Estimating Risk Margin and Risk Adjustment Based on Solvency II and IFRS 17 Frameworks Using Cost of Capital Technique Applied to an Egyptian Non-life Insurance Company

Document Type : Original Article

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Faculty of Commerce, Cairo University, Egypt

Abstract

Implementing the International Financial Reporting Standard for insurance contracts (IFRS17) has transformed the regulatory landscape for insurance companies through establishing stringent requirements for risk assessment and financial reporting. The key aspect is the non-financial risk adjustment (RA), which must meet specific criteria but allows the insurers’ flexibility in the estimation method. Consequently, the main aim of this research is to examine the use of the Cost of Capital (CoC) method employed under Solvency II for risk margin (RM) estimation in assessing RA under IFRS 17. The study utilizes the bootstrap simulation techniques on Mack’s (1993) model to assess reserve risks for an Egyptian insurer’s motor line. It connects the traditional view of lifetime risks under IFRS 17 with Solvency II’s one-year risk perspective. Using Cornish-Fisher and Bohman-Esscher approximations, the research estimates the Probability of Sufficiency (PoS) as a confidence level for CoC risk margin. The findings suggest that CoC can compute risk adjustment with consistent results from distribution-free PoS estimations.

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