Speaker(s): Eric Dal Moro (SCOR), Yuriy Krvavych (PWC London)
With the upcoming IFRS 17 regime, significant changes for the valuation of insurance liabilities are expected. In particular, there is a specific requirement of IFRS 17 to disclose "the confidence level used to determine the risk adjustment for non-financial risk. If the entity uses a technique other than the confidence level technique [..], it shall disclose [..] the confidence level corresponding to the results of that technique" (IFRS 17).
Given that there is no specific guidance on the calculation of confidence level when using a technique other than the confidence level (e.g. Cost of Capital), this article proposes a method that applies to life insurance portfolios so as to estimate the confidence level as required. The proposed method will beusing the basic characteristics (e.g. CoV/skewness) of the main risk drivers without resorting to modelling/simulations. In order to achieve this goal, this article proposes to model the two main risks present in a life insurance portfolio:
Using these models, the characteristics of the biometric and interest rate risks are provided:
The resulting distributions are then aggregated using Fleishman polynomials. As a result, the approximation formulae from Dal Moro/Krvavych (2017) are applied for the diversified risk margin at the portfolio level leading to the confidence level as required.