On the Representative Scenario Method
Shamita Dutta Gupta, Xiaotie She

The insurance industry in United States has been going through a profound change. The reserve methodology has been shifting from a formula based reserving to the principle based reserving (PBR).The PBR, using Monte Carlo method, usually requires significant computation power due to size of the in-force, complexity of the product, number of parameters. There are some proposals for smaller insurance companies to use the Representative Scenario Method (RSM), which requires less computational resource, but reflects the idea of PBR. The RSM calculates the reserve based on the liability projection of limited number of scenarios (for example, 5 scenarios). The choice of these scenarios is critical to the resulting reserve. In this work, we modify the concept of the importance sampling to propose a methodology of choosing these limited scenarios. We will compare the RSM reserve based on our approach to the full Monte Carlo result.

Full Text: PDF     DOI: 10.15640/arms.v10n1a2