Surplus for short-tailed vs long-tailed lines
Hi,
All else being equal, does a short-tailed line of business tend to require more or less surplus than a long-tailed line? I'm trying to better understand the disadvantage listed in the wiki that the IEE surplus allocation method doesn't reflect risk characteristics of the LOB (short-tailed vs long-tailed).
Thanks
Comments
On the one hand, the magnitude of reserve estimate uncertainty and of downside risk is higher for long-tailed lines, all else being equal. Therefore, they would need more surplus. On the other hand, Property (a short-tail line) is subject to catastrophe risk, which brings the need to allocate more surplus to it than to line that is not exposed to catastrophes, like General Liability.