Risk Adjustment Definition (IFRS17-1 & IFRS17-2)
IFRS17-1:
"RA: Risk Adjustment (for non-financial risk)
→ claims development"
IFRS17-2
"Risk Adjustment for non-financial risk, or RA, is defined as follows:
RA adjusts PV(future cash flows) to reflect the compensation the entity requires for bearing uncertainty about the amount and timing of cash flows"
I am not sure to understand how claims development relates to a compensation of uncertainty.
Thank you
Comments
There is uncertainty related to the development of claims -> For example, IBNR and ultimate loss ratio changes at every valuation period. If we knew for sure that ultimate claims would be 1000, then we wouldn't need any Risk adjustment because there is no uncertainty as to whether it could possibly increase to 1000 or decrease to 800. We would just reserve 1000. However, given that there is a range of possible outcomes and 1000 just represents the expected value, we need additional padding or compensation to bear this uncertainty or risk
I see. When I first read the 'Claims Development', I thought we needed RA for the Ultimate calculation and not necessarily the uncertainty around the ultimate.
It makes more sense now, thank you!
No problem, the RA in general is meant to pad for uncertainty in any aspect, not just specifically for claims development