaluate the fair value of motor third-party liability under the direct reimbursement scheme and quantification of the capital requirement in a Solvency II perspective

Author

Listed:
  • Fersini, Paola
  • Melisi, Giuseppe

Abstract

As commonly known, to evaluate the claims reserve (otherwise known as the provision for outstanding claims), the loss adjuster uses as a first component the claims reserve given by the sum of the estimated provision for each outstanding claim (known as case reserve). Traditional statistical-actuarial methods are used to control and/or asseverate the evaluation and recent developments have tended to ensure that these enable an independent assessment of the claims reserve. In some European countries, a large subset of motor liability claims is managed within a direct reimbursement (DR) scheme. In Italy, the introduction of the direct compensation CARD system for third-party liability insurance has resulted in greater attention in the use of these traditional methods due to the heterogeneity of the data available for evaluations. This paper presents the results of a study undertaken to define a calculation method that, using the different assumptions that describe the evolution of settlement mechanisms, is able to quantify the claims reserve. The proposed methodology reduces the loss adjuster’s discretion in applying statistical methods since all assumptions must be made explicit and can hence be monitored and controlled. Furthermore, a stress test can be performed on all the parameters that influence the settlement and thus the claims reserve. Finally, in a backtesting perspective, the proposed methodology enables an ex-post analysis of actual cash flow deviations compared to expected values, identifying the variables that lead to these differences. In particular, a calculation method is presented that using the different assumptions describing the evolution of the settlement of different claim handling procedures (Non-Card, Card, Handler Forfait and Debtor Forfait) is able to quantify the claims reserve. Via simulations, future payments, the expected value of the claims reserve and some indicators of variability are also estimated. The numerical application allows comparing the results obtained with those deriving from the application of traditional statistical methods.

Suggested Citation

  • Fersini, Paola & Melisi, Giuseppe, 2016. "Stochastic model to evaluate the fair value of motor third-party liability under the direct reimbursement scheme and quantification of the capital requirement in a Solvency II perspective," Insurance: Mathematics and Economics, Elsevier, vol. 68(C), pages 27-44.
  • Handle: RePEc:eee:insuma:v:68:y:2016:i:c:p:27-44
    DOI: 10.1016/j.insmatheco.2016.02.002
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    References listed on IDEAS

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    More about this item

    Keywords

    Chain Ladder; Claims reserve; Best estimate; Direct compensation; Multistate model; Copula; Dependence;

    JEL classification:

    • G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies

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