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08

The three-pillar approach to stochastic reserving

Open-access content Wednesday 29th July 2015 — updated 9.20pm, Thursday 2nd April 2020

On 24 March, the London Market Student Group (LMSG) played host to Alessandro Carrato, an actuary at Allianz Insurance Plc and a member of the Pragmatic Stochastic Reserving Working Party. He began his talk by discussing 'The three-pillar approach' under Solvency II and went on to explain that reserve risk is "at the end of the reserve run-off looking back and observing how wrong you were in estimating reserves at a certain valuation date". 

It is now common practice to model reserve risk stochastically. The most popular models adopted are the ODP and Mack models, generally accepted by the Solvency II directive. 

The focus of the talk then shifted from the quantification of the uncertainty attached to the calculation of the 'ultimate view' reserve risk to that of the 'one-year view' reserve risk calculation.

Carrato went on to explain how there have only been two main industry studies performed on this topic, resulting in an abundance of "open issues to deepen". He then discussed the 'actuary in the box' method, which is currently one of the most popular methods adopted in the market to calculate the 'one-year view' reserve risk. This process involves estimating the reserve at the start of the year, simulating future payments in the year and then using these results to estimate the reserve at the beginning of the following year. 

 If you are interested in learning more about the LMSG or attending our events, please email Cian at [email protected]

This article appeared in our August 2015 issue of The Actuary.
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