The notes describe the split between these two concepts [in isolation or when referring to Counterparty credit risk] along the Written / Earned or not. What exactly do the notes mean when they refer to Written / Earned - Im assuming its 'Written and Earned' Is this so? Cheers, Alun.
Hi Alun, I think, though not sure, there should be written rather than written/earned... Because if we consider earned as its meaning in accounting, earned-and-unearned will present from start to end of any policies, so that will trigger both Premium Risk Capital and Reserving Risk Capital at any time for a particular policy. Written is as at a time, it can be point where Premium risk premium before that point and Reserving Risk Capital after that point. You should consider insurance risk and credit risk separately(even every risk should considered separately then diversification benefit can be applied to reduce risk)... i.e. while calculating risk capital for insurance you should assume collection will be in full and non-collection risk will be presented in Credit risk Capital.
A standard explanation is this: "Premium risk normally relates to unexpired risk (ie business written but not yet earned, plus some other technicalities, like business that your are legally obliged to accept in the future, even though it hasn't yet incepted). Incidentally that's why you often see a large premium risk charge for cat-exposed business, because the insurer doesn't yet know whether the catastrophe will happen or not. The premium risk is that the unexpired risks and associated expenses will be higher than the premiums received in respect of those risks. Reserve risks stems from two sources: either the absolute level of claims (on earned business) is misestimated, or the actual claims will fluctuate around their true value due to the random nature of the business." Mind you, as the ST7 notes say on page 8 of chapter 20, the precise delineation of reserve risk and premium risk may vary, depending on whether the dividing line is the time of writing or the time of earning.
