Exploration of the concept of claim reserve risk under the risk based capital framework

Abstract

The concept of claim reserve risk is a critical aspect of risk assessment and management within the insurance industry. This abstract presents an in-depth exploration of claim reserve risk and provides a comprehensive illustration of its computation under the Risk-Based Capital (RBC) framework. Claim reserve risk refers to the uncertainty associated with the adequacy of reserves set aside by insurance companies to cover future claims payments. As insurers rely heavily on these reserves to honor their obligations to policyholders, understanding and quantifying claim reserve risk is of paramount importance. This study elucidated the fundamental principles of claim reserving, highlighting the key factors that contribute to reserve uncertainty. It delves into the complexities of reserving methodologies, including research design, quantitative phase, qualitative phase, data source, variables and their measurements, dependent variable, independent variables components of claim reserving risk, and more, to underscore the inherent challenges in estimating claim reserves accurately. This study provided a practical understanding which included a step-by-step illustration of the computation of claim reserve risk under the RBC framework. This involves the integration of various risk factors, including claim reserve capital, net outstanding claims, Incurred but Not Reported (IBNR) Claims, total net claim provisions, claim reserve risk capital charges, net incurred claims, claims paid, claims outstanding, claims incurred, net earned premiums and Value at Risk (VAR). The study recommends that insurance companies should use a 90% confidence interval for the analysis and computation of claim reserve risk is grounded in the pursuit of greater financial stability, regulatory compliance, and long-term sustainability. Also, a wider range of business classes should be incorporated in the analysis and computation of claim reserve risk for the pursuit of accuracy, transparency, and refined risk management.