infonet-economy

The purpose of this paper is to present a simulation-based approach for modeling multi-year non-life insurance risk in internal risk models. Strategic management in an insurance company requires a multi-year time horizon for economic decision making, for example, in the context of internal risk models. In the literature to date, only the ultimate perspective and, more recently, the one-year perspective (for Solvency II purposes) are considered. Design/methodology/approach - The authors present a way of defining and calculating multi-year claims development results and extend the simulation-based algorithm ("re-reserving") for quantifying one-year non-life insurance risk, presented in Ohlsson and Lauzeningks, to a multi-year perspective. Findings - The multi-year algorithm is applied to the chain ladder reserving model framework of Mack (1993). Practical implications - The usefulness of the new multi-year horizon is illustrated in the context of internal risk models by means of a case study, where the multi-year algorithm is applied to a claims development triangle based on Mack and on England and Verrall. This algorithm has been implemented in an excel tool, which is given as supplemented material. Originality/value - To the best of the authors' knowledge, there are no model approaches or studies on insurance risk for projection periods of not just one, but several, new accident years; this requires a suitable extension of the classical Mack model; however, consideration of multiple years is crucial in the context of enterprise risk management.