A Dynamic Approach to Modeling Free Tail Coverage

This paper presents two approaches to estimating free tail coverage unearned premium reserves. The first approach starts with an existing deterministic model and outlines several enhancements that can be added if there is sufficient data on the insured population. Specific modifications presented include reflecting waiting periods for eligibility, trends in mortality rates, gender distinctions in mortality rates, differences in policy limits and semi-retired status. The second approach uses a completely different method. Instead of computing expected values for a cohort of insureds, the second approach simulates possible individual insured results. This is accomplished using elements of stochastic simulation for the random generation of interest and mortality variables so as to create a truly Dynamic approach. Modifications in the approach focus on modeling interest rates, loss inflation rates and insured mortality behavior.