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Reinsurance Pricing of Large Motor Insurance Claims in Nigeria: An Extreme Value Analysis

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  • Queensley C. Chukwudum

Abstract

Reinsurance is of utmost importance to insurers because it enables insurance companies cover risks that they, under normal circumstances, would not be able to cover on their own. An insurer needs to be able to evaluate his solvency probability and consequently, adjust his retention levels appropriately because the insurer’s retention level plays a vital role in determining the premiums he will pay to the reinsurer. To illustrate how Extreme Value theory can be applied, this study delves into modelling the probabilistic behaviour of the frequency and severity of large motor claims from the Nigerian insurance sector (2013-2016) using the Negative Binomial-Generalized Pareto distribution (NB-GPD). The annual loss distribution is simulated using the Monte Carlo method and it is used to predict the expected annual total claims and estimate the capital requirement for a year. Pricing of the Excess-of-loss (XL) reinsurance is also examined to aid insurers in optimizing their risk management decision in regards to the choice of their risk transfer position.

Suggested Citation

  • Queensley C. Chukwudum, 2019. "Reinsurance Pricing of Large Motor Insurance Claims in Nigeria: An Extreme Value Analysis," International Journal of Statistics and Probability, Canadian Center of Science and Education, vol. 8(4), pages 1-12, July.
    • Handle: RePEc:ibn:ijspjl:v:8:y:2019:i:4:p:1
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    References listed on IDEAS

    as
    1. Vytaras Brazauskas & Andreas Kleefeld, 2016. "Modeling Severity and Measuring Tail Risk of Norwegian Fire Claims," North American Actuarial Journal, Taylor & Francis Journals, vol. 20(1), pages 1-16, January.
    2. McNeil, Alexander J., 1997. "Estimating the Tails of Loss Severity Distributions Using Extreme Value Theory," ASTIN Bulletin, Cambridge University Press, vol. 27(1), pages 117-137, May.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    extreme value theory; generalized Pareto distribution; risk management; XL reinsurance; negative binomial;
    All these keywords.

    JEL classification:

    • R00 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General - - - General
    • Z0 - Other Special Topics - - General

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