© Brammertz Consulting, 20091Date: Unified Financial Analysis Risk & Finance Lab Chapter 16: Non-Life insurance Willi Brammertz / Ioannis Akkizidis

© Brammertz Consulting, 20092Date: The balance sheet

© Brammertz Consulting, 20093Date: Modeling premiums > Dynamic simulation starts with forecasting the premium by line of business > Premium patterns are normally simple and homogenous > 1 year coverage > Payment at the beginning > Deviations are however possible > Premiums are in most cases amortized linearly (exceptions!)

© Brammertz Consulting, 20094Date: Modeling receivables > Receivables nothing else than short term loans > Don’t change book keeping pattern of premium > Changes however cash in-flow pattern

© Brammertz Consulting, 20095Date: Modeling claim patterns via loss triangles > Claim patterns are constantly observed and used for statistics (loss triangles) > Can be represented like financial contracts

© Brammertz Consulting, 20096Date: Modeling claim patterns via frequency/severity > Claim patterns are also modeled using > Stochastic inter-claim interval (which models frequency) > Stochastic severity > Modeling of claim patterns using inter-claim interval and severity and loss triangles cannot be made easily (and fully consistent) > Claims are usually split into three classes (with own distributions) > Attritional > Large > Catastrophes

© Brammertz Consulting, 20097Date: Modeling IBNR and reserving risk > IBNR = incurred but not reported > At any point in time, there can be cases outstanding which are not yet known to the insurer > This can be long after the coverage period (asbestos!) > IBNR’s have to be modeled > Model draws on historic experience

© Brammertz Consulting, 20098Date: Modeling reinsurance > Four types of Reinsurance > Proportional > Quota share > Surplus > Absolute > Excess of loss > Stop loss

© Brammertz Consulting, 20099Date: Reinsurance programs > Needs clear ordering and relationships > The next lower level insures remaining cash flows of previous level