12.1 Introduction

Estimate risk margin for unpaid losses and premium liabilities

  • An additional reserve held as a safety measure in case losses end up worse than expected

  • Risk margin = 75th percentile - mean

    (an Australian regulatory standard)

  • Based on CoV

Goal is to create a framework for an actuary to proceed through to estimate the risk margin

Data Segmentation

  • Portfolio for the analysis should be split into reasonably homogeneous groups

  • Might combine or further split groups from what was used for liability valuation

  • Balance the practical benefits from large groups vs insight gained from smaller groups

  • Might want to further split if a LoB has a portion that has significantly more uncertainty than another part (e.g. HO CAT/non CAT)