Risk margin estimation and budget-constrained optimal allocation of outstanding claims reserves across accident years: A case study of the Nigerian agricultural insurance corporation
Vol 8, Issue 1, 2025
VIEWS - 6 (Abstract)
Abstract
The implications of insurance risk margins for insurers are extensive, impacting their competitive position, financial stability, and overall business strategy. Inadequate risk margins can lead to significant financial losses and regulatory sanctions, endangering their reputation and long-term viability. This study examines the insurance claims for general accident and subsidized agriculture business classes of the Nigerian Agricultural Insurance Corporation (NAIC) from 2007 to 2019. The chain ladder technique is employed to estimate ultimate claims. By incorporating claims variability using the Mack model, we estimate a more appropriate risk margin for outstanding claims. Additionally, we frame the allocation of outstanding claims as an optimization problem and compute the optimal reserves for each accident year, constrained by 90% of the insurer’s overall budget, assuming log-normally distributed claims. Our findings indicate that although the total ultimate reserves for the general accident class is much lower than that of the subsidized agriculture, the former’s aggregated coefficient of variation for all accident years combined is much higher, with a value greater than one. This suggests that NAIC’s general accident class of business is highly susceptible to systemic risk contagion. Moreover, a significant underestimation of the risk margin is observed when variability analysis is not considered. Consequently, Nigerian insurance regulators are urged to mandate variability analysis in the claims reserve estimation within annual financial reports.
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DOI: https://doi.org/10.24294/fsj9967
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