Risk Margin Calculation Methods Based On The Bayesian Chain-Ladder Model

The international financial crisis in 2008 has given a heavy blow to the global economy and the insurance industry, then the Solvency Ⅱ came into being. This new risk management framework is more complete and complex. The Solvency Ⅱ needs to consider many aspects, such as solvency indicators, governance structure, industry risk. According to the Solvency Ⅱ, any insurance company’s balance sheet must be measured in the same way, which means that any insurance company’s all assets and liabilities should be measured with its market value. If there is no market value, it can be replaced by the market consistent value. There is a deviation between the actual amount of compensation and the best estimate in the actuarial industry, and this value is the risk margin, which represents the risk measurement.With the implementation of the Solvency II, scholars have gradually focused their research on the outstanding claims reserve, capital requirements and solvency capital requirements. At present, the main research directions are concentrated on the extraction and evaluation of outstanding claims reserve, and only some scholars have studied the calculation method of the risk marginal. Based on the existing literature, the paper studies the calculation method of the marginal risk. At first, this article introduces the concept of risk margin and the current methods of risk margin, then focus on the Cost of Capital method. Then we introduce the Bayesian statistical theory and analysis method and get the Bayesian Chain ladder model based on the Chain ladder method. We explain how to get the two kinds of risk margin calculation methods:the proportional substitution method and the risk substitution method. At last, we make a comparison between proportional substitution method and risk substitution method. We find that the risk substitution method is much better.