Estimation of IFRS 17 Risk Adjustment for Surrender Risk in Life Insurance Elisa Murti Dewi (a), Sapto Wahyu Indratno (b*), Ellys Agustina (a)
(a) Departement of Actuarial Sciences, Faculty of Mathematics and Natural Science, Institut Teknologi Bandung
(b*) Statistics Research Division, Faculty of Mathematics and Natural Science, Institut Teknologi Bandung
*saptowi[at]itb.ac.id
Abstract
Surrender risk is a risk associated with policyholders terminating their life insurance policy before its maturity or before the insured event occurs. Surrender risk is a critical consideration for life insurance company because it leads to uncertainty in the expected future cash flows of the insurer. This risk affects the finansial stability of the insurer. This study proposes a model for calculating the risk adjustment under IFRS 17 for surrender risk in life insurance portfolios. The risk adjustment is one of the components of the liability measurement under IFRS 17 that reflects the compensation required by insurers to bear uncertainties arising from non finansial risks. IFRS 17 does not specify a particular method for risk adjustment calculation, making it one of the main challenges for insurance companies in implementing IFRS 17. The proposed model is based on statistical concepts, such as convex ordering and comonotonicity of random variables to provide a closed form quantile formula for the entire portfolio. Surrender rate is assumed to follow a data driven stochastic process and the present value of future individual cash flows is calculated. We demonstrate the practical application of these formulas in the calculation of risk adjustment. Using these formulas, insurance companies can calculate the risk adjustment for surrender risk without running time consuming simulations.
