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The purpose of this paper is to present a simulation‐based approach for modeling multi‐year non‐life insurance risk in internal risk models. Strategic management in an insurance company requires a multi‐year time horizon for economic decision making, for example, in the context of internal risk models. In the literature to date, only the ultimate perspective and, more recently, the one‐year perspective (for Solvency II purposes) are considered.

The authors present a way of defining and calculating multi‐year claims development results and extend the simulation‐based algorithm (“re‐reserving”) for quantifying one‐year non‐life insurance risk, presented in Ohlsson and Lauzeningks, to a multi‐year perspective.

The multi‐year algorithm is applied to the chain ladder reserving model framework of Mack (1993).

The usefulness of the new multi‐year horizon is illustrated in the context of internal risk models by means of a case study, where the multi‐year algorithm is applied to a claims development triangle based on Mack and on England and Verrall. This algorithm has been implemented in an excel tool, which is given as supplemented material.

To the best of the authors' knowledge, there are no model approaches or studies on insurance risk for projection periods of not just one, but several, new accident years; this requires a suitable extension of the classical Mack model; however, consideration of multiple years is crucial in the context of enterprise risk management.

The usual, simple and computationally expensive recovery payment method for a given reinsurance treaty, besides the total run-off triangle, builds a new run-off triangle, say recovery run-off triangle, for the reinsurer’s contribution and predicts the reinsurer’s contribution to the total loss reserves. This paper, without building a recovery run-off triangle, uses the available prior knowledge about a reinsurance treaty to predict the cedent’s loss reserve under five reinsurance treaties.

The authors propose a new solution to the problem of how to consider reserving issues when there is a reinsurance treaty for a portfolio of general insurance policies. Considering this when determining pricing or making capital decisions is very important.

In particular, it considers the quota share (QS) treaty, surplus (SPL) treaty, excess-of-loss (XL) treaty, largest claims reinsurance (LCR) treaty and excédent du coût moyen relatif (ECOMOR) treaty. Then, it develops a theoretical foundation for predicting the cedent’s loss reserve and evaluating such prediction using the mean square error of prediction (MSEP). The impact of such reinsurance treaties on the variability of the cedent’s loss reserve has been investigated through a simulation study.

This paper, without building a recovery run-off triangle, uses the available prior knowledge about a reinsurance treaty to predict the cedent’s loss reserve under five reinsurance treaties. In particular, it considers the QS treaty, SPL treaty, XL treaty, LCR treaty and ECOMOR treaty. Then, it develops a theoretical foundation for predicting the cedent’s loss reserve and evaluating such prediction using the MSEP. The impact of such reinsurance treaties on the variability of the cedent’s loss reserve has been investigated through a simulation study.

The purpose of this study is to assess the level and variability of Ghanaian property and liability insurer’s reserve estimates to examine its sources and ascertain if reserve errors are random or not (i.e. manipulated or not).

It uses information on insurer claim reserve provisions, claims outstanding, claims incurred and claims paid for the period of 2000-2010. Categorizing the sources of variation as endogenous and exogenous, the authors use the panel correlated standard error regression model to determine sources and magnitude of industry reserve error.

The study finds that size, age, lag of loss reserve error, inflation rate and real gross domestic product are significant in determining the degree of reserve error variation. Type of ownership (domestic or foreign) is, however, not a significant source of variation. Further, the authors found that industry reserve errors are random (not manipulated) across firms, suggesting that sampled insurers act independently on reserve error decision making and are not influenced by industry trends and competition.

The main research study limitation is the difficulty involved in obtaining annual statements from insurance companies in Ghana. Reluctance of companies to make statements available impeded on the smooth flow of the study during data collection.

Policy-wise, this suggest that regulatory bodies can uniquely set reserve error levels for existing firms with little influence on competition. Further, the Ghanaian insurance regulator does not to focus on the type of ownership (foreign or local) when setting regulatory standards. However, size of the company and age (length of operation) should be considered.

This paper is the first empirical study to examine the loss reserve error and loss reserve variability of Ghanaian property and liability insurance companies.

Latin America's contagion from the Asian shock was limited because: a) the region had successfully implemented structural reforms in recent years; b) policymakers acted swiftly to make appropriate changes in fiscal and monetary policy; and c) abundant reserves facilitated a relatively smooth adjustment. The Russian shock proved much harder to weather, as it adversely affected risk perception about emerging markets as an asset class resulting in an abrupt halt of capital inflows and a deep recession. Recent developments in international capital markets suggest a more benign environment for growth. This, however, provides no guarantee of a sustainable recovery for all economies in the region.

Develops principles for banks that want to evaluate the distribution of life insurance as well as non‐life insurance products and identifies key factors for profitability. Analyses the costs of training personnel, the costs of computers and communication, the fixed and variable sales costs, and the costs of administration including customer service. These costs have to be covered by direct benefits in terms of commissions and indirect benefits in terms of more faithful bank customers. Then estimates the profitability of the distribution through a branch network. Develops a model to calculate the “break‐even” sales volume. Identifies five key factors: the number of branches; the number of specialists per branch; the number of customers to the bank; the cross‐selling ratio; and the reduction over time in costs of selling and administration. Gives two examples from the banking sector.

The purpose of this paper is to better understand how commercial contracts are interpreted and the level of control that contracting parties have over the judicial interpretation of their contracts.

The paper approaches the subject of commercial contract interpretation through an analysis of four dichotomies debated in legal scholarship and found in judicial decisions. The four dichotomies are formalism versus realism, literalism versus contextualism, facilitation versus regulation, and rules versus standards.

The main finding of the paper is that both poles of each of the dichotomies play important roles in the interpretation and enforcement of commercial contracts. For example, contract interpretation characterized by a high degree of formalism looks to the four‐corners of the contract for interpretive answers. In turn, some courts make use of external factors – such as distributive justice or public policy concerns in interpreting contracts.

One of the research implications of the paper is the need for a more in‐depth analysis of how contracting parties may agree on how their contracts are to be interpreted and whether courts should be obligated to enforce party‐mandated rules of interpretation.

The practical implication of understanding the means and methods of contract interpretation is that it leads to a better understanding of commercial contracts in transborder transactions.

The value of this research lies upon the fundamental premise that the same philosophies and theories of interpretation found in most legal systems are replicated in the area of international commercial contracting.

The equation of unified knowledge says that S = f (A,P) which means that the practical solution to a given problem is a function of the existing, empirical, actual realities and the future, potential, best possible conditions of general stable equilibrium which both pure and practical reason, exhaustive in the Kantian sense, show as being within the realm of potential realities beyond any doubt. The first classical revolution in economic thinking, included in factor “P” of the equation, conceived the economic and financial problems in terms of a model of ideal conditions of stable equilibrium but neglected the full consideration of the existing, actual conditions. That is the main reason why, in the end, it failed. The second modern revolution, included in factor “A” of the equation, conceived the economic and financial problems in terms of the existing, actual conditions, usually in disequilibrium or unstable equilibrium (in case of stagnation) and neglected the sense of right direction expressed in factor “P” or the realization of general, stable equilibrium. That is the main reason why the modern revolution failed in the past and is failing in front of our eyes in the present. The equation of unified knowledge, perceived as a sui generis synthesis between classical and modern thinking has been applied rigorously and systematically in writing the enclosed American‐British economic, monetary, financial and social stabilization plans. In the final analysis, a new economic philosophy, based on a synthesis between classical and modern thinking, called here the new economics of unified knowledge, is applied to solve the malaise of the twentieth century which resulted from a confusion between thinking in terms of stable equilibrium on the one hand and disequilibrium or unstable equilibrium on the other.

The purpose of this paper is to investigate two audit committee characteristics – independence and expertise of the audit committee – and the property‐liability insurers' financial reporting quality, which is proxied by loss reserve error.

The authors' hypotheses are tested using multivariate analysis where the loss reserve error is the dependent variable, and audit committee independence, and four types of audit committee financial expertise (accounting, finance, supervisory, and insurance expertise) are the testing variables.

It is found that accounting, finance, and insurance financial expertise are associated with more accurate loss reserve estimate. In contrast, a supervisory financial expertise and an independence audit committee are not found to be associated with better loss reserve quality.

The sample includes publicly‐held property‐liability insurers. Although the results from publicly‐held insurers could provide a good laboratory for such investigation in all insurers, they might be limited due to different organization structures of public vs private insurers.

The implications of the study are important for the SEC and NAIC. The results suggest that the requirements on the audit committee financial expertise would be necessary, even in highly regulated industry, such as property‐casualty insurance.

The paper contributes to the extant literature by studying audit committee characteristics in the insurance industry. It also contributes to the extant literature on audit committee effectiveness by decomposing the financial expertise into four types of financial expertise (accounting, finance, supervisory, or insurance expertise) and investigates which (if any) of these four types of expertise really drives the improvement of loss reserve quality.

The purpose of this paper is to analyze how exchange ratios in mergers can be assessed when the companies economic capital valuation is carried out in a stochastic framework with financial assets and minimum guarantees.

The paper is a theoretical one. Its main objective is to present a quantitative model for exchange ratios accounting, introducing a stochastic pricing model in the presence of stochastic cash‐flows and representing contractual embedded real option such as minimum guarantees.

The paper presents a financial model to evaluate the differences in exchange ratios induced by stochastic capital reserves in the merging companies.

Stochastic cash‐flows in the economic capital of the merging companies set up a stochastic capital reserve which represents an additional value and could induce important differences in exchange ratios.

The model is fully applicable, also in the presence of embedded real options such as minimum guarantees, but requires the volatility of the underlying.

The paper should be useful under both a managerial and a theoretical use in order to evaluate stochastic exchange ratios.

The purpose of this paper is to transfer the concept of market‐consistent embedded value (MCEV) from life to non‐life insurance. This is an important undertaking since differences in management techniques between life and non‐life insurance make management at the group level very difficult. The purpose of this paper is to offer a solution to this problem.

After explaining MCEV, the authors derive differences between life and non‐life insurance and develop a MCEV model for non‐life business. The model framework is applied to a German non‐life insurance company to illustrate its usefulness in different applications.

The authors show an MCEV calculation based on empirical data and set up an economic balance sheet. The value implications of varying loss ratios, cancellation rates, and costs within a sensitivity analysis are analyzed. The usefulness of the model is illustrated within a value‐added analysis. The authors also embed the MCEV concept in a simplified model for an insurance group, to derive group MCEV and outline differences between local GAAP, IFRS and MCEV.

The analysis provides new and relevant information to the stakeholders of an insurance company. The model provides information comparable to that provided by embedded value models currently used in the life insurance industry and fills a gap in the literature. The authors reveal significant valuation difference between MCEV and IFRS and argue that there is a need for a consistent MCEV approach at the insurance‐group level.

The paper presents a new valuation technique for non‐life insurance that is easy to use, simple to interpret, and directly comparable to life insurance. Despite the growing policy interest in embedded value, not much academic attention has been given to this methodology. The authors hope that this work will encourage further discussion on this topic in academia and practice.