Lloyds Reserving Guide The reserving process must be consistent with the treatment of reserve risk in the capital model What does this mean in practice Relating reserving uncertainty to the underlying distribution from the capital model what is the return period of specific s ID: 388245
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Slide1
Linkage between Capital and Reserving
Lloyds Reserving Guide:
“
The reserving process must be consistent with the treatment of reserve risk in the capital model
.”
What does this mean in practice?
Relating reserving uncertainty to the underlying distribution from the capital model – what is the return period of specific scenarios? And
does the
answer make sense?
How does this work in your firm?Slide2
How Capital Models can Inform Reserve Uncertainty
Capital modelling is typically focussed on the 1 in 200 regulatory requirement – this is by nature very uncertain
However Solvency II requires consideration of the full distribution of returns which should provide some useful information on reserving uncertainty at lower return periods
For example considering return periods of 1 in 10, 1 in 20 could usefully inform reserve uncertainty work
The challenge is how reliable are capital models in this range?
Fundamentally this is a risk (earnings volatility) issue not a capital issue
Possibly circular in that techniques for determining reserve uncertainty are what underpins the reserve risk element of capital
models
A scenario approach may be useful both in assessing reserve uncertainty and determining the extreme event required to determine capital requirements – looking at specific scenarios of differing likelihoods may inform the distribution. Also helps with communication – what can go wrong?
Also need to consider the difference between a 1 year view of risk (as required by Solvency II) and an ultimate view – for short tail classes these are likely to be very similar but for longer tail classes they could be quite different.