Probability of sufficiency of the risk margin for life companies under IFRS17

Probability of sufficiency of the risk margin for life companies under IFRS17


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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:

  • The interest rate risk based on duration/convexity models and interest rate models, assuming the company uses a replicating portfolio for modelling its cash-flows;
  • The biometric risk based on parametric models for which a few issues will be resolved:
  • The calibration of the model on an ultimate view starting from a one-year view (e.g. using the solvency 2 standard formula);
  • The need to separately model the different biometric risks (mortality, lapses …). using different parametric distributions.

Using these models, the characteristics of the biometric and interest rate risks are provided:

  • The variability measured by Coefficient of Variation (CoV);
  • The degree of Skewness;
  • The degree of Kurtosis.

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.

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