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A Model for Risk Adjustment (IFRS 17) for Surrender Risk in Life Insurance

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  • Magnus Carlehed

    (Department of Mathematics, Stockholm University, 106 91 Stockholm, Sweden)

Abstract

We propose a model for risk adjustment, in the context of IFRS 17, for surrender risk. Surrender rates are assumed to follow a stochastic process, underpinned by data. The distribution of the present value of future individual cash flows is calculated. Using well-known techniques from the theory of convex ordering of stochastic variables, we present closed formula approximations of risk measures, such as quantiles, for the total portfolio. These formulas are easy to program and enable an insurance company to calculate its risk adjustment without time-consuming simulations.

Suggested Citation

  • Magnus Carlehed, 2023. "A Model for Risk Adjustment (IFRS 17) for Surrender Risk in Life Insurance," Risks, MDPI, vol. 11(3), pages 1-22, March.
    • Handle: RePEc:gam:jrisks:v:11:y:2023:i:3:p:62-:d:1102477
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    References listed on IDEAS

    as
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    2. Hesselager, Ole, 1993. "Extensions of Ohlin's lemma with applications to optimal reinsurance structures," Insurance: Mathematics and Economics, Elsevier, vol. 13(1), pages 83-97, September.
    3. Hamza Hanbali & Daniel Linders, 2019. "American-type basket option pricing: a simple two-dimensional partial differential equation," Quantitative Finance, Taylor & Francis Journals, vol. 19(10), pages 1689-1704, October.
    4. Chaoubi, Ihsan & Cossette, Hélène & Gadoury, Simon-Pierre & Marceau, Etienne, 2020. "On sums of two counter-monotonic risks," Insurance: Mathematics and Economics, Elsevier, vol. 92(C), pages 47-60.
    5. Ohlin, Jan, 1969. "On a class of measures of dispersion with application to optimal reinsurance," ASTIN Bulletin, Cambridge University Press, vol. 5(2), pages 249-266, May.
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