Estimating Risk Margin For General Insurance Sector In The Saudi Insurance Market

Abstract

The research aimed to estimate the fair value of the risk margin paid by policyholders, and to examine the significance of its balanced relationship with the rate of return on the cost of risk capital requirements, which is proportional to the amount of risk borne by shareholders in exchange for their unlimited liability for insurance obligations. To achieve the research objective, an actuarial model was proposed to estimate the value of the risk margin based on the standard rate of the cost of capital, which is consistent with the requirements of the Second Solvency Agreement. As well as designing a quantitative measure to measure the impact of diversification in the insurance portfolio on the value of the risk margin, and then the impact on the prices of insurance products. The practical application of the proposed model dealt with the data available for a sample of insurance companies operating in the Kingdom of Saudi Arabia. The application[1] also included all the insurance sectors (vehicles, property and accidents, and health). The research found that the actual rate of the cost of capital requirements is higher than the standard rate imposed by supervisory and regulatory bodies, as Saudi insurance companies resort to non-financial hedging to avoid the risk of fluctuations in the values of obligations, which results in higher prices and, consequently, lower demand for insurance products. The research also found that the significant differences arising between the risk margin and the corresponding optimal estimation values for obligations are due to the difference in the interest rate taken as a basis for estimating each of them. The inverse relationship between the diversification risk margin rate and the value of the risk margin directly affects the volume of premiums collected, which is reflected in the prices of insurance products, and thus the demand for insurance. The researchers recommended the necessity of estimating the risk margin based on the degree of risk in the insurance portfolio, and trying to achieve diversification in the insurance portfolio, because it has a direct impact on reducing the degree of risk, and thus reducing the value of the risk margin, which reflects positively on the possibility of reducing capital requirements to confront these risks.