172
Reading List General Insurance 2011-2012 Institute and Faculty of Actuaries December 2012 Compiled by Scott McLachlan
Reading List
General Insurance 2011-2012
Institute and Faculty of Actuaries
December 2012
Compiled by Scott McLachlan
ii
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v
Contents ACCOUNTING STANDARDS ............................................................................................................................. 1
ACTUARIAL EDUCATION ................................................................................................................................ 1
AGENCIES ......................................................................................................................................................... 1
ALGORITHMS ................................................................................................................................................... 1
ALTERNATIVE RISK TRANSFER ..................................................................................................................... 2
ANALYSIS.......................................................................................................................................................... 2
ANNUITIES ....................................................................................................................................................... 2
APPLIED ECONOMETRICS .............................................................................................................................. 3
APPOINTED ACTUARY .................................................................................................................................... 3
ARGENTINA ...................................................................................................................................................... 3
ARTIFICIAL INTELLIGENCE ............................................................................................................................ 4
ASSET MANAGEMENT ..................................................................................................................................... 4
ASYMMETRIC INFORMATION ........................................................................................................................ 5
AUSTRALIA ....................................................................................................................................................... 5
AUSTRIA ........................................................................................................................................................... 5
AUTOMOBILE INSURANCE ............................................................................................................................. 5
BANCASSURANCE ............................................................................................................................................ 6
BANKING .......................................................................................................................................................... 6
BANKRUPTCY................................................................................................................................................... 6
BANKS AND BANKING ..................................................................................................................................... 6
BAYES THEOREM............................................................................................................................................. 7
BAYESIAN ANALYSIS ....................................................................................................................................... 7
BAYESIAN METHODS ...................................................................................................................................... 8
BEHAVIOUR, CONSUMER ................................................................................................................................ 8
BENCHMARKING ............................................................................................................................................. 8
BONDS............................................................................................................................................................... 9
BONUS MALUS ................................................................................................................................................. 9
BONUS SYSTEMS .............................................................................................................................................. 9
BOOTSTRAP ..................................................................................................................................................... 9
BROWNIAN MOTION ..................................................................................................................................... 10
BUILDINGS INSURANCE ................................................................................................................................ 11
BUSINESS ENTERPRISE ................................................................................................................................ 11
vi
BUSINESS INTERRUPTION ........................................................................................................................... 11
CANADA .......................................................................................................................................................... 12
CAPITAL .......................................................................................................................................................... 12
CAPITAL ALLOCATION .................................................................................................................................. 13
CAPITAL CHOICE ........................................................................................................................................... 13
CAPITAL FORMATION ................................................................................................................................... 13
CAPITAL INJECTIONS .................................................................................................................................... 13
CAPITAL MANAGEMENT .............................................................................................................................. 14
CAPITAL MARKETS ....................................................................................................................................... 14
CATASTROPHE ............................................................................................................................................... 14
CATASTROPHE INSURANCE ......................................................................................................................... 15
CATASTROPHE THEORY ............................................................................................................................... 19
CATERING ....................................................................................................................................................... 19
CHAIN LADDER METHODS ........................................................................................................................... 19
CHAIN LADDER TESTS .................................................................................................................................. 20
CHANNELS OF DISTRIBUTION ..................................................................................................................... 20
CLAIM FREQUENCY ....................................................................................................................................... 20
CLAIMS ........................................................................................................................................................... 21
CLAIMS RESERVES ........................................................................................................................................ 22
CLIMATE CHANGE ......................................................................................................................................... 23
CLIMATE RISK ................................................................................................................................................ 25
COINSURANCE ............................................................................................................................................... 25
COMMERCIAL INSURANCE ........................................................................................................................... 25
COMMISSION .................................................................................................................................................. 26
COMPUTER SYSTEMS .................................................................................................................................... 26
CONTINGENT BUSINESS INTERRUPTION ................................................................................................... 27
CONTINGENT COMMISSION ......................................................................................................................... 27
CONTROL ........................................................................................................................................................ 27
COPULAS ......................................................................................................................................................... 28
CORPORATE INSURANCE ............................................................................................................................. 29
CORPORATE STRATEGY................................................................................................................................ 29
COSTS .............................................................................................................................................................. 29
COUNTING PROCESS ..................................................................................................................................... 30
CREDIBILITY .................................................................................................................................................. 30
CREDIT RATING ............................................................................................................................................. 30
vii
CREDIT RISK .................................................................................................................................................. 31
DAMAGES ....................................................................................................................................................... 31
DATA ............................................................................................................................................................... 31
DEATH BENEFIT ............................................................................................................................................ 31
DEBT FINANCING .......................................................................................................................................... 32
DECENTRALISED ........................................................................................................................................... 32
DEMUTUALISATION ...................................................................................................................................... 32
DENMARK....................................................................................................................................................... 33
DERIVATIVES ................................................................................................................................................. 33
DEVELOPMENT .............................................................................................................................................. 33
DIRECTORS' AND OFFICERS' INSURANCE .................................................................................................. 34
DISABILITY BENEFITS .................................................................................................................................. 34
DISABILITY INSURANCE ............................................................................................................................... 34
DISAPPOINTMENT THEORY ......................................................................................................................... 35
DISCOUNTING ................................................................................................................................................ 35
DISCRIMINATION .......................................................................................................................................... 35
DISEASES AND DISORDERS .......................................................................................................................... 36
DIVERSIFICATION ......................................................................................................................................... 36
DIVIDENDS ..................................................................................................................................................... 36
DYNAMIC HEDGING ....................................................................................................................................... 37
EARLY RETIREMENT..................................................................................................................................... 37
EARTHQUAKES .............................................................................................................................................. 37
EASTERN EUROPE ......................................................................................................................................... 38
ECONOMIC GROWTH .................................................................................................................................... 38
ECONOMIC INDICATORS ............................................................................................................................... 39
ECONOMIC PROJECTIONS ............................................................................................................................. 39
ECONOMIC RESEARCH .................................................................................................................................. 39
ECONOMICS .................................................................................................................................................... 39
EDUCATION .................................................................................................................................................... 39
EMBEDDED VALUE ........................................................................................................................................ 40
EMERGING MARKETS ................................................................................................................................... 40
EMPLOYEES ................................................................................................................................................... 40
ENERGY RESOURCES ..................................................................................................................................... 41
ENTERPRISE RISK MANAGEMENT .............................................................................................................. 41
ENVIRONMENT .............................................................................................................................................. 42
viii
EPIDEMIOLOGY ............................................................................................................................................. 42
EQUITIES ........................................................................................................................................................ 42
EQUITY RELEASE SCHEMES ......................................................................................................................... 42
EUROPE .......................................................................................................................................................... 43
EUROPEAN UNION ........................................................................................................................................ 43
EXCESS OF LOSS REINSURANCE .................................................................................................................. 43
EXPECTED UTILITY ....................................................................................................................................... 44
EXPENSES ....................................................................................................................................................... 44
EXPOSURE TO RISK ....................................................................................................................................... 45
EXTREME VALUE THEORY ........................................................................................................................... 45
FARM INSURANCE ......................................................................................................................................... 45
FINANCE ......................................................................................................................................................... 45
FINANCIAL CRISES ........................................................................................................................................ 46
FINANCIAL EDUCATION ............................................................................................................................... 46
FINANCIAL STATEMENTS ............................................................................................................................ 47
FIRE INSURANCE ........................................................................................................................................... 47
FLOODS ........................................................................................................................................................... 47
FRAUD ............................................................................................................................................................. 48
FUNDING ........................................................................................................................................................ 48
GENDER .......................................................................................................................................................... 48
GENERAL INSURANCE .................................................................................................................................. 48
GENERAL INSURANCE COMPANY ................................................................................................................ 59
GENERALISED LINEAR MODELS .................................................................................................................. 59
GERMANY ....................................................................................................................................................... 61
GHANA ............................................................................................................................................................ 61
GLOBALISATION ............................................................................................................................................ 62
GOVERNANCE ................................................................................................................................................ 62
GRADUATION ................................................................................................................................................. 63
GREECE ........................................................................................................................................................... 63
GUARANTEES ................................................................................................................................................. 63
HEALTH INSURANCE .................................................................................................................................... 64
HEDGING ........................................................................................................................................................ 64
HISTORY ......................................................................................................................................................... 65
HOUSING MARKET ........................................................................................................................................ 65
HURRICANES .................................................................................................................................................. 65
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HYPERBOLIC TRANSFORM ........................................................................................................................... 66
IMMUNISATION ............................................................................................................................................. 66
INDEXED ANNUITIES .................................................................................................................................... 66
INFORMATION ............................................................................................................................................... 66
INSOLVENCY .................................................................................................................................................. 67
INSURANCE .................................................................................................................................................... 67
INSURANCE BROKING ................................................................................................................................... 70
INSURANCE COMPANIES .............................................................................................................................. 70
INSURANCE COMPANY ................................................................................................................................. 72
INSURANCE CONTRACTS .............................................................................................................................. 72
INSURANCE INDUSTRY ................................................................................................................................. 73
INSURANCE LAW ........................................................................................................................................... 75
INTEREST RATES ........................................................................................................................................... 75
INTERNATIONAL ........................................................................................................................................... 76
INTERNATIONAL ASSOCIATION FOR THE STUDY OF INSURANCE ECONOMICS .................................... 76
INTERNATIONAL TRADE .............................................................................................................................. 76
INVESTMENT ................................................................................................................................................. 76
INVESTMENT GUARANTEES ........................................................................................................................ 76
INVESTMENT MANAGEMENT ...................................................................................................................... 77
ITALY .............................................................................................................................................................. 77
JAPAN .............................................................................................................................................................. 77
JUMP DIFFUSION ........................................................................................................................................... 77
LAW ................................................................................................................................................................. 78
LEAST SQUARES ............................................................................................................................................ 78
LIABILITIES .................................................................................................................................................... 78
LIABILITY ....................................................................................................................................................... 79
LIABILITY INSURANCE.................................................................................................................................. 79
LIFE ASSURANCE ........................................................................................................................................... 80
LIFE INSURANCE ........................................................................................................................................... 81
LIQUIDITY ...................................................................................................................................................... 82
LOGNORMAL DISTRIBUTION ....................................................................................................................... 83
LONG-TERM ................................................................................................................................................... 83
LONG TERM CARE COVER ............................................................................................................................ 83
LONGEVITY RISK ........................................................................................................................................... 83
LOSS ................................................................................................................................................................ 85
x
LOSS FUNCTIONS ........................................................................................................................................... 86
LOSS RATIOS .................................................................................................................................................. 86
LOSS RESERVING ........................................................................................................................................... 86
LOSS TRIANGLES ........................................................................................................................................... 87
LOWER BARRIER ........................................................................................................................................... 87
MANAGEMENT ............................................................................................................................................... 87
MANAGEMENT ORGANISATION STRUCTURE ............................................................................................ 88
MARKET TRENDS .......................................................................................................................................... 88
MARKOV PROCESSES .................................................................................................................................... 88
MATHEMATICAL MODELS ............................................................................................................................ 89
MATHEMATICS .............................................................................................................................................. 90
MECHANISM DESIGN .................................................................................................................................... 91
MICROINSURANCE ........................................................................................................................................ 91
MODELLING ................................................................................................................................................... 92
MODELS .......................................................................................................................................................... 94
MONTE CARLO TECHNIQUES ....................................................................................................................... 95
MORTALITY .................................................................................................................................................... 95
MORTALITY PROJECTIONS ........................................................................................................................... 95
MORTGAGE INSURANCE ............................................................................................................................... 96
MORTGAGES ................................................................................................................................................... 96
MOTIVATION ................................................................................................................................................. 97
MOTOR INSURANCE ...................................................................................................................................... 98
MULTIVARIATE ANALYSIS ........................................................................................................................... 99
NETHERLANDS .............................................................................................................................................. 99
NEW ZEALAND ............................................................................................................................................ 100
NO FAULT ..................................................................................................................................................... 100
NORWAY ....................................................................................................................................................... 100
OCCUPATIONAL HEALTH ........................................................................................................................... 100
OCCUPATIONAL PENSIONS ........................................................................................................................ 101
OLDER WORKERS ........................................................................................................................................ 101
OPTIMAL REINSURANCE ............................................................................................................................ 101
OPTION PRICING ......................................................................................................................................... 102
ORGANISATION AND METHODS ................................................................................................................ 102
PENSION PLANS ........................................................................................................................................... 103
PENSIONS ..................................................................................................................................................... 103
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PERFORMANCE ............................................................................................................................................ 104
PERSONAL INJURY COMPENSATION ......................................................................................................... 104
POISSON PROCESS ....................................................................................................................................... 104
POVERTY ...................................................................................................................................................... 105
PREMIUM CALCULATION ........................................................................................................................... 105
PREMIUM RESERVES .................................................................................................................................. 106
PREMIUMS ................................................................................................................................................... 106
PRICE COMPETITION .................................................................................................................................. 106
PRICING ........................................................................................................................................................ 107
PROBABILITY DISTORTION ........................................................................................................................ 108
PRODUCTS .................................................................................................................................................... 109
PROFIT AND LOSS ....................................................................................................................................... 109
PROPERTY INSURANCE .............................................................................................................................. 109
PROPERTY PRICES ...................................................................................................................................... 111
PROSPECT THEORY ..................................................................................................................................... 112
PRUDENCE ................................................................................................................................................... 112
RANDOM PROCESSES .................................................................................................................................. 112
RANDOM WALK MODEL ............................................................................................................................. 112
RATEMAKING ............................................................................................................................................... 112
REFORM ........................................................................................................................................................ 113
REGRESSION ................................................................................................................................................ 113
REGULATION ............................................................................................................................................... 113
REINSURANCE ............................................................................................................................................. 115
REINSURANCE COLLATERAL ..................................................................................................................... 119
RENEWAL PROCESS .................................................................................................................................... 119
RENEWAL THEORY ..................................................................................................................................... 119
REPUTATION RISK ...................................................................................................................................... 119
RESEARCH .................................................................................................................................................... 120
RESERVE RISK.............................................................................................................................................. 120
RESERVING................................................................................................................................................... 120
RETIREMENT ............................................................................................................................................... 121
REVIEWS ...................................................................................................................................................... 121
RISK ............................................................................................................................................................... 122
RISK ANALYSIS ............................................................................................................................................ 123
RISK APPETITE ............................................................................................................................................ 124
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RISK AVERSION ........................................................................................................................................... 124
RISK BASED CAPITAL .................................................................................................................................. 125
RISK CLASSIFICATION ................................................................................................................................ 125
RISK (INSURANCE) ...................................................................................................................................... 126
RISK MANAGEMENT ................................................................................................................................... 126
RISK MEASUREMENT .................................................................................................................................. 132
RISK PREMIA ................................................................................................................................................ 133
RISK SHARING .............................................................................................................................................. 133
RISK TRANSFER ........................................................................................................................................... 133
RUIN PROBABILITY ..................................................................................................................................... 134
RUIN THEORY .............................................................................................................................................. 135
SCENARIO GENERATION ............................................................................................................................ 136
SECURITIES .................................................................................................................................................. 136
SECURITISATION ......................................................................................................................................... 136
SHAREHOLDERS .......................................................................................................................................... 137
SIMULATION ................................................................................................................................................ 137
SOCIAL SECURITY ........................................................................................................................................ 137
SOLVENCY .................................................................................................................................................... 138
SOLVENCY II ................................................................................................................................................. 139
SOLVENCY TESTS ........................................................................................................................................ 142
SOUTH AFRICA ............................................................................................................................................. 142
SPAIN ............................................................................................................................................................ 142
SPARRE ANDERSEN MODEL ....................................................................................................................... 143
STANDARDS AND SPECIFICATIONS .......................................................................................................... 143
STATISTICS................................................................................................................................................... 143
STOCHASTIC MODELS ................................................................................................................................. 143
STOCHASTIC PROCESSES ............................................................................................................................ 144
STOCK MARKET ........................................................................................................................................... 145
STOCKS AND SHARES .................................................................................................................................. 145
STOP LOSS .................................................................................................................................................... 145
STORMS ........................................................................................................................................................ 146
STRESS TESTS .............................................................................................................................................. 146
SUPERVISION ............................................................................................................................................... 146
SURETY ......................................................................................................................................................... 146
SWITZERLAND ............................................................................................................................................. 147
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TABULATED STATISTICS ............................................................................................................................ 147
TAIL RISK MEASURES ................................................................................................................................. 147
TAIWAN ........................................................................................................................................................ 148
TAX ................................................................................................................................................................ 148
TEMPERANCE .............................................................................................................................................. 148
TERRORISM .................................................................................................................................................. 149
TERRORISM INSURANCE ............................................................................................................................ 149
THIRD PARTY TARIFF ................................................................................................................................. 149
TRANSACTION COSTS ................................................................................................................................. 149
UNCERTAINTY ............................................................................................................................................. 150
UNDERWRITING .......................................................................................................................................... 150
UNEMPLOYMENT ........................................................................................................................................ 151
UNEMPLOYMENT INSURANCE .................................................................................................................. 151
UNITED KINGDOM ....................................................................................................................................... 151
UNITED STATES ........................................................................................................................................... 152
VALUATION .................................................................................................................................................. 155
VALUATIONS ................................................................................................................................................ 155
VALUE-AT-RISK (VAR) ................................................................................................................................ 155
VARIABLE ANNUITIES ................................................................................................................................ 157
VARIANCE ANALYSIS .................................................................................................................................. 158
VOLATILITY.................................................................................................................................................. 158
WEATHER ..................................................................................................................................................... 158
WORKERS' COMPENSATION INSURANCE ................................................................................................. 159
1
ACCOUNTING STANDARDS Insurance accounting : A new era. Foroughi, Kamran (2011). - London: Institute and Faculty of Actuaries, 2011. - 65 pages. [RKN: 73664] Shelved at: JOU
Insurance accounting has for many years proved a challenging topic for standard setters, perparers and users, often described as a "black box". Will recent developments, in particular the July 2010 Insurance Contracts Exposure Draft, herald a new era? This paper reviews these developments, settting out key issues and implications. It concentrates on issues relevant to life insurers, although much of the content is also relevant to non-life insurers. This paper compares certain IFRS and Solvency II developments, recognising that UK insurers face challenges in implementing new financial and regulatory reporting requirements in similar timeframes. The paper considers resulting external disclosure requirements and a possible future role for supplementary information. Presented to the Institute and Faculty of Actuaries on 11 April 2011 (London) and 11 May 2011 (Edinburgh). http://www.actuaries.org.uk/research-and-resources/documents/insurance-accounting-new-era
Risk margin estimation through the cost of capital approach: some conceptual issues. Floreani, Alberto Palgrave Macmillan, [RKN: 45332] Shelved at: Per: Geneva (Oxf) Geneva Papers on Risk and Insurance (2011) 36(2) : 226-253.
The Solvency II directive requires that insurance liabilities are valued using a best estimate plus a risk margin. The risk margin should be estimated using the cost of capital approach, that is the cost of the solvency capital requirement—which is computed through a value at risk measure—needed to support the insurance obligation until settlement. The unitary cost of capital applied to the future capital requirement should be fixed. This paper deals with conceptual issues relating to the risk margin estimate through the cost of capital approach. It shows that the Solvency II specification of the methodology is consistent with financial economics. However, the theoretical framework required (a frictionless and normally distributed world) is too far-fetched to be acceptable. Even if these conditions were satisfied, a variable unitary cost of capital must be used. Available via Athens: Palgrave MacMillan http://www.openathens.net
ACTUARIAL EDUCATION Gathering pace. Reinhard, Dirk; Clarke, Daniel Staple Inn Actuarial Society, [RKN: 45473] Shelved at: Per: Actuary (Oxf) Per: Actuary (Lon) Shelved at: SIA/ACT The Actuary (2011) October : 25.
Dirk Reinhard and Daniel Clarke provide an overview of the UK‘s first Microinsurance Learning Session, hosted at Staple Inn. http://www.theactuary.com/
AGENCIES Regulation and reform of rating agencies in the European Union : an insurance industry perspective. Theis, Anja; Wolgast, Michael Palgrave Macmillan, [RKN: 45541] Shelved at: Per: Geneva (Oxf) Geneva Papers on Risk and Insurance (2012) 37(1) : 47-76.
This article investigates the current discussion on the regulatory framework for credit rating agencies (CRAs) from the perspective of the insurance industry, focusing on the European Union. It becomes apparent that the new European system of regulation and supervision of CRAs conforms well to general principles of economic theory and can be expected to resolve many issues of concern. In contrast, some of the additional policy options currently discussed in Europe could involve substantial costs and risks for market participants and the financial system without contributing further to the objectives of CRA reform. Available via Athens: Palgrave MacMillan http://www.openathens.net
ALGORITHMS Fast remote but not extreme quantiles with multiple factors: applications to Solvency II and Enterprise Risk Management. Chauvigny, Matthieu; Devineau, Laurent; Loisel, Stéphane; Maume-Deschamps, Véronique [RKN: 44809] Shelved at: online only European Actuarial Journal (2011) 1(1) July : 131-157.
For operational purposes, in Enterprise Risk Management or in insurance for example, it may be important to estimate remote (but not extreme) quantiles of some function f of some random vector. The call to f may be time- and resource-consuming so that one aims at reducing as much as possible the number of calls to f. In this paper, we propose some ways to address this problem of
2
general interest. We then numerically analyze the performance of the method on insurance and Enterprise Risk Management real-world case studies. Available online via Athens http://www.openathens.net
ALTERNATIVE RISK TRANSFER Computing bounds on the expected payoff of Alternative Risk Transfer products. Villegas, Andrés M; Medaglia, Andrés L; Zuluaga, Luis F [RKN: 44786] Shelved at: Online Only Shelved at: Online Only Insurance: Mathematics & Economics (2012) 51(2) : 271-281.
The demand for integrated risk management solutions and the need for new sources of capital have led to the development of innovative risk management products that mix the characteristics of traditional insurance and financial products. Such products, usually referred as Alternative Risk Transfer (ART) products include: (re)insurance contracts that bundle several risks under a single policy; multi-trigger products where the payment of benefits depends upon the occurrence of several events; and insurance linked securities that place insurance risks in the capital market. Pricing of these complex products usually requires tailor-made complex valuation methods that combine derivative pricing and actuarial science techniques for each product, as well as strong distributional assumptions on the ART‘s underlying risk factors. We present here an alternative methodology to compute bounds on the price of ART products when there is limited information on the distribution of the underlying risk factors. In particular, we develop a general optimization-based method that computes upper and lower price bounds for different ART products using market data and possibly expert information about the underlying risk factors. These bounds are useful when the structure of the product is too complex to develop analytical or simulation valuation methods, or when the scarcity of data makes it difficult to make strong distributional assumptions on the risk factors. We illustrate our results by computing bounds on the price of a floating retention insurance contract, and a catastrophe equity put (CatEPut) option. Available via Athens: ScienceDirect http://www.openathens.net/
ANALYSIS Insurability in microinsurance markets : an analysis of problems and potential solutions. Biener, Christian; Eling, Martin Palgrave Macmillan, [RKN: 45542] Shelved at: Per: Geneva (Oxf) Geneva Papers on Risk and Insurance (2012) 37(1) : 77-107.
This paper provides a comprehensive analysis of the insurability of risks in microinsurance markets. Our aim is to enhance the understanding of impediments to and facilitators of microinsurance from an economic perspective and outline potential solutions. The motivation for conducting this analysis arises from two important aspects. (1) Despite strong growth of microinsurance markets in recent years, more than 90 per cent of the poor population in developing countries have limited or no access to insurance. (2) Industry practitioners frequently highlight problems in the insurability of risks that hinder the development of microinsurance. We review 131 papers and find that the most severe problems stem from insufficient resources for risk evaluation, small size of insurance groups, information asymmetries and the size of the insurance premium. On the basis of the analysis, we discuss a number of potential solutions such as, for example, a cooperative microinsurance architecture. Available via Athens: Palgrave MacMillan http://www.openathens.net
ANNUITIES Market discipline in the individual annuity market. Carson, James M; Doran, James S; Dumm, Randy E - 21 pages. [RKN: 74768] Shelved at: JOU Risk Management and Insurance Review (2011) 14 (1) : 27-47.
Theoretical expectations related to market discipline generally suggest a positive relationship between firm financial strength and price. We examine market discipline in the individual annuity market by measuring annuity contract yields during the accumulation phase and find that, among other results, firm financial strength is positively related to yield (i.e., negatively related to price). We argue that this apparent anomaly can be viewed as a form of market discipline itself, for at least four related reasons, the foremost reason being that in order to compete in the asset accumulation market, an insurer has an incentive to provide a track record of historically strong credited interest rates within the annuity. In addition, the credited interest rates within an annuity are only revealed ex post over time, thus diminishing consumer ability to impose traditional market discipline relating firm financial strength and price, and also enabling financially weaker insurers to impose higher ex post prices in the form of lower realized annuity yields. Available via Athens: Wiley Online Library http://www.openathens.net
3
APPLIED ECONOMETRICS Are the dimensions of private information more multiple than expected? : Information asymmetries in the market of supplementary private health insurance in england. Karlsson, Martin; Klohn, Florian; Rickayzen, Ben (2012). - London: Cass Business School, 2012. - 30 pages. [RKN: 73994]
Our study re-examines standard econometric approaches for the detection of information asymmetries on insurance markets. We claim that evidence based on a standard framework with 2 equations, which uses potential sources of information asymmetries, should stress the importance of heterogeneity in the parameters. We argue that conclusions derived from this methodology can be misleading if the estimated coefficients in such an `unused characteristics' framework are driven by different parts of the population. We show formally that an individual's expected risk from the perspective of insurance, conditioned on certain characteristics (which are not used for calculating the risk premium), can equal the population's expectation in risk { although such characteristics are both related to risk and insurance probability, which is usually interpreted as an indicator of information asymmetries. We provide empirical evidence on the existence of information asymmetries in the market for supplementary private health insurance in the UK. Overall, we found evidence for advantageous selection into the private risk pool; i.e. people with lower health risk tend to insure more. The main drivers of this phenomenon seem to be characteristics such as income and wealth. Nevertheless, we also found parameter heterogeneity to be relevant, leading to possible misinterpretation if the standard `unused characteristics' approach is applied. 1995 onwards available online. Download as PDF. http://www.cass.city.ac.uk/research-and-faculty/faculties/faculty-of-actuarial-science-and-insurance/publications/actuarial-research-reports
APPOINTED ACTUARY Loss reserves and the employment status of the appointed actuary. Kelly, Mary; Kleffner, Anne; Li, Si Society of Actuaries, - 21 pages. [RKN: 70643] Shelved at: Per: NAAJ (Oxf) Per NAAJ (Lon) Shelved at: JOU North American Actuarial Journal (2012) 16 (3) : 285-305.
Property/casualty (P/C) insurers are required to establish loss reserves for unpaid losses at the time that the loss has occurred or is reasonably expected to have occurred. We examine factors that may impact the accurate setting of loss reserves. These include the level of rate regulation faced by the insurer and the incentives to underestimate or overestimate reserves to improve financial ratios or improve solvency scores, to reduce earnings, to defer taxes, or to smooth earnings volatility in order to meet shareholder expectations. The employment status of the Appointed Actuary, that is, whether the Appointed Actuary is an employee of the firm or a consultant, may also impact reserve accuracy. Using a variety of regression models with data from 1995 to 2010, we examine the impact of these factors on the accuracy of reserves posted by Canadian P/C insurers. Our results provide no evidence of systematic differences in the magnitude or direction of loss reserve errors between insurers that use company actuaries versus those that use consultant actuaries. However, we find that for both consultant and company actuaries positive reserve errors are associated with increases in global stock market returns and decreases in unanticipated inflation. The insurance market cycle impacts reserve errors for company actuaries and not consultant actuaries. As well, our results indicate that as the proportion of short-tailed business increases in a company, consultant actuaries are more likely to over-reserve. Similar to many previous studies using U.S. data, we do not find strong evidence regarding insurers‘ incentives to deliberately overstate or understate reserves: Loss reserves are relatively unbiased estimates of the true losses paid. Thus these findings should be welcome news to the actuarial profession in Canada and to the prudential regulator: The Appointed Actuary, regardless of employment status, provides objective and unbiased estimates of insurers‘ largest liability. http://www.soa.org/news-and-publications/publications/journals/naaj/naaj-detail.aspx
ARGENTINA Disability insurance risks : The Argentinian case. Belliard, Matias; Grushka, Carlos; De Biase, Marcelo [RKN: 45801] Shelved at: Per: ISSR (Oxf) International Social Security Review (2012) 65 (3) : 49-75.
This article analyses the risk of disability facing workers who contribute to the Argentinian Integrated Social Security System (Sistema Integrado Previsional Argentino— SIPA). Using administrative records as our source of data for the period 2000-2006, the results indicate that 1.46 workers per 1,000 became disabled annually during that period. The risk of disability rates were higher for men than for women, but increased with age for both sexes. The risk of disability rates have also been broken down by pathology and social security scheme, taking the effects of age and sex into account. To conclude, international comparisons are presented.
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ARTIFICIAL INTELLIGENCE Computational intelligence with applications to general insurance: a review: I – The role of statistical learning. Parodi, Pietro [RKN: 43655] Shelved at: Per: AAS (Lon) Shelved at: JOU/AAS Annals of Actuarial Science (2012) 6(2) : 307-343.
This paper argues that most of the problems that actuaries have to deal with in the context of non-life insurance can be usefully cast in the framework of computational intelligence (a.k.a. artificial intelligence), the discipline that studies the design of agents which exhibit intelligent behaviour. Finding an adequate framework for actuarial problems has more than a simply theoretical interest: it also allows a knowledge transfer from the computational intelligence discipline to general insurance, wherever techniques have been developed for problems which are common to both contexts. This has already happened in the past (neural networks, clustering, data mining have all found applications to general insurance) but not systematically, with the result that many useful computational intelligence techniques such as sparsity-based regularisation schemes (a technique for feature selection) are virtually unknown to actuaries. In this first of two papers, we will explore the role of statistical learning in actuarial modelling. We will show that risk costing, which is at the core of pricing, reserving and capital modelling, can be described as a supervised learning problem. Many activities involved in exploratory analysis, such as data mining or feature construction, can be described as unsupervised learning. A comparison of different computational intelligence methods will be carried out, and practical insurance applications (rating factor selection, IBNER analysis) will also be presented. This paper has a following part: Computational intelligence with applications to general insurance: a review: II – Dealing with uncertain knowledge, Annals of Actuarial Science 6(2): 344-380 http://www.actuaries.org.uk/research-and-resources/pages/access-journals
Computational intelligence with applications to general insurance: a review: II – Dealing with uncertain knowledge. Parodi, Pietro [RKN: 43656] Shelved at: Per: AAS (Lon) Shelved at: JOU/AAS Annals of Actuarial Science (2012) 6(2) : 344-380.
This paper argues that most of the problems that actuaries have to deal with in the context of non-life insurance can be usefully cast in the framework of computational intelligence (a.k.a. artificial intelligence), the discipline that studies the design of agents which exhibit intelligent behaviour. Finding an adequate framework for actuarial problems has more than a simply theoretical interest: it also allows a technological transfer from the computational intelligence discipline to general insurance, wherever techniques have been developed for problems which are common to both contexts. This has already happened in the past (neural networks, clustering, data mining have all found applications to general insurance) but not in a systematic way. One of the objectives of this paper will therefore be to introduce some useful techniques such as sparsity-based regularisation and dynamic decision networks that are not yet known to the wider actuarial community. Whilst in the first part of this paper we dealt mainly with data-driven loss modelling under the assumption that all the data were accurate and fully relevant to the exercise, in this second part of the paper we explore how to deal with uncertain knowledge, whether this uncertainty comes from the fact that the data are not fully reliable (e.g. they are estimates) or from the fact that the knowledge is ―soft‖ (e.g. expert beliefs) or not fully relevant (e.g. market information on a given risk). Most importantly, we will deal with the problem of making pricing, reserving and capital decisions under uncertainty. It will be concluded that a Bayesian framework is the most adequate for dealing with uncertainty, and we will present a number of computational intelligence techniques to do this in practice. This paper has a preceding part: Computational intelligence with applications to general insurance: a review: II – The role of statistical learning, Annals of Actuarial Science 6(2): 307-343 http://www.actuaries.org.uk/research-and-resources/pages/access-journals
ASSET MANAGEMENT The interplay between insurers’ financial and asset risks during the crisis of 2007-2009. Baranoff, Etti G; Sager, Thomas W Palgrave Macmillan, [RKN: 44914] Shelved at: Per: Geneva (Oxf) Geneva Papers on Risk and Insurance (2011) 36(3) : 348-379.
In this study we compare the interplay between capital and asset risks before and during the 2007–2009 financial crisis for the U.S. life and health insurance industries partitioned into segments by product specialisation, size and governance. The results show substantial intra-industry variation in the partial elasticity of capital with respect to asset risk, as well as significant impact of the crisis. Segment variation was driven by product focus. Most notable is the greater impact of the crisis on the U.S. insurers specialising in annuities (least risky product) than on specialists in health lines (riskiest product). During the crisis, the elasticity between asset risk and capital declined for all segments indicating that insurers‘ operation may have shifted from offsetting risk to seeking risk. Available via Athens: Palgrave MacMillan http://www.openathens.net
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ASYMMETRIC INFORMATION Risk-sharing contracts with asymmetric information. Bourles, Renaud; Henriet, Dominique - 30 pages. [RKN: 74941] Shelved at: Per: Geneva (Oxf) Geneva Risk and Insurance Review (2012) 37 (1) : 27-56.
We examine how risk-sharing is impacted by asymmetric information on the probability distribution of wealth. We define the optimal incentive compatible agreements in a two-agent model with two levels of wealth. When there is complete information on the probability of the different outcomes, the resulting allocation satisfies the mutuality principle (which states that everyone's final wealth depends only upon the aggregate wealth of the economy). This is no longer true when agents have private information regarding their probability distribution of wealth. Asymmetry of information (i) makes ex-post equal sharing unsustainable between two low-risk agents, and (ii) induces exchanges when agents have the same realization of wealth.
AUSTRALIA Fresh insights - Australian/NZ home lending default risk. Gorst, Tim [RKN: 43241] Australian Actuarial Journal (2011) 17(1) : 1-25.
By using Basel 2 ('B2') risk and capital data published by the four largest Australian banks since 2008, this paper analyses Australian/NZ home lending credit default risk by comparing recent default experience against an implied 'through the cycle' default probability. Adapted and updated for the Australian Actuarial Journal from the original paper 'APS330 Home lending data - applications and insights' presented to the Institute of Actuaries of Australia, 5th Financial Services Forum, 13-14 May 2010 http://www.actuaries.asn.au/TechnicalResources/ActuaryJournals.aspx
AUSTRIA Risk and insurability of storm damages to residential buildings in Austria. Prettenthaler, Franz; Albrecher, Hansjorg; Koberla, Judith; Kortschak, Dominik Palgrave Macmillan, [RKN: 45663] Shelved at: Per: Geneva Geneva Papers on Risk and Insurance (2012) 37(2) : 340-364.
This paper develops a stochastic model to assess storm risk in Austria, which relates wind speed and actual losses. By virtue of a building-stock-value-weighted wind index, we use suitably normalised historical loss data of residential buildings over 12 years and corresponding wind speed data to calibrate the model. Subsequently, additional wind speed data is used to generate further scenarios and to obtain loss curves for storm risk that give rise to storm insurance loss quantiles and corresponding solvency capital requirements both on the aggregate and on the regional level. We also investigate the diversification effect across regions and use tools from extreme value theory to assess the insurability of storm risk in Austria in general. Available via Athens: Palgrave MacMillan http://www.openathens.net
AUTOMOBILE INSURANCE The impact of rate regulation on claims : Evidence from Massachusetts automobile insurance. Derrig, Richard A; Tennyson, Sharon - 27 pages. [RKN: 74761] Shelved at: JOU Risk Management and Insurance Review (2011) 14 (2) : 173-199.
The article tests the hypothesis that insurance price subsidies created by rate regulation lead to higher insurance cost growth. The article makes use of data from the Massachusetts private passenger automobile insurance market, where cross-subsidies were explicitly built into the rate structure through rules that limit rate differentials and differences in rate increases across driver rating categories. Two approaches are taken to study the potential loss cost reaction to the Massachusetts cross-subsidies. The first approach compares Massachusetts with all other states while controlling for demographic, regulatory, and liability coverage levels. Loss cost levels that were about 29 percent above the expected level are found for Massachusetts during years 1978–1998, when premiums charged were those fixed by the state and included explicit subsidies for high-risk drivers. A second approach considers changing cost levels across Massachusetts by studying loss cost changes by town and relating those changes to subsidy providers and subsidy receivers. Subsidy data based on accident year data for 1993–2004 show a significant and positive (relative) growth in loss costs and an increasing proportion of high-risk drivers for towns that were subsidy receivers, in line with the theory of underlying incentives for adverse selection and moral hazard. Available via Athens: Wiley Online Library http://www.openathens.net
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BANCASSURANCE A comparison of Bancassurance and traditional insurer sales channels. Chang, Pang-Ru; Peng, Jin-Lung; Fan, Chiang Ku Palgrave Macmillan, [RKN: 39977] Shelved at: Per: Geneva (Oxf) Geneva Papers on Risk and Insurance (2011) 36(1) : 76-93.
Although various sales channels exist for insurance products, no existing research compares their sales efficiency. This study offers a comparison of bancassurance and traditional sales channels in Taiwan. Using a data envelopment analysis approach, this study first computes the efficiencies of bancassurance and traditional sales channels separately. The efficiency score of the traditional sales channel is significantly higher than that of a comparable bancassurance channel. Furthermore, the efficiency relationship between the bancassurance and the traditional sales channels is independent. These findings have significant implications for the insurance industry and ongoing research in this field. Available via Athens: Palgrave MacMillan http://www.openathens.net
BANKING A comparative assessment of Basel II/III and Solvency II. Gatzert, Nadine; Wesker, Hannah [RKN: 43637] Shelved at: Per: Geneva Geneva Papers on Risk and Insurance (2012) 37(3) : 539-570.
In the course of creating a single European market for financial services and in the wake of two financial crises, regulatory frameworks in the financial services industry in the European Union have undergone significant change. One of the major reforms has been the transition from static rules-based systems towards principles-based regulation with the intent to better capture the risk situation of an undertaking. For insurance companies, the regulatory framework Solvency II is being finalised and is scheduled for implementation after 2013. At the same time, the regulatory regime for banking, Basel II, has been revised in response to the financial crisis; the new version is Basel III. The aim of this paper is to conduct a comprehensive and structured comparative assessment of Basel II/III and Solvency II in order to detect similarities and differences as well as the benefits and drawbacks of both regimes, which might be profitably addressed. The comparison is conducted against the background of the industries‘ characteristics and the objectives of regulation. Available via Athens: Palgrave MacMillan http://www.openathens.net
BANKRUPTCY Surety bonds with fair and unfair pricing. Wambach, Achim; Engel, Andreas R. [RKN: 45274] Shelved at: Per: Geneva (Oxf) Geneva Risk and Insurance Review (2011) 36 (1) : 36-50.
Surety bonds are instruments used in public and private procurement to avoid the problem of contractor bankruptcy. A surety company issuing such a bond guarantees to either finish the project itself or pay the bond to the procurement agency in case of contractor's bankruptcy. This situation is analysed under the assumption that the bond is either priced fairly, or a risk loading that is proportional to the money at risk is imposed. If the surety is priced fairly, full insurance (or even overinsurance) is optimal. If the surety is priced unfairly, more solvent contractors are more likely to win, thus the problem of abnormally low tenders is alleviated.
Who benefits from building insurance groups? A welfare analysis of optimal group capital management. Schlütter, Sebastian; Gründl, Helmut [RKN: 43638] Shelved at: Per: Geneva Geneva Papers on Risk and Insurance (2012) 37(3) : 571-593.
This paper compares the shareholder-value-maximising capital structure and pricing policy of insurance groups against that of stand-alone insurers. Groups can utilise intra-group risk diversification by means of capital and risk transfer instruments. We show that using these instruments enables the group to offer insurance with less default risk and at lower premiums than is optimal for stand-alone insurers. We also take into account that shareholders of groups could find it more difficult to prevent inefficient overinvestment or cross-subsidisation, which we model by higher dead-weight costs of carrying capital. The trade-off between risk diversification on the one hand and higher dead-weight costs on the other can result in group-building being beneficial for shareholders but detrimental for policyholders. Available via Athens: Palgrave MacMillan http://www.openathens.net
BANKS AND BANKING Risk management and the global banking crisis: lessons for insurance solvency regulation. Ashby, Simon Palgrave Macmillan, [RKN: 44913] Shelved at: Per: Geneva (Oxf) Geneva Papers on Risk and Insurance (2011) 36(3) : 330-347.
This paper investigates the causes of the banking crisis and the resulting lessons that need to be learned for insurance regulation. The paper argues that the banking crisis was predominantly caused by weaknesses in the management and regulation of banks,
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weaknesses that lead to problems such as flawed compensation schemes, poor risk management communication and an over-reliance on mathematical risk models. On the basis of these findings, doubts are expressed about the direction of certain insurance regulatory reforms—such as the focus on capital requirements and quantitative risk assessment (the so-called ―Pillar I‖ of most reforms). It is also recommended that a more balanced approach to insurance regulation should be implemented, which places much greater emphasis on enhancing risk management guidance and supervisory tools (Pillar II) and improving disclosure rules (Pillar III). Available via Athens: Palgrave MacMillan http://www.openathens.net
BAYES THEOREM Bayesian multivariate Poisson models for insurance ratemaking. Bermudez, Lluis; Karlis, Dimitris [RKN: 40017] Shelved at: Per: IME (Oxf) Insurance: Mathematics & Economics (2011) 48 (2) : 226-236.
When actuaries face the problem of pricing an insurance contract that contains different types of coverage, such as a motor insurance or a homeowner‘s insurance policy, they usually assume that types of claim are independent. However, this assumption may not be realistic: several studies have shown that there is a positive correlation between types of claim. Here we introduce different multivariate Poisson regression models in order to relax the independence assumption, including zero-inflated models to account for excess of zeros and overdispersion. These models have been largely ignored to date, mainly because of their computational difficulties. Bayesian inference based on MCMC helps to resolve this problem (and also allows us to derive, for several quantities of interest, posterior summaries to account for uncertainty). Finally, these models are applied to an automobile insurance claims database with three different types of claim. We analyse the consequences for pure and loaded premiums when the independence assumption is relaxed by using different multivariate Poisson regression models together with their zero-inflated versions. Available via Athens: ScienceDirect http://www.openathens.net
BAYESIAN ANALYSIS Bayesian over-dispersed Poisson model and the Bornhuetter & Ferguson claims reserving method. England, Peter D; Verrall, Richard J; Wüthrich, Mario V [RKN: 43653] Shelved at: Per: AAS (Lon) Shelved at: JOU/AAS Annals of Actuarial Science (2012) 6(2) : 258-283.
We consider the Bayesian over-dispersed Poisson (ODP) model for claims reserving in general insurance. We choose two different types of prior distributions for the parameters and then study the different Bayesian predictors. This study leads, on the one hand, to the classical chain ladder predictor and, on the other hand, to Bornhuetter & Ferguson predictors. We highlight (either analytically or numerically) how these predictors are obtained and how their prediction uncertainty can be determined. http://www.actuaries.org.uk/research-and-resources/pages/access-journals
Bayesian prediction of disability insurance frequencies using economic indicators. Donnelly, Catherine; Wüthrich, Mario V [RKN: 43657] Shelved at: Per: AAS (Lon) Shelved at: JOU/AAS Annals of Actuarial Science (2012) 6(2) : 381-400.
We use economic indicators to improve the prediction of the number of incurred but not recorded disability insurance claims, assuming that there is a link between the number of claims and the chosen economic indicators. We propose a Bayesian model where we model the claims development in three directions: along incurred periods, recording lag periods and calendar periods. A stochastic model of the economic indicators is incorporated into the calendar period development direction. Thus we allow for the impact of the economic environment on the number of claims. Applying the proposed model to data, we illustrate how the inclusion of economic indicators affects the prediction of the number of incurred but not recorded disability claims. http://www.actuaries.org.uk/research-and-resources/pages/access-journals
Skew mixture models for loss distributions: a Bayesian approach. Bernardi, Mauro; Maruotti, Antonello; Petrella, Lea [RKN: 44879] Shelved at: Online Only Shelved at: Online Only Insurance: Mathematics & Economics (2012) 51(3) : 617-623.
The derivation of loss distribution from insurance data is a very interesting research topic but at the same time not an easy task. To find an analytic solution to the loss distribution may be misleading although this approach is frequently adopted in the actuarial literature. Moreover, it is well recognized that the loss distribution is strongly skewed with heavy tails and presents small, medium and large size claims which hardly can be fitted by a single analytic and parametric distribution. Here we propose a finite mixture of Skew Normal distributions that provides a better characterization of insurance data. We adopt a Bayesian approach to estimate the model, providing the likelihood and the priors for the all unknown parameters; we implement an adaptive Markov Chain Monte Carlo algorithm to approximate the posterior distribution. We apply our approach to a well known Danish fire loss data and relevant risk measures, such as Value-at-Risk and Expected Shortfall probability, are evaluated as well. Available via Athens: ScienceDirect http://www.openathens.net/
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BAYESIAN METHODS A Bayesian log-normal model for multivariate loss reserving. Shi, Peng; Basu, Sanjib; Meyers, Glenn G Society of Actuaries, - 23 pages. [RKN: 73840] Shelved at: Per: NAAJ (Oxf) Per NAAJ (Lon) Shelved at: JOU North American Actuarial Journal (2012) 16 (1) : 29-51.
The correlation among multiple lines of business plays an important role in quantifying the uncertainty of loss reserves for insurance portfolios. To accommodate correlation, most multivariate loss-reserving methods focus on the pairwise association between corresponding cells in multiple run-off triangles. However, such practice usually relies on the independence assumption across accident years and ignores the calendar year effects that could affect all open claims simultaneously and induce dependencies among loss triangles. To address this issue, we study a Bayesian log-normal model in the prediction of outstanding claims for dependent lines of business. In addition to the pairwise correlation, our method allows for an explicit examination of the correlation due to common calendar year effects. Further, different specifications of the calendar year trend are considered to reflect valuation actuaries‘ prior knowledge of claim development. In a case study, we analyze an insurance portfolio of personal and commercial auto lines from a major U.S. property-casualty insurer. It is shown that the incorporation of calendar year effects improves model fit significantly, though it contributes substantively to the predictive variability. The availability of the realizations of predicted claims permits us to perform a retrospective test, which suggests that extra prediction uncertainty is indispensable in modern risk management practices http://www.soa.org/news-and-publications/publications/journals/naaj/naaj-detail.aspx
A Bayesian non-linear model for forecasting insurance loss payments. Zhang, Yanwei; Dukic, Vanja; Guszcza, James [RKN: 43396] Journal of the Royal Statistical Society, Series A (2012) 175(2) : 637-656.
We propose a Bayesian non-linear hierarchical model that addresses some of the major challenges that non-life insurance companies face when forecasting the outstanding claim amounts for which they will ultimately be liable. This approach is distinctive in several ways. First, data from individual companies are treated as repeated measurements of various cohorts of claims, thus respecting the correlation between successive observations. Second, non-linear growth curves are used to model the loss development process in a way that is intuitively appealing and facilitates prediction and extrapolation beyond the range of the available data. Third, a hierarchical structure is employed to reflect the natural variation of major parameters between the claim cohorts, accounting for their heterogeneity. This approach enables us to carry out inference at the level of industry, company and/or accident year, based on the full posterior distribution of all quantities of interest. In addition, prior experience and expert opinion can be incorporated in the analyses through judgementally selected prior probability distributions. The ability of the Bayesian framework to carry out simultaneous inference based on the joint posterior is of great importance for insurance solvency monitoring and industry decision making.
BEHAVIOUR, CONSUMER Explaining the failure to insure catastrophic risks. Kousky, Carolyn; Cooke, Roger Palgrave Macmillan, [RKN: 45658] Shelved at: Per: Geneva Geneva Papers on Risk and Insurance (2012) 37(2) : 206-227.
It has often been observed that homeowners fail to purchase disaster insurance. Explanations have ranged from behavioural biases to information search costs. We show that the decision to forego disaster insurance may be quite rational. Solvency-constrained insurers are required to have access to enough capital to cover a particular percentile of their aggregate loss distribution. When insuring risks with loss distributions characterised by fat tails, micro-correlations or tail dependence, insurers need to charge a price that is many times the expected loss in order to meet their solvency constraint. Homeowners, facing a budget constraint and a constraint that their utility with insurance exceeds that without it, may find the required loadings too high to make insurance purchase an optimal decision. Available via Athens: Palgrave MacMillan http://www.openathens.net
BENCHMARKING U.S. property-casualty: underwriting cycle modeling and risk benchmarks. Wang, Shaun S; Major, John A; Hucheng, Pan (Charles); Leong, Weng Kah [RKN: 43601] Shelved at: Per: Variance Variance (2011) 5(2) : 91-114.
The risk benchmarks and underwriting cycle models presented here can be used by insurers in their enterprise risk management models. We analyze the historical underwriting cycle and develop a regime-switching model for simulating future cycles, and show its superiority to an autoregressive approach. We compute benchmarks for pricing and reserving risks by line of business and by industry segments (large national, super regional, and small regional). We also compute the historical correlation of the loss ratio, as well as the correlation of changes in the reserve estimate between lines of business. http://www.variancejournal.org/issues
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BONDS Surety bonds with fair and unfair pricing. Wambach, Achim; Engel, Andreas R. [RKN: 45274] Shelved at: Per: Geneva (Oxf) Geneva Risk and Insurance Review (2011) 36 (1) : 36-50.
Surety bonds are instruments used in public and private procurement to avoid the problem of contractor bankruptcy. A surety company issuing such a bond guarantees to either finish the project itself or pay the bond to the procurement agency in case of contractor's bankruptcy. This situation is analysed under the assumption that the bond is either priced fairly, or a risk loading that is proportional to the money at risk is imposed. If the surety is priced fairly, full insurance (or even overinsurance) is optimal. If the surety is priced unfairly, more solvent contractors are more likely to win, thus the problem of abnormally low tenders is alleviated.
BONUS MALUS Un modelo bonus-malus con asignación de tarifas más competitivas en el mercado de seguro de automóviles. Pérez Sánchez; José Maria; Gómez Déniz, Emilio; Calderín Ojeda, Enrique [RKN: 44776] Anales del Instituto de Actuarios Españoles (Epoca 3a) (2011) 17 : 91-104.
http://www.actuarios.org/espa/anales.htm
BONUS SYSTEMS Do U.S. insurance firms offer the ―wrong‖ incentives to their executives?. Milidonis, Andreas; Stathopoulos, Konstantinos - 30 pages. [RKN: 74868] Shelved at: Per: J.Risk Ins (Oxf) Shelved at: JOU Journal of Risk and Insurance (2011) 78 (3) : 643–672.
We examine the relation between executive compensation and market-implied default risk for listed insurance firms from 1992 to 2007. Shareholders are expected to encourage managerial risk sharing through equity-based incentive compensation. We find that long-term incentives and other share-based plans do not affect the default risk faced by firms. However, the extensive use of stock options leads to higher future default risk for insurance firms. We argue that this is because option-based incentives induce managerial risk-taking behavior, which seeks to maximize managerial payoff through equity volatility. This could be detrimental to the interests of shareholders, especially during a financial crisis. Available via Athens: Wiley Online Library http://www.openathens.net
Earnings smoothing, executive compensation, and corporate governance : Evidence from the property-liability insurance industry. Eckles, David L; Halek, Martin; He, Enya; Sommer, David W; Zhang, Rongrong - 30 pages. [RKN: 74872] Shelved at: Per: J.Risk Ins (Oxf) Shelved at: JOU Journal of Risk and Insurance (2011) 78 (3) : 761–790.
Unlike studies that estimate managerial bias, we utilize a direct measure of managerial bias in the U.S. insurance industry to investigate the effects of executive compensation and corporate governance on firms‘ earnings management behaviors. We find managers receiving larger bonuses and stock awards tend to make reserving decisions that serve to decrease firm earnings. Moreover, we examine the monitoring effect of corporate board structures in mitigating managers‘ reserve manipulation practices. We find managers are more likely to manipulate reserves in the presence of particular board structures. Similar results are not found when we employ traditional estimated measures of managerial bias. Available via Athens: Wiley Online Library http://www.openathens.net
BOOTSTRAP Back-testing the ODP bootstrap of the paid chain-ladder model with actual historical claims data. Leong, Jessica; Wang, Shaun; Chen, Han (2012). 2012. [RKN: 43554] General Insurance Convention (2012) : 63-97.
Paper presented at [39th] annual GIRO conference, or General Insurance Convention of the UK Actuarial Professon, at Square Conference Centre, Brussels, 18-21 September 2012 http://www.actuaries.org.uk/events/paper-presentation-archives/2012
Dependent loss reserving using copulas. Shi, Peng; Frees, Edward W - 38 pages. [RKN: 74743] Shelved at: Per: Astin Bull (Oxf) Shelved at: JOU ASTIN Bulletin (2011) 41 (2) : 449-486.
Modeling dependencies among multiple loss triangles has important implications for the determination of loss reserves, a critical element of risk management and capital allocation practices of property-casualty insurers. In this article, we propose a copula regression model for dependent lines of business that can be used to predict unpaid losses and hence determine loss reserves. The proposed method, relating the payments in different run-off triangles through a copula function, allows the analyst to use flexible parametric families for the loss distribution and to understand the associations among lines of business. Based on the copula model, a parametric bootstrap procedure is developed to incorporate the uncertainty in parameter estimates. To illustrate this method, we consider an insurance portfolio consisting of personal and commercial automobile lines. When applied to the data
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of a major US property-casualty insurer, our method provides comparable point prediction of unpaid losses with the industry's standard practice, chain-ladder estimates. Moreover, our flexible structure allows us to easily compute the entire predictive distribution of unpaid losses. This procedure also readily yields accident year reserves, calendar year reserves, as well as the aggregate reserves. One important implication of the dependence modeling is that it allows analysts to quantify the diversification effects in risk capital analysis. We demonstrate these effects by calculating commonly used risk measures, including value at risk and conditional tail expectation, for the insurer's combined portfolio of personal and commercial automobile lines. http://www.actuaries.org/index.cfm?lang=EN&DSP=PUBLICATIONS&ACT=ASTIN BULLETIN
Does the bootstrap model work?. Leong, Jessica Staple Inn Actuarial Society, [RKN: 74804] Shelved at: Per: Actuary (Oxf) Per: Actuary (Lon) Shelved at: JOU The Actuary (2011) December : 32-33.
Distributions created by the bootstrap method underestimate reserve risk, says Jessica Leong http://www.theactuary.com/
Extending the Mack bootstrap: hypothesis testing and resampling techniques. Lo, Joseph (2011). 2011. [RKN: 43576] General Insurance Convention (2011) : 29-79.
Paper presented at [38th] annual GIRO conference, or General Insurance Convention of the UK Actuarial Professon, at BT Convention Centre, Liverpool, 11-14 October 2011 http://www.actuaries.org.uk/events/paper-presentation-archives/2011
GIRO Conference and Exhibition 2011: Navigating risk: are actuaries at the helm? : [38th annual General Insurance Convention papers] : BT Convention Centre, Liverpool, 11-14 September 2011. Institute and Faculty of Actuaries (2011). - London: Institute and Faculty of Actuaries, 2011. - 216 pages. [RKN: 43573] Shelved at: Strg box J33 gic (Oxf) BX (Lon) Shelved at: 368
Papers presented at [38th] annual GIRO conference, or General Insurance Convention of the UK Actuarial Professon, at BT Convention Centre, Liverpool, 11-14 September 2011 http://www.actuaries.org.uk/events/paper-presentation-archives/2011
GIRO Conference and Exhibition 2012: Juggling uncertainty: the actuary's part to play : [39th annual General Insurance Convention papers] : SQUARE Conference Centre, Brussels, 18-21 September 2012. Institute and Faculty of Actuaries (2012). - London: Institute and Faculty of Actuaries, 2012. - 457 pages. [RKN: 43552] Shelved at: Strg box J33 gic (Oxf) BX (Lon) Shelved at: 368
Papers presented at [39th] annual GIRO conference, or General Insurance Convention of the UK Actuarial Professon, at Square Conference Centre, Brussels, 18-21 September 2012 http://www.actuaries.org.uk/events/residential/giro-conference-and-exhibition-2012
BROWNIAN MOTION Minimal cost of a Brownian risk without ruin. Luo, Shangzhen; Taksar, Michael [RKN: 43686] Shelved at: Online Only Shelved at: Online Only Insurance: Mathematics & Economics (2012) 51(3) : 685-693.
In this paper, we study an optimal stochastic control problem for an insurance company whose surplus process is modeled by a Brownian motion with drift (the diffusion approximation model). The company can purchase reinsurance to lower its risk and receive cash injections at discrete times to avoid ruin. Proportional reinsurance and excess-of-loss reinsurance are considered. The objective is to find an optimal reinsurance and cash injection strategy that minimizes the total cost to keep the surplus process non-negative (without ruin). Here the cost function is defined as the total discounted value of the injections. The minimal cost function is found explicitly by solving the according quasi-variational inequalities (QVIs). Its associated optimal reinsurance-injection control policy is also found. Available via Athens: ScienceDirect http://www.openathens.net/
Pricing in a competitive insurance market driven by fractional noise. Zimbidis, Alexandros A [RKN: 44925] Shelved at: Per: Variance Variance (2011) 5(1) : 55-67.
Motivated by the empirical evidence of the long-range dependency found within the Greek motor insurance market, we formulate a particular stochastic pricing model in a continuous framework. We assume the structure of a competitive insurance market where the business volume of each company is directly related to the existing relativity between the company‘s premium and the market‘s average premium. Using a simple demand function and modeling the movements of the market via a fractional Brownian motion, we derive the optimal premium control strategy. Finally, we support the importance of the specific approach by a short application. It is shown that the optimal premium strategy is considerably different under the absence or existence of the long-range dependency. http://www.variancejournal.org/issues
Threshold dividend strategies for a Markov-additive risk model. Breuer, Lothar [RKN: 44835] Shelved at: online only European Actuarial Journal (2011) 1(2) November : 237-258.
We consider the following risk reserve model. The premium income is a level dependent Markov-modulated Brownian motion. Claim sizes are iid with a phase-type distribution. The claim arrival process is a Markov-modulated Poisson process. For this model the payment of dividends under a threshold dividend strategy and the time until ruin will be analysed. Available online via Athens -- Published online, 22 December 2011 http://www.openathens.net
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BUILDINGS INSURANCE Rainfall or rainmaking? Lawyers, courts, and the price of mold insurance in Texas. North, Charles M; Garven, James R; Gwin, Carl R - 23 pages. [RKN: 70432] Shelved at: Per: J.Risk Ins (Oxf) Shelved at: JOU Journal of Risk and Insurance (2012) 79 (3) : 817-839.
In well-functioning property--liability insurance markets, the price of coverage reflects the impact of the legal environment on the frequency and severity of claims. This article presents a case study of the Texas mold insurance crisis of 2001–2002. We provide a narrative of the controversy in Texas over insurance coverage for household mold and use county-level data from a single Texas insurer to assess the determinants of postcrisis prices for supplemental mold, slab, and extended water loss coverages. We find that more attorneys per capita and more heavily Democratic courts were both associated with higher prices for mold and slab coverage. Available via Athens: Wiley Online Library http://www.openathens.net
BUSINESS ENTERPRISE Market discipline in the individual annuity market. Carson, James M; Doran, James S; Dumm, Randy E - 21 pages. [RKN: 74768] Shelved at: JOU Risk Management and Insurance Review (2011) 14 (1) : 27-47.
Theoretical expectations related to market discipline generally suggest a positive relationship between firm financial strength and price. We examine market discipline in the individual annuity market by measuring annuity contract yields during the accumulation phase and find that, among other results, firm financial strength is positively related to yield (i.e., negatively related to price). We argue that this apparent anomaly can be viewed as a form of market discipline itself, for at least four related reasons, the foremost reason being that in order to compete in the asset accumulation market, an insurer has an incentive to provide a track record of historically strong credited interest rates within the annuity. In addition, the credited interest rates within an annuity are only revealed ex post over time, thus diminishing consumer ability to impose traditional market discipline relating firm financial strength and price, and also enabling financially weaker insurers to impose higher ex post prices in the form of lower realized annuity yields. Available via Athens: Wiley Online Library http://www.openathens.net
A unifying approach to the analysis of business with random gains. Cheung, Eric C K [RKN: 44883] Shelved at: Per: SAJ Shelved at: SCA/ACT Scandinavian Actuarial Journal (2012) 3 : 153-182.
In this paper, we consider a stochastic model in which a business enterprise is subject to constant rate of expenses over time and gains which are random in both time and amount. Inspired by Albrecher & Boxma (2004), it is assumed in general that the size of a given gain has an impact on the time until the next gain. Under such a model, we are interested in various quantities related to the survival of the business after default, which include: (i) the fair price of a perpetual insurance which pays the expenses whenever the available capital reaches zero; (ii) the probability of recovery by the first gain after default if money is borrowed at the time of default; and (iii) the Laplace transforms of the time of recovery and the first duration of negative capital. To this end, a function resembling the so-called Gerber–Shiu function (Gerber & Shiu (1998)) commonly used in insurance analysis is proposed. The function's general structure is studied via the use of defective renewal equations, and its applications to the evaluation of the above-mentioned quantities are illustrated. Exact solutions are derived in the independent case by assuming that either the inter-arrival times or the gains have an arbitrary distribution. A dependent example is also considered and numerical illustrations follow. Available via Athens: Taylor & Francis http://www.openathens.net/
BUSINESS INTERRUPTION Insuring ever-evolving commercial risks. Swiss Reinsurance Company (2012). - Zurich: Swiss Reinsurance Company, 2012. - 40 pages. [RKN: 70571] Shelved at: JOU Sigma (2012) 5
Commercial insurance helps companies to manage risks and find new ways to innovate, grow, and stabilise their earning. Swiss Re‘s sigma 5/2012, "Insuring ever-evolving commercial risks", explores the different commercial insurance markets and business lines in today's rapidly changing risk environment, and provides a glimpse of the profitability outlook for commercial insurance in the future. Globally, commercial insurance is an over USD 600 billion business. The US is by far the world's biggest commercial insurance market, with USD 237 billion in premiums in 2010 (or a 40% share). Japan and China follow, with USD 35 billion and USD 31 billion in premiums, respectively. In high-growth markets, where the economy tends to be expanding and insurance penetration tends to be increasing, commercial insurance growth outpaces advanced markets by a factor of two to three. http://www.swissre.com
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CANADA Structure, principles and effectiveness of insurance regulation in the 21st century : Insights from Canada. Kelly, Mary; Kleffner, Anne; Leadbetter, Darrell Palgrave Macmillan, [RKN: 45545] Shelved at: Per: Geneva (Oxf) Geneva Papers on Risk and Insurance (2012) 37(1) : 155-174.
The 2007–2009 financial crisis resulted in failures of many large financial institutions and among the G8 countries, only Canada did not have to provide financial support to distressed financial institutions. We first examine the existing Canadian regulatory architecture in relationship to underlying principles arising from the public theory of regulation. Elements of the Canadian regulatory framework that contributed to the success of the insurance industry in weathering the crisis include the presence of a federal regulator who monitors system-wide issues also ensures consistent solvency standards; investment guidelines that encourage prudent risk-taking; and a holistic approach to insurer monitoring. A comparison of the Canadian experience with that of other jurisdictions highlights the importance of a holistic risk management approach to firm viability, especially in light of the inherent risks arising from complex group structures. A lesson from the crisis is the need for effective ex ante and ex post cross-border and holistic supervision as most distressed institutions belonged to large complex groups operating in multiple regulatory jurisdictions. Available via Athens: Palgrave MacMillan http://www.openathens.net
Whole farm income insurance. Turvey, Calum G - 26 pages. [RKN: 70737] Shelved at: Per: J.Risk Ins (Oxf) Shelved at: JOU Journal of Risk and Insurance (2012) 79 (2) : 515-540.
This article employs a mathematical programming model to investigate farmers‘ optimal crop choices under gross revenue insurance, whole farm income insurance (WFI), the Canadian Agricultural Income Stabilization (CAIS) program, and its modified 2008 program AgrInvest. WFI poses a particularly interesting problem since the indemnity/premium structure is dependent upon the choice of crops, whereas the choice of crops is simultaneously influenced by the presence of the whole farm insurance program. Results indicate that farmers will alter farm plans significantly in response to the type of insurance offered and the level of subsidy. Available via Athens: Wiley Online Library http://www.openathens.net
CAPITAL Multiperiod insurance supervision: top-down models. Eisele, Karl-Theodor; Artzner, Philippe [RKN: 44808] Shelved at: online only European Actuarial Journal (2011) 1(1) July : 107-130.
We describe a top-down procedure for the supervisory accounting of insurance companies with special emphasis on market impacts. The technical tools are a multiperiod risk assessment, a market consistent best estimate and an eligible asset. First, to avoid supervisory arbitrage by financial market instruments, the risk assessment is bounded by a market consistent best estimate. Applied to the risk bearing capital, i.e. asset value minus best estimate of obligations, the risk assessment immediately gives the free capital which has to be positive for acceptability. Next, optimal hedging of the obligation process by suitable asset portfolios yields the supervisory provision as the minimal initial value of a portfolio acceptable with respect to the given obligations. The problem to attain this minimal value leads to the definition of an optimal replicating portfolio. A further task of supervision is the determination of the ‗‗Fremd‘‘-capital in the supervisory balance sheet. This is formalized by the cost-of-capital method, i.e. a fictitious standardized transfer of the obligations to new investors on the market. The regulated price of such a transfer leads to the technical provision and the risk margin as ‗‗Fremd‘‘-capital items. Finally, the additional financial risks within the insurance‘s real asset portfolio are taken care of by the solvency capital requirement defined as the minimal acceptable ‗‗Eigen‘‘-capital for a given business plan. It measures the adequacy or inadequacy of the trading risks incorporated in the portfolio with respect to the obligation risks. An optimal replicating portfolio is characterized by a minimal solvency capital requirement. Solvency II and the Swiss Solvency Test (SST) are defined as bottom-up models. In the forthcoming paper Eisele and Artzner (2011), we shall show how bottom-up and top-down models can be made congruent. Available online via Athens http://www.openathens.net
Risk margin estimation through the cost of capital approach: some conceptual issues. Floreani, Alberto Palgrave Macmillan, [RKN: 45332] Shelved at: Per: Geneva (Oxf) Geneva Papers on Risk and Insurance (2011) 36(2) : 226-253.
The Solvency II directive requires that insurance liabilities are valued using a best estimate plus a risk margin. The risk margin should be estimated using the cost of capital approach, that is the cost of the solvency capital requirement—which is computed through a value at risk measure—needed to support the insurance obligation until settlement. The unitary cost of capital applied to the future capital requirement should be fixed. This paper deals with conceptual issues relating to the risk margin estimate through the cost of capital approach. It shows that the Solvency II specification of the methodology is consistent with financial economics. However, the theoretical framework required (a frictionless and normally distributed world) is too far-fetched to be acceptable. Even if these conditions were satisfied, a variable unitary cost of capital must be used. Available via Athens: Palgrave MacMillan http://www.openathens.net
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Running it off. Czapiewski, Colin Staple Inn Actuarial Society, [RKN: 40081] Shelved at: Per: Actuary (Oxf) Per: Actuary (Lon) Shelved at: SIA/ACT The Actuary (2011) February : 26-27.
Colin Czapiewski believes Solvency II will have a significant impact on run-off insurers, affecting their capital requirements far more than insurers that continue to write new business. http://www.theactuary.com/archive
CAPITAL ALLOCATION Optimal capital allocation principles. Dhaene, Jan; Tsanakas, Andreas; Valdez, Emiliano A; Vanduffel, Steven - 28 pages. [RKN: 73845] Shelved at: Per: J.Risk Ins (Oxf) Shelved at: JOU Journal of Risk and Insurance (2012) 79 (1) : 1–28.
This article develops a unifying framework for allocating the aggregate capital of a financial firm to its business units. The approach relies on an optimization argument, requiring that the weighted sum of measures for the deviations of the business unit's losses from their respective allocated capitals be minimized. The approach is fair insofar as it requires capital to be close to the risk that necessitates holding it. The approach is additionally very flexible in the sense that different forms of the objective function can reflect alternative definitions of corporate risk tolerance. Owing to this flexibility, the general framework reproduces several capital allocation methods that appear in the literature and allows for alternative interpretations and possible extensions. Available via Athens: Wiley Online Library http://www.openathens.net
CAPITAL CHOICE Raising capital in an insurance oligopoly market. Hardelin, Julien; Lemoyne de Forges, Sabine - 26 pages. [RKN: 74943] Shelved at: Per: Geneva (Oxf) Geneva Risk and Insurance Review (2012) 37 (1) : 83-108.
We consider an oligopoly market where firms offer insurance coverage against a risk characterised by aggregate uncertainty. Firms behave as if they were risk averse for a standard reason of costly external finance. The model consists in a two-stage game where firms choose their internal capital level at stage one and compete on price at stage two. We characterise the subgame perfect Nash equilibria of this game and focus attention on the strategic impact of insurers capital choice. We discuss the model with regard to the insurance industry specificities and regulation.
CAPITAL FORMATION Optimal capital structure for a property-liability insurer. D'Arcy, Stephen P; Lwin, Teresa [RKN: 43636] Shelved at: Per: Geneva Geneva Papers on Risk and Insurance (2012) 37(3) : 509-538.
Traditional finance studies have found that firm value is maximised at a mid-range level of leverage. This paper empirically tests the effect of leverage on firm value for property-liability insurers. We analysed an international data set of 96 insurers from 1992 to 2006 using two measures for firm value (price-to-earnings and market-to-book) and three measures of leverage (liabilities-to-equity, premiums-to-equity and surplus duration). We found that price-to-earnings at first increases with leverage, as measured by liabilities-to-equity and premiums-to-equity, but decreases past a certain point. Market-to-book exhibited a similar pattern for the premium-to-equity ratio but had a positive relationship with liabilities-to-equity and a negative relationship with surplus duration. Available via Athens: Palgrave MacMillan http://www.openathens.net
CAPITAL INJECTIONS Minimizing the ruin probability through capital injections. Nie, Ciyu; Dickson, David C M; Li, Shuanming Institute and Faculty of Actuaries; Cambridge University Press, - 15 pages. [RKN: 74951] Shelved at: Per: AAS (Oxf) Per: AAS (Lon) Annals of Actuarial Science (2011) 5(2) : 195-209.
We consider an insurer who has a fixed amount of funds allocated as the initial surplus for a risk portfolio, so that the probability of ultimate ruin for this portfolio is at a known level. We consider the question of whether the insurer can reduce this ultimate ruin probability by allocating part of the initial funds to the purchase of a reinsurance contract. This reinsurance contract would restore the insurer's surplus to a positive level k every time the surplus fell between 0 and k. The insurer's objective is to choose the level k that minimizes the ultimate ruin probability. Using different examples of reinsurance premium calculation and claim size distribution we show that this objective can be achieved, often with a substantial reduction in the ultimate ruin probability from the situation when there is no reinsurance. We also show that by purchasing reinsurance the insurer can release funds for other purposes without altering its ultimate ruin probability. Available via Athens: Cambridge Journals
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CAPITAL MANAGEMENT Excess based allocation of risk capital. van Gulick, Gerwald; de Waegenaere, Anja; Norde, Henk [RKN: 44987] Shelved at: Per: IME (Oxf) Insurance: Mathematics & Economics (2012) 50 (1) : 26-42.
In this paper we propose a new rule to allocate risk capital to portfolios or divisions within a firm. Specifically, we determine the capital allocation that minimizes the excesses of sets of portfolios in a lexicographical sense. The excess of a set of portfolios is defined as the expected loss of that set of portfolios in excess of the amount of risk capital allocated to them. The underlying idea is that large excesses are undesirable, and therefore the goal is to determine the allocation for which the largest excess is as small as possible. We show that this allocation rule yields a unique allocation, and that it satisfies some desirable properties. We also show that the allocation can be determined by solving a series of linear programming problems. Available via Athens: ScienceDirect http://www.openathens.net/
CAPITAL MARKETS Editorial: Longevity risk and capital markets: the 2010-2011 update. Blake, David; Courbage, Christophe; MacMinn, Richard; Sherris, Michael Palgrave Macmillan, [RKN: 44901] Shelved at: Per: Geneva (Oxf) Geneva Papers on Risk and Insurance (2011) 36(4) : 489-500.
Available via Athens: Palgrave MacMillan -- This article and others in Geneva Papers on Risk and Insurance: Issues and Practice 36(4) form part of special issue on Longevity http://www.openathens.net
Longevity risk from the perspective of the ILS markets. Lane, Morton Palgrave Macmillan, [RKN: 44902] Shelved at: Per: Geneva (Oxf) Geneva Papers on Risk and Insurance (2011) 36(4) : 501-515.
This paper compares and contrasts the evolution of the longevity risk transfer market with the development of the Catastrophe Bond Market, more formally known as the Insurance Linked Securities (ILS) Market. The ILS market is small; the longevity market is potentially enormous. The ILS market has been around for some 15 years; the Longevity market less than 5 years. The ILS market has had a heterogeneous approach to loss measures; the longevity market has striven for homogeneity. The ILS market has used security, i.e. bond, structures; the longevity market uses derivative, i.e. swap, structures. Nearly all ILS transactions cover ―event‖ risk; nearly all longevity structures are ―aggregate‖. The paper reflects on these and other differences and speculates on the nature of the two approaches. Available via Athens: Palgrave MacMillan -- This article and others in Geneva Papers on Risk and Insurance: Issues and Practice 36(4) form part of special issue on Longevity http://www.openathens.net
CATASTROPHE Catastrophes and Insurance Stocks – A Benchmarking Approach for Measuring Efficiency. West, Jason Faculty of Actuaries and Institute of Actuaries; Cambridge University Press, [RKN: 45563] Shelved at: Per: AAS (Oxf) Per: AAS (Lon) Annals of Actuarial Science (2012) 6(1) : 103-136.
This study uses the numeraire portfolio to benchmark insurance stock returns as a natural measure for detecting abnormal insurance stock returns from catastrophic events. The assumptions underlying the efficient markets hypothesis using a numeraire denominated returns approach hold for catastrophic insurance events whereas other more traditional methods such as the market model and Fama-French three factor model often fail, typically due to the accumulation of estimation errors. We construct a portfolio of Australian insurance firms and observe the market reaction to major insured catastrophic events. Using the numeraire denominated returns approach we observe no particular trend in the cumulative abnormal returns of insurance securities following a catastrophic event. Using both the traditional market model and the Fama-French three factor model however, we observe significantly positive cumulative abnormal returns following an insured catastrophic event. The errors inherent in the market model and three factor model for event studies are shown to be eliminated using the numeraire denominated returns approach. Available via Athens: Cambridge Journals http://www.actuaries.org.uk/research-and-resources/pages/access-journals
Disasters and decentralisation. Johnston, Jason Scott Palgrave Macmillan, [RKN: 45659] Shelved at: Per: Geneva Geneva Papers on Risk and Insurance (2012) 37(2) : 228-256.
Climate change may potentially increase the magnitude of losses from natural hazards, but the United States experience shows that the primary reason for escalating losses is policy failure. It is well known that centralised, taxpayer-funded ex post disaster relief has actually encouraged development in risky jurisdictions and also weakened incentives for ex ante precautions in such jurisdictions (moral or ―charity‖ hazard). Less well known and analysed is the role played by centralised ex ante development subsidies—often masquerading as protective investment—in distorting incentives. This paper develops a simple three jurisdiction
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model in which homogeneous jurisdictions decide by majority vote in a centralised legislature on the centralised (federal) share of ex post loss and centralised spending an ex ante development in a Beneficiary jurisdiction, taking into account how these decisions about centralised spending impact local Beneficiary jurisdiction incentives for precautions against ex post loss. The model shows that the marginal cost of ex ante federal development spending may be greater for a Beneficiary jurisdiction than for a Contractor jurisdiction. This somewhat technical result has an observable implication: evidence that a small fraction of ex post loss in a Beneficiary jurisdiction is centrally compensated (shared across jurisdictions) is evidence that ex ante development subsidies there may be truly precautionary on net; conversely, evidence that a Beneficiary jurisdiction has a large share of its ex post hazard loss compensated by centralised disaster relief suggests that the ex ante development subsidies received by that jurisdiction did more to encourage new development and increase the amount at risk than they did to protect existing development. The model is extended to consider how ex post loss sharing impacts the demand for federally subsidised disaster insurance and other related issues. Available via Athens: Palgrave MacMillan http://www.openathens.net
Natural catastrophes and man-made disasters in 2010: a year of devastating and costly events. Swiss Reinsurance Company (2011). - Zurich: Swiss Reinsurance Company, 2011. - 40 pages. [RKN: 73660] Shelved at: JOU Sigma (2011) 1
According to Swiss Re‘s latest sigma study, worldwide economic losses from natural catastrophes and man-made disasters were USD 218 billion in 2010, more than triple the 2009 figure of USD 68 billion. The cost to the global insurance industry was more than USD 43 billion, an increase of more than 60% over the previous year. Approximately 304 000 people died in these events, the highest number since 1976. http://www.swissre.com
New Orleans business recovery in the aftermath of Hurricane Katrina. LeSage, James P; Pace, R Kelley; Campanella, Richard; Liu, Xingjian [RKN: 43374] Journal of the Royal Statistical Society, Series A (2011) 174(4) : 1000-1027.
CATASTROPHE INSURANCE An analysis of the demand for earthquake insurance. Athavale, Manoj; Avila, Stephen M - 14 pages. [RKN: 74763] Shelved at: JOU Risk Management and Insurance Review (2011) 14 (2) : 233-246.
This research examines the decision to purchase earthquake insurance by analyzing data on earthquake insurance price and penetration in the New Madrid fault zone in Missouri. Earthquake risk is of concern to consumers, the insurance industry, industry regulators, and government agencies because of the potentially catastrophic nature of losses resulting from a major earthquake. Despite the significance of the earthquake peril, the recent literature does not contain estimates of the price and income elasticity of the demand for earthquake insurance. Our analysis indicates that homeowners acquire earthquake insurance because of risk considerations, at higher levels of risk the demand for earthquake insurance is higher, and the price of earthquake coverage does not provide incremental information in explaining the demand for earthquake coverage. Available via Athens: Wiley Online Library http://www.openathens.net
Calculating catastrophe. Woo, Gordon (2011). - London: Imperial College Press, 2011. - 355 pages. [RKN: 73989] Shelved at: 363.34
Calculating Catastrophe has been written to explain, to a general readership, the underlying philosophical ideas and scientific principles that govern catastrophic events, both natural and man-made. Knowledge of the broad range of catastrophes deepens understanding of individual modes of disaster. This book will be of interest to anyone aspiring to understand catastrophes better, but will be of particular value to those engaged in public and corporate policy, and the financial markets.
Catastrophe bonds, reinsurance, and the optimal collateralization of risk transfer. Lakdawalla, Darius; Zanjani, George - 28 pages. [RKN: 70709] Shelved at: Per: J.Risk Ins (Oxf) Shelved at: JOU Journal of Risk and Insurance (2012) 79 (2) : 449-476.
Catastrophe bonds feature full collateralization of the underlying risk transfer and thus abandon the reinsurance principle of economizing on collateral through diversification of risk transfer. Our analysis demonstrates that this feature places limits on catastrophe bond penetration, even if the structure possesses frictional cost advantages over reinsurance. However, we also show that catastrophe bonds have important uses when buyers and reinsurers cannot contract over the division of assets in the event of insolvency and, more generally, cannot write contracts with a full menu of state-contingent payments. In this environment, segregation of collateral—in the form of multiple reinsurance companies, as well as catastrophe bond vehicles—can ameliorate inefficiencies due to reinsurance contracting constraints by improving welfare for those exposed to default risk. Numerical simulation illustrates how catastrophe bonds improve efficiency in market niches with correlated risks, or with uneven exposure of buyers to reinsurer default. Available via Athens: Wiley Online Library http://www.openathens.net
Catastrophes and workers compensation ratemaking. Daley, Thomas V [RKN: 44928] Shelved at: Per: Variance Variance (2011) 5(1) : 13-31.
The National Council on Compensation Insurance (NCCI) changed its workers compensation ratemaking methodology to improve the treatment of large individual claims and catastrophic multiclaim events related to the perils of industrial accidents, earthquake, and terrorism. NCCI worked with a well known modeling firm to determine provisions for catastrophic events on a state basis. This
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paper describes the new methodology that NCCI has filed in many states. We discuss how certain traditional areas of aggregate ratemaking were modified: loss development including the tail factor, trend, capping losses, and application of excess provisions. The paper also documents for the first time in Casualty Actuarial Society literature how computer modeling was applied in workers compensation to determine loss costs by state. http://www.variancejournal.org/issues
Climate change, weather insurance design and hedging effectiveness. Kapphan, Ines; Calanca, Pierluigi; Holzkaemper, Annelie Palgrave Macmillan, [RKN: 45661] Shelved at: Per: Geneva Geneva Papers on Risk and Insurance (2012) 37(2) : 286-317.
Insurers have relied on historical data to design weather insurance contracts. In light of climate change, we examine the effects of this practice on the hedging effectiveness and profitability of insurance contracts. Using synthetic crop and weather data for today's and future climatic conditions we derive adjusted weather insurance contracts that account for shifts in the distribution of weather and yields. In our scenario, hedging benefits from adjusted contracts almost triple and expected profits increase by about 240 per cent. We further investigate the effect on risk reduction (for the insured) and profits (for the insurer) from hedging future weather risk with non-adjusted contracts based on historical data. In this case, insurers generate profits that are significantly smaller than for adjusted contracts, or even face substantial losses. Moreover, non-adjusted contracts that create higher profits than the adjusted counterparts cause negative hedging benefits for the insured. Available via Athens: Palgrave MacMillan http://www.openathens.net
A comparative study of public-private catastrophe insurance systems : Lessons from current practices. Paudel, Youbaraj Palgrave Macmillan, [RKN: 45660] Shelved at: Per: Geneva Geneva Papers on Risk and Insurance (2012) 37(2) : 257-285.
Natural disasters risk is increasing in several regions around the world as a result of socio-economic development and climate change. This indicates the importance of establishing affordable and sustainable natural disaster risk management and compensation arrangements. Given the complexity of insuring extreme risks, insurers and governments often cooperate in catastrophe insurance systems. This paper presents a comparative study of the main components and a broad range of indicators of fully private and fully public, as well as public-private (PP) insurance systems, for extreme events, in ten countries. This analysis results in the following nine main recommendations for policymakers who aim to establish new, or improve existing, insurance arrangements for natural disasters: (1) mandatory participation requirements are advisable to achieve a high market penetration rate; (2) adequate monitoring and enforcement mechanisms need to be put in place to ensure compliance with these requirements; (3) the government needs to take responsibility for part of the (extreme) damage in order to keep an insurance system financially viable and affordable; (4) private insurance companies should participate in a PP insurance scheme by selling and administering policies and by covering medium-sized losses; (5) the integration in systems of risk transferring mechanisms is advisable; (6) it is advisable that governments stimulate the building-up of insurers‘ reserves by providing tax exemptions; (7) risk mitigation policies should be carefully integrated in a natural disaster insurance system; (8) a detailed assessment and mapping of risk provides the basis for an effective mitigation policy; (9) insurance should provide financial incentives for policyholders to take risk mitigation measures. Available via Athens: Palgrave MacMillan http://www.openathens.net
Disasters and decentralisation. Johnston, Jason Scott Palgrave Macmillan, [RKN: 45659] Shelved at: Per: Geneva Geneva Papers on Risk and Insurance (2012) 37(2) : 228-256.
Climate change may potentially increase the magnitude of losses from natural hazards, but the United States experience shows that the primary reason for escalating losses is policy failure. It is well known that centralised, taxpayer-funded ex post disaster relief has actually encouraged development in risky jurisdictions and also weakened incentives for ex ante precautions in such jurisdictions (moral or ―charity‖ hazard). Less well known and analysed is the role played by centralised ex ante development subsidies—often masquerading as protective investment—in distorting incentives. This paper develops a simple three jurisdiction model in which homogeneous jurisdictions decide by majority vote in a centralised legislature on the centralised (federal) share of ex post loss and centralised spending an ex ante development in a Beneficiary jurisdiction, taking into account how these decisions about centralised spending impact local Beneficiary jurisdiction incentives for precautions against ex post loss. The model shows that the marginal cost of ex ante federal development spending may be greater for a Beneficiary jurisdiction than for a Contractor jurisdiction. This somewhat technical result has an observable implication: evidence that a small fraction of ex post loss in a Beneficiary jurisdiction is centrally compensated (shared across jurisdictions) is evidence that ex ante development subsidies there may be truly precautionary on net; conversely, evidence that a Beneficiary jurisdiction has a large share of its ex post hazard loss compensated by centralised disaster relief suggests that the ex ante development subsidies received by that jurisdiction did more to encourage new development and increase the amount at risk than they did to protect existing development. The model is extended to consider how ex post loss sharing impacts the demand for federally subsidised disaster insurance and other related issues. Available via Athens: Palgrave MacMillan http://www.openathens.net
Does insurance help to escape the poverty trap?—a ruin theoretic approach. Kovacevic, Raimund M; Pflug, Georg Ch - 26 pages. [RKN: 74890] Shelved at: Per: J.Risk Ins (Oxf) Shelved at: JOU Journal of Risk and Insurance (2011) 78 (4) : 1003–1028.
Poverty trapping refers to the fact that poor people in developing countries cannot escape their poverty without help from outside. This is worsened by extreme events, for example, floods or hurricanes, sending people to poverty who have not been poor before. Often, insurance is seen as a way out. This article studies poverty trapping in the context of catastrophic risk and introduces a ruin-type model, combining deterministic growth with a stochastic loss model. We analyze the properties of the resulting piecewise deterministic Markov process, especially its trapping risk, and discuss for which groups of people insurance can reduce trapping probability. Available via Athens: Wiley Online Library
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Explaining the failure to insure catastrophic risks. Kousky, Carolyn; Cooke, Roger Palgrave Macmillan, [RKN: 45658] Shelved at: Per: Geneva Geneva Papers on Risk and Insurance (2012) 37(2) : 206-227.
It has often been observed that homeowners fail to purchase disaster insurance. Explanations have ranged from behavioural biases to information search costs. We show that the decision to forego disaster insurance may be quite rational. Solvency-constrained insurers are required to have access to enough capital to cover a particular percentile of their aggregate loss distribution. When insuring risks with loss distributions characterised by fat tails, micro-correlations or tail dependence, insurers need to charge a price that is many times the expected loss in order to meet their solvency constraint. Homeowners, facing a budget constraint and a constraint that their utility with insurance exceeds that without it, may find the required loadings too high to make insurance purchase an optimal decision. Available via Athens: Palgrave MacMillan http://www.openathens.net
Flood insurance coverage in the coastal zone. Landry, Craig; Jahan-Parvar, Mohammad R - 28 pages. [RKN: 74858] Shelved at: Per: J.Risk Ins (Oxf) Shelved at: JOU Journal of Risk and Insurance (2011) 78 (2) : 361-388.
We explore determinants of flood insurance demand in the coastal zone using micro-data for nine Southeastern counties. Overall estimates indicate price inelastic demand, though subsidized policyholders have greater coverage and are more price sensitive. Mortgage borrowers exhibit no greater coverage; only 12 percent in 100-year flood zone indicate flood insurance was required by their lender. Flood insurance demand is increasing in the levels of flood and erosion risk. We find a positive correlation between household income and coverage, but the effect is not monotonic. Community-level erosion hazard mitigation projects influence flood insurance coverage, with beach replenishment acting as a complement. Available via Athens: Wiley Online Library http://www.openathens.net
The impact of climate change on precipitation-related insurance risk : A study of the effect of future scenarios on residential buildings in Norway. Scheel, Ida; Hinnerichsen, Mikkel Palgrave Macmillan, [RKN: 45664] Shelved at: Per: Geneva Geneva Papers on Risk and Insurance (2012) 37(2) : 365-376.
Climate change is likely to increase the future risk of weather-related damage to buildings worldwide. This challenge is faced by society in general, but the insurance industry is particularly important in the management of the anticipated increase in future risk. In addition to adjusting premiums appropriately and gradually, they can play an important role in prevention. It is crucial to know which areas are vulnerable and to what extent. In this paper, a spatial regression model for linking weather-related insurance losses for residential buildings to meteorological and hydrological covariates is coupled with three plausible scenarios for the future climate in order to project the future number of weather-related residential building insurance losses in Norway. The model is trained on observed daily insurance loss and weather data at the municipality level. Our results indicate a dramatic increase in the projected future weather-related insurance risk in many parts of Norway. The procedure can be extended and applied to other areas globally. Available via Athens: Palgrave MacMillan http://www.openathens.net
Natural catastrophes and man-made disasters in 2011 : Historic losses surface from record earthquakes and floods. Swiss Reinsurance Company - Zurich: Swiss Reinsurance Company, - 44 pages. [RKN: 73945] Sigma (2012) 2
2011 saw unprecedented economic losses of USD 370 billion from natural catastrophes and man-made disasters. Despite immense insured losses of USD 116 billion (a 142% increase over the previous year) arising from record earthquake and flood losses, the insurance industry weathered the year well and played a key role in risk management and post-disaster recovery financing. http://www.swissre.com
Proposal for a national earthquake insurance programme for Greece. Petseti, Aglaia; Nektarios, Milton Palgrave Macmillan, [RKN: 45665] Shelved at: Per: Geneva Geneva Papers on Risk and Insurance (2012) 37(2) : 377-400.
It is proposed that Greece undertakes the establishment of a national earthquake insurance programme for homeowners that will replace the ex post disaster relief by the State when an earthquake occurs. Greece is seismically the most active region in the whole Mediterranean. By employing four different catastrophe models, it has been estimated that the economic loss to the residential stock of a 1-in-200 year event is likely to be greater than 22 billion euros; for a 1-in-100 year event is about 14 billion euros; for an 1-in-25 year event is 5 billion euros; and for a 1-in-5 year event is 1.3 billion euros. This potential loss severity exposes the inherent limitations of the ex post funding approach to natural disasters adopted by successive Greek governments and underscores the urgent need for establishing a National Earthquake Insurance Programme. It is proposed that the earthquake coverage should be compulsory and the management of the insurance programme be based on the principle of a public–private partnership. The objective of the programme would be to provide affordable earthquake insurance, up to a maximum amount, to all homeowners, on the basis of risk-based premiums. A comprehensive and unique data bank of the residential stock in the country has been developed, which will be very useful to the local insurance industry as well as to reinsurers. Available via Athens: Palgrave MacMillan http://www.openathens.net
Risk and insurability of storm damages to residential buildings in Austria. Prettenthaler, Franz; Albrecher, Hansjorg; Koberla, Judith; Kortschak, Dominik Palgrave Macmillan, [RKN: 45663] Shelved at: Per: Geneva Geneva Papers on Risk and Insurance (2012) 37(2) : 340-364.
This paper develops a stochastic model to assess storm risk in Austria, which relates wind speed and actual losses. By virtue of a building-stock-value-weighted wind index, we use suitably normalised historical loss data of residential buildings over 12 years
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and corresponding wind speed data to calibrate the model. Subsequently, additional wind speed data is used to generate further scenarios and to obtain loss curves for storm risk that give rise to storm insurance loss quantiles and corresponding solvency capital requirements both on the aggregate and on the regional level. We also investigate the diversification effect across regions and use tools from extreme value theory to assess the insurability of storm risk in Austria in general. Available via Athens: Palgrave MacMillan http://www.openathens.net
Seasonality modelling for catastrophe bond pricing. Hainaut, Donatien [RKN: 43469] Shelved at: online only Bulletin Français d'Actuariat (2012) 12 (no.23) : 129-150.
During the last decades, a new category of assets whose return is linked to insurance claims have appeared. Those assets, called catastrophe bonds, are primarily designed by insurers and reinsurers to transfer their risks to other categories of investors, looking for diversification. This paper proposes a method to price such bonds, when the claims arrival process is under the influence of a stochastic seasonal effect. The arrival process is modeled by a Poisson Process whose intensity is the sum of an Ornstein Uhlenbeck process and of one periodic function. The size of claims is assumed to be a positive random variable, independent of the intensity process. In this paper, we show that the expected number of claims can be inferred from the probability generating function and propose a pricing method of the fair coupon based on the Fourier Transform. To illustrate the tractability of our model, we price insurance bonds on claims resulting from tornadoes in the US. http://www.institutdesactuaires.com/bfa/
September 11 - Ten years on : Lasting impact on the world of risk and insurance. Liedtke, Patrick M; Schanz, Kai-Uwe (2011). - Geneva: Geneva Association, 2011. - 95 pages. [RKN: 73687] Shelved at: Online only
The Geneva Reports Series tackles issues of strategic importance to the insurance industry that warrant special attention and particular analysis. http://www.genevaassociation.org/Home/Results.aspx?mode=free&keyword=geneva%20report
The use of postloss financing of catastrophic risk. Cole, Cassandra R; Macpherson, David A; Maroney, Patrick F; McCullough, Kathleen A; Newman, James W (Jay); Nyce, Charles - 34 pages. [RKN: 74765] Shelved at: JOU Risk Management and Insurance Review (2011) 14 (2) : 265-298.
Catastrophic risk financing is a critical issue for many states. At the epicenter of the debate is the role of the state government in helping homeowners finance catastrophic storm risk. In general, states have used a variety of pre- and postloss strategies, including rate regulation, residual markets, guaranty funds, and postloss assessment structures. However, several states, including Florida, Louisiana, Mississippi, and Texas have used strategies that involve potentially large postloss funding of hurricane risk. In some cases, the structure of the postloss financing mechanism is likely to create significant assessments and subsidies. This article examines the role of state government in catastrophe financing, focusing primarily on postloss financing methods. Specifically, the article provides a discussion of the advantages and disadvantages of the postloss catastrophe financing as well as the political forces that motivate the use of this approach. Further, given the potential magnitude of postloss assessments and related subsidies, we use the Florida homeowners market to illustrate the implications of the state's decisions. This allows for a concrete discussion of the impact and viability of postloss financing mechanisms. Available via Athens: Wiley Online Library http://www.openathens.net
Valuation of catastrophe equity puts with markov-modulated poisson processes. Chang, Chia-Chien; Lin, Shih-Kuei; Yu, Min-Teh - 27 pages. [RKN: 74861] Shelved at: Per: J.Risk Ins (Oxf) Shelved at: JOU Journal of Risk and Insurance (2011) 78 (2) : 447-473.
We derive the pricing formula for catastrophe equity put options (CatEPuts) by assuming catastrophic events follow a Markov Modulated Poisson process (MMPP) whose intensity varies according to the change of the Atlantic Multidecadal Oscillation (AMO) signal. U.S. hurricanes events from 1960 to 2007 show that the CatEPuts pricing errors under the MMPP(2) are smaller than the PP by 30 percent to 66 percent. The scenario analysis indicates that the MMPP outperforms the exponential growth pattern (EG) if the hurricane intensity is the AMO signal, whereas the EG may outperform the MMPP if the future climate is warming rapidly. Available via Athens: Wiley Online Library http://www.openathens.net
What role for ―long-term insurance‖ in adaptation? : an analysis of the prospects for and pricing of multi-year insurance contracts. Maynard, Trevor; Ranger, Nicola Palgrave Macmillan, [RKN: 45662] Shelved at: Per: Geneva Geneva Papers on Risk and Insurance (2012) 37(2) : 318-339.
Multi-year insurance has been proposed as a tool to incentivise policy-holders to invest in property-level adaptation. In a world of rising natural catastrophe risks, such autonomous adaptations could have significant benefits for the property owner, the insurer and society. We review some arguments made in respect of multi-year contracts and provide new analyses on their price implications. We conclude that even under conditions of known and stationary risk, initial capital requirements could be around 50 per cent higher for a 10-year contract than an annual contract and the annual premium around 5.5 per cent higher; in the real world of changing and uncertain risks, premiums would be even higher. We also conclude that multi-year contracts have several additional disadvantages that are likely to limit their demand and availability in the general retail insurance market. For adaptation, we conclude that other tools, such as risk-based premiums and loans for adaptation tied to the property, have greater potential. Available via Athens: Palgrave MacMillan http://www.openathens.net
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CATASTROPHE THEORY Catastrophe model blending. Calder, Alan; Couper, Andrew; Lo, Joseph (2012). 2012. [RKN: 43553] General Insurance Convention (2012) : 1-62.
Paper presented at [39th] annual GIRO conference, or General Insurance Convention of the UK Actuarial Professon, at Square Conference Centre, Brussels, 18-21 September 2012 http://www.actuaries.org.uk/events/paper-presentation-archives/2012
GIRO Conference and Exhibition 2012: Juggling uncertainty: the actuary's part to play : [39th annual General Insurance Convention papers] : SQUARE Conference Centre, Brussels, 18-21 September 2012. Institute and Faculty of Actuaries (2012). - London: Institute and Faculty of Actuaries, 2012. - 457 pages. [RKN: 43552] Shelved at: Strg box J33 gic (Oxf) BX (Lon) Shelved at: 368
Papers presented at [39th] annual GIRO conference, or General Insurance Convention of the UK Actuarial Professon, at Square Conference Centre, Brussels, 18-21 September 2012 http://www.actuaries.org.uk/events/residential/giro-conference-and-exhibition-2012
CATERING Do publicly traded property–casualty insurers cater to the stock market?. Ma, Yu-Luen; Ren, Yayuan - 16 pages. [RKN: 70707] Shelved at: Per: J.Risk Ins (Oxf) Shelved at: JOU Journal of Risk and Insurance (2012) 79 (2) : 415-430.
This article examines the catering theory in the insurance industry. We investigate whether managers of publicly traded insurers pursue a growth strategy catering to the stock market's preference. Two hypotheses are tested in this study: (1) an insurer will devote more efforts to increasing premium growth when the stock market places greater values on growth, and (2) this catering effect will be more pronounced at firms where managers have greater incentives to maximize short-term stock prices. We find evidence supporting both hypotheses. Our study discovers a new channel through which the stock market and executive compensation affect insurance companies‘ business strategies and the insurance market. The implication of the interplay between insurers and the stock market is significant and deserves future research. Available via Athens: Wiley Online Library http://www.openathens.net
CHAIN LADDER METHODS Asymptotic consistency and inconsistency of the chain ladder. Pesta, Michal; Hudecová, Sárka [RKN: 44867] Shelved at: Online Only Shelved at: Online Only Insurance: Mathematics & Economics (2012) 51(2) : 472-479.
The distribution-free chain ladder reserving method belongs to the most frequently used approaches in general insurance. It is well known, see Mack (1993), [T. Mack (1993), Distribution-free calculation of the standard error of chain ladder reserve estimates, ASTIN Bulletin 23(2): 213–225] that the estimators [fj symbols] of the development factors are unbiased and mutually uncorrelated under some mild conditions on the mean structure and under the assumption of independence of the claims in different accident years. In this article we deal with some asymptotic properties of . Necessary and sufficient conditions for asymptotic consistency of the estimators of true development factors [fj symbols] are provided. A rate of convergence for the consistency is derived. Possible violation of these conditions and its consequences are discussed, and some practical recommendations are given. Numerical simulations and a real data example are provided as well. Available via Athens: ScienceDirect http://www.openathens.net/
Detection and correction of outliers in the bivariate chain–ladder method. Verdonck, T; Van Wouwe, M [RKN: 44961] Shelved at: Per: IME (Oxf) Insurance: Mathematics & Economics (2011) 49 (2) : 188-193.
The expected profit or loss of a non-life insurance company is determined for the whole of its multiple business lines. This implies the study of the claims reserving problem for a portfolio consisting of several correlated run-off triangles. A popular technique to deal with such a portfolio is the multivariate chain–ladder method of . However, it is well known that the chain–ladder method is very sensitive to outlying data. For the univariate case, we have already developed a robust version of the chain–ladder method. In this article we propose two techniques to detect and correct outlying values in a bivariate situation. The methodologies are illustrated and compared on real examples from practice. Available via Athens: ScienceDirect http://www.openathens.net
GIRO Conference and Exhibition 2011: Navigating risk: are actuaries at the helm? : [38th annual General Insurance Convention papers] : BT Convention Centre, Liverpool, 11-14 September 2011. Institute and Faculty of Actuaries (2011). - London: Institute and Faculty of Actuaries, 2011. - 216 pages. [RKN: 43573] Shelved at: Strg box J33 gic (Oxf) BX (Lon) Shelved at: 368
Papers presented at [38th] annual GIRO conference, or General Insurance Convention of the UK Actuarial Professon, at BT Convention Centre, Liverpool, 11-14 September 2011 http://www.actuaries.org.uk/events/paper-presentation-archives/2011
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Maximum likelihood and estimation efficiency of the chain ladder - Greg Taylor -. Taylor, Greg (2011). 2011. [RKN: 43577] General Insurance Convention (2011) : 81-107.
Paper presented at [38th] annual GIRO conference, or General Insurance Convention of the UK Actuarial Professon, at BT Convention Centre, Liverpool, 11-14 October 2011 http://www.actuaries.org.uk/events/paper-presentation-archives/2011
Prediction uncertainty in the Bornhuetter-Ferguson claims reserving method: revisited. Alai, D H; Merz, M; Wüthrich, Mario V Faculty of Actuaries and Institute of Actuaries; Cambridge University Press, [RKN: 39998] Shelved at: Per: AAS (Oxf) Per: AAS (Lon) Annals of Actuarial Science (2011) 5(1) : 7-17.
We revisit the stochastic model of Alai et al. (2009) for the Bornhuetter-Ferguson claims reserving method, Bornhuetter & Ferguson (1972). We derive an estimator of its conditional mean square error of prediction (MSEP) using an approach that is based on generalized linear models and maximum likelihood estimators for the model parameters. This approach leads to simple formulas, which can easily be implemented in a spreadsheet. http://www.actuaries.org.uk/research-and-resources/pages/access-journals
CHAIN LADDER TESTS Back-testing the ODP bootstrap of the paid chain-ladder model with actual historical claims data. Leong, Jessica; Wang, Shaun; Chen, Han (2012). 2012. [RKN: 43554] General Insurance Convention (2012) : 63-97.
Paper presented at [39th] annual GIRO conference, or General Insurance Convention of the UK Actuarial Professon, at Square Conference Centre, Brussels, 18-21 September 2012 http://www.actuaries.org.uk/events/paper-presentation-archives/2012
CHANNELS OF DISTRIBUTION A comparison of Bancassurance and traditional insurer sales channels. Chang, Pang-Ru; Peng, Jin-Lung; Fan, Chiang Ku Palgrave Macmillan, [RKN: 39977] Shelved at: Per: Geneva (Oxf) Geneva Papers on Risk and Insurance (2011) 36(1) : 76-93.
Although various sales channels exist for insurance products, no existing research compares their sales efficiency. This study offers a comparison of bancassurance and traditional sales channels in Taiwan. Using a data envelopment analysis approach, this study first computes the efficiencies of bancassurance and traditional sales channels separately. The efficiency score of the traditional sales channel is significantly higher than that of a comparable bancassurance channel. Furthermore, the efficiency relationship between the bancassurance and the traditional sales channels is independent. These findings have significant implications for the insurance industry and ongoing research in this field. Available via Athens: Palgrave MacMillan http://www.openathens.net
CLAIM FREQUENCY Modeling insurance claims via a mixture exponential model combined with peaks-over-threshold approach. Lee, David; Li, Wai Keung; Wong, Tony Siu Tong [RKN: 44873] Shelved at: Online Only Shelved at: Online Only Insurance: Mathematics & Economics (2012) 51(3) : 538-550.
We consider a model which allows data-driven threshold selection in extreme value analysis. A mixture exponential distribution is employed as the thin-tailed distribution in view of the special structure of insurance claims, where individuals are often grouped into categories. An EM algorithm-based procedure is described in model fitting. We then demonstrate how a multi-level fitting procedure will substantially reduce computation time when the data set is large. The fitted model is applied to derive statistics such as return level and expected tail loss of the claim distribution, and ruin probability bounds are obtained. Finally we propose a statistical test to justify the choice of mixture exponential distribution over the homogeneous exponential distribution in terms of improved fit. Available via Athens: ScienceDirect http://www.openathens.net/
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CLAIMS Correlated random effects for hurdle models applied to claim counts. Boucher, Jean-Philippe; Denuit, Michel; Guillén, Montserrat [RKN: 44926] Shelved at: Per: Variance Variance (2011) 5(1) : 68-81.
New models for panel data that consist of a generalization of the hurdle model are presented and are applied to modeling a panel of claim counts. Correlated random effects are assumed for the two processes involved to allow for dependence among all the contracts held by the same insured. A method to obtain a posteriori distribution of the random effects as well as predictive distributions of the number of claims is presented. A numerical illustration of reported insurance claims shows that if independence between random effects is assumed, then the variance of a priori premiums may be underestimated. If dependence between random effects is considered, then the predicted number of claims given past observations and covariate information and its variance is also larger than the one obtained when independence is assumed. http://www.variancejournal.org/issues
Maximum likelihood and estimation efficiency of the chain ladder - Greg Taylor -. Taylor, Greg (2011). 2011. [RKN: 43577] General Insurance Convention (2011) : 81-107.
Paper presented at [38th] annual GIRO conference, or General Insurance Convention of the UK Actuarial Professon, at BT Convention Centre, Liverpool, 11-14 October 2011 http://www.actuaries.org.uk/events/paper-presentation-archives/2011
Moving in the right direction. Patrick, Bart Staple Inn Actuarial Society, [RKN: 45205] Shelved at: Per: Actuary (Oxf) Per: Actuary (Lon) Shelved at: SIA/ACT The Actuary (2011) May : 32-33.
Bart Patrick explores how insurers are driving operational efficiency across the claims value chain. http://www.theactuary.com/archive
Precise large deviations of aggregate claims in a size-dependent renewal risk model. Chen, Yiqing; Yuen, Kam C [RKN: 44865] Shelved at: Online Only Shelved at: Online Only Insurance: Mathematics & Economics (2012) 51(2) : 457-461.
Consider a renewal risk model in which claim sizes and inter-arrival times correspondingly form a sequence of independent and identically distributed random pairs, with each pair obeying a dependence structure described via the conditional distribution of the inter-arrival time given the subsequent claim size being large. We study large deviations of the aggregate amount of claims. For a heavy-tailed case, we obtain a precise large-deviation formula, which agrees with existing ones in the literature. Available via Athens: ScienceDirect http://www.openathens.net/
A statistical basis for claims experience monitoring. Taylor, Greg (2011). - Victoria: University of Melbourne, 2011. - 32 pages. [RKN: 74757]
By claims experience monitoring is meant the systematic comparison of the forecasts from a claims model with claims experience as it emerges subsequently. In the event that the stochastic properties of the forecasts are known, the comparison can be represented as a collection of probabilistic statements. This is stochastic monitoring. The paper defines this process rigorously in terms of statistical hypothesis testing. If the model is a regression model (which is the case for most stochastic claims models), then the natural form of hypothesis test is a number of likelihood ratio tests, one for each parameter in the valuation model. Such testing is shown to be very easily implemented by means of GLM software. This tests the formal structure of the claims model and is referred to as micro-testing. There may be other quantities (e.g. amount of claim payments in a defined interval) that require testing for practical reasons. This sort of testing is referred to as macro-testing, and its formulation is also discussed. No.1 (1993) onwards available online. Download as PDF. http://www.economics.unimelb.edu.au/ACT/papers.shtml
A statistical basis for claims experience monitoring. Taylor, Greg (2011). 2011. [RKN: 43575] General Insurance Convention (2011) : 3-28.
Paper presented at [38th] annual GIRO conference, or General Insurance Convention of the UK Actuarial Professon, at BT Convention Centre, Liverpool, 11-14 October 2011 http://www.actuaries.org.uk/events/paper-presentation-archives/2011
Underwater underwriters. Parodi, Pietro Staple Inn Actuarial Society, [RKN: 45111] Shelved at: Per: Actuary (Oxf) Per: Actuary (Lon) Shelved at: SIA/ACT The Actuary (2011) March : 34-36.
Pietro Parodi considers how actuaries can use different techniques in modelling insurance claims. http://www.theactuary.com/archive
Update from the Third Party Motor and the PPO Working Parties. Brown, David; MacDonnell, Sarah (2012). - London: Institute and Faculty of Actuaries, 2012. [RKN: 43526] Shelved at: Online
A key finding of the Institute and Faculty of Actuaries report is the increase in the proportion of third party accidents involving bodily injury where data shows a staggering 18% increase from 2010 to 2011. A rise in the proportion of reported accidents involving bodily injury has been a key trend for several years; however this year has seen the greatest increase ever. The Institute and Faculty of Actuaries believes that this rise is down to unprecedented activity by claims management companies. The increase in claims increased costs to insurers to the tune of approximately £400 million in 2011 The Institute and Faculty of Actuaries 3rd annual report looking at ‗third party motor and periodic payment orders (PPOs) UK claims data‘, a report which collates and analyses data from across the motor and PPO insurance industry for 2011. http://www.actuaries.org.uk/research-and-resources/documents/update-third-party-motor-and-ppo-working-parties
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Worst-case-optimal dynamic reinsurance for large claims. Korn, Ralf; Menkens, Olaf; Steffensen, Mogens [RKN: 44839] Shelved at: online only European Actuarial Journal (2012) 2(1) July : 21-48.
We control the surplus process of a non-life insurance company by dynamic proportional reinsurance. The objective is to maximize expected (utility of the) surplus under the worst-case claim development. In the large claim case with a worst-case upper limit on claim numbers and claim sizes, we find the optimal reinsurance strategy in a differential game setting where the insurance company plays against mother nature. We analyze the resulting strategy and illustrate its characteristics numerically. A crucial feature of our result is that the optimal strategy is robust to claim number and size modeling and robust to the choice of utility function. This robustness makes a strong case for our approach. Numerical examples illustrate the characteristics of the new approach. We analyze the optimal strategy, e.g. in terms of the more conventional, in the insurance context, objective of minimizing the probability of ruin. Finally, we calculate the intrinsic risk-free return of the model and we show that the principle of Markowitz—don‘t put all your eggs in one basket—does not hold in this setting. Available online via Athens -- Published online, July 2012 http://www.openathens.net
CLAIMS RESERVES Asymptotic consistency and inconsistency of the chain ladder. Pesta, Michal; Hudecová, Sárka [RKN: 44867] Shelved at: Online Only Shelved at: Online Only Insurance: Mathematics & Economics (2012) 51(2) : 472-479.
The distribution-free chain ladder reserving method belongs to the most frequently used approaches in general insurance. It is well known, see Mack (1993), [T. Mack (1993), Distribution-free calculation of the standard error of chain ladder reserve estimates, ASTIN Bulletin 23(2): 213–225] that the estimators [fj symbols] of the development factors are unbiased and mutually uncorrelated under some mild conditions on the mean structure and under the assumption of independence of the claims in different accident years. In this article we deal with some asymptotic properties of . Necessary and sufficient conditions for asymptotic consistency of the estimators of true development factors [fj symbols] are provided. A rate of convergence for the consistency is derived. Possible violation of these conditions and its consequences are discussed, and some practical recommendations are given. Numerical simulations and a real data example are provided as well. Available via Athens: ScienceDirect http://www.openathens.net/
Bayesian over-dispersed Poisson model and the Bornhuetter & Ferguson claims reserving method. England, Peter D; Verrall, Richard J; Wüthrich, Mario V [RKN: 43653] Shelved at: Per: AAS (Lon) Shelved at: JOU/AAS Annals of Actuarial Science (2012) 6(2) : 258-283.
We consider the Bayesian over-dispersed Poisson (ODP) model for claims reserving in general insurance. We choose two different types of prior distributions for the parameters and then study the different Bayesian predictors. This study leads, on the one hand, to the classical chain ladder predictor and, on the other hand, to Bornhuetter & Ferguson predictors. We highlight (either analytically or numerically) how these predictors are obtained and how their prediction uncertainty can be determined. http://www.actuaries.org.uk/research-and-resources/pages/access-journals
The construction of the claims reserve distribution by means of a semi-Markov backward simulation model. Gismondi, Fulvio; Janssen, Jacques; Manca, Raimondo Faculty of Actuaries and Institute of Actuaries; Cambridge University Press, [RKN: 45560] Shelved at: Per: AAS (Oxf) Per: AAS (Lon) Annals of Actuarial Science (2012) 6(1) : 23-64.
The claims reserving problem is currently one of the most debated in actuarial literature. The high level of interest in this topic is due to the fact that Solvency II rules will come into operation in 2014. Indeed, it is expected that quantile computations will be compulsory in the evaluation of company risk and for this reason we think that the construction of the claims reserve random variable distribution assumes a fundamental relevance. The aim of this paper is to present a method for constructing the claims reserve distribution which can take into account IBNyR (Issued But Not yet Reported) claims in a natural way. The construction of the distribution function for each time of the observed interval is done by means of a Monte Carlo simulation model applied on a backward time semi-Markov process. It should be pointed out that this is the first time that a simulation model based on semi-Markov with backward recurrence time has been presented. The method is totally different from the models given in the current literature. The most important features given in the paper are: 1) for the first time the Monte Carlo simulation method is applied to a backward semi-Markov environment; 2) the Monte Carlo simulation permits the construction of the random variable of the claims reserve for each year of the studied horizon in a natural way; 3) as already pointed out, the backward process attached to the semi-Markov process permits taking into account the evaluation of the IBNyR claims in a natural way. In the last part of the paper an applicative example constructed from tables that summarise 4 years of claims from an important Italian insurance company will be given. Available via Athens: Cambridge Journals http://www.actuaries.org.uk/research-and-resources/pages/access-journals
Detection and correction of outliers in the bivariate chain–ladder method. Verdonck, T; Van Wouwe, M [RKN: 44961] Shelved at: Per: IME (Oxf) Insurance: Mathematics & Economics (2011) 49 (2) : 188-193.
The expected profit or loss of a non-life insurance company is determined for the whole of its multiple business lines. This implies the study of the claims reserving problem for a portfolio consisting of several correlated run-off triangles. A popular technique to deal with such a portfolio is the multivariate chain–ladder method of . However, it is well known that the chain–ladder method is very sensitive to outlying data. For the univariate case, we have already developed a robust version of the chain–ladder method.
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In this article we propose two techniques to detect and correct outlying values in a bivariate situation. The methodologies are illustrated and compared on real examples from practice. Available via Athens: ScienceDirect http://www.openathens.net
Development pattern and prediction error for the stochastic Bornhuetter-Ferguson claims reserving method. Saluz, Annina; Gisler, Alois; Wüthrich, Mario V - 35 pages. [RKN: 74737] Shelved at: Per: Astin Bull (Oxf) Shelved at: JOU ASTIN Bulletin (2011) 41 (2) : 279-313.
We investigate the question how the development pattern in the Bornhuetter-Ferguson method should be estimated and derive the corresponding conditional mean square error of prediction (MSEP) of the ultimate claim prediction. An estimator of this conditional MSEP in a distribution-free model was given by Mack [9], whereas in Alai et al. [2] this conditional MSEP was studied in an over-dispersed Poisson model using the chain ladder development pattern. First we consider distributional models and derive estimators (maximum likelihood) for the development pattern taking all relevant information into account. Moreover, we suggest new estimators of the correlation matrix of these estimators and new estimators of the conditional MSEP. Our findings supplement some of Mack‘s results. The methodology is illustrated at two numerical examples. online access via International Actuarial Association: http://www.actuaries.org/index.cfm?lang=EN&DSP=PUBLICATIONS&ACT=ASTIN BULLETIN http://www.actuaries.org/index.cfm?lang=EN&DSP=PUBLICATIONS&ACT=ASTIN BULLETIN
Prediction uncertainty in the Bornhuetter-Ferguson claims reserving method: revisited. Alai, D H; Merz, M; Wüthrich, Mario V Faculty of Actuaries and Institute of Actuaries; Cambridge University Press, [RKN: 39998] Shelved at: Per: AAS (Oxf) Per: AAS (Lon) Annals of Actuarial Science (2011) 5(1) : 7-17.
We revisit the stochastic model of Alai et al. (2009) for the Bornhuetter-Ferguson claims reserving method, Bornhuetter & Ferguson (1972). We derive an estimator of its conditional mean square error of prediction (MSEP) using an approach that is based on generalized linear models and maximum likelihood estimators for the model parameters. This approach leads to simple formulas, which can easily be implemented in a spreadsheet. http://www.actuaries.org.uk/research-and-resources/pages/access-journals
Reversible jump Markov chain Monte Carlo method for parameter reduction in claims reserving. Verrall, Richard J; Wüthrich, Mario V Society of Actuaries, - 20 pages. [RKN: 70132] Shelved at: Per: NAAJ (Oxf) Per NAAJ (Lon) Shelved at: JOU North American Actuarial Journal (2012) 16 (2) : 240-259.
We present an application of the reversible jump Markov chain Monte Carlo (RJMCMC) method to the important problem of setting claims reserves in general insurance business for the outstanding loss liabilities. A measure of the uncertainty in these claims reserves estimates is also needed for solvency purposes. The RJMCMC method described in this paper represents an improvement over the manual processes often employed in practice. In particular, our RJMCMC method describes parameter reduction and tail factor estimation in the claims reserving process, and, moreover, it provides the full predictive distribution of the outstanding loss liabilities. http://www.soa.org/news-and-publications/publications/journals/naaj/naaj-detail.aspx
CLIMATE CHANGE Climate change, weather insurance design and hedging effectiveness. Kapphan, Ines; Calanca, Pierluigi; Holzkaemper, Annelie Palgrave Macmillan, [RKN: 45661] Shelved at: Per: Geneva Geneva Papers on Risk and Insurance (2012) 37(2) : 286-317.
Insurers have relied on historical data to design weather insurance contracts. In light of climate change, we examine the effects of this practice on the hedging effectiveness and profitability of insurance contracts. Using synthetic crop and weather data for today's and future climatic conditions we derive adjusted weather insurance contracts that account for shifts in the distribution of weather and yields. In our scenario, hedging benefits from adjusted contracts almost triple and expected profits increase by about 240 per cent. We further investigate the effect on risk reduction (for the insured) and profits (for the insurer) from hedging future weather risk with non-adjusted contracts based on historical data. In this case, insurers generate profits that are significantly smaller than for adjusted contracts, or even face substantial losses. Moreover, non-adjusted contracts that create higher profits than the adjusted counterparts cause negative hedging benefits for the insured. Available via Athens: Palgrave MacMillan http://www.openathens.net
A comparative study of public-private catastrophe insurance systems : Lessons from current practices. Paudel, Youbaraj Palgrave Macmillan, [RKN: 45660] Shelved at: Per: Geneva Geneva Papers on Risk and Insurance (2012) 37(2) : 257-285.
Natural disasters risk is increasing in several regions around the world as a result of socio-economic development and climate change. This indicates the importance of establishing affordable and sustainable natural disaster risk management and compensation arrangements. Given the complexity of insuring extreme risks, insurers and governments often cooperate in catastrophe insurance systems. This paper presents a comparative study of the main components and a broad range of indicators of fully private and fully public, as well as public-private (PP) insurance systems, for extreme events, in ten countries. This analysis results in the following nine main recommendations for policymakers who aim to establish new, or improve existing, insurance arrangements for natural disasters: (1) mandatory participation requirements are advisable to achieve a high market penetration rate; (2) adequate monitoring and enforcement mechanisms need to be put in place to ensure compliance with these requirements; (3) the government needs to take responsibility for part of the (extreme) damage in order to keep an insurance system financially viable and affordable; (4) private insurance companies should participate in a PP insurance scheme by selling
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and administering policies and by covering medium-sized losses; (5) the integration in systems of risk transferring mechanisms is advisable; (6) it is advisable that governments stimulate the building-up of insurers‘ reserves by providing tax exemptions; (7) risk mitigation policies should be carefully integrated in a natural disaster insurance system; (8) a detailed assessment and mapping of risk provides the basis for an effective mitigation policy; (9) insurance should provide financial incentives for policyholders to take risk mitigation measures. Available via Athens: Palgrave MacMillan http://www.openathens.net
Disasters and decentralisation. Johnston, Jason Scott Palgrave Macmillan, [RKN: 45659] Shelved at: Per: Geneva Geneva Papers on Risk and Insurance (2012) 37(2) : 228-256.
Climate change may potentially increase the magnitude of losses from natural hazards, but the United States experience shows that the primary reason for escalating losses is policy failure. It is well known that centralised, taxpayer-funded ex post disaster relief has actually encouraged development in risky jurisdictions and also weakened incentives for ex ante precautions in such jurisdictions (moral or ―charity‖ hazard). Less well known and analysed is the role played by centralised ex ante development subsidies—often masquerading as protective investment—in distorting incentives. This paper develops a simple three jurisdiction model in which homogeneous jurisdictions decide by majority vote in a centralised legislature on the centralised (federal) share of ex post loss and centralised spending an ex ante development in a Beneficiary jurisdiction, taking into account how these decisions about centralised spending impact local Beneficiary jurisdiction incentives for precautions against ex post loss. The model shows that the marginal cost of ex ante federal development spending may be greater for a Beneficiary jurisdiction than for a Contractor jurisdiction. This somewhat technical result has an observable implication: evidence that a small fraction of ex post loss in a Beneficiary jurisdiction is centrally compensated (shared across jurisdictions) is evidence that ex ante development subsidies there may be truly precautionary on net; conversely, evidence that a Beneficiary jurisdiction has a large share of its ex post hazard loss compensated by centralised disaster relief suggests that the ex ante development subsidies received by that jurisdiction did more to encourage new development and increase the amount at risk than they did to protect existing development. The model is extended to consider how ex post loss sharing impacts the demand for federally subsidised disaster insurance and other related issues. Available via Athens: Palgrave MacMillan http://www.openathens.net
The impact of climate change on precipitation-related insurance risk : A study of the effect of future scenarios on residential buildings in Norway. Scheel, Ida; Hinnerichsen, Mikkel Palgrave Macmillan, [RKN: 45664] Shelved at: Per: Geneva Geneva Papers on Risk and Insurance (2012) 37(2) : 365-376.
Climate change is likely to increase the future risk of weather-related damage to buildings worldwide. This challenge is faced by society in general, but the insurance industry is particularly important in the management of the anticipated increase in future risk. In addition to adjusting premiums appropriately and gradually, they can play an important role in prevention. It is crucial to know which areas are vulnerable and to what extent. In this paper, a spatial regression model for linking weather-related insurance losses for residential buildings to meteorological and hydrological covariates is coupled with three plausible scenarios for the future climate in order to project the future number of weather-related residential building insurance losses in Norway. The model is trained on observed daily insurance loss and weather data at the municipality level. Our results indicate a dramatic increase in the projected future weather-related insurance risk in many parts of Norway. The procedure can be extended and applied to other areas globally. Available via Athens: Palgrave MacMillan http://www.openathens.net
Insurance law and economics research for natural hazard management in a changing climate : Editorial. Schwarze, Reimund Palgrave Macmillan, [RKN: 45657] Shelved at: Per: Geneva Geneva Papers on Risk and Insurance (2012) 37(2) : 201-205.
Available via Athens: Palgrave MacMillan http://www.openathens.net
On the underestimation of the precautionary effect in discounting. Gollier, Christian - 17 pages. [RKN: 74785] Shelved at: Per: Geneva (Oxf) Geneva Risk and Insurance Review (2011) 36 (2) : 95-111.
Using the extended Ramsey rule, the socially efficient rate is the difference between a wealth effect and a precautionary effect of economic growth. This second effect is increasing in the degree of uncertainty affecting the future. In the literature, it is usually calibrated by estimating the historical volatility of the growth of GDP in a specific country. In this paper, I show that using cross-section data tends to magnify uncertainty, and to reduce the discount rate. Using a data set covering 190 countries over the period 1969–2010, I justify using a much smaller discount rate of approximately 0.7 per cent per year for time horizons exceeding 40 years.
Proposal for a national earthquake insurance programme for Greece. Petseti, Aglaia; Nektarios, Milton Palgrave Macmillan, [RKN: 45665] Shelved at: Per: Geneva Geneva Papers on Risk and Insurance (2012) 37(2) : 377-400.
It is proposed that Greece undertakes the establishment of a national earthquake insurance programme for homeowners that will replace the ex post disaster relief by the State when an earthquake occurs. Greece is seismically the most active region in the whole Mediterranean. By employing four different catastrophe models, it has been estimated that the economic loss to the residential stock of a 1-in-200 year event is likely to be greater than 22 billion euros; for a 1-in-100 year event is about 14 billion euros; for an 1-in-25 year event is 5 billion euros; and for a 1-in-5 year event is 1.3 billion euros. This potential loss severity exposes the inherent limitations of the ex post funding approach to natural disasters adopted by successive Greek governments and underscores the urgent need for establishing a National Earthquake Insurance Programme. It is proposed that the earthquake coverage should be compulsory and the management of the insurance programme be based on the principle of a public–private partnership. The objective of the programme would be to provide affordable earthquake insurance, up to a maximum amount, to
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all homeowners, on the basis of risk-based premiums. A comprehensive and unique data bank of the residential stock in the country has been developed, which will be very useful to the local insurance industry as well as to reinsurers. Available via Athens: Palgrave MacMillan http://www.openathens.net
Tackling climate risk : an insurance contribution to the COP discussions. Geneva Association's Climate Risk and Insurance Project (2011). - Geneva: Geneva Association, 2011. - 12 pages. [RKN: 45620] Shelved at: Online Shelved at: Online
The Geneva Association has issued this paper to emphasise the key role that insurance plays when it comes to dealing with climate and environmental risks and how this industry can contribute in a positive way to cope with the challenges confronting humankind. The document builds on the central messages of The Geneva Association‘s 2009 Kyoto Statement and the 2010 Developing Countries Statement, issued in collaboration with ClimateWise, the Munich Climate Insurance Initiative (MCII) and UNEP-FI. http://www.genevaassociation.org/PDF/BookandMonographs/GA2011-Tackling Climate Risk.pdf
What role for ―long-term insurance‖ in adaptation? : an analysis of the prospects for and pricing of multi-year insurance contracts. Maynard, Trevor; Ranger, Nicola Palgrave Macmillan, [RKN: 45662] Shelved at: Per: Geneva Geneva Papers on Risk and Insurance (2012) 37(2) : 318-339.
Multi-year insurance has been proposed as a tool to incentivise policy-holders to invest in property-level adaptation. In a world of rising natural catastrophe risks, such autonomous adaptations could have significant benefits for the property owner, the insurer and society. We review some arguments made in respect of multi-year contracts and provide new analyses on their price implications. We conclude that even under conditions of known and stationary risk, initial capital requirements could be around 50 per cent higher for a 10-year contract than an annual contract and the annual premium around 5.5 per cent higher; in the real world of changing and uncertain risks, premiums would be even higher. We also conclude that multi-year contracts have several additional disadvantages that are likely to limit their demand and availability in the general retail insurance market. For adaptation, we conclude that other tools, such as risk-based premiums and loans for adaptation tied to the property, have greater potential. Available via Athens: Palgrave MacMillan http://www.openathens.net
CLIMATE RISK Index insurance, probabilistic climate forecasts, and production. Carriquiry, Miguel A; Osgood, Daniel E - 14 pages. [RKN: 73855] Shelved at: Per: J.Risk Ins (Oxf) Shelved at: JOU Journal of Risk and Insurance (2012) 79 (1) : 287-300.
Index insurance and probabilistic seasonal forecasts are becoming available in developing countries to help farmers manage climate risks in production. Although these tools are intimately related, work has not been done to formalize the connections between them. We investigate the relationship between the tools through a model of input choice under uncertainty, forecasts, and insurance. While it is possible for forecasts to undermine insurance, we find that when contracts are appropriately designed, there are important synergies between forecasts, insurance, and effective input use. Used together, these tools overcome barriers preventing the use of imperfect information in production decision making. Available via Athens: Wiley Online Library http://www.openathens.net
COINSURANCE Disappointment and the optimal insurance contract. Huang, Rachel J; Shih, Pai-Ta; Tzeng, Larry Y - 27 pages. [RKN: 70279] Shelved at: Per: Geneva (Oxf) Geneva Risk and Insurance Review (2012) 37 (2) : 258-284.
This paper studies the optimal insurance contract under disappointment theory. We show that, when the individuals anticipate disappointment, there are two types of optimal insurance contract. The first type contains a deductible and a coinsurance above the deductible. We find that zero marginal cost is just a sufficient but not a necessary condition for a zero deductible. The second type has no deductible and the optimal insurance starts with full coverage for small losses and includes a coinsurance above an upper value of the full coverage.
COMMERCIAL INSURANCE Insuring ever-evolving commercial risks. Swiss Reinsurance Company (2012). - Zurich: Swiss Reinsurance Company, 2012. - 40 pages. [RKN: 70571] Shelved at: JOU Sigma (2012) 5
Commercial insurance helps companies to manage risks and find new ways to innovate, grow, and stabilise their earning. Swiss Re‘s sigma 5/2012, "Insuring ever-evolving commercial risks", explores the different commercial insurance markets and business lines in today's rapidly changing risk environment, and provides a glimpse of the profitability outlook for commercial insurance in the future. Globally, commercial insurance is an over USD 600 billion business. The US is by far the world's biggest commercial insurance market, with USD 237 billion in premiums in 2010 (or a 40% share). Japan and China follow, with USD 35 billion and
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USD 31 billion in premiums, respectively. In high-growth markets, where the economy tends to be expanding and insurance penetration tends to be increasing, commercial insurance growth outpaces advanced markets by a factor of two to three. http://www.swissre.com
COMMISSION An analysis of contingent commission use by property-liability insurers. Colquitt, L Lee; McCullough, Kathleen A; Sommer, David W - 15 pages. [RKN: 74760] Shelved at: JOU Risk Management and Insurance Review (2011) 14 (2) : 157-171.
The payment of contingent commissions in the property–liability insurance industry has long been commonplace, but recent events have made the practice highly controversial. Even prior to these events, wide variation existed among insurers in their use of contingent commissions. In this article, we examine the determinants of whether or not an insurer chooses to pay contingent commissions at all, as well as the determinants of the extent of their use for those insurers that pay them. We find a number of variables that have a significant relation to the use and extent of use of contingent commissions. Available via Athens: Wiley Online Library http://www.openathens.net
Optimal brokerage commissions for fair insurance: a first order approach. Hau, Arthur - 13 pages. [RKN: 74789] Shelved at: Per: Geneva (Oxf) Geneva Risk and Insurance Review (2011) 36 (2) : 189-201.
This paper studies a principal-agent insurance brokerage problem with a risk-averse principal (an insured) and a risk-neutral agent (a broker). The concept of ―mean-preserving, spread-reducing‖ (MPSR) effort is introduced to model the broker's activities. Using the first-order approach, it is shown that under some common conditions, the insured may ―concavify‖ the reward function to induce the risk-neutral agent to exert MPSR brokering effort. These conditions, together with an additional condition, guarantee the validity of the first-order approach even when the monotone likelihood ratio condition (used exclusively to justify the first-order approach) is violated.
COMPUTER SYSTEMS Computational intelligence with applications to general insurance: a review: I – The role of statistical learning. Parodi, Pietro [RKN: 43655] Shelved at: Per: AAS (Lon) Shelved at: JOU/AAS Annals of Actuarial Science (2012) 6(2) : 307-343.
This paper argues that most of the problems that actuaries have to deal with in the context of non-life insurance can be usefully cast in the framework of computational intelligence (a.k.a. artificial intelligence), the discipline that studies the design of agents which exhibit intelligent behaviour. Finding an adequate framework for actuarial problems has more than a simply theoretical interest: it also allows a knowledge transfer from the computational intelligence discipline to general insurance, wherever techniques have been developed for problems which are common to both contexts. This has already happened in the past (neural networks, clustering, data mining have all found applications to general insurance) but not systematically, with the result that many useful computational intelligence techniques such as sparsity-based regularisation schemes (a technique for feature selection) are virtually unknown to actuaries. In this first of two papers, we will explore the role of statistical learning in actuarial modelling. We will show that risk costing, which is at the core of pricing, reserving and capital modelling, can be described as a supervised learning problem. Many activities involved in exploratory analysis, such as data mining or feature construction, can be described as unsupervised learning. A comparison of different computational intelligence methods will be carried out, and practical insurance applications (rating factor selection, IBNER analysis) will also be presented. This paper has a following part: Computational intelligence with applications to general insurance: a review: II – Dealing with uncertain knowledge, Annals of Actuarial Science 6(2): 344-380 http://www.actuaries.org.uk/research-and-resources/pages/access-journals
Computational intelligence with applications to general insurance: a review: II – Dealing with uncertain knowledge. Parodi, Pietro [RKN: 43656] Shelved at: Per: AAS (Lon) Shelved at: JOU/AAS Annals of Actuarial Science (2012) 6(2) : 344-380.
This paper argues that most of the problems that actuaries have to deal with in the context of non-life insurance can be usefully cast in the framework of computational intelligence (a.k.a. artificial intelligence), the discipline that studies the design of agents which exhibit intelligent behaviour. Finding an adequate framework for actuarial problems has more than a simply theoretical interest: it also allows a technological transfer from the computational intelligence discipline to general insurance, wherever techniques have been developed for problems which are common to both contexts. This has already happened in the past (neural networks, clustering, data mining have all found applications to general insurance) but not in a systematic way. One of the objectives of this paper will therefore be to introduce some useful techniques such as sparsity-based regularisation and dynamic decision networks that are not yet known to the wider actuarial community. Whilst in the first part of this paper we dealt mainly with data-driven loss modelling under the assumption that all the data were accurate and fully relevant to the exercise, in this second part of the paper we explore how to deal with uncertain knowledge, whether this uncertainty comes from the fact that the data are not fully reliable (e.g. they are estimates) or from the fact that the knowledge is ―soft‖ (e.g. expert beliefs) or not fully relevant (e.g. market information on a given risk). Most importantly, we will deal with the problem of making pricing, reserving and capital decisions under uncertainty. It will be concluded that a Bayesian framework is the most adequate for dealing with uncertainty, and we will present a number of computational intelligence techniques to do this in practice.
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This paper has a preceding part: Computational intelligence with applications to general insurance: a review: II – The role of statistical learning, Annals of Actuarial Science 6(2): 307-343 http://www.actuaries.org.uk/research-and-resources/pages/access-journals
CONTINGENT BUSINESS INTERRUPTION Insuring ever-evolving commercial risks. Swiss Reinsurance Company (2012). - Zurich: Swiss Reinsurance Company, 2012. - 40 pages. [RKN: 70571] Shelved at: JOU Sigma (2012) 5
Commercial insurance helps companies to manage risks and find new ways to innovate, grow, and stabilise their earning. Swiss Re‘s sigma 5/2012, "Insuring ever-evolving commercial risks", explores the different commercial insurance markets and business lines in today's rapidly changing risk environment, and provides a glimpse of the profitability outlook for commercial insurance in the future. Globally, commercial insurance is an over USD 600 billion business. The US is by far the world's biggest commercial insurance market, with USD 237 billion in premiums in 2010 (or a 40% share). Japan and China follow, with USD 35 billion and USD 31 billion in premiums, respectively. In high-growth markets, where the economy tends to be expanding and insurance penetration tends to be increasing, commercial insurance growth outpaces advanced markets by a factor of two to three. http://www.swissre.com
CONTINGENT COMMISSION Reinsurance purchases, contingent commission payments and insurer reserve estimation. Browne, Mark J; Lu, Lan; Lei, Yu [RKN: 43633] Shelved at: Per: Geneva Geneva Papers on Risk and Insurance (2012) 37(3) : 452-466.
Prior studies on errors in reserve estimation suggest that insurers manage loss reserves to achieve corporate goals, including tax minimisation and income smoothing. Analysing U.S. property and casualty insurance industry data, we find a relationship between reserve errors and the purchase of reinsurance. A relationship is also found between reserve errors and the payment of contingent commissions. Since reserve errors may be costly in both instances, insurers who purchase reinsurance and those who pay contingent commissions may have a greater incentive to reserve accurately than other insurers. We find that in these cases insurers report smaller over-reserving errors. Available via Athens: Palgrave MacMillan http://www.openathens.net
The value of contingent commissions in the property–casualty insurance industry : Evidence from stock market returns. Ghosh, Chinmoy; Hilliard, James I - 28 pages. [RKN: 73851] Shelved at: Per: J.Risk Ins (Oxf) Shelved at: JOU Journal of Risk and Insurance (2012) 79 (1) : 165-192.
Insurance producer compensation has incorporated contingent commissions for decades. In 2004, the New York State Attorney General sued insurers and brokers, alleging compensation abuses and calling for elimination of some forms of contingent commissions. Daily stock price return data reveal negative announcement-period portfolio returns for property–casualty carriers, suggesting expected negative cash flow effects. Firm-level losses were related to intensity of contingent commission use, suggesting that the effects of such regulatory changes would be felt most by firms that relied on contingent commissions. Investors believed contingent commissions were valuable not only for producers but also for carriers. Available via Athens: Wiley Online Library http://www.openathens.net
CONTROL Demutualisation, control and efficiency in the U.S. life insurance industry. Xie, Xiaoying; Lu, WeiLi; Reising, Joseph; Stohs, Mark Hoven Palgrave Macmillan, [RKN: 45331] Shelved at: Per: Geneva (Oxf) Geneva Papers on Risk and Insurance (2011) 36(2) : 197-225.
This paper examines the role of corporate governance in the demutualisation wave in the U.S. life insurance industry during the 1990s and 2000s. The efficiency hypothesis suggests a firm should experience improved performance after demutualisation and managers should only gain from superior performance. Alternately, the managerial welfare hypothesis proposes that executives gain independence of company performance. This research suggests that demutualisation is value-enhancing for firms converting through initial public offerings (IPOs), but value-neutral for firms that convert but stay private. Firms converting into public companies experience increased CEO turnover that leads to efficiency improvement. CEOs of these firms receive higher compensation after demutualisation, but most of the gain is due to a jump in incentive compensation. Firms converting but staying private do not have a similar significant increase in CEO compensation. Overall, our results provide evidence that value-enhancement, not private managerial welfare, motivates demutualisation. Available via Athens: Palgrave MacMillan http://www.openathens.net
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COPULAS Copula regression. Parsa, Rahul A; Klugman, Stuart A [RKN: 44927] Shelved at: Per: Variance Variance (2011) 5(1) : 45-54.
Regression analysis is one of the most commonly used statistical methods. But in its basic form, ordinary least squares (OLS) is not suitable for actuarial applications because the relationships are often nonlinear and the probability distribution of the dependent variable may be non-normal. One approach that has been successful in overcoming these challenges is the generalized linear model (GLM), which requires that the dependent variable have a distribution from the exponential family. In this paper, we present copula regression as an alternative to OLS and GLM. The major advantage of a copula regression is that there are no restrictions on the probability distributions that can be used. In this paper, we will present the formulas and algorithms necessary for conducting a copula regression analysis using the normal copula. However, the ideas presented here can be used with any copula function that can incorporate multiple variables with varying degrees of association. http://www.variancejournal.org/issues
Correlated random effects for hurdle models applied to claim counts. Boucher, Jean-Philippe; Denuit, Michel; Guillén, Montserrat [RKN: 44926] Shelved at: Per: Variance Variance (2011) 5(1) : 68-81.
New models for panel data that consist of a generalization of the hurdle model are presented and are applied to modeling a panel of claim counts. Correlated random effects are assumed for the two processes involved to allow for dependence among all the contracts held by the same insured. A method to obtain a posteriori distribution of the random effects as well as predictive distributions of the number of claims is presented. A numerical illustration of reported insurance claims shows that if independence between random effects is assumed, then the variance of a priori premiums may be underestimated. If dependence between random effects is considered, then the predicted number of claims given past observations and covariate information and its variance is also larger than the one obtained when independence is assumed. http://www.variancejournal.org/issues
Dependence modeling in non-life insurance using the Bernstein copula. Diers, Dorothea; Eling, Martin; Marek, Sebastian D [RKN: 45646] Shelved at: Online Only Shelved at: Online Only Insurance: Mathematics & Economics (2012) 50 (3) : 430-436.
This paper illustrates the modeling of dependence structures of non-life insurance risks using the Bernstein copula. We conduct a goodness-of-fit analysis and compare the Bernstein copula with other widely used copulas. Then, we illustrate the use of the Bernstein copula in a value-at-risk and tail-value-at-risk simulation study. For both analyses we utilize German claims data on storm, flood, and water damage insurance for calibration. Our results highlight the advantages of the Bernstein copula, including its flexibility in mapping inhomogeneous dependence structures and its easy use in a simulation context due to its representation as mixture of independent Beta densities. Practitioners and regulators working toward appropriate modeling of dependences in a risk management and solvency context can benefit from our results. Available via Athens: ScienceDirect http://www.openathens.net/
Dependent loss reserving using copulas. Shi, Peng; Frees, Edward W - 38 pages. [RKN: 74743] Shelved at: Per: Astin Bull (Oxf) Shelved at: JOU ASTIN Bulletin (2011) 41 (2) : 449-486.
Modeling dependencies among multiple loss triangles has important implications for the determination of loss reserves, a critical element of risk management and capital allocation practices of property-casualty insurers. In this article, we propose a copula regression model for dependent lines of business that can be used to predict unpaid losses and hence determine loss reserves. The proposed method, relating the payments in different run-off triangles through a copula function, allows the analyst to use flexible parametric families for the loss distribution and to understand the associations among lines of business. Based on the copula model, a parametric bootstrap procedure is developed to incorporate the uncertainty in parameter estimates. To illustrate this method, we consider an insurance portfolio consisting of personal and commercial automobile lines. When applied to the data of a major US property-casualty insurer, our method provides comparable point prediction of unpaid losses with the industry's standard practice, chain-ladder estimates. Moreover, our flexible structure allows us to easily compute the entire predictive distribution of unpaid losses. This procedure also readily yields accident year reserves, calendar year reserves, as well as the aggregate reserves. One important implication of the dependence modeling is that it allows analysts to quantify the diversification effects in risk capital analysis. We demonstrate these effects by calculating commonly used risk measures, including value at risk and conditional tail expectation, for the insurer's combined portfolio of personal and commercial automobile lines. http://www.actuaries.org/index.cfm?lang=EN&DSP=PUBLICATIONS&ACT=ASTIN BULLETIN
On allocation of upper limits and deductibles with dependent frequencies and comonotonic severities. Li, Xiaohu; You, Yinping [RKN: 45645] Shelved at: Online Only Shelved at: Online Only Insurance: Mathematics & Economics (2012) 50 (3) : 423-429.
With the assumption of Archimedean copula for the occurrence frequencies of the risks covered by an insurance policy, this note further investigates the allocation problem of upper limits and deductibles addressed in Hua and Cheung (2008a). Sufficient conditions for a risk averse policyholder to well allocate the upper limits and the deductibles are built, respectively. Available via Athens: ScienceDirect http://www.openathens.net/
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CORPORATE INSURANCE Corporate management of highly dynamic risks : Evidence from the demand for terrorism insurance in Germany. Thomann, Christian; Pascalau, Razvan; von der Schulenburg, J Mattias Graf - 26 pages. [RKN: 74942] Shelved at: Per: Geneva (Oxf) Geneva Risk and Insurance Review (2012) 37 (1) : 57-82.
This paper investigates a corporation's risk management response to highly dynamic risks. Using a unique data set on the German terrorist insurance market, the paper tests whether corporate risk managers have a clear understanding of the probability distribution of highly dynamic risks or if risk managers learn from severe losses and base their decisions upon day-to-day experience. The paper further investigates whether risk managers become more confident in their risk management decisions over time. For this purpose, we apply Viscusi's prospective reference theory to a corporate context. We find that firms learn from single events when making their risk management decisions, and that risk managers become more confident with their risk management decisions over time.
CORPORATE STRATEGY Chief Executive officer incentives, monitoring, and corporate risk management : Evidence from insurance use. Adams, Mike; Lin, Chen; Zou, Hong - 32 pages. [RKN: 74865] Shelved at: Per: J.Risk Ins (Oxf) Shelved at: JOU Journal of Risk and Insurance (2011) 78 (3) : 551-582.
Corporate governance and risk management issues have received prominent publicity in recent years following several major company failures such as Bear Stearns and Lehman Brothers. While prior studies have examined this issue within the context of derivatives‘ trading, little is known regarding the linkage between corporate governance and alternative corporate risk management activities such as insurance. Using a detailed firm survey conducted by the World Bank (2004), we examine the impacts of various governance monitoring mechanisms and chief executive officer (CEO) characteristics on the corporate insurance decision. Overall, our results suggest that both monitoring mechanisms and managerial incentives induce the corporate purchase of property insurance. However, the purchase of property insurance for managerial self-interest is only prevalent in firms subject to lax monitoring, and the determinants of insurance purchases are more in line with the prediction of the economic theory in firms with strong monitoring. In addition, our study contributes a number of new insights into the determinants of corporate purchase of property insurance. Available via Athens: Wiley Online Library http://www.openathens.net
The impact of CEO turnover on property–liability insurer performance. He, Enya; Sommer, David W; Xie, Xiaoying - 26 pages. [RKN: 74866] Shelved at: Per: J.Risk Ins (Oxf) Shelved at: JOU Journal of Risk and Insurance (2011) 78 (3) : 583-608.
Chief executive officer (CEO) turnover has long been an important topic in the academic literature. Previous research has focused mostly on the rationale for CEO turnovers, or circumstances that lead to CEO changes, with much less attention paid to how CEO turnovers affect future firm performance. We extend the literature regarding the impact of CEO turnover on performance using data for U.S. property-liability insurers. Measuring firm performance with cost efficiency (CE) and revenue efficiency (RE) scores, we find strong support for the hypothesis that firms with a CEO turnover, especially those with a nonroutine turnover, experience more favorable performance changes than firms without a CEO turnover. Available via Athens: Wiley Online Library http://www.openathens.net
COSTS Insurance pricing with complete information, state-dependent utility, and production costs. Ramsay, Colin M; Oguledo, Victor I [RKN: 45649] Shelved at: Online Only Shelved at: Online Only Insurance: Mathematics & Economics (2012) 50 (3) : 462-469.
We consider a group of identical risk-neutral insurers selling single-period indemnity insurance policies. The insurance market consists of individuals with common state-dependent utility function who are identical except for their known accident probability q. Insurers incur production costs (commonly called expenses or transaction costs by actuaries) that are proportional to the amount of insurance purchased and to the premium charged. By introducing the concept of insurance desirability, we prove that the existence of insurer expenses generates a pair of constants qmin and qmax that naturally partitions the applicant pool into three mutually exclusive and exhaustive groups of individuals: those individuals with accident probability q [0,qmin) are insurable but do not desire insurance, those individuals with accident probability q [qmin,qmax] are insurable and desire insurance, and those individuals with accident probability q (qmax,1] desire insurance but are uninsurable. We also prove that, depending on the level of q and the marginal rate of substitution between states, it may be optimal for individuals to buy complete (full) insurance, partial insurance, or no insurance at all. Finally, we prove that when q is known in monopolistic markets (i.e., markets with a single insurer), applicants may be induced to ―over insure‖ whenever partial insurance is bought. Available via Athens: ScienceDirect http://www.openathens.net/
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COUNTING PROCESS Correlated random effects for hurdle models applied to claim counts. Boucher, Jean-Philippe; Denuit, Michel; Guillén, Montserrat [RKN: 44926] Shelved at: Per: Variance Variance (2011) 5(1) : 68-81.
New models for panel data that consist of a generalization of the hurdle model are presented and are applied to modeling a panel of claim counts. Correlated random effects are assumed for the two processes involved to allow for dependence among all the contracts held by the same insured. A method to obtain a posteriori distribution of the random effects as well as predictive distributions of the number of claims is presented. A numerical illustration of reported insurance claims shows that if independence between random effects is assumed, then the variance of a priori premiums may be underestimated. If dependence between random effects is considered, then the predicted number of claims given past observations and covariate information and its variance is also larger than the one obtained when independence is assumed. http://www.variancejournal.org/issues
CREDIBILITY Credibility for a tower of excess layers. Clark, David R [RKN: 44924] Shelved at: Per: Variance Variance (2011) 5(1) : 32-44.
In pricing excess of loss reinsurance, the traditional method for applying credibility is as a weighted average of two estimates of expected loss: one from experience rating and a second from exposure rating. This paper will show how this method can be improved by incorporating loss estimates from lower layers; producing a multifactor credibility-weighted estimate of expected loss. The method described is based on minimum variance criteria, whereby the resulting credibility-weighted estimator has a lower variance than any other combination of the individual estimators. It is shown that the multifactor credibility model can be presented as a simple recursive procedure for practical application. http://www.variancejournal.org/issues
A credibility method for profitable cross-selling of insurance products. Thuring, Fredrik Faculty of Actuaries and Institute of Actuaries; Cambridge University Press, [RKN: 45561] Shelved at: Per: AAS (Oxf) Per: AAS (Lon) Annals of Actuarial Science (2012) 6(1) : 65-75.
A method is presented for identifying an expected profitable set of customers, to offer them an additional insurance product, by estimating a customer specific latent risk profile, for the additional product, by using the customer specific available data for an existing insurance product of the specific customer. For the purpose, a multivariate credibility estimator is considered and we investigate the effect of assuming that one (of two) insurance products is inactive (without available claims information) when estimating the latent risk profile. Instead, available customer specific claims information from the active existing insurance product is used to estimate the risk profile and thereafter assess whether or not to include a specific customer in an expected profitable set of customers. The method is tested using a large real data set from a Danish insurance company and it is shown that sets of customers, with up to 36% less claims than a priori expected, are produced as a result of the method. It is therefore argued that the proposed method could be considered, by an insurance company, when cross-selling insurance products to existing customers. Available via Athens: Cambridge Journals http://www.actuaries.org.uk/research-and-resources/pages/access-journals
CREDIT RATING Regulation and reform of rating agencies in the European Union : an insurance industry perspective. Theis, Anja; Wolgast, Michael Palgrave Macmillan, [RKN: 45541] Shelved at: Per: Geneva (Oxf) Geneva Papers on Risk and Insurance (2012) 37(1) : 47-76.
This article investigates the current discussion on the regulatory framework for credit rating agencies (CRAs) from the perspective of the insurance industry, focusing on the European Union. It becomes apparent that the new European system of regulation and supervision of CRAs conforms well to general principles of economic theory and can be expected to resolve many issues of concern. In contrast, some of the additional policy options currently discussed in Europe could involve substantial costs and risks for market participants and the financial system without contributing further to the objectives of CRA reform. Available via Athens: Palgrave MacMillan http://www.openathens.net
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CREDIT RISK Modeling credit value adjustment with downgrade-triggered termination clause using a ruin theoretic approach. Feng, Runhuan; Volkmer, Hans W [RKN: 44800] Shelved at: Online Only Shelved at: Online Only Insurance: Mathematics & Economics (2012) 51(2) : 409-421.
Downgrade-triggered termination clause is a recent innovation in credit risk management to control counterparty credit risk. It allows one party of an over-the-counter derivative to close off its position at marked-to-market price when the other party‘s credit rating downgrades to an agreed alarming level. Although the default risk is significantly reduced, the non-defaulting party may still suffer losses in case that the other party defaults without triggering the termination clause prior to default. At the heart of the valuation of credit risk adjustment (CVA) is the computation of the probability of default. We employ techniques from ruin theory and complex analysis to provide solutions for probabilities of default, which in turn lead to very efficient and accurate algorithms for computing CVA. The underlying risk model in question is an extension of the commercially available KMV–Merton model and hence can be easily implemented. We provide a hypothetical example of CVA computation for an interest-rate swap with downgrade-triggered termination clause. The paper also contributes to ruin theory by presenting some new results on finite-time ruin probabilities in a jump-diffusion risk model. Available via Athens: ScienceDirect http://www.openathens.net/
DAMAGES Damages for personal injury and death: legal aspects relevant to actuarial assessments. Koch, Robert J - 24 pages. [RKN: 74815] Shelved at: Per: SAAJ (Oxf) Shelved at: JOU South African Actuarial Journal (2011) 11 : 111-134.
In this paper the actuarial assessment of damages for personal injury and death is discussed in the context of South African law. The legal framework imposes a variety of calculation rules that need to be born in mind if an actuary is to produce a quality product. This framework changes with the passage of time. The purpose of the paper is to summarise the current state of affairs and highlight issues deserving of further actuarial discussion. http://www.actuarialsociety.org.za/News-and-Publications/Publications/South-African-Actuarial-Journal-671.aspx
DATA Fitting insurance claims to skewed distributions: are the skew-normal and skew-student good models?. Eling, Martin [RKN: 44782] Shelved at: Online Only Shelved at: Online Only Insurance: Mathematics & Economics (2012) 51(2) : 239-248.
This paper analyzes whether the skew-normal and skew-student distributions recently discussed in the finance literature are reasonable models for describing claims in property-liability insurance. We consider two well-known datasets from actuarial science and fit a number of parametric distributions to these data. Also the non-parametric transformation kernel approach is considered as a benchmark model. We find that the skew-normal and skew-student are reasonably competitive compared to other models in the literature when describing insurance data. In addition to goodness-of-fit tests, tail risk measures such as value at risk and tail value at risk are estimated for the datasets under consideration. Available via Athens: ScienceDirect http://www.openathens.net/
Guest editorial: Sexless and beautiful data: from quantity to quality. Guillén, Montserrat Faculty of Actuaries and Institute of Actuaries; Cambridge University Press, [RKN: 43651] Shelved at: Per: AAS (Oxf) Per: AAS (Lon) Shelved at: JOU/AAS Annals of Actuarial Science (2012) 6(2) : 231-234.
http://www.actuaries.org.uk/research-and-resources/pages/access-journals
DEATH BENEFIT Impacts of jumps and stochastic interest rates on the fair costs of guaranteed minimum death benefit contracts. Quittard-Pinon, François; Randrianarivony, Rivo [RKN: 45275] Shelved at: Per: Geneva (Oxf) Geneva Risk and Insurance Review (2011) 36 (1) : 51-73.
The authors offer a new perspective to the field of guaranteed minimum death benefit contracts, especially for simple return premium and rising floor guarantees. A particular feature of these contracts is a guaranteed capital upon the insured's death. A complete methodology based on the generalized Fourier transform is proposed to investigate the impacts of jumps and stochastic interest rates. This paper thus extends Milevsky and Posner (2001). If jumps alone are considered, similar results are obtained, but, when stochastic interest rates are introduced, the fair costs of the guarantee feature are found to be substantially higher in this more general economy.
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DEBT FINANCING Fresh insights - Australian/NZ home lending default risk. Gorst, Tim [RKN: 43241] Australian Actuarial Journal (2011) 17(1) : 1-25.
By using Basel 2 ('B2') risk and capital data published by the four largest Australian banks since 2008, this paper analyses Australian/NZ home lending credit default risk by comparing recent default experience against an implied 'through the cycle' default probability. Adapted and updated for the Australian Actuarial Journal from the original paper 'APS330 Home lending data - applications and insights' presented to the Institute of Actuaries of Australia, 5th Financial Services Forum, 13-14 May 2010 http://www.actuaries.asn.au/TechnicalResources/ActuaryJournals.aspx
DECENTRALISED Disasters and decentralisation. Johnston, Jason Scott Palgrave Macmillan, [RKN: 45659] Shelved at: Per: Geneva Geneva Papers on Risk and Insurance (2012) 37(2) : 228-256.
Climate change may potentially increase the magnitude of losses from natural hazards, but the United States experience shows that the primary reason for escalating losses is policy failure. It is well known that centralised, taxpayer-funded ex post disaster relief has actually encouraged development in risky jurisdictions and also weakened incentives for ex ante precautions in such jurisdictions (moral or ―charity‖ hazard). Less well known and analysed is the role played by centralised ex ante development subsidies—often masquerading as protective investment—in distorting incentives. This paper develops a simple three jurisdiction model in which homogeneous jurisdictions decide by majority vote in a centralised legislature on the centralised (federal) share of ex post loss and centralised spending an ex ante development in a Beneficiary jurisdiction, taking into account how these decisions about centralised spending impact local Beneficiary jurisdiction incentives for precautions against ex post loss. The model shows that the marginal cost of ex ante federal development spending may be greater for a Beneficiary jurisdiction than for a Contractor jurisdiction. This somewhat technical result has an observable implication: evidence that a small fraction of ex post loss in a Beneficiary jurisdiction is centrally compensated (shared across jurisdictions) is evidence that ex ante development subsidies there may be truly precautionary on net; conversely, evidence that a Beneficiary jurisdiction has a large share of its ex post hazard loss compensated by centralised disaster relief suggests that the ex ante development subsidies received by that jurisdiction did more to encourage new development and increase the amount at risk than they did to protect existing development. The model is extended to consider how ex post loss sharing impacts the demand for federally subsidised disaster insurance and other related issues. Available via Athens: Palgrave MacMillan http://www.openathens.net
DEMUTUALISATION Conversion and efficiency performance changes: evidence from the U.S. property-liability insurance industry. Chen, Lih-Ru; Lai, Gene C; Wang, Jennifer L [RKN: 45273] Shelved at: Per: Geneva (Oxf) Geneva Risk and Insurance Review (2011) 36 (1) : 1-35.
This study investigates whether the conversion of U.S. property-liability insurers improves their efficiency performance before and after the conversion. We estimate relative efficiency of converting insurers and control insurers using data envelopment analysis. The Malmquist analysis is also used to measure changes in efficiency pre- and post-conversion. The evidence shows that converting insurers experience larger gains in cost efficiency and total productivity change than mutual control insurers before conversion. In addition, the empirical results indicate that converting insurers improve efficiency after conversion. These results are robust with respect to both the value-added and the financial intermediary approaches. The overall results support the efficiency hypothesis proposed by Mayers and Smith (1986).
Demutualisation, control and efficiency in the U.S. life insurance industry. Xie, Xiaoying; Lu, WeiLi; Reising, Joseph; Stohs, Mark Hoven Palgrave Macmillan, [RKN: 45331] Shelved at: Per: Geneva (Oxf) Geneva Papers on Risk and Insurance (2011) 36(2) : 197-225.
This paper examines the role of corporate governance in the demutualisation wave in the U.S. life insurance industry during the 1990s and 2000s. The efficiency hypothesis suggests a firm should experience improved performance after demutualisation and managers should only gain from superior performance. Alternately, the managerial welfare hypothesis proposes that executives gain independence of company performance. This research suggests that demutualisation is value-enhancing for firms converting through initial public offerings (IPOs), but value-neutral for firms that convert but stay private. Firms converting into public companies experience increased CEO turnover that leads to efficiency improvement. CEOs of these firms receive higher compensation after demutualisation, but most of the gain is due to a jump in incentive compensation. Firms converting but staying private do not have a similar significant increase in CEO compensation. Overall, our results provide evidence that value-enhancement, not private managerial welfare, motivates demutualisation. Available via Athens: Palgrave MacMillan http://www.openathens.net
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DENMARK Skew mixture models for loss distributions: a Bayesian approach. Bernardi, Mauro; Maruotti, Antonello; Petrella, Lea [RKN: 44879] Shelved at: Online Only Shelved at: Online Only Insurance: Mathematics & Economics (2012) 51(3) : 617-623.
The derivation of loss distribution from insurance data is a very interesting research topic but at the same time not an easy task. To find an analytic solution to the loss distribution may be misleading although this approach is frequently adopted in the actuarial literature. Moreover, it is well recognized that the loss distribution is strongly skewed with heavy tails and presents small, medium and large size claims which hardly can be fitted by a single analytic and parametric distribution. Here we propose a finite mixture of Skew Normal distributions that provides a better characterization of insurance data. We adopt a Bayesian approach to estimate the model, providing the likelihood and the priors for the all unknown parameters; we implement an adaptive Markov Chain Monte Carlo algorithm to approximate the posterior distribution. We apply our approach to a well known Danish fire loss data and relevant risk measures, such as Value-at-Risk and Expected Shortfall probability, are evaluated as well. Available via Athens: ScienceDirect http://www.openathens.net/
DERIVATIVES Effects of risk management on cost efficiency and cost function of the U.S. Property and liability insurers. Lin, Hong-Jen; Wen, Min-Ming; Yang, Charles C Society of Actuaries, - 12 pages. [RKN: 74918] Shelved at: Per: NAAJ (Oxf) Per NAAJ (Lon) Shelved at: JOU North American Actuarial Journal (2011) 15 (4) : 487-498.
This paper adopts the one-step stochastic frontier approach to investigate the impact of risk management tools of derivatives and reinsurance on cost efficiency of U.S. property-liability insurance companies. The stochastic frontier approach considers both the mean and variance of cost efficiency. The sample includes both stock and mutual insurers. Among the findings, the cost function of the entire sample carries the concavity feature, and insurers tend to use financial derivatives for firm value creation. The results also show that for the entire sample the use of derivatives enhances the mean of cost efficiency but accompanied with larger efficiency volatility. Nevertheless, the utilization of financial derivatives mitigates efficiency volatility for mutual insurers. This research provides important insights for the practice of risk management in the property-liability insurance industry. http://www.soa.org/news-and-publications/publications/journals/naaj/naaj-detail.aspx
What motivates insurers to use derivatives: evidence from the United Kingdom life insurance industry. Yung-Ming, Shiu Palgrave Macmillan, [RKN: 45330] Shelved at: Per: Geneva (Oxf) Geneva Papers on Risk and Insurance (2011) 36(2) : 186-196.
Using firm-specific variables that proxy for the motivations of life insurers‘ decision to participate in derivative transactions, we examine existing theories of corporate hedging behaviour. Our findings support the evidence of previous research that risk management and scale factors explain the use of derivatives. We observe a substitution effect that insurers use on-balance-sheet hedging through structuring their assets and liabilities to reduce price risks. Available via Athens: Palgrave MacMillan http://www.openathens.net
DEVELOPMENT Disasters and decentralisation. Johnston, Jason Scott Palgrave Macmillan, [RKN: 45659] Shelved at: Per: Geneva Geneva Papers on Risk and Insurance (2012) 37(2) : 228-256.
Climate change may potentially increase the magnitude of losses from natural hazards, but the United States experience shows that the primary reason for escalating losses is policy failure. It is well known that centralised, taxpayer-funded ex post disaster relief has actually encouraged development in risky jurisdictions and also weakened incentives for ex ante precautions in such jurisdictions (moral or ―charity‖ hazard). Less well known and analysed is the role played by centralised ex ante development subsidies—often masquerading as protective investment—in distorting incentives. This paper develops a simple three jurisdiction model in which homogeneous jurisdictions decide by majority vote in a centralised legislature on the centralised (federal) share of ex post loss and centralised spending an ex ante development in a Beneficiary jurisdiction, taking into account how these decisions about centralised spending impact local Beneficiary jurisdiction incentives for precautions against ex post loss. The model shows that the marginal cost of ex ante federal development spending may be greater for a Beneficiary jurisdiction than for a Contractor jurisdiction. This somewhat technical result has an observable implication: evidence that a small fraction of ex post loss in a Beneficiary jurisdiction is centrally compensated (shared across jurisdictions) is evidence that ex ante development subsidies there may be truly precautionary on net; conversely, evidence that a Beneficiary jurisdiction has a large share of its ex post hazard loss compensated by centralised disaster relief suggests that the ex ante development subsidies received by that jurisdiction did more to encourage new development and increase the amount at risk than they did to protect existing development. The model is extended to consider how ex post loss sharing impacts the demand for federally subsidised disaster insurance and other related issues. Available via Athens: Palgrave MacMillan http://www.openathens.net
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DIRECTORS' AND OFFICERS' INSURANCE Information embedded in directors and officers insurance purchases. Gupta, Manu; Prakash, Puneet [RKN: 43632] Shelved at: Per: Geneva Geneva Papers on Risk and Insurance (2012) 37(3) : 429-451.
We examine corporate purchases of Directors and Officers (D&O) liability insurance and find that in addition to governance quality it contains managers‘ private information. In particular, we find that insider control in excess of insider share holdings is jointly associated with lower D&O coverage limits and higher firm performance. The result holds when deductibles, corporate governance characteristics and litigation risk factors are controlled for. Our finding is consistent with an asymmetric information hypothesis in financial markets which posits that managers possess private information about firm risk. Our findings differ from existing literature that shows that D&O insurance purchases primarily reflect firm's governance quality and litigation risk. The evidence supports the policy prescription advanced in earlier studies which call for mandatory public disclosure of D&O insurance purchases since it contains additional information for the market. Available via Athens: Palgrave MacMillan http://www.openathens.net
DISABILITY BENEFITS The decline of substitute pathways into retirement : Empirical evidence from the Dutch health care sector. Euwals, Rob; van Vuren, Annemiek; van Vuuren, Daniel [RKN: 45803] Shelved at: Per: ISSR (Oxf) International Social Security Review (2012) 65 (3) : 101-122.
Early retirement schemes and disability insurance in the Netherlands have undergone several reforms in recent decades. The reforms have increased incentives for older workers to continue working and have decreased the roles of ―substitute pathways‖ into retirement. This article gives an overview of the reforms and, using administrative data for workers in the health care sector, tests a number of hypotheses about the labour market participation of older workers. The results offer two main findings: i) that the Dutch reforms have indeed been effective, as the labour force participation rate of older workers has increased; and ii) the concept of ―substitute pathways‖ has become less relevant as the use of disability insurance has been closed off as an exit route to early retirement. Nevertheless, caution is required before generalizing the implications of these Dutch findings to other OECD countries.
Disability insurance risks : The Argentinian case. Belliard, Matias; Grushka, Carlos; De Biase, Marcelo [RKN: 45801] Shelved at: Per: ISSR (Oxf) International Social Security Review (2012) 65 (3) : 49-75.
This article analyses the risk of disability facing workers who contribute to the Argentinian Integrated Social Security System (Sistema Integrado Previsional Argentino— SIPA). Using administrative records as our source of data for the period 2000-2006, the results indicate that 1.46 workers per 1,000 became disabled annually during that period. The risk of disability rates were higher for men than for women, but increased with age for both sexes. The risk of disability rates have also been broken down by pathology and social security scheme, taking the effects of age and sex into account. To conclude, international comparisons are presented.
DISABILITY INSURANCE Asymmetric information and countermeasures in early twentieth-century American short-term disability microinsurance. Murray, John E - 22 pages. [RKN: 74847] Shelved at: Per: J.Risk Ins (Oxf) Shelved at: JOU Journal of Risk and Insurance (2011) 78 (1) : 117-138.
American workers and employers a century ago formed microinsurance funds to provide sick pay to temporarily disabled workers. This article analyzes a 1908 survey of several hundred such microinsurers. Theoretically, a single cross-section may yield evidence of asymmetric information, but cannot enable the separation of moral hazard and adverse selection effects. However, microinsurance fund managers and outside observers believed they did see separate such effects and so microinsurers created separate countermeasures to mitigate these problems. This article finds prima facie evidence of asymmetric information and suggestive evidence of the separability of informational asymmetries and the effectiveness of such countermeasures. Available via Athens: Wiley Online Library http://www.openathens.net
Bayesian prediction of disability insurance frequencies using economic indicators. Donnelly, Catherine; Wüthrich, Mario V [RKN: 43657] Shelved at: Per: AAS (Lon) Shelved at: JOU/AAS Annals of Actuarial Science (2012) 6(2) : 381-400.
We use economic indicators to improve the prediction of the number of incurred but not recorded disability insurance claims, assuming that there is a link between the number of claims and the chosen economic indicators. We propose a Bayesian model where we model the claims development in three directions: along incurred periods, recording lag periods and calendar periods. A stochastic model of the economic indicators is incorporated into the calendar period development direction. Thus we allow for the impact of the economic environment on the number of claims. Applying the proposed model to data, we illustrate how the inclusion of economic indicators affects the prediction of the number of incurred but not recorded disability claims. http://www.actuaries.org.uk/research-and-resources/pages/access-journals
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The decline of substitute pathways into retirement : Empirical evidence from the Dutch health care sector. Euwals, Rob; van Vuren, Annemiek; van Vuuren, Daniel [RKN: 45803] Shelved at: Per: ISSR (Oxf) International Social Security Review (2012) 65 (3) : 101-122.
Early retirement schemes and disability insurance in the Netherlands have undergone several reforms in recent decades. The reforms have increased incentives for older workers to continue working and have decreased the roles of ―substitute pathways‖ into retirement. This article gives an overview of the reforms and, using administrative data for workers in the health care sector, tests a number of hypotheses about the labour market participation of older workers. The results offer two main findings: i) that the Dutch reforms have indeed been effective, as the labour force participation rate of older workers has increased; and ii) the concept of ―substitute pathways‖ has become less relevant as the use of disability insurance has been closed off as an exit route to early retirement. Nevertheless, caution is required before generalizing the implications of these Dutch findings to other OECD countries.
DISAPPOINTMENT THEORY Disappointment and the optimal insurance contract. Huang, Rachel J; Shih, Pai-Ta; Tzeng, Larry Y - 27 pages. [RKN: 70279] Shelved at: Per: Geneva (Oxf) Geneva Risk and Insurance Review (2012) 37 (2) : 258-284.
This paper studies the optimal insurance contract under disappointment theory. We show that, when the individuals anticipate disappointment, there are two types of optimal insurance contract. The first type contains a deductible and a coinsurance above the deductible. We find that zero marginal cost is just a sufficient but not a necessary condition for a zero deductible. The second type has no deductible and the optimal insurance starts with full coverage for small losses and includes a coinsurance above an upper value of the full coverage.
DISCOUNTING Innovation and information acquisition under time inconsistency and uncertainty. Chemarin, Sophie; Orset, Caroline - 42 pages. [RKN: 74787] Shelved at: Per: Geneva (Oxf) Geneva Risk and Insurance Review (2011) 36 (2) : 132-173.
When an agent invests in new industrial activities, he has a limited initial knowledge of his project's returns. Acquiring information allows him both to reduce the uncertainty on the dangerousness of this project and to limit potential damages that it might cause on people's health and on the environment. In this paper, we study whether there exist situations in which the agent does not acquire information. We find that an agent with time-consistent preferences, as well as an agent with hyperbolic ones, will acquire information unless its cost exceeds the direct benefit they could get with this information. Nevertheless, a hyperbolic agent may remain strategically ignorant and, when he does acquire information, he will acquire less information than a time-consistent type. Moreover, a hyperbolic-discounting type who behaves as a time-consistent agent in the future is more inclined to stay ignorant. We then emphasize that this strategic ignorance depends on the degree of precision of the information. Finally, we analyse the role that existing liability rules could play as an incentive to acquire information under uncertainty and with regard to the form of the agent's preferences.
DISCRIMINATION Non-risk price discrimination in insurance : market outcomes and public policy. Thomas, R Guy Palgrave Macmillan, [RKN: 45540] Shelved at: Per: Geneva (Oxf) Geneva Papers on Risk and Insurance (2012) 37(1) : 27-46.
This paper considers price discrimination in insurance, defined as systematic price variations based on individual customer data but unrelated to those customers‘ expected losses or other marginal costs (sometimes characterised as ―price optimisation‖). An analysis is given of one type of price discrimination, ―inertia pricing‖, where renewal prices are higher than prices for risk-equivalent new customers. The analysis suggests that the practice intensifies competition, leading to lower aggregate industry profits; customers in aggregate pay lower prices, but not all customers are better off; and the high level of switching between insurers is inefficient for society as a whole. Other forms of price discrimination may be more likely to increase aggregate industry profits. Some public policy issues relating to price discrimination in insurance are outlined, and possible policy responses by regulators are considered. It is suggested that competition will tend to lead to increased price discrimination over time, and that this may undermine public acceptance of traditional justifications for risk-related pricing. Available via Athens: Palgrave MacMillan http://www.openathens.net
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DISEASES AND DISORDERS Actuarial applications of epidemiological models. Feng, Runhuan; Garrido, Jose Society of Actuaries, - 25 pages. [RKN: 74822] Shelved at: Per: NAAJ (Oxf) Per NAAJ (Lon) Shelved at: JOU North American Actuarial Journal (2011) 15 (1) : 112-136.
The risk of a global avian flu or influenza A (H1N1) pandemic and the emergence of the worldwide SARS epidemic in 2002–2003 have led to a revived interest in the study of infectious diseases. Mathematical models have become important tools in analyzing the transmission dynamics and in measuring the effectiveness of controlling strategies. Research on infectious diseases in the actuarial literature goes only so far in setting up epidemiological models that better reflect the transmission dynamics. This paper attempts to build a bridge between epidemiological and actuarial modeling and set up an actuarial model that provides financial arrangements to cover the expenses resulting from the medical treatments of infectious diseases. Based on classical epidemiological compartment models, the first part of this paper proposes insurance policies and models to quantify the risk of infection and formulates financial arrangements, between an insurer and insureds, using actuarial methodology. For practical purposes, the second part employs a variety of numerical methods to calculate premiums and reserves. The last part illustrates the methods by designing insurance products for two well-known epidemics: the Great Plague in England and the SARS epidemic in Hong Kong. http://www.soa.org/news-and-publications/publications/journals/naaj/naaj-detail.aspx
DIVERSIFICATION Determinants of corporate diversification: evidence from the property–liability insurance industry. Berry-Stölzle, Thomas R; Liebenberg, Andre P; Ruhland, Joseph S; Sommer, David W - 33 pages. [RKN: 70706] Shelved at: Per: J.Risk Ins (Oxf) Shelved at: JOU Journal of Risk and Insurance (2012) 79 (2) : 381-413.
This article analyzes variations in line-of-business diversification status and extent among property–liability insurers. Our results show that the extent of diversification is not driven by risk pooling considerations; insurers operating in more volatile business lines do not diversify more. Diversification can rather be explained by the benefits of internal capital markets and barriers to business growth like market size and concentration. In our analysis, we distinguish between related and unrelated diversification. Using a measure of unrelated line-of-business diversification we find the first support for the diversification prediction of the managerial discretion hypothesis that mutual insurers should be less diversified than stock insurers. While mutual insurers tend to exhibit higher levels of total diversification, they engage in significantly less unrelated diversification than do stock insurers. Available via Athens: Wiley Online Library http://www.openathens.net
DIVIDENDS Dividends and reinsurance under a penalty for ruin. Liang, Zhibin; Young, Virginia R [RKN: 45647] Shelved at: Online Only Shelved at: Online Only Insurance: Mathematics & Economics (2012) 50 (3) : 437-445.
We find the optimal dividend strategy in a diffusion risk model under a penalty for ruin, as in Thonhauser and Albrecher (2007), although we allow for both a positive and a negative penalty. Furthermore, we determine the optimal proportional reinsurance strategy, when so-called expensive reinsurance is available; that is, the premium loading on reinsurance is greater than the loading on the directly written insurance. One can think of our model as taking the one in Taksar (2000, Section 6) and adding a penalty for ruin. We use the Legendre transform to obtain the optimal dividend and reinsurance strategies. Not surprisingly, the optimal dividend strategy is a barrier strategy. Also, we investigate the effect of the penalty P on the optimal strategies. In particular, we show that the optimal barrier increases with respect to P, while the optimal proportion retained and the value function decrease with respect to P. In the end, we explore the time of ruin, and find that the expected time of ruin increases with respect to P under a net profit condition. Available via Athens: ScienceDirect http://www.openathens.net/
Optimal dividend and equity issuance problem with proportional and fixed transaction costs. Peng, Xiaofan; Chen, Mi; Guo, Junyi [RKN: 44876] Shelved at: Online Only Shelved at: Online Only Insurance: Mathematics & Economics (2012) 51(3) : 576-585.
This paper investigates the optimal dividend problem of an insurance company, which controls risk exposure by reinsurance and by issuing new equity to protect from bankruptcy. Transaction costs are incurred by these business activities: reinsurance is non-cheap, dividend is taxed and fixed costs are generated by equity issuance. The goal of the company is to maximize the expected cumulative discounted dividend minus the expected discounted costs of equity issuance. This problem is formulated as a mixed regular-singular-impulse stochastic control problem. By solving the corresponding HJB [Hamilton-Jacobi-Bellman] equation, the authors obtain the analytical solutions of the optimal return function and the optimal strategy. Available via Athens: ScienceDirect http://www.openathens.net/
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Threshold dividend strategies for a Markov-additive risk model. Breuer, Lothar [RKN: 44835] Shelved at: online only European Actuarial Journal (2011) 1(2) November : 237-258.
We consider the following risk reserve model. The premium income is a level dependent Markov-modulated Brownian motion. Claim sizes are iid with a phase-type distribution. The claim arrival process is a Markov-modulated Poisson process. For this model the payment of dividends under a threshold dividend strategy and the time until ruin will be analysed. Available online via Athens -- Published online, 22 December 2011 http://www.openathens.net
DYNAMIC HEDGING An executive's handbook for understanding and risk managing unit linked guarantees. Maher, J; Corrigan, J; Bentley, A; Diffey, W - 55 pages. [RKN: 73954] Shelved at: Per: BAJ (Oxf) Per: BAJ (Lon) Shelved at: REF BAJ (2012) 17 (1) : 71-125.
The focus of this paper is the identification, and more importantly, sustainable management, of risks embedded in guarantees attaching to unit linked savings and retirement contracts (as commonly referred to as GMxBs). In developing customer centric guarantees that are not readily transferrable to the capital markets, insurance undertakings require the skills and resources to hedge the guarantees within their own balance sheet (or with a temporary use of packaged solutions such as reinsurance). In taking on the guarantee manufacture task insurers are departing from areas of historic competence and need to develop a comprehensive understanding of all elements of market risk replication. These include both first order market exposures as well as the material second order risks associated with market micro structure. The paper seeks to integrate this comprehensive analysis within a practitioner focused framework and concludes with a senior executive summary of ―Seven key considerations in successful guarantee manufacture‖. http://www.actuaries.org.uk/research-and-resources/pages/members-access-journals
An executive's handbook for understanding and risk managing unit linked guarantees : Abstract of the Edinburgh discussion. Maher, James - 11 pages. [RKN: 73956] Shelved at: Per: BAJ (Oxf) Per: BAJ (Lon) Shelved at: REF BAJ (2012) 17 (1) : 142-152.
Institute and Faculty of Actuaries, 15 November 2010. http://www.actuaries.org.uk/research-and-resources/pages/members-access-journals
EARLY RETIREMENT The decline of substitute pathways into retirement : Empirical evidence from the Dutch health care sector. Euwals, Rob; van Vuren, Annemiek; van Vuuren, Daniel [RKN: 45803] Shelved at: Per: ISSR (Oxf) International Social Security Review (2012) 65 (3) : 101-122.
Early retirement schemes and disability insurance in the Netherlands have undergone several reforms in recent decades. The reforms have increased incentives for older workers to continue working and have decreased the roles of ―substitute pathways‖ into retirement. This article gives an overview of the reforms and, using administrative data for workers in the health care sector, tests a number of hypotheses about the labour market participation of older workers. The results offer two main findings: i) that the Dutch reforms have indeed been effective, as the labour force participation rate of older workers has increased; and ii) the concept of ―substitute pathways‖ has become less relevant as the use of disability insurance has been closed off as an exit route to early retirement. Nevertheless, caution is required before generalizing the implications of these Dutch findings to other OECD countries.
EARTHQUAKES An analysis of the demand for earthquake insurance. Athavale, Manoj; Avila, Stephen M - 14 pages. [RKN: 74763] Shelved at: JOU Risk Management and Insurance Review (2011) 14 (2) : 233-246.
This research examines the decision to purchase earthquake insurance by analyzing data on earthquake insurance price and penetration in the New Madrid fault zone in Missouri. Earthquake risk is of concern to consumers, the insurance industry, industry regulators, and government agencies because of the potentially catastrophic nature of losses resulting from a major earthquake. Despite the significance of the earthquake peril, the recent literature does not contain estimates of the price and income elasticity of the demand for earthquake insurance. Our analysis indicates that homeowners acquire earthquake insurance because of risk considerations, at higher levels of risk the demand for earthquake insurance is higher, and the price of earthquake coverage does not provide incremental information in explaining the demand for earthquake coverage. Available via Athens: Wiley Online Library http://www.openathens.net
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Natural catastrophes and man-made disasters in 2011 : Historic losses surface from record earthquakes and floods. Swiss Reinsurance Company - Zurich: Swiss Reinsurance Company, - 44 pages. [RKN: 73945] Sigma (2012) 2
2011 saw unprecedented economic losses of USD 370 billion from natural catastrophes and man-made disasters. Despite immense insured losses of USD 116 billion (a 142% increase over the previous year) arising from record earthquake and flood losses, the insurance industry weathered the year well and played a key role in risk management and post-disaster recovery financing. http://www.swissre.com
Proposal for a national earthquake insurance programme for Greece. Petseti, Aglaia; Nektarios, Milton Palgrave Macmillan, [RKN: 45665] Shelved at: Per: Geneva Geneva Papers on Risk and Insurance (2012) 37(2) : 377-400.
It is proposed that Greece undertakes the establishment of a national earthquake insurance programme for homeowners that will replace the ex post disaster relief by the State when an earthquake occurs. Greece is seismically the most active region in the whole Mediterranean. By employing four different catastrophe models, it has been estimated that the economic loss to the residential stock of a 1-in-200 year event is likely to be greater than 22 billion euros; for a 1-in-100 year event is about 14 billion euros; for an 1-in-25 year event is 5 billion euros; and for a 1-in-5 year event is 1.3 billion euros. This potential loss severity exposes the inherent limitations of the ex post funding approach to natural disasters adopted by successive Greek governments and underscores the urgent need for establishing a National Earthquake Insurance Programme. It is proposed that the earthquake coverage should be compulsory and the management of the insurance programme be based on the principle of a public–private partnership. The objective of the programme would be to provide affordable earthquake insurance, up to a maximum amount, to all homeowners, on the basis of risk-based premiums. A comprehensive and unique data bank of the residential stock in the country has been developed, which will be very useful to the local insurance industry as well as to reinsurers. Available via Athens: Palgrave MacMillan http://www.openathens.net
EASTERN EUROPE Liberalisation and market concentration impact on performance of the non-life insurance industry: the evidence from Eastern Europe. Njegomir, Vladimir; Stojic, Dragan Palgrave Macmillan, [RKN: 39982] Shelved at: Per: Geneva (Oxf) Geneva Papers on Risk and Insurance (2011) 36(1) : 94-106.
The aim of this paper is to examine market structure, conduct and performance relationship (S-C-P) hypothesis for the non-life insurance industry in Eastern European countries. Additionally, we examine the effect of liberalisation on market structure and performance. We use the country-specific fixed effects models for panel data for the period 2004–2008 allowing each cross-sectional unit to have a different intercept term serving as an unobserved random variable that is potentially correlated with the observed regressors. Three models are presented, each placing market structure, liberalisation and profitability in a distinct environment defined by related control variables. The research results support the S-C-P hypothesis in all of the observed models, showing evidence of strong influence of market structure and liberalisation on market profitability. These results could be useful in decision-making for both governments and insurance companies. Available via Athens: Palgrave MacMillan http://www.openathens.net
ECONOMIC GROWTH Insurance stock returns and economic growth. Zhou, Chunyang; Wu, Chongfeng; Li, Donghui; Chen, Zhian [RKN: 43631] Shelved at: Per: Geneva Geneva Papers on Risk and Insurance (2012) 37(3) : 405-428.
In this paper, we propose to use insurance stock returns as an indicator of insurance activities, and apply a dynamic panel technique to examine the link between the role of insurance and economic growth. Our empirical results show that after we control for the variations of market index returns, there is a significantly positive relationship between insurance stock returns and future economic growth. Furthermore, we also investigate how law environment and governance quality affect the link between the role of insurance and economic growth. The empirical results are consistent with our expectation that a well-defined law environment and governance quality facilitate the functioning of insurance companies, and strengthen the role of insurance in economic growth. We find generally that the effect of law and governance on the link between the role of insurance and economic growth is more significant in developed markets than in emerging markets. Available via Athens: Palgrave MacMillan http://www.openathens.net
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ECONOMIC INDICATORS Bayesian prediction of disability insurance frequencies using economic indicators. Donnelly, Catherine; Wüthrich, Mario V [RKN: 43657] Shelved at: Per: AAS (Lon) Shelved at: JOU/AAS Annals of Actuarial Science (2012) 6(2) : 381-400.
We use economic indicators to improve the prediction of the number of incurred but not recorded disability insurance claims, assuming that there is a link between the number of claims and the chosen economic indicators. We propose a Bayesian model where we model the claims development in three directions: along incurred periods, recording lag periods and calendar periods. A stochastic model of the economic indicators is incorporated into the calendar period development direction. Thus we allow for the impact of the economic environment on the number of claims. Applying the proposed model to data, we illustrate how the inclusion of economic indicators affects the prediction of the number of incurred but not recorded disability claims. http://www.actuaries.org.uk/research-and-resources/pages/access-journals
ECONOMIC PROJECTIONS On the underestimation of the precautionary effect in discounting. Gollier, Christian - 17 pages. [RKN: 74785] Shelved at: Per: Geneva (Oxf) Geneva Risk and Insurance Review (2011) 36 (2) : 95-111.
Using the extended Ramsey rule, the socially efficient rate is the difference between a wealth effect and a precautionary effect of economic growth. This second effect is increasing in the degree of uncertainty affecting the future. In the literature, it is usually calibrated by estimating the historical volatility of the growth of GDP in a specific country. In this paper, I show that using cross-section data tends to magnify uncertainty, and to reduce the discount rate. Using a data set covering 190 countries over the period 1969–2010, I justify using a much smaller discount rate of approximately 0.7 per cent per year for time horizons exceeding 40 years.
ECONOMIC RESEARCH Insurance law and economics research for natural hazard management in a changing climate : Editorial. Schwarze, Reimund Palgrave Macmillan, [RKN: 45657] Shelved at: Per: Geneva Geneva Papers on Risk and Insurance (2012) 37(2) : 201-205.
Available via Athens: Palgrave MacMillan http://www.openathens.net
ECONOMICS On the underestimation of the precautionary effect in discounting. Gollier, Christian - 17 pages. [RKN: 74785] Shelved at: Per: Geneva (Oxf) Geneva Risk and Insurance Review (2011) 36 (2) : 95-111.
Using the extended Ramsey rule, the socially efficient rate is the difference between a wealth effect and a precautionary effect of economic growth. This second effect is increasing in the degree of uncertainty affecting the future. In the literature, it is usually calibrated by estimating the historical volatility of the growth of GDP in a specific country. In this paper, I show that using cross-section data tends to magnify uncertainty, and to reduce the discount rate. Using a data set covering 190 countries over the period 1969–2010, I justify using a much smaller discount rate of approximately 0.7 per cent per year for time horizons exceeding 40 years.
EDUCATION Strategic market entry project. Ferguson, William L; Ferguson, Tamela - 11 pages. [RKN: 74704] Shelved at: JOU Risk Management and Insurance Review (2011) 14 (1) : 145-155.
Successful risk management is critical to top level decision makers in any organization, involving fundamental strategic policy and planning to identify and allocate scarce resources to projects or activities that generate sustainable competitive advantage and maximize available long-term growth opportunities, or even survival. This article describes a flexible group project wherein students of risk management and insurance (RMI) may gain additional exposure and experience with applications of fundamental strategic management theory in the context of their particular RMI major coursework. The Project may be a useful tool in helping RMI students further develop their research and presentation skills, as well as enhance critical strategic decision making; exposure to cultural, regional or globalization issues; application of fundamental strategic management concepts; and knowledge of current events. While this Project was developed primarily for RMI students, students across business disciplines also may benefit from participation.
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Available via Athens: Wiley Online Library http://www.openathens.net
Using technology to encourage critical thinking and optimal decision making in risk management education. Garvey, John; Buckley, Patrick - 11 pages. [RKN: 74766] Shelved at: JOU Risk Management and Insurance Review (2011) 14 (2) : 299-309.
This article draws a link between the risk management failures in the financial services industry and the educational philosophy and teaching constraints at business schools. An innovative application of prediction market technology within business education is proposed as a method that can be used to encourage students to think about risk in an open and flexible way. This article explains how prediction markets also provide students with the necessary experience to critically evaluate and stress-test quantitative risk modeling techniques later in their academic and professional careers. Available via Athens: Wiley Online Library http://www.openathens.net
EMBEDDED VALUE Value relevance of embedded value and IFRS 4 insurance contracts. Chung-Fern, Rebecca; Wen-Hsin, Hsu Palgrave Macmillan, [RKN: 45334] Shelved at: Per: Geneva (Oxf) Geneva Papers on Risk and Insurance (2011) 36(2) : 283-303.
In light of the recent exodus of foreign insurers from Taiwan and the local insurers‘ outcries against the International Financial Reporting Standard (IFRS) 4 Insurance Contracts, we examine the value relevance of financial statements for life insurance firms, with particular interests to the embedded value (EV) disclosure. We find that the EV of equity has an incremental information role for book value of equity, which indicates that the accounting mismatching problem in the insurance industry creates a demand for fair value accounting. The fair value of liabilities under IFRS 4 Phase 2 has been disputed globally by accountants, actuaries, academia and regulators. The EV model is a concept approaching the fair value model. The research findings provide important empirical evidences supporting the fair value concept of IFRS 4. Available via Athens: Palgrave MacMillan http://www.openathens.net
EMERGING MARKETS Insurance in emerging markets: growth drivers and profitability. Swiss Reinsurance Company (2011). - Zurich: Swiss Reinsurance Company, 2011. - 40 pages. [RKN: 74794] Shelved at: JOU Sigma (2011) 5
The latest Swiss Re sigma publication, "Insurance in emerging markets: growth drivers and profitability," focuses on two of the regions that have contributed the most to emerging market premium growth, Emerging Asia and Latin America. Drawing on ten years of experience of rapid insurance development in these markets, the study explores growth drivers and profitability in these two key regions, and provides an outlook on emerging markets. http://www.swissre.com
EMPLOYEES Governance and shareholder response to chief risk officer appointments. Gupta, Manu; Prakash, Puneet; Rangan, Nanda Palgrave Macmillan, [RKN: 45543] Shelved at: Per: Geneva (Oxf) Geneva Papers on Risk and Insurance (2012) 37(1) : 108-124.
This study examines the recent, significant growth in the appointments of Chief Risk Officers (CROs), the role of a CRO, and whether such appointments benefit shareholders. We find that the market is more likely to react positively to a CRO appointment for a firm with weak corporate governance. In particular, the lower the proportion of outside directors the greater is the likelihood of a positive market reaction to CRO appointments, suggesting that CRO appointments are associated with better future governance by firms‘ shareholders. Finally, firms with higher tax and product risk also experience increases in stock prices when they appoint CROs. Available via Athens: Palgrave MacMillan http://www.openathens.net
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ENERGY RESOURCES Ripple effect. Dodson, Antony; Rensburg, Hannes van Staple Inn Actuarial Society, [RKN: 40069] Shelved at: Per: Actuary (Oxf) Per: Actuary (Lon) Shelved at: SIA/ACT The Actuary (2011) January : 20-22.
Antony Dodson and Hannes van Rensburg look at the spillover effect of environmental disasters on the energy insurance market. http://www.theactuary.com/archive
ENTERPRISE RISK MANAGEMENT Fast remote but not extreme quantiles with multiple factors: applications to Solvency II and Enterprise Risk Management. Chauvigny, Matthieu; Devineau, Laurent; Loisel, Stéphane; Maume-Deschamps, Véronique [RKN: 44809] Shelved at: online only European Actuarial Journal (2011) 1(1) July : 131-157.
For operational purposes, in Enterprise Risk Management or in insurance for example, it may be important to estimate remote (but not extreme) quantiles of some function f of some random vector. The call to f may be time- and resource-consuming so that one aims at reducing as much as possible the number of calls to f. In this paper, we propose some ways to address this problem of general interest. We then numerically analyze the performance of the method on insurance and Enterprise Risk Management real-world case studies. Available online via Athens http://www.openathens.net
Implementation of enterprise risk management: evidence from the German property-liability insurance industry. Altuntas, Muhammed; Berry-Stölzle, Thomas R; Hoyt, Robert E Palgrave Macmillan, [RKN: 44916] Shelved at: Per: Geneva (Oxf) Geneva Papers on Risk and Insurance (2011) 36(3) : 414-439.
Implementing a properly functioning enterprise risk management (ERM) programme has become increasingly important for insurance companies. Unlike traditional risk management where individual risks are managed in separate silos, ERM is based on the concept of managing all relevant risks in an integrated, holistic fashion. ERM has also been growing in importance as a result of increased attention on risk management in the context of corporate governance. A recent report by The Geneva Association identified strengthening ―risk management practices‖ as one of three key measures that ―aim to strengthen financial stability‖. Despite the heightened interest in ERM by insurance managers and actuaries, there is only limited empirical evidence on how insurance companies actually implement the ERM approach. The goal of our research is to examine the implementation of the ERM components by insurers. Therefore, we surveyed all German property-liability insurance companies with premiums written in excess of 40 million euros. There are 113 such insurers and 95 of them participated in our survey, leading to a response rate of 84 per cent. The questionnaire covers a comprehensive set of dimensions of an ERM system. In addition to detailed questions about specific ERM activities, the questionnaire assesses when these ERM activities were initiated. The results document significant increases in the extent to which ERM is being implemented by these firms and details the sequence of implementation of this evolving risk management process. Available via Athens: Palgrave MacMillan http://www.openathens.net
L'analyse de la rentabilité vue par la formule standard. Derien, Anthony; Le Floc'h, Emmanuel [RKN: 43465] Shelved at: online only Bulletin Français d'Actuariat (2011) 11 (no.22) : 83-104.
The standard formula is mainly viewed as a basic formula to evaluate the regulatory capital, the internal model being commonly considered as a more powerful tool to adopt a proactive approach as defined in the ``Use Test'' (capital allocation, reinsurance, ...). The main arguments of the standard formula are the rigidity and the lack of flexibility to fit the risk profile of the insurance company. This research aims to demonstrate that the standard formula can have a more important contribution in the enterprise risk management with the production of keys indicator. http://www.institutdesactuaires.com/bfa/
Management strategies in multi-year enterprise risk management. Diers, Dorothea Palgrave Macmillan, [RKN: 39983] Shelved at: Per: Geneva (Oxf) Geneva Papers on Risk and Insurance (2011) 36(1) : 107-125.
In enterprise risk management, strategies should be evaluated and managed from a multi-year view. In this paper, we present a multi-year model approach and apply a multi-year risk-capital concept to enable the company's ―Own Risk and Solvency Assessment‖ as a part of enterprise risk management on a multi-year basis. We show under which assumptions an allocation method gives the ―right‖ strategic incentives. We illustrate the usefulness of the concept for managerial decision support using data from a German non-life insurer. Available via Athens: Palgrave MacMillan http://www.openathens.net
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ENVIRONMENT Ripple effect. Dodson, Antony; Rensburg, Hannes van Staple Inn Actuarial Society, [RKN: 40069] Shelved at: Per: Actuary (Oxf) Per: Actuary (Lon) Shelved at: SIA/ACT The Actuary (2011) January : 20-22.
Antony Dodson and Hannes van Rensburg look at the spillover effect of environmental disasters on the energy insurance market. http://www.theactuary.com/archive
EPIDEMIOLOGY Actuarial applications of epidemiological models. Feng, Runhuan; Garrido, Jose Society of Actuaries, - 25 pages. [RKN: 74822] Shelved at: Per: NAAJ (Oxf) Per NAAJ (Lon) Shelved at: JOU North American Actuarial Journal (2011) 15 (1) : 112-136.
The risk of a global avian flu or influenza A (H1N1) pandemic and the emergence of the worldwide SARS epidemic in 2002–2003 have led to a revived interest in the study of infectious diseases. Mathematical models have become important tools in analyzing the transmission dynamics and in measuring the effectiveness of controlling strategies. Research on infectious diseases in the actuarial literature goes only so far in setting up epidemiological models that better reflect the transmission dynamics. This paper attempts to build a bridge between epidemiological and actuarial modeling and set up an actuarial model that provides financial arrangements to cover the expenses resulting from the medical treatments of infectious diseases. Based on classical epidemiological compartment models, the first part of this paper proposes insurance policies and models to quantify the risk of infection and formulates financial arrangements, between an insurer and insureds, using actuarial methodology. For practical purposes, the second part employs a variety of numerical methods to calculate premiums and reserves. The last part illustrates the methods by designing insurance products for two well-known epidemics: the Great Plague in England and the SARS epidemic in Hong Kong. http://www.soa.org/news-and-publications/publications/journals/naaj/naaj-detail.aspx
EQUITIES Optimal dividend and equity issuance problem with proportional and fixed transaction costs. Peng, Xiaofan; Chen, Mi; Guo, Junyi [RKN: 44876] Shelved at: Online Only Shelved at: Online Only Insurance: Mathematics & Economics (2012) 51(3) : 576-585.
This paper investigates the optimal dividend problem of an insurance company, which controls risk exposure by reinsurance and by issuing new equity to protect from bankruptcy. Transaction costs are incurred by these business activities: reinsurance is non-cheap, dividend is taxed and fixed costs are generated by equity issuance. The goal of the company is to maximize the expected cumulative discounted dividend minus the expected discounted costs of equity issuance. This problem is formulated as a mixed regular-singular-impulse stochastic control problem. By solving the corresponding HJB [Hamilton-Jacobi-Bellman] equation, the authors obtain the analytical solutions of the optimal return function and the optimal strategy. Available via Athens: ScienceDirect http://www.openathens.net/
EQUITY RELEASE SCHEMES A semi-Markov multiple state model for reverse mortgage terminations. Ji, Min; Hardy, Mary R; Li, Johnny Siu-Hang Faculty of Actuaries and Institute of Actuaries; Cambridge University Press, [RKN: 43652] Shelved at: Per: AAS (Lon) Shelved at: JOU/AAS Annals of Actuarial Science (2012) 6(2) : 235-257.
Reverse mortgages provide a mechanism for seniors to release the equity that has been built up in their home. At termination, the mortgagors are usually guaranteed to owe no more than the value of their property. The value of the reverse mortgage guarantee is heavily dependent on the maturity or termination date, which is uncertain. In this paper, we model reverse mortgage terminations using a semi-Markov multiple state model which incorporates three different modes of exit: death, entrance into a long-term care facility, and voluntary prepayment. We apply the proposed model specifically to develop the valuation formulas for roll-up mortgages in the UK and Home Equity Conversion Mortgages (HECMs) in the USA. We examine the significance of each mode of termination by valuing the contracts allowing progressively for each mode. On the basis of our model and assumptions, we find that both health related terminations and voluntary (non-health related) terminations significantly impact the contract value. In addition we analyze the premium structure for US reverse mortgage insurance, and demonstrate that premiums appear to be too high for some borrowers, and substantial cross-subsidies may result. http://www.actuaries.org.uk/research-and-resources/pages/access-journals
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EUROPE Investigating risk disclosure practices in the European insurance industry. Höring, Dirk; Gründl, Helmut Palgrave Macmillan, [RKN: 44915] Shelved at: Per: Geneva (Oxf) Geneva Papers on Risk and Insurance (2011) 36(3) : 380-413.
In light of the upcoming Solvency II Pillar 3 disclosure regulation for the insurance industry, this paper explores the risk disclosure practices in annual reports of European primary insurers in the Dow Jones Stoxx 600 Insurance Index between 2005 and 2009. On the basis of a self-constructed risk disclosure index, the study examines the relation between the extent of risk disclosure and insurance companies‘ characteristics such as size, risk, profitability, ownership dispersion, cross-listing, home country and type of insurance sold, to draw inferences regarding motives for enhanced risk disclosure based on positive accounting theory. Available via Athens: Palgrave MacMillan http://www.openathens.net
The productivity of European life insurers: best-practice adoption vs. innovation. Bertoni, Fabio; Croce, Annalisa Palgrave Macmillan, [RKN: 45329] Shelved at: Per: Geneva (Oxf) Geneva Papers on Risk and Insurance (2011) 36(2) : 165-185.
The aim of this work is to investigate the drivers of productivity evolution in the European life insurance industry in the aftermath of the enforcement of the Third Directive. We apply Data Envelopment Analysis (DEA) to a panel of 602 life insurance companies operating in five European countries (Germany, France, Italy, Spain and the U.K.) between 1997 and 2004 and develop a generalized Malmquist efficiency decomposition to gauge the relative importance of two sources of productivity change: the improvement of best-practices via innovation, and the adoption of practices currently adopted by local or foreign best-in-class insurers. We find that productivity increased on an annual basis by 6.71 per cent; the increase has been mostly due to innovation in best-practices (6.67 per cent), while best-practice adoption contributed by a mere 0.04 per cent. Our findings also indicate that, over the period of our analysis, innovation of best-practices was attributable to technological change. We find no evidence, instead, that productivity has been driven by a shift in the risk profile of insurers. Available via Athens: Palgrave MacMillan http://www.openathens.net
EUROPEAN UNION Insurance protection funds in the European Union—Quo Vadis?. Monkiewicz, Marek - 18 pages. [RKN: 73822] Shelved at: JOU Risk Management and Insurance Review (2012) 15 (1) : 89-106.
Contrary to the development in other major insurance markets in the world only 13 out of 27 EU member states have introduced until now some type of insurance protection funds (IPF). As a result around a third of the market is without any collective protection. There is also a continuous debate since 2001 among the member states on the need for such a system at the community level. The experiences of the latest financial crisis have raised new arguments for reorganizing the existing system to avoid regulatory arbitrage and to strengthen consumer security. Even the prospective implementation of provisions strengthening supervisory bodies, and the new solvency directive (so-called Solvency II) are not fail-safe solutions. This article is an attempt to review the current situation as regards IPF in the EU and to discuss possible development scenarios. Available via Athens: Wiley Online Library http://www.openathens.net
Regulation and reform of rating agencies in the European Union : an insurance industry perspective. Theis, Anja; Wolgast, Michael Palgrave Macmillan, [RKN: 45541] Shelved at: Per: Geneva (Oxf) Geneva Papers on Risk and Insurance (2012) 37(1) : 47-76.
This article investigates the current discussion on the regulatory framework for credit rating agencies (CRAs) from the perspective of the insurance industry, focusing on the European Union. It becomes apparent that the new European system of regulation and supervision of CRAs conforms well to general principles of economic theory and can be expected to resolve many issues of concern. In contrast, some of the additional policy options currently discussed in Europe could involve substantial costs and risks for market participants and the financial system without contributing further to the objectives of CRA reform. Available via Athens: Palgrave MacMillan http://www.openathens.net
EXCESS OF LOSS REINSURANCE Credibility for a tower of excess layers. Clark, David R [RKN: 44924] Shelved at: Per: Variance Variance (2011) 5(1) : 32-44.
In pricing excess of loss reinsurance, the traditional method for applying credibility is as a weighted average of two estimates of expected loss: one from experience rating and a second from exposure rating. This paper will show how this method can be improved by incorporating loss estimates from lower layers; producing a multifactor credibility-weighted estimate of expected loss. The method described is based on minimum variance criteria, whereby the resulting credibility-weighted estimator has a lower variance than any other combination of the individual estimators. It is shown that the multifactor credibility model can be presented
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as a simple recursive procedure for practical application. http://www.variancejournal.org/issues
Index clause: analytical properties and the capitalization strategy. Zimmerman, Pavel [RKN: 44844] Shelved at: online only European Actuarial Journal (2012) 2(1) July : 149-160.
In non-life insurance, some bodily liability losses (e.g. loss of income) are paid out as annuity until specified age or death of victim. In case of excess of loss reinsurance, reinsurers often do not accept the inflation risk embedded in such losses and therefore include in the reinsurance treaty so called index clause which increases the priority by the impact of the inflation on the loss. A formula to calculate the expected reinsurance recoveries and its limiting behavior in case of presence of the index clause is derived and illustrated. A capitalization strategy which minimizes the insurer‘s loss is derived. Available online via Athens -- Published online, July 2012 http://www.openathens.net
Minimal cost of a Brownian risk without ruin. Luo, Shangzhen; Taksar, Michael [RKN: 43686] Shelved at: Online Only Shelved at: Online Only Insurance: Mathematics & Economics (2012) 51(3) : 685-693.
In this paper, we study an optimal stochastic control problem for an insurance company whose surplus process is modeled by a Brownian motion with drift (the diffusion approximation model). The company can purchase reinsurance to lower its risk and receive cash injections at discrete times to avoid ruin. Proportional reinsurance and excess-of-loss reinsurance are considered. The objective is to find an optimal reinsurance and cash injection strategy that minimizes the total cost to keep the surplus process non-negative (without ruin). Here the cost function is defined as the total discounted value of the injections. The minimal cost function is found explicitly by solving the according quasi-variational inequalities (QVIs). Its associated optimal reinsurance-injection control policy is also found. Available via Athens: ScienceDirect http://www.openathens.net/
Optimal control of excess-of-loss reinsurance and investment for insurers under a CEV model. Gu, Ailing; Guo, Xianping; Li, Zhongfei; Zeng, Yan [RKN: 43685] Shelved at: Online Only Shelved at: Online Only Insurance: Mathematics & Economics (2012) 51(3) : 674-684.
The optimal excess-of-loss reinsurance and investment strategies under a constant elasticity of variance (CEV) model for an insurer are considered in this paper. Assume that the insurer‘s surplus process is approximated by a Brownian motion with drift, the insurer can purchase excess-of-loss reinsurance and invest his (or her) surplus in a financial market consisting of one risk-free asset and one risky asset whose price is modeled by a CEV model, and the objective of the insurer is to maximize the expected exponential utility from terminal wealth. Two problems are studied, one being a reinsurance-investment problem and the other being an investment-only problem. Explicit expressions for optimal strategies and optimal value functions of the two problems are derived by stochastic control approach and variable change technique. Moreover, several interesting results are found, and some sensitivity analysis and numerical simulations are provided to illustrate our results. Available via Athens: ScienceDirect http://www.openathens.net/
EXPECTED UTILITY Corporate management of highly dynamic risks : Evidence from the demand for terrorism insurance in Germany. Thomann, Christian; Pascalau, Razvan; von der Schulenburg, J Mattias Graf - 26 pages. [RKN: 74942] Shelved at: Per: Geneva (Oxf) Geneva Risk and Insurance Review (2012) 37 (1) : 57-82.
This paper investigates a corporation's risk management response to highly dynamic risks. Using a unique data set on the German terrorist insurance market, the paper tests whether corporate risk managers have a clear understanding of the probability distribution of highly dynamic risks or if risk managers learn from severe losses and base their decisions upon day-to-day experience. The paper further investigates whether risk managers become more confident in their risk management decisions over time. For this purpose, we apply Viscusi's prospective reference theory to a corporate context. We find that firms learn from single events when making their risk management decisions, and that risk managers become more confident with their risk management decisions over time.
EXPENSES A unifying approach to the analysis of business with random gains. Cheung, Eric C K [RKN: 44883] Shelved at: Per: SAJ Shelved at: SCA/ACT Scandinavian Actuarial Journal (2012) 3 : 153-182.
In this paper, we consider a stochastic model in which a business enterprise is subject to constant rate of expenses over time and gains which are random in both time and amount. Inspired by Albrecher & Boxma (2004), it is assumed in general that the size of a given gain has an impact on the time until the next gain. Under such a model, we are interested in various quantities related to the survival of the business after default, which include: (i) the fair price of a perpetual insurance which pays the expenses whenever the available capital reaches zero; (ii) the probability of recovery by the first gain after default if money is borrowed at the time of default; and (iii) the Laplace transforms of the time of recovery and the first duration of negative capital. To this end, a function resembling the so-called Gerber–Shiu function (Gerber & Shiu (1998)) commonly used in insurance analysis is proposed. The function's general structure is studied via the use of defective renewal equations, and its applications to the evaluation of the
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above-mentioned quantities are illustrated. Exact solutions are derived in the independent case by assuming that either the inter-arrival times or the gains have an arbitrary distribution. A dependent example is also considered and numerical illustrations follow. Available via Athens: Taylor & Francis http://www.openathens.net/
EXPOSURE TO RISK Credibility for a tower of excess layers. Clark, David R [RKN: 44924] Shelved at: Per: Variance Variance (2011) 5(1) : 32-44.
In pricing excess of loss reinsurance, the traditional method for applying credibility is as a weighted average of two estimates of expected loss: one from experience rating and a second from exposure rating. This paper will show how this method can be improved by incorporating loss estimates from lower layers; producing a multifactor credibility-weighted estimate of expected loss. The method described is based on minimum variance criteria, whereby the resulting credibility-weighted estimator has a lower variance than any other combination of the individual estimators. It is shown that the multifactor credibility model can be presented as a simple recursive procedure for practical application. http://www.variancejournal.org/issues
EXTREME VALUE THEORY Modeling insurance claims via a mixture exponential model combined with peaks-over-threshold approach. Lee, David; Li, Wai Keung; Wong, Tony Siu Tong [RKN: 44873] Shelved at: Online Only Shelved at: Online Only Insurance: Mathematics & Economics (2012) 51(3) : 538-550.
We consider a model which allows data-driven threshold selection in extreme value analysis. A mixture exponential distribution is employed as the thin-tailed distribution in view of the special structure of insurance claims, where individuals are often grouped into categories. An EM algorithm-based procedure is described in model fitting. We then demonstrate how a multi-level fitting procedure will substantially reduce computation time when the data set is large. The fitted model is applied to derive statistics such as return level and expected tail loss of the claim distribution, and ruin probability bounds are obtained. Finally we propose a statistical test to justify the choice of mixture exponential distribution over the homogeneous exponential distribution in terms of improved fit. Available via Athens: ScienceDirect http://www.openathens.net/
FARM INSURANCE Whole farm income insurance. Turvey, Calum G - 26 pages. [RKN: 70737] Shelved at: Per: J.Risk Ins (Oxf) Shelved at: JOU Journal of Risk and Insurance (2012) 79 (2) : 515-540.
This article employs a mathematical programming model to investigate farmers‘ optimal crop choices under gross revenue insurance, whole farm income insurance (WFI), the Canadian Agricultural Income Stabilization (CAIS) program, and its modified 2008 program AgrInvest. WFI poses a particularly interesting problem since the indemnity/premium structure is dependent upon the choice of crops, whereas the choice of crops is simultaneously influenced by the presence of the whole farm insurance program. Results indicate that farmers will alter farm plans significantly in response to the type of insurance offered and the level of subsidy. Available via Athens: Wiley Online Library http://www.openathens.net
FINANCE Risk analysis in finance and insurance. Melnikov, Alexander V (2011). - 2nd ed. - Boca Raton, FL: Chapman & Hall/CRC, 2011. - x, 318 pages. [RKN: 44513] Shelved at: UHG/EA/AA (Lon)
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FINANCIAL CRISES A comparative assessment of Basel II/III and Solvency II. Gatzert, Nadine; Wesker, Hannah [RKN: 43637] Shelved at: Per: Geneva Geneva Papers on Risk and Insurance (2012) 37(3) : 539-570.
In the course of creating a single European market for financial services and in the wake of two financial crises, regulatory frameworks in the financial services industry in the European Union have undergone significant change. One of the major reforms has been the transition from static rules-based systems towards principles-based regulation with the intent to better capture the risk situation of an undertaking. For insurance companies, the regulatory framework Solvency II is being finalised and is scheduled for implementation after 2013. At the same time, the regulatory regime for banking, Basel II, has been revised in response to the financial crisis; the new version is Basel III. The aim of this paper is to conduct a comprehensive and structured comparative assessment of Basel II/III and Solvency II in order to detect similarities and differences as well as the benefits and drawbacks of both regimes, which might be profitably addressed. The comparison is conducted against the background of the industries‘ characteristics and the objectives of regulation. Available via Athens: Palgrave MacMillan http://www.openathens.net
The financial crisis: risk transfer, insurance layers, and (no?) reinsurance culture. Fackler, Michael (2012). 2012. [RKN: 43560] General Insurance Convention (2012) : 391-406.
Paper presented at [39th] annual GIRO conference, or General Insurance Convention of the UK Actuarial Professon, at Square Conference Centre, Brussels, 18-21 September 2012 http://www.actuaries.org.uk/events/paper-presentation-archives/2012
GIRO Conference and Exhibition 2012: Juggling uncertainty: the actuary's part to play : [39th annual General Insurance Convention papers] : SQUARE Conference Centre, Brussels, 18-21 September 2012. Institute and Faculty of Actuaries (2012). - London: Institute and Faculty of Actuaries, 2012. - 457 pages. [RKN: 43552] Shelved at: Strg box J33 gic (Oxf) BX (Lon) Shelved at: 368
Papers presented at [39th] annual GIRO conference, or General Insurance Convention of the UK Actuarial Professon, at Square Conference Centre, Brussels, 18-21 September 2012 http://www.actuaries.org.uk/events/residential/giro-conference-and-exhibition-2012
Insurance, systemic risk and the financial crisis. Baluch, Faisal; Mutenga, Stanley; Parsons, Chris Palgrave Macmillan, [RKN: 39984] Shelved at: Per: Geneva (Oxf) Geneva Papers on Risk and Insurance (2011) 36(1) : 126-163.
In this paper we assess the impact of the financial crisis on insurance markets and the role of the insurance industry in the crisis itself. We examine some previous ―insurance crises‖ and consider the effect of the crisis on insurance risk—the liabilities arising from contracts that insurers underwrite. We then analyse the effects of the crisis on the performance of insurers in different markets and assess the extent of systemic risk in insurance. We conclude that, while systemic risk remains lower in insurance than in the banking sector, it is not negligible and has grown in recent years, partly as a consequence of insurers‘ increasing links with banks and their recent focus on non-(traditional) insurance activities, including structured finance. We conclude by considering the structural changes in the insurance industry that are likely to result from the crisis, including possible effects on ―bancassurance‖ activity, and offer some thoughts on changes in the regulation of insurance markets that might ensue. Available via Athens: Palgrave MacMillan http://www.openathens.net
FINANCIAL EDUCATION An empirical analysis of the effect of financial education on graduating business students’ perceptions of their retirement planning familiarity, motivation, and preparedness. Power, Mark L; Hobbs, Jonathan M; Ober, Ashley - 17 pages. [RKN: 74771] Shelved at: JOU Risk Management and Insurance Review (2011) 14 (1) : 89-105.
Today's multifaceted and dynamic financial environment requires a high level of individual financial literacy to ensure that sound financial behaviors are the norm. Unfortunately, many individuals have limited knowledge regarding financial issues and are ill prepared to make sound financial choices. The purpose of this article was to benchmark and then determine if graduating business students‘ perception of their retirement planning familiarity, motivation, and preparedness improved after taking a semester-long course in Personal Risk Management and Insurance (PRMI). We discovered that business students were more financially literate than nonbusiness students and that business students‘ familiarity with retirement plans and personal level of readiness to make retirement planning decisions improved significantly after taking the principles class. Specifically, we showed that only 15.8 percent and 42.3 percent of the nonbusiness and business control students, respectively, felt adequately prepared to make retirement decisions, while 82 percent of the business students who completed the PRMI class felt prepared. Ex post, graduating seniors who were exposed to coursework covering life-cycle risks and options to treat those risks perceived that they are leaving college with a better ability to meet the financial challenges that await them. Last, we showed that significant differences existed in retirement plan and investment familiarity based on gender. Our findings provide support for including financial literacy as a general education requirement at colleges and universities. Available via Athens: Wiley Online Library http://www.openathens.net
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Who responds to tax reforms? : evidence from the life insurance market. Hecht, Carolin; Hanewald, Katja Palgrave Macmillan, [RKN: 45539] Shelved at: Per: Geneva (Oxf) Geneva Papers on Risk and Insurance (2012) 37(1) : 5-26.
We exploit the natural experiment of the 2005 income tax reform in Germany to study the effects of tax incentives on consumer behaviour in life insurance markets. Our empirical analysis of sociodemographic, economic and psychological household characteristics elicited in the German SAVE study shows that two very different consumer groups buy (endowment) life insurance before and after the tax reform. We find that education plays a central role in reactions to the modified tax environment. Our stylised characterisation of ―arbitrageur‖ and ―straggler‖ buyers will assist both life insurance firms and regulatory authorities in designing effective policies. Available via Athens: Palgrave MacMillan http://www.openathens.net
FINANCIAL STATEMENTS Key performance indicators of UK insurance companies : volume 1: 2009-2010. O'Brien, Christopher D; Orton, Tim R (2011). - Nottingham: Centre for Risk & Insurance Studies, 2011. - 108 pages. [RKN: 45508] Shelved at: BU/ELCB
We have compiled data from over 180 companies (including many subsidiaries), based on what firms regard as important: their key performance indicators (KPIs). Our report sets out the KPIs of those companies, where reported in their 2009 accounts and also for 2010, for 21 listed insurers and 5 major mutuals. The report includes an Excel spreadsheet that sets out those KPIs, and also the following data items for 2008 and 2009 where reported: · Premiums: earned and written, gross and net; · Claims paid (gross); claims incurred (net); · Administration expenses; net operating expenses; · Pre-tax profit; profit after tax; · Assets; shareholders‘ equity; fund for future appropriations; · Technical provisions; and outstanding claims (gross and net of reinsurance); · New life business annual premium, single premium, APE; capital resources for long-term business and regulatory requirement (life insurers). The spreadsheet also shows the following calculated ratios: · Expense ratio; combined ratio (general insurers); and rate of return on equity. There are tables indicating the top 10 insurers by assets, premiums, shareholders‘ equity, profits, rate of return on equity, and combined ratio. The report includes a paper presented to the 33rd UK Insurance Economists‘ conference that analyses the data. Among its findings was that while some firms did not disclose KPIs, firms which were less profitable were more likely than others to disclose KPIs. Includes 1 spreadsheet located as in network location. -- Replaces "Insurance Company Performance" RKN 39236
FIRE INSURANCE Skew mixture models for loss distributions: a Bayesian approach. Bernardi, Mauro; Maruotti, Antonello; Petrella, Lea [RKN: 44879] Shelved at: Online Only Shelved at: Online Only Insurance: Mathematics & Economics (2012) 51(3) : 617-623.
The derivation of loss distribution from insurance data is a very interesting research topic but at the same time not an easy task. To find an analytic solution to the loss distribution may be misleading although this approach is frequently adopted in the actuarial literature. Moreover, it is well recognized that the loss distribution is strongly skewed with heavy tails and presents small, medium and large size claims which hardly can be fitted by a single analytic and parametric distribution. Here we propose a finite mixture of Skew Normal distributions that provides a better characterization of insurance data. We adopt a Bayesian approach to estimate the model, providing the likelihood and the priors for the all unknown parameters; we implement an adaptive Markov Chain Monte Carlo algorithm to approximate the posterior distribution. We apply our approach to a well known Danish fire loss data and relevant risk measures, such as Value-at-Risk and Expected Shortfall probability, are evaluated as well. Available via Athens: ScienceDirect http://www.openathens.net/
FLOODS Natural catastrophes and man-made disasters in 2011 : Historic losses surface from record earthquakes and floods. Swiss Reinsurance Company - Zurich: Swiss Reinsurance Company, - 44 pages. [RKN: 73945] Sigma (2012) 2
2011 saw unprecedented economic losses of USD 370 billion from natural catastrophes and man-made disasters. Despite immense insured losses of USD 116 billion (a 142% increase over the previous year) arising from record earthquake and flood losses, the insurance industry weathered the year well and played a key role in risk management and post-disaster recovery financing. http://www.swissre.com
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FRAUD Estimating JP Morgan Chase's profits from the Madoff deposits. Davis, Louis R; Wilson, Linus - 13 pages. [RKN: 74702] Shelved at: JOU Risk Management and Insurance Review (2011) 14 (1) : 107-119.
JP Morgan Chase had deposits from Bernard L. Madoff's investors totaling $5.5 billion at one point in 2008. The Chase account was supposedly where most of the funds in his Ponzi scheme were deposited. Any large deposit can be a considerable source of profit to a bank. Assuming that the deposits returned the bank's net interest margin and grew at a random geometric rate, this article estimates that JP Morgan Chase generated $435 million in after-tax profits from this very large account over the course of 16 years. With JP Morgan Chase the target of pending lawsuits relating to the Madoff fraud, this article's methodology and results may be of interest to litigants, prosecutors, journalists, and academics. Available via Athens: Wiley Online Library http://www.openathens.net
FUNDING Disasters and decentralisation. Johnston, Jason Scott Palgrave Macmillan, [RKN: 45659] Shelved at: Per: Geneva Geneva Papers on Risk and Insurance (2012) 37(2) : 228-256.
Climate change may potentially increase the magnitude of losses from natural hazards, but the United States experience shows that the primary reason for escalating losses is policy failure. It is well known that centralised, taxpayer-funded ex post disaster relief has actually encouraged development in risky jurisdictions and also weakened incentives for ex ante precautions in such jurisdictions (moral or ―charity‖ hazard). Less well known and analysed is the role played by centralised ex ante development subsidies—often masquerading as protective investment—in distorting incentives. This paper develops a simple three jurisdiction model in which homogeneous jurisdictions decide by majority vote in a centralised legislature on the centralised (federal) share of ex post loss and centralised spending an ex ante development in a Beneficiary jurisdiction, taking into account how these decisions about centralised spending impact local Beneficiary jurisdiction incentives for precautions against ex post loss. The model shows that the marginal cost of ex ante federal development spending may be greater for a Beneficiary jurisdiction than for a Contractor jurisdiction. This somewhat technical result has an observable implication: evidence that a small fraction of ex post loss in a Beneficiary jurisdiction is centrally compensated (shared across jurisdictions) is evidence that ex ante development subsidies there may be truly precautionary on net; conversely, evidence that a Beneficiary jurisdiction has a large share of its ex post hazard loss compensated by centralised disaster relief suggests that the ex ante development subsidies received by that jurisdiction did more to encourage new development and increase the amount at risk than they did to protect existing development. The model is extended to consider how ex post loss sharing impacts the demand for federally subsidised disaster insurance and other related issues. Available via Athens: Palgrave MacMillan http://www.openathens.net
GENDER Guest editorial: Sexless and beautiful data: from quantity to quality. Guillén, Montserrat Faculty of Actuaries and Institute of Actuaries; Cambridge University Press, [RKN: 43651] Shelved at: Per: AAS (Oxf) Per: AAS (Lon) Shelved at: JOU/AAS Annals of Actuarial Science (2012) 6(2) : 231-234.
http://www.actuaries.org.uk/research-and-resources/pages/access-journals
More equal than others. Thomas, Guy Staple Inn Actuarial Society, [RKN: 45112] Shelved at: Per: Actuary (Oxf) Per: Actuary (Lon) Shelved at: SIA/ACT The Actuary (2011) March : 30-31.
Guy Thomas argues that some gender selection increases the societal benefits of insurance. http://www.theactuary.com/archive
GENERAL INSURANCE Actuarial applications of epidemiological models. Feng, Runhuan; Garrido, Jose Society of Actuaries, - 25 pages. [RKN: 74822] Shelved at: Per: NAAJ (Oxf) Per NAAJ (Lon) Shelved at: JOU North American Actuarial Journal (2011) 15 (1) : 112-136.
The risk of a global avian flu or influenza A (H1N1) pandemic and the emergence of the worldwide SARS epidemic in 2002–2003 have led to a revived interest in the study of infectious diseases. Mathematical models have become important tools in analyzing the transmission dynamics and in measuring the effectiveness of controlling strategies. Research on infectious diseases in the actuarial literature goes only so far in setting up epidemiological models that better reflect the transmission dynamics. This paper attempts to build a bridge between epidemiological and actuarial modeling and set up an actuarial model that provides financial arrangements to cover the expenses resulting from the medical treatments of infectious diseases. Based on classical epidemiological compartment models, the first part of this paper proposes insurance policies and models to quantify the risk of infection and formulates financial arrangements, between an insurer and insureds, using actuarial methodology. For practical
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purposes, the second part employs a variety of numerical methods to calculate premiums and reserves. The last part illustrates the methods by designing insurance products for two well-known epidemics: the Great Plague in England and the SARS epidemic in Hong Kong. http://www.soa.org/news-and-publications/publications/journals/naaj/naaj-detail.aspx
Back-testing the ODP bootstrap of the paid chain-ladder model with actual historical claims data. Leong, Jessica; Wang, Shaun; Chen, Han (2012). 2012. [RKN: 43554] General Insurance Convention (2012) : 63-97.
Paper presented at [39th] annual GIRO conference, or General Insurance Convention of the UK Actuarial Professon, at Square Conference Centre, Brussels, 18-21 September 2012 http://www.actuaries.org.uk/events/paper-presentation-archives/2012
Bayesian multivariate Poisson models for insurance ratemaking. Bermudez, Lluis; Karlis, Dimitris [RKN: 40017] Shelved at: Per: IME (Oxf) Insurance: Mathematics & Economics (2011) 48 (2) : 226-236.
When actuaries face the problem of pricing an insurance contract that contains different types of coverage, such as a motor insurance or a homeowner‘s insurance policy, they usually assume that types of claim are independent. However, this assumption may not be realistic: several studies have shown that there is a positive correlation between types of claim. Here we introduce different multivariate Poisson regression models in order to relax the independence assumption, including zero-inflated models to account for excess of zeros and overdispersion. These models have been largely ignored to date, mainly because of their computational difficulties. Bayesian inference based on MCMC helps to resolve this problem (and also allows us to derive, for several quantities of interest, posterior summaries to account for uncertainty). Finally, these models are applied to an automobile insurance claims database with three different types of claim. We analyse the consequences for pure and loaded premiums when the independence assumption is relaxed by using different multivariate Poisson regression models together with their zero-inflated versions. Available via Athens: ScienceDirect http://www.openathens.net
A Bayesian non-linear model for forecasting insurance loss payments. Zhang, Yanwei; Dukic, Vanja; Guszcza, James [RKN: 43396] Journal of the Royal Statistical Society, Series A (2012) 175(2) : 637-656.
We propose a Bayesian non-linear hierarchical model that addresses some of the major challenges that non-life insurance companies face when forecasting the outstanding claim amounts for which they will ultimately be liable. This approach is distinctive in several ways. First, data from individual companies are treated as repeated measurements of various cohorts of claims, thus respecting the correlation between successive observations. Second, non-linear growth curves are used to model the loss development process in a way that is intuitively appealing and facilitates prediction and extrapolation beyond the range of the available data. Third, a hierarchical structure is employed to reflect the natural variation of major parameters between the claim cohorts, accounting for their heterogeneity. This approach enables us to carry out inference at the level of industry, company and/or accident year, based on the full posterior distribution of all quantities of interest. In addition, prior experience and expert opinion can be incorporated in the analyses through judgementally selected prior probability distributions. The ability of the Bayesian framework to carry out simultaneous inference based on the joint posterior is of great importance for insurance solvency monitoring and industry decision making.
A bumpy road for insurers?. Holliday, Linden Staple Inn Actuarial Society, - 2 pages. [RKN: 74926] Shelved at: Per: Actuary (Oxf) Per: Actuary (Lon) Shelved at: JOU The Actuary (2012) January/February : 24-25.
Telematics is transforming the way motor insurance risk is assessed and priced, but can insurers rely on the data they are receiving http://www.theactuary.com/
Capital tranching: a RAROC [Return on risk-adjusted capital] approach to assessing reinsurance cost effectiveness. Mango, Donald; Major, John; Adler, Avraham; Bunick, Claude (2012). 2012. [RKN: 43555] General Insurance Convention (2012) : 99-112.
Paper presented at [39th] annual GIRO conference, or General Insurance Convention of the UK Actuarial Professon, at Square Conference Centre, Brussels, 18-21 September 2012 http://www.actuaries.org.uk/events/paper-presentation-archives/2012
Catastrophe model blending. Calder, Alan; Couper, Andrew; Lo, Joseph (2012). 2012. [RKN: 43553] General Insurance Convention (2012) : 1-62.
Paper presented at [39th] annual GIRO conference, or General Insurance Convention of the UK Actuarial Professon, at Square Conference Centre, Brussels, 18-21 September 2012 http://www.actuaries.org.uk/events/paper-presentation-archives/2012
CEO turnover and ownership structure: evidence from the U.S. property–liability insurance industry. He, Enya; Sommer, David W - 29 pages. [RKN: 74869] Shelved at: Per: J.Risk Ins (Oxf) Shelved at: JOU Journal of Risk and Insurance (2011) 78 (3) : 673–701.
This article examines the impact of ownership structure on the relation between firm performance and chief executive officer (CEO) turnover in the U.S. property–liability insurance industry. Theoretical implications of stock versus mutual ownership structures on the performance–turnover relation are ambiguous. Our empirical results indicate that CEO turnover is less responsive to firm underwriting performance in mutual insurers compared to stock insurers. In fact, we find that while CEO turnover for stock firms is negatively related to prior performance, no such relationship is found for mutual insurers. These results hold while controlling for board structure and other relevant factors. Available via Athens: Wiley Online Library http://www.openathens.net
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Chief Executive officer incentives, monitoring, and corporate risk management : Evidence from insurance use. Adams, Mike; Lin, Chen; Zou, Hong - 32 pages. [RKN: 74865] Shelved at: Per: J.Risk Ins (Oxf) Shelved at: JOU Journal of Risk and Insurance (2011) 78 (3) : 551-582.
Corporate governance and risk management issues have received prominent publicity in recent years following several major company failures such as Bear Stearns and Lehman Brothers. While prior studies have examined this issue within the context of derivatives‘ trading, little is known regarding the linkage between corporate governance and alternative corporate risk management activities such as insurance. Using a detailed firm survey conducted by the World Bank (2004), we examine the impacts of various governance monitoring mechanisms and chief executive officer (CEO) characteristics on the corporate insurance decision. Overall, our results suggest that both monitoring mechanisms and managerial incentives induce the corporate purchase of property insurance. However, the purchase of property insurance for managerial self-interest is only prevalent in firms subject to lax monitoring, and the determinants of insurance purchases are more in line with the prediction of the economic theory in firms with strong monitoring. In addition, our study contributes a number of new insights into the determinants of corporate purchase of property insurance. Available via Athens: Wiley Online Library http://www.openathens.net
Commitment and lapse behavior in long-term insurance: a case study. Pinquet, Jean; Guillén, Montserrat; Ayuso, Mercedes - 20 pages. [RKN: 74880] Shelved at: Per: J.Risk Ins (Oxf) Shelved at: JOU Journal of Risk and Insurance (2011) 78 (4) : 983–1002.
This article presents a case study of a portfolio of individual long-term insurance contracts sold by a Spanish mutual company. We describe the risk levels, the rating structure, and the implied cross-subsidies on a portfolio of policies providing health, life, and long-term care insurance. We show evidence of reclassification risk through the history of disability spells. We also analyze the lapse behavior and seek to provide a rationale for the portfolio‘s dynamics. We discuss the lack of commitment from the policyholders (lapses) and from the mutual company (which took a run-off decision). Finally, we draw conclusions regarding the design of such contracts. Available via Athens: Wiley Online Library http://www.openathens.net
Corporate governance and efficiency: evidence from U.S. property–liability insurance industry. Huang, Li-Ying; Lai, Gene C; McNamara, Michael; Wang, Jennifer - 32 pages. [RKN: 74864] Shelved at: Per: J.Risk Ins (Oxf) Shelved at: JOU Journal of Risk and Insurance (2011) 78 (3) : 519-550.
This study examines the relation between corporate governance and the efficiency of the U.S. property–liability insurance industry during the period from 2000 to 2007. We find a significant relation between efficiency and corporate governance (board size, proportion of independent directors on the audit committee, proportion of financial experts on the audit committee, director tenure, proportion of block shareholding, average number of directorships, proportion of insiders on the board, and auditor dependence). We also find property–liability insurers have complied with the Sarbanes-Oxley Act (SOX) to a large extent. Although SOX achieved the goal of greater auditor independence and might have prevented Enron-like scandals, it had some unexpected effects. For example, insurers became less efficient when they had more independent auditors because the insurers were unable to recoup the benefits of auditor independence. Available via Athens: Wiley Online Library http://www.openathens.net
Corporate governance and issues from the insurance industry. Boubakri, Narjess - 18 pages. [RKN: 74863] Shelved at: Per: J.Risk Ins (Oxf) Shelved at: JOU Journal of Risk and Insurance (2011) 78 (3) : 501-518.
In this article, we review the literature and empirical research on the nature and consequences of corporate governance. We particularly assess the impact of corporate governance on firm performance and risk taking. While the article analyzes the general literature on corporate governance in publicly listed firms, we also discuss issues pertaining to the insurance industry. The article identifies avenues for future research. Available via Athens: Wiley Online Library http://www.openathens.net
The cost of duplicative regulation: evidence from risk retention groups. Leverty, J Tyler - 24 pages. [RKN: 73849] Shelved at: Per: J.Risk Ins (Oxf) Shelved at: JOU Journal of Risk and Insurance (2012) 79 (1) : 105-128.
A vast majority of insurers are regulated by each state in which they conduct business; however, a small subset of specialized firms, risk retention groups (RRGs), are largely exempt from most aspects of duplicative regulation no matter how many states they operate. This article analyzes the differences between RRGs and standard insurers specializing in commercial liability insurance to determine the cost of duplicative regulation. The costs associated with multi-state regulation are significantly higher than those for single-entity regulation. These high regulatory compliance costs reduce the technical efficiency of firms, deter firms from operating in additional states, and increase the price of insurance. Available via Athens: Wiley Online Library http://www.openathens.net
Development pattern and prediction error for the stochastic Bornhuetter-Ferguson claims reserving method. Saluz, Annina; Gisler, Alois; Wüthrich, Mario V - 35 pages. [RKN: 74737] Shelved at: Per: Astin Bull (Oxf) Shelved at: JOU ASTIN Bulletin (2011) 41 (2) : 279-313.
We investigate the question how the development pattern in the Bornhuetter-Ferguson method should be estimated and derive the corresponding conditional mean square error of prediction (MSEP) of the ultimate claim prediction. An estimator of this conditional MSEP in a distribution-free model was given by Mack [9], whereas in Alai et al. [2] this conditional MSEP was studied in an over-dispersed Poisson model using the chain ladder development pattern. First we consider distributional models and derive estimators (maximum likelihood) for the development pattern taking all relevant information into account. Moreover, we
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suggest new estimators of the correlation matrix of these estimators and new estimators of the conditional MSEP. Our findings supplement some of Mack‘s results. The methodology is illustrated at two numerical examples. online access via International Actuarial Association: http://www.actuaries.org/index.cfm?lang=EN&DSP=PUBLICATIONS&ACT=ASTIN BULLETIN http://www.actuaries.org/index.cfm?lang=EN&DSP=PUBLICATIONS&ACT=ASTIN BULLETIN
Do U.S. insurance firms offer the ―wrong‖ incentives to their executives?. Milidonis, Andreas; Stathopoulos, Konstantinos - 30 pages. [RKN: 74868] Shelved at: Per: J.Risk Ins (Oxf) Shelved at: JOU Journal of Risk and Insurance (2011) 78 (3) : 643–672.
We examine the relation between executive compensation and market-implied default risk for listed insurance firms from 1992 to 2007. Shareholders are expected to encourage managerial risk sharing through equity-based incentive compensation. We find that long-term incentives and other share-based plans do not affect the default risk faced by firms. However, the extensive use of stock options leads to higher future default risk for insurance firms. We argue that this is because option-based incentives induce managerial risk-taking behavior, which seeks to maximize managerial payoff through equity volatility. This could be detrimental to the interests of shareholders, especially during a financial crisis. Available via Athens: Wiley Online Library http://www.openathens.net
Does insurance help to escape the poverty trap?—a ruin theoretic approach. Kovacevic, Raimund M; Pflug, Georg Ch - 26 pages. [RKN: 74890] Shelved at: Per: J.Risk Ins (Oxf) Shelved at: JOU Journal of Risk and Insurance (2011) 78 (4) : 1003–1028.
Poverty trapping refers to the fact that poor people in developing countries cannot escape their poverty without help from outside. This is worsened by extreme events, for example, floods or hurricanes, sending people to poverty who have not been poor before. Often, insurance is seen as a way out. This article studies poverty trapping in the context of catastrophic risk and introduces a ruin-type model, combining deterministic growth with a stochastic loss model. We analyze the properties of the resulting piecewise deterministic Markov process, especially its trapping risk, and discuss for which groups of people insurance can reduce trapping probability. Available via Athens: Wiley Online Library http://www.openathens.net
Does the bootstrap model work?. Leong, Jessica Staple Inn Actuarial Society, [RKN: 74804] Shelved at: Per: Actuary (Oxf) Per: Actuary (Lon) Shelved at: JOU The Actuary (2011) December : 32-33.
Distributions created by the bootstrap method underestimate reserve risk, says Jessica Leong http://www.theactuary.com/
Earnings smoothing, executive compensation, and corporate governance : Evidence from the property-liability insurance industry. Eckles, David L; Halek, Martin; He, Enya; Sommer, David W; Zhang, Rongrong - 30 pages. [RKN: 74872] Shelved at: Per: J.Risk Ins (Oxf) Shelved at: JOU Journal of Risk and Insurance (2011) 78 (3) : 761–790.
Unlike studies that estimate managerial bias, we utilize a direct measure of managerial bias in the U.S. insurance industry to investigate the effects of executive compensation and corporate governance on firms‘ earnings management behaviors. We find managers receiving larger bonuses and stock awards tend to make reserving decisions that serve to decrease firm earnings. Moreover, we examine the monitoring effect of corporate board structures in mitigating managers‘ reserve manipulation practices. We find managers are more likely to manipulate reserves in the presence of particular board structures. Similar results are not found when we employ traditional estimated measures of managerial bias. Available via Athens: Wiley Online Library http://www.openathens.net
The effect of regulation on insurance pricing: the case of Germany. Berry-Stölzle, Thomas R; Born, Patricia - 36 pages. [RKN: 73850] Shelved at: Per: J.Risk Ins (Oxf) Shelved at: JOU Journal of Risk and Insurance (2012) 79 (1) : 129-164.
This article analyzes the impact of policy form regulation on the unit price of insurance and determinants of premium changes using the 1994 deregulation of the German property–liability market as a natural experiment. Our result show that policy form regulation did not increase prices above competitive levels. Factors influencing premium changes are significantly different for the two time periods, pre- and post-deregulation, indicating that regulation affects insurance pricing. Focusing on highly competitive lines after deregulation, we find a significant price decrease, and this decrease is offset by higher prices in the remaining other lines. Available via Athens: Wiley Online Library http://onlinelibrary.wiley.com/doi/10.1111/j.1539-6975.2010.01398.x/abstract
The efficiency of categorical discrimination in insurance markets. Rothschild, Casey G - 19 pages. [RKN: 74853] Shelved at: Per: J.Risk Ins (Oxf) Shelved at: JOU Journal of Risk and Insurance (2011) 78 (2) : 267-285.
Crocker and Snow (1986) show that banning categorization based on risk-related characteristics such as gender or race in pricing insurance policies is inefficient whenever categorization is costless. Their analysis, by contrast, suggests ambiguous welfare effects of banning costly categorization. I show that this latter conclusion is incorrect: categorical pricing bans are inefficient even when categorization is costly. Whenever the ban-imposing government can instead provide breakeven partial social insurance, it can remove its ban in such a way that the insurance market will choose to employ the categorizing technology only when doing so is Pareto improving. Available via Athens: Wiley Online Library http://www.openathens.net
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An empirical examination of stakeholder groups as monitoring sources in corporate governance . Cole, Cassandra R; He, Enya; McCullough, Kathleen A; Semykina, Anastasia; Sommer, David W - 28 pages. [RKN: 74870] Shelved at: Per: J.Risk Ins (Oxf) Shelved at: JOU Journal of Risk and Insurance (2011) 78 (3) : 703-730.
Insurers are formally and informally monitored by a variety of stakeholders, including reinsurers, agents, outside board members, and regulators. While other studies have generally examined these stakeholders separately, they have not accounted for the fact that there is some relation among the stakeholder groups, and the presence of these groups is likely to be jointly determined. By empirically controlling for these potential interrelations, we create a more complete assessment of the impact of these stakeholders/monitors on insurers‘ risk taking. Specifically, we find that the presence of some stakeholders offsets the degree or presence of others, and that most stakeholders/monitors are associated with a reduction of overall firm risk. Available via Athens: Wiley Online Library http://www.openathens.net
Equilibrium pricing of general insurance policies. Emms, Paul Society of Actuaries, - 17 pages. [RKN: 70654] Shelved at: Per: NAAJ (Oxf) Per NAAJ (Lon) Shelved at: JOU North American Actuarial Journal (2012) 16 (3) : 323-349.
A model is developed for determining the price of general insurance policies in a competitive, noncooperative market. This model extends previous single-optimizer pricing models by supposing that each participant chooses an optimal pricing strategy. Specifically, prices are determined by finding a Nash equilibrium of an N-player differential game. In the game, a demand law describes the relationship between policy sales and premium, and each insurer aims to maximize its (expected) utility of wealth at the end of the planning horizon. Two features of the model are investigated in detail: the effect of limited total demand for policies, and the uncertainty in the calculation of the breakeven (or cost price) of an insurance policy. It is found that if the demand for policies is unlimited, then the equilibrium pricing strategy is identical for all insurers, and it can be found analytically for particular model parameterizations. However, if the demand for policies is limited, then, for entrants to a new line of business, there are additional asymmetric Nash equilibria with insurers alternating between maximal and minimal selling. Consequently it is proposed that the actuarial cycle is a result of price competition, limited demand, and entry of new insurers into the market. If the breakeven premium is highly volatile, then the symmetric equilibrium premium loading tends to a constant, and it is suggested that this will dampen the oscillatory pricing of new entrants. http://www.soa.org/news-and-publications/publications/journals/naaj/naaj-detail.aspx
Facing the interest rate challenge. Swiss Reinsurance Company (2012). - Zurich: Swiss Reinsurance Company, 2012. - 44 pages. [RKN: 70565] Sigma (2012) 4
Interest rates affect all insurers, but the impact differs by line of business and also by product. Add this to the fact that interest rates can be highly volatile, and that it would be foolish to believe that interest rates can be predicted mid- to long-term with any reasonable precision. Therefore, insurers need to be prepared for all possible interest rate scenarios. Swiss Re‘s sigma 4/2012, "Facing the interest rate challenge", explores the impact of interest rates on insurers and explains why a rapid rise in or sustained low interest rates can be a challenge for the road ahead. http://www.swissre.com
The financial crisis: risk transfer, insurance layers, and (no?) reinsurance culture. Fackler, Michael (2012). 2012. [RKN: 43560] General Insurance Convention (2012) : 391-406.
Paper presented at [39th] annual GIRO conference, or General Insurance Convention of the UK Actuarial Professon, at Square Conference Centre, Brussels, 18-21 September 2012 http://www.actuaries.org.uk/events/paper-presentation-archives/2012
Flood insurance coverage in the coastal zone. Landry, Craig; Jahan-Parvar, Mohammad R - 28 pages. [RKN: 74858] Shelved at: Per: J.Risk Ins (Oxf) Shelved at: JOU Journal of Risk and Insurance (2011) 78 (2) : 361-388.
We explore determinants of flood insurance demand in the coastal zone using micro-data for nine Southeastern counties. Overall estimates indicate price inelastic demand, though subsidized policyholders have greater coverage and are more price sensitive. Mortgage borrowers exhibit no greater coverage; only 12 percent in 100-year flood zone indicate flood insurance was required by their lender. Flood insurance demand is increasing in the levels of flood and erosion risk. We find a positive correlation between household income and coverage, but the effect is not monotonic. Community-level erosion hazard mitigation projects influence flood insurance coverage, with beach replenishment acting as a complement. Available via Athens: Wiley Online Library http://www.openathens.net
Forecasting in an extended chain-ladder-type model. Kuang, Di; Nielsen, Bent; Nielsen, Jens Perch - 15 pages. [RKN: 74857] Shelved at: Per: J.Risk Ins (Oxf) Shelved at: JOU Journal of Risk and Insurance (2011) 78 (2) : 345-359.
Reserving in general insurance is often done using chain-ladder-type methods. We propose a method aimed at situations where there is a sudden change in the economic environment affecting the policies for all accident years in the reserving triangle. It is shown that methods for forecasting nonstationary time series are helpful. We illustrate the method using data published in Barnett and Zehnwirth (2000, pp. 245–321). These data illustrate features we also found in data from the general insurer RSA during the recent credit crunch. Available via Athens: Wiley Online Library http://www.openathens.net
Game theory in general insurance: how to outdo your adversaries while they are trying to outdo you. Yao, Ji; Rourke, Tim; Iwanik, Jan (2012). 2012. [RKN: 43556] General Insurance Convention (2012) : 113-187.
Paper presented at [39th] annual GIRO conference, or General Insurance Convention of the UK Actuarial Professon, at Square
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Conference Centre, Brussels, 18-21 September 2012 http://www.actuaries.org.uk/events/paper-presentation-archives/2012
GIRO Conference and Exhibition 2011: Navigating risk: are actuaries at the helm? : [38th annual General Insurance Convention papers] : BT Convention Centre, Liverpool, 11-14 September 2011. Institute and Faculty of Actuaries (2011). - London: Institute and Faculty of Actuaries, 2011. - 216 pages. [RKN: 43573] Shelved at: Strg box J33 gic (Oxf) BX (Lon) Shelved at: 368
Papers presented at [38th] annual GIRO conference, or General Insurance Convention of the UK Actuarial Professon, at BT Convention Centre, Liverpool, 11-14 September 2011 http://www.actuaries.org.uk/events/paper-presentation-archives/2011
GIRO Conference and Exhibition 2012: Juggling uncertainty: the actuary's part to play : [39th annual General Insurance Convention papers] : SQUARE Conference Centre, Brussels, 18-21 September 2012. Institute and Faculty of Actuaries (2012). - London: Institute and Faculty of Actuaries, 2012. - 457 pages. [RKN: 43552] Shelved at: Strg box J33 gic (Oxf) BX (Lon) Shelved at: 368
Papers presented at [39th] annual GIRO conference, or General Insurance Convention of the UK Actuarial Professon, at Square Conference Centre, Brussels, 18-21 September 2012 http://www.actuaries.org.uk/events/residential/giro-conference-and-exhibition-2012
Guest editorial: Sexless and beautiful data: from quantity to quality. Guillén, Montserrat Faculty of Actuaries and Institute of Actuaries; Cambridge University Press, [RKN: 43651] Shelved at: Per: AAS (Oxf) Per: AAS (Lon) Shelved at: JOU/AAS Annals of Actuarial Science (2012) 6(2) : 231-234.
http://www.actuaries.org.uk/research-and-resources/pages/access-journals
High standards. Becker, Greg Staple Inn Actuarial Society, [RKN: 40068] Shelved at: Per: Actuary (Oxf) Per: Actuary (Lon) Shelved at: SIA/ACT The Actuary (2011) January : 28-29.
Greg Becker discusses the success of the South Africal Zimele insurance standard, and asks whether there is potential for other markets to adopt similar schemes. http://www.theactuary.com/archive
The impact of CEO turnover on property–liability insurer performance. He, Enya; Sommer, David W; Xie, Xiaoying - 26 pages. [RKN: 74866] Shelved at: Per: J.Risk Ins (Oxf) Shelved at: JOU Journal of Risk and Insurance (2011) 78 (3) : 583-608.
Chief executive officer (CEO) turnover has long been an important topic in the academic literature. Previous research has focused mostly on the rationale for CEO turnovers, or circumstances that lead to CEO changes, with much less attention paid to how CEO turnovers affect future firm performance. We extend the literature regarding the impact of CEO turnover on performance using data for U.S. property-liability insurers. Measuring firm performance with cost efficiency (CE) and revenue efficiency (RE) scores, we find strong support for the hypothesis that firms with a CEO turnover, especially those with a nonroutine turnover, experience more favorable performance changes than firms without a CEO turnover. Available via Athens: Wiley Online Library http://www.openathens.net
Institutional ownership stability and risk taking: evidence from the life–health insurance industry. Cheng, Jiang; Elyasiani, Elyas; Jia, Jingyi - 33 pages. [RKN: 74867] Shelved at: Per: J.Risk Ins (Oxf) Shelved at: JOU Journal of Risk and Insurance (2011) 78 (3) : 609–641.
We investigate the relationship between risk taking of life–health (LH) insurers and stability of their institutional ownership within a simultaneous equation system model. Three main results are obtained. First, stable institutional ownership of is associated with lower total risk of LH insurers, supporting the prudent-man law hypothesis. Second, when investors are sorted in terms of stringency of the prudent-man restrictions, their negative effect on risk holds for all, except insurance companies, as owners of LH insurers. Third, large institutional owners do not raise the riskiness of the investee-firms, as proposed by the large shareholder hypothesis. Regulatory implications are drawn. Available via Athens: Wiley Online Library http://www.openathens.net
Insurance in emerging markets: growth drivers and profitability. Swiss Reinsurance Company (2011). - Zurich: Swiss Reinsurance Company, 2011. - 40 pages. [RKN: 74794] Shelved at: JOU Sigma (2011) 5
The latest Swiss Re sigma publication, "Insurance in emerging markets: growth drivers and profitability," focuses on two of the regions that have contributed the most to emerging market premium growth, Emerging Asia and Latin America. Drawing on ten years of experience of rapid insurance development in these markets, the study explores growth drivers and profitability in these two key regions, and provides an outlook on emerging markets. http://www.swissre.com
Insurance pricing, reserving, and performance evaluation under external constraints on capitalization and return on equity. Ulm, Eric R - 26 pages. [RKN: 70738] Shelved at: Per: J.Risk Ins (Oxf) Shelved at: JOU Journal of Risk and Insurance (2012) 79 (2) : 541-566.
We derive formulas for calculating the premiums that should be charged on policies in a discounted cash flow model with tax reserves and required assets that are determined by regulation. We also determine the unique division of required assets into ―reserves‖ and ―capital‖ that allows the product profitability to be correctly evaluated. That is, the profit after capital charges is zero
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if the product achieves the return assumed in pricing. We illustrate the concepts using whole life insurance and guaranteed minimum death benefit examples. Available via Athens: Wiley Online Library http://www.openathens.net
Liberalisation and market concentration impact on performance of the non-life insurance industry: the evidence from Eastern Europe. Njegomir, Vladimir; Stojic, Dragan Palgrave Macmillan, [RKN: 39982] Shelved at: Per: Geneva (Oxf) Geneva Papers on Risk and Insurance (2011) 36(1) : 94-106.
The aim of this paper is to examine market structure, conduct and performance relationship (S-C-P) hypothesis for the non-life insurance industry in Eastern European countries. Additionally, we examine the effect of liberalisation on market structure and performance. We use the country-specific fixed effects models for panel data for the period 2004–2008 allowing each cross-sectional unit to have a different intercept term serving as an unobserved random variable that is potentially correlated with the observed regressors. Three models are presented, each placing market structure, liberalisation and profitability in a distinct environment defined by related control variables. The research results support the S-C-P hypothesis in all of the observed models, showing evidence of strong influence of market structure and liberalisation on market profitability. These results could be useful in decision-making for both governments and insurance companies. Available via Athens: Palgrave MacMillan http://www.openathens.net
Log-supermodularity of weight functions, ordering weighted losses, and the loading monotonicity of weighted premiums. Sendov, Hristo S; Wang, Ying; Zitikis, Ricardas [RKN: 40020] Shelved at: Per: IME (Oxf) Insurance: Mathematics & Economics (2011) 48 (2) : 257-264.
The paper is motivated by a problem concerning the monotonicity of insurance premiums with respect to their loading parameter: the larger the parameter, the larger the insurance premium is expected to be. This property, usually called the loading monotonicity, is satisfied by premiums that appear in the literature. The increased interest in constructing new insurance premiums has raised a question as to what weight functions would produce loading-monotonic premiums. In this paper, we demonstrate a decisive role of log-supermodularity or, equivalently, of total positivity of order 2 (TP2) in answering this question. As a consequence, we establish–at a stroke–the loading monotonicity of a number of well-known insurance premiums, and offer a host of further weight functions, and consequently of premiums, thus illustrating the power of the herein suggested methodology for constructing loading-monotonic insurance premiums. Available via Athens: ScienceDirect http://www.openathens.net
Loss reserves and the employment status of the appointed actuary. Kelly, Mary; Kleffner, Anne; Li, Si Society of Actuaries, - 21 pages. [RKN: 70643] Shelved at: Per: NAAJ (Oxf) Per NAAJ (Lon) Shelved at: JOU North American Actuarial Journal (2012) 16 (3) : 285-305.
Property/casualty (P/C) insurers are required to establish loss reserves for unpaid losses at the time that the loss has occurred or is reasonably expected to have occurred. We examine factors that may impact the accurate setting of loss reserves. These include the level of rate regulation faced by the insurer and the incentives to underestimate or overestimate reserves to improve financial ratios or improve solvency scores, to reduce earnings, to defer taxes, or to smooth earnings volatility in order to meet shareholder expectations. The employment status of the Appointed Actuary, that is, whether the Appointed Actuary is an employee of the firm or a consultant, may also impact reserve accuracy. Using a variety of regression models with data from 1995 to 2010, we examine the impact of these factors on the accuracy of reserves posted by Canadian P/C insurers. Our results provide no evidence of systematic differences in the magnitude or direction of loss reserve errors between insurers that use company actuaries versus those that use consultant actuaries. However, we find that for both consultant and company actuaries positive reserve errors are associated with increases in global stock market returns and decreases in unanticipated inflation. The insurance market cycle impacts reserve errors for company actuaries and not consultant actuaries. As well, our results indicate that as the proportion of short-tailed business increases in a company, consultant actuaries are more likely to over-reserve. Similar to many previous studies using U.S. data, we do not find strong evidence regarding insurers‘ incentives to deliberately overstate or understate reserves: Loss reserves are relatively unbiased estimates of the true losses paid. Thus these findings should be welcome news to the actuarial profession in Canada and to the prudential regulator: The Appointed Actuary, regardless of employment status, provides objective and unbiased estimates of insurers‘ largest liability. http://www.soa.org/news-and-publications/publications/journals/naaj/naaj-detail.aspx
Managerial discretion and corporate governance in publicly traded firms : Evidence from the property-liability insurance industry. Miller, Steve M - 30 pages. [RKN: 74871] Shelved at: Per: J.Risk Ins (Oxf) Shelved at: JOU Journal of Risk and Insurance (2011) 78 (3) : 731-760.
We study the incremental impact of corporate governance in mitigating managerial discretion, controlling for incentive alignment of managerial ownership. We extend the managerial discretion hypothesis to predict that for firms with the same set of governance tools, those that utilize governance tools more stringently to control agency costs will command greater contracting cost advantages, leading them to specialize in business with greater managerial discretion. Using 72 publicly traded insurers from 1994 to 2006, we find evidence supporting our hypothesis. Our findings complement the finance literature that focuses on the role of financing policies in mitigating agency costs of managerial discretion. Available via Athens: Wiley Online Library http://www.openathens.net
A Meta-study of the General Insurance Reserving Issues Taskforce and Reserving Oversight Committee Research in this area between 2004 and 2009. Gibson, E R; Barlow, C; Bruce, N A; Felisky, K M; Fisher, S; Hilary, N; Hilder, Ian M; Kam, Hanna; Matthews, Peter N; Winter, R [RKN: 45281] Shelved at: Per: BAJ (Oxf) Per: BAJ (Lon) Shelved at: BRI/ACT BAJ (2011) 16 (1) : 63-80.
http://www.actuaries.org.uk/research-and-resources/pages/members-access-journals
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More equal than others. Thomas, Guy Staple Inn Actuarial Society, [RKN: 45112] Shelved at: Per: Actuary (Oxf) Per: Actuary (Lon) Shelved at: SIA/ACT The Actuary (2011) March : 30-31.
Guy Thomas argues that some gender selection increases the societal benefits of insurance. http://www.theactuary.com/archive
Mossin's theorem given random initial wealth. Hong, Soon Koo; Lew, Keun Ock; MacMinn, Richard; Brockett, Patrick - 16 pages. [RKN: 74855] Shelved at: Per: J.Risk Ins (Oxf) Shelved at: JOU Journal of Risk and Insurance (2011) 78 (2) : 309-324.
Bundled coverage of different losses and distinct perils, along with differential deductibles and policy limits, are common features of insurance contracts. We show that, through these practices, insurers can implement multidimensional screening of insurance applicants who possess hidden knowledge of their risks, and thereby reduce the externality cost of adverse selection. Competitive forces drive insurers to exploit multidimensional screening, enhancing the efficiency of insurance contracting. Moreover, multidimensional screening allows competitive insurance markets to attain pure strategy Nash equilibria over a wider range of applicant pools, resolving completely the Rothschild–Stiglitz nonexistence puzzle in markets where the perils space is sufficiently divisible. Available via Athens: Wiley Online Library http://www.openathens.net
Multidimensional screening in insurance markets with adverse selection. Crocker, Keith J; Snow, Arthur - 21 pages. [RKN: 74854] Shelved at: Per: J.Risk Ins (Oxf) Shelved at: JOU Journal of Risk and Insurance (2011) 78 (2) : 287-307.
Bundled coverage of different losses and distinct perils, along with differential deductibles and policy limits, are common features of insurance contracts. We show that, through these practices, insurers can implement multidimensional screening of insurance applicants who possess hidden knowledge of their risks, and thereby reduce the externality cost of adverse selection. Competitive forces drive insurers to exploit multidimensional screening, enhancing the efficiency of insurance contracting. Moreover, multidimensional screening allows competitive insurance markets to attain pure strategy Nash equilibria over a wider range of applicant pools, resolving completely the Rothschild–Stiglitz nonexistence puzzle in markets where the perils space is sufficiently divisible. Available via Athens: Wiley Online Library http://www.openathens.net
Multivariate analysis of premium dynamics in P&L insurance. Lazar, Dorina; Denuit, Michel M - 18 pages. [RKN: 70708] Shelved at: Per: J.Risk Ins (Oxf) Shelved at: JOU Journal of Risk and Insurance (2012) 79 (2) : 431-448.
This article studies the dynamic relationship between premiums and losses on the U.S. property–casualty insurance market, accounting for the external impacts of GDP and interest rate. Compared to the existing literature, the present work innovates in that the dynamic relationships between premiums, losses, GDP, and interest rate are studied in a cointegration framework, single-equation and vector approach, involving the long- and short-run dynamics. The results suggest a stable long-run equilibrium between premiums, losses, and general economy. On short term, the premiums adjust quickly and significantly to the long-term disequilibrium and have a strong autoregressive behavior. External factors contribute to explain the dynamics of premiums. Available via Athens: Wiley Online Library http://www.openathens.net
Optimal brokerage commissions for fair insurance: a first order approach. Hau, Arthur - 13 pages. [RKN: 74789] Shelved at: Per: Geneva (Oxf) Geneva Risk and Insurance Review (2011) 36 (2) : 189-201.
This paper studies a principal-agent insurance brokerage problem with a risk-averse principal (an insured) and a risk-neutral agent (a broker). The concept of ―mean-preserving, spread-reducing‖ (MPSR) effort is introduced to model the broker's activities. Using the first-order approach, it is shown that under some common conditions, the insured may ―concavify‖ the reward function to induce the risk-neutral agent to exert MPSR brokering effort. These conditions, together with an additional condition, guarantee the validity of the first-order approach even when the monotone likelihood ratio condition (used exclusively to justify the first-order approach) is violated.
Optimal reinsurance and investment for a jump diffusion risk process under the CEV model. Lin, Xiang; Li, Yanfang Society of Actuaries, - 15 pages. [RKN: 74827] Shelved at: Per: NAAJ (Oxf) Per NAAJ (Lon) Shelved at: JOU North American Actuarial Journal (2011) 15 (3) : 417-431.
We consider an optimal reinsurance-investment problem of an insurer whose surplus process follows a jump-diffusion model. In our model the insurer transfers part of the risk due to insurance claims via a proportional reinsurance and invests the surplus in a ‗‗simplified‘‘ financial market consisting of a risk-free asset and a risky asset. The dynamics of the risky asset are governed by a constant elasticity of variance model to incorporate conditional heteroscedasticity. The objective of the insurer is to choose an optimal reinsurance-investment strategy so as to maximize the expected exponential utility of terminal wealth. We investigate the problem using the Hamilton-Jacobi-Bellman dynamic programming approach. Explicit forms for the optimal reinsurance investment strategy and the corresponding value function are obtained. Numerical examples are provided to illustrate how the optimal investment-reinsurance policy changes when the model parameters vary. http://www.soa.org/news-and-publications/publications/journals/naaj/naaj-detail.aspx
Practical issues in the Solvency II Internal Model Approval Process (IMAP) for general insurance actuaries. Anzar, Jahan; Armstrong, James; Austin, Roger; Bartliff, Adrian; Bird, Chris; Cairns, Martin; Chan, Cherry; Chavez-Lopez, Gabriela; Dee, Andrew; Dunkerley, Gavin; Latchman, Shane; Menezes, David; Robertson-Dunn, Stephen; Strudwick, Melinda; Trong, Buu (2012). 2012. [RKN: 43557] General Insurance Convention (2012) : 189-360.
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Paper presented at [39th] annual GIRO conference, or General Insurance Convention of the UK Actuarial Professon, at Square Conference Centre, Brussels, 18-21 September 2012 http://www.actuaries.org.uk/events/paper-presentation-archives/2012
Product innovation in non-life insurance. Swiss Reinsurance Company (2012). - Zurich: Swiss Reinsurance Company, 2012. [RKN: 74793] Shelved at: JOU Sigma (2011) 4
The word ―innovation‖ means different things to different people. For some, it only refers to groundbreaking discoveries that fundamentally change the competitive landscape. Against that benchmark, many observers perceive that insurers are slow to embrace product innovation, especially when applied to non-life insurance. But according to Swiss Re‘s latest sigma publication ―Product innovation in non-life insurance,‖ innovation in non-life insurance is more common than believed, although it tends to happen incrementally and be transaction led. The report discusses the incremental nature of product innovation in traditional markets, explaining how this type of innovation builds on existing knowledge or infrastructure to secure benefits for insurers and their customers alike. In addition, the report argues that even though there are limits to how far insurers can go, there may be more scope to promote product innovation within the industry. http://www.swissre.com
Redefining the deviance objective for generalised linear models. Lovick, Anthony C; Lee, Peter K W (2011). - London: Institute and Faculty of Actuaries, 2011. - 28 pages. [RKN: 73663] Shelved at: JOU
This paper defines the 'Case deleted' deviance - a new objective function for evaluating Generalised Linear Models, and applies this to a number of practical examples in the pricing of general insurance. The paper details practical modifications to the standard Generalsed Linear Modelling Algorithm to allow the derivation of scaled parameters from this measure to reduce potential over fitting to historical data. These scaled parameters improve the predictiveness of the model when applied to previously unseen data points, the most likely being related to future business written. The potential for over fitting has increased due to number of factors now used, particularly in pricing personal lines business and the advent of price comparison sites which has increased the penalties of mis-estimation. New material in this paper has been included in a UK patent application No. 1020091.3. Presented to the Institute and Faculty of Actuaries on 28 March 2011 (London) and 6 June 2011 (Norwich). http://www.actuaries.org.uk/research-and-resources/documents/redefining-deviance-objective-generalised-linear-models
Reinsurance and capital structure: evidence from the United Kingdom non-life insurance industry. Shiu, Yung-Ming - 20 pages. [RKN: 74862] Shelved at: Per: J.Risk Ins (Oxf) Shelved at: JOU Journal of Risk and Insurance (2011) 78 (2) : 475-494.
Using a data set consisting of statutory returns of U.K. non-life insurers from 1985 to 2002, I find that insurers with higher leverage tend to purchase more reinsurance, and insurers with higher reinsurance dependence tend to have a higher level of debt. My results are consistent with the expected bankruptcy costs argument, agency costs theory, risk-bearing hypothesis, and renting capital hypothesis. I also find that the impact of leverage on reinsurance will be weaker for insurers that use more derivatives than those that use less. Moreover, high levels of derivative use increase the leverage gains attributable to reinsurance. Available via Athens: Wiley Online Library http://www.openathens.net
Reinsurance structure and shareholder value. Karim, James (2012). 2012. [RKN: 43558] General Insurance Convention (2012) : 361-383.
Paper presented at [39th] annual GIRO conference, or General Insurance Convention of the UK Actuarial Professon, at Square Conference Centre, Brussels, 18-21 September 2012 http://www.actuaries.org.uk/events/paper-presentation-archives/2012
Reserving on a contract-by-contract basis. Monk, Joe; Brink, Peter; Hudson, Kathryn; Peet, Katherine; Raw, Leith (2012). 2012. [RKN: 43559] General Insurance Convention (2012) : 385-389.
Paper presented at [39th] annual GIRO conference, or General Insurance Convention of the UK Actuarial Professon, at Square Conference Centre, Brussels, 18-21 September 2012 http://www.actuaries.org.uk/events/paper-presentation-archives/2012
Restructuring of the Dutch nonlife insurance industry: consolidation, organizational form, and focus. Bikker, Jacob A; Gorter, Janko - 22 pages. [RKN: 74849] Shelved at: Per: J.Risk Ins (Oxf) Shelved at: JOU Journal of Risk and Insurance (2011) 78 (1) : 163-184.
Since the deregulation of the European insurance market in 1994, Dutch nonlife insurance firms have sized up and increased their focus. Concurrently, the stock organizational form has become increasingly dominant. This article investigates these 1995–2005 trends from a cost-efficiency perspective. We observe substantial economies of scale that are even larger for smaller firms. In line with the efficient structure hypothesis, both stocks and mutuals are found to have comparative cost advantages. Supporting the strategic focus hypothesis, we find that more specialized insurers have lower costs. Thick frontier efficiency estimates point to large cost X-inefficiencies that have moderately decreased over time. Available via Athens: Wiley Online Library http://www.openathens.net
Ripple effect. Dodson, Antony; Rensburg, Hannes van Staple Inn Actuarial Society, [RKN: 40069] Shelved at: Per: Actuary (Oxf) Per: Actuary (Lon) Shelved at: SIA/ACT The Actuary (2011) January : 20-22.
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Antony Dodson and Hannes van Rensburg look at the spillover effect of environmental disasters on the energy insurance market. http://www.theactuary.com/archive
Risk aversion, downside risk aversion and paying for stochastic improvements. Chiu, W Henry - 27 pages. [RKN: 74940] Shelved at: Per: Geneva (Oxf) Geneva Risk and Insurance Review (2012) 37 (1) : 1-26.
This paper considers the relationship between risk preferences and the willingness to pay for stochastic improvements. We show that if the stochastic improvement satisfies a double-crossing condition, then a decision maker with utility v is willing to pay more than a decision maker with utility u, if v is both more risk averse and less downside risk averse than u. As the condition always holds in the case of self-protection, the result implies novel characterizations of individuals‘ willingness to pay to reduce the probability of loss. By establishing a general result on the correspondence between an individual's willingness to pay, and his optimal purchase of stochastic improvement when there is a given relationship between stochastic improvements and the amount paid for them, we further show that all results on the willingness to pay can be applied directly to characterize the conditions under which a more risk averse individual will optimally choose to buy more stochastic improvement. Generalizations of existing results on optimal choice of self-protection can be obtained as corollaries.
Risk management for insurers : Risk control, economic capital and Solvency II. Doff, René (2011). - 2nd ed. - London: Risk Books, 2011. - xi, 322 pages. [RKN: 45485] Shelved at: BX/BXP/BUG (Lon) Shelved at: 519.287
All over the globe insurers are facing the impact of the turmoil on the financial markets, making it more crucial than ever to fully understand how to implement risk management best practice. In this timely second edition, industry expert René Doff argues that Solvency II, which aims to improve standards of risk assessment, should be regarded as an opportunity. Solvency II will provide incentives for insurance companies to improve their risk management systems and will allow you to benefit from the risk management efforts in the context of supervision.
Risk modelling in general insurance: from principles to practice. Gray, Roger J; Pitts, Susan M (2012). - Cambridge: Cambridge University Press for the Institute of Actuaries and the Faculty of Actuaries, 2012. - xiv, 393 pages. [RKN: 45763] Shelved at: BX/UHG (Lon) Shelved at: 368.01
Knowledge of risk models and the assessment of risk is a fundamental part of the training of actuaries and all who are involved in financial, pensions and insurance mathematics. This book provides students and others with a firm foundation in a wide range of statistical and probabilistic methods for the modelling of risk, including short term risk modelling, model based pricing, risk sharing, ruin theory and credibility. Final publication following proof copy.
Running it off. Czapiewski, Colin Staple Inn Actuarial Society, [RKN: 40081] Shelved at: Per: Actuary (Oxf) Per: Actuary (Lon) Shelved at: SIA/ACT The Actuary (2011) February : 26-27.
Colin Czapiewski believes Solvency II will have a significant impact on run-off insurers, affecting their capital requirements far more than insurers that continue to write new business. http://www.theactuary.com/archive
Self-insurance and self-protection as public goods. Lohse, Tim; Robledo, Julio R; Schmidt, Ulrich - 20 pages. [RKN: 73847] Shelved at: Per: J.Risk Ins (Oxf) Shelved at: JOU Journal of Risk and Insurance (2012) 79 (1) : 57-76.
Many public goods provide utility by insuring against hazardous events. Those public goods can have self-insurance and self-protection character. For both situations we analyze the efficient public provision level and the provision level resulting from Nash behavior in a private provision game. We consider the interaction of public goods as insurance devices with market insurance. The availability of market insurance reduces the provision level of the public good for both public and private provision, regardless of whether we consider self-insurance or self-protection. Moreover, we show that Nash behavior has always a larger impact than the availability of market insurance. Available via Athens: Wiley Online Library http://www.openathens.net
A spatial econometric analysis of loss experience in the U.S. crop insurance program. Woodard, Joshua D; Schnitkey, Gary D; Sherrick, Bruce J; Lozano-Gracia, Nancy; Anselin, Luc - 26 pages. [RKN: 73854] Shelved at: Per: J.Risk Ins (Oxf) Shelved at: JOU Journal of Risk and Insurance (2012) 79 (1) : 261-286.
Patterns in loss-ratio experience in the U.S. corn insurance market are investigated with a spatial econometric model. The results demonstrate systematic geographically related misratings and provide estimates of the impacts of several observable factors on the magnitude of misrating in the program. The model is used to estimate actuarial cross-subsidizations across the primary corn-producing states and counties. The impacts of the primary factors are substantial, resulting in net premium transfers of approximately 26 percent of total premiums annually. The misratings likely have important insurance demand, welfare, and land-use implications. Available via Athens: Wiley Online Library http://www.openathens.net
State dependent unemployment benefits. Andersen, Torben M; Svarer, Michael - 20 pages. [RKN: 74856] Shelved at: Per: J.Risk Ins (Oxf) Shelved at: JOU Journal of Risk and Insurance (2011) 78 (2) : 325-344.
Optimal design of unemployment insurance is considered in a search setting where the state of nature (business cycle) affects the unemployment risk and thus the return to search. The incentive effects or distortions of individual job search arising due to the unemployment insurance scheme are crucial for optimal policies, so is the scope for risk diversification that depends critically on whether the balanced budget requirement applies to each state of nature or across states of nature. In the former case a basic budget effect tends to cause optimal benefits to be procyclical. If risk diversification across states of nature is possible, the fact that incentives are more distorted in good than bad states of nature tends to make both benefits and contribution rates countercyclical. It is shown that countercyclical benefits exacerbate employment fluctuations but increase average employment by aligning
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benefits more with states of nature where the incentive costs are small. Available via Athens: Wiley Online Library http://www.openathens.net
Statistical tools for finance and insurance. Cizek, Pavel; Hardle, Wolfgang Karl; Weron, Rafal (2011). - 2nd ed. - London: Springer, 2011. - 420 pages. [RKN: 73685] Shelved at: 519.5
Statistical Tools for Finance and Insurance presents ready-to-use solutions, theoretical developments and method construction for many practical problems in quantitative finance and insurance. Written by practitioners and leading academics in the field, this book offers a unique combination of topics from which every market analyst and risk manager will benefit. Features of the significantly enlarged and revised second edition: Offers insight into new methods and the applicability of the stochastic technologyProvides the tools, instruments and (online) algorithms for recent techniques in quantitative finance and modern treatments in insurance calculations. Covers topics such as - expected shortfall for heavy tailed and mixture distributions* - pricing of variance swaps* - volatility smile calibration in FX markets - pricing of catastrophe bonds and temperature derivatives* - building loss models and ruin probability approximation - insurance pricing with GLM* - equity linked retirement plans* (new topics in the second edition marked with*) Presents extensive examples
Tarification des risques en assurance non-vie, une approche par modèle d'apprentissage statistique. Paglia, Antoine; Phélippé-Guinvarc'h, Martial V [RKN: 43464] Shelved at: online only Bulletin Français d'Actuariat (2011) 11 (no.22) : 49-81.
Non-life actuarial researches mainly focus on improving Generalized Linear Models. Nevertheless, this type of model sets constraints on the risk structure and on the interactions between explanatory variables. Then, a bias between the real risk and the predicted risk by the model is often observed on a part of data. Nonparametric tools such as machine learning algorithms are more efficient to explain the singularity of the policyholder. Among these models, regression trees offer the benefit of both reducing the bias and improving the readability of the results of the pricing estimation. Our study introduces a modification of the Classification And Regression Tree (CART) algorithm to take into account the specificities of insurance data-sets. It compares the results produced by this algorithm to these obtained using Generalized Linear Models. These two approaches are then applied to the pricing of a vehicle insurance portfolio. http://www.institutdesactuaires.com/bfa/
A theory of the demand for underwriting. Browne, Mark J; Kamiya, Shinichi - 15 pages. [RKN: 70704] Shelved at: Per: J.Risk Ins (Oxf) Shelved at: JOU Journal of Risk and Insurance (2012) 79 (2) : 335-349.
We examine the demand for underwriting and its effect on equilibrium in an insurance market in which insureds know their risk type, but insurers do not. Our analysis indicates that a set of policies including one that requires buyers to take an underwriting test can constitute a full coverage Nash equilibrium when perfect classification is possible. We also find that underwriting equilibria, in which low risks obtain greater coverage than they would without underwriting, widely exist in a Wilsonian market with nonmyopic insurers. Our findings provide a potential explanation for why empirical evidence on adverse selection is mixed. Available via Athens: Wiley Online Library http://www.openathens.net
Triangle-free reserving. Parodi, Pietro (2012). 2012. [RKN: 43561] General Insurance Convention (2012) : 407-457.
Paper presented at [39th] annual GIRO conference, or General Insurance Convention of the UK Actuarial Professon, at Square Conference Centre, Brussels, 18-21 September 2012 http://www.actuaries.org.uk/events/paper-presentation-archives/2012
Underwater underwriters. Parodi, Pietro Staple Inn Actuarial Society, [RKN: 45111] Shelved at: Per: Actuary (Oxf) Per: Actuary (Lon) Shelved at: SIA/ACT The Actuary (2011) March : 34-36.
Pietro Parodi considers how actuaries can use different techniques in modelling insurance claims. http://www.theactuary.com/archive
Update from the Third Party Motor and the PPO Working Parties. Brown, David; MacDonnell, Sarah (2012). - London: Institute and Faculty of Actuaries, 2012. [RKN: 43526] Shelved at: Online
A key finding of the Institute and Faculty of Actuaries report is the increase in the proportion of third party accidents involving bodily injury where data shows a staggering 18% increase from 2010 to 2011. A rise in the proportion of reported accidents involving bodily injury has been a key trend for several years; however this year has seen the greatest increase ever. The Institute and Faculty of Actuaries believes that this rise is down to unprecedented activity by claims management companies. The increase in claims increased costs to insurers to the tune of approximately £400 million in 2011 The Institute and Faculty of Actuaries 3rd annual report looking at ‗third party motor and periodic payment orders (PPOs) UK claims data‘, a report which collates and analyses data from across the motor and PPO insurance industry for 2011. http://www.actuaries.org.uk/research-and-resources/documents/update-third-party-motor-and-ppo-working-parties
Valuation of catastrophe equity puts with markov-modulated poisson processes. Chang, Chia-Chien; Lin, Shih-Kuei; Yu, Min-Teh - 27 pages. [RKN: 74861] Shelved at: Per: J.Risk Ins (Oxf) Shelved at: JOU Journal of Risk and Insurance (2011) 78 (2) : 447-473.
We derive the pricing formula for catastrophe equity put options (CatEPuts) by assuming catastrophic events follow a Markov Modulated Poisson process (MMPP) whose intensity varies according to the change of the Atlantic Multidecadal Oscillation (AMO) signal. U.S. hurricanes events from 1960 to 2007 show that the CatEPuts pricing errors under the MMPP(2) are smaller than the PP by 30 percent to 66 percent. The scenario analysis indicates that the MMPP outperforms the exponential growth pattern (EG) if the hurricane intensity is the AMO signal, whereas the EG may outperform the MMPP if the future climate is
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warming rapidly. Available via Athens: Wiley Online Library http://www.openathens.net
The value of enterprise risk management. Hoyt, Robert E; Liebenberg, Andre P - 28 pages. [RKN: 74873] Shelved at: Per: J.Risk Ins (Oxf) Shelved at: JOU Journal of Risk and Insurance (2011) 78 (4) : 795–822.
Enterprise risk management (ERM) has been the topic of increased media attention in recent years. The objective of this study is to measure the extent to which specific firms have implemented ERM programs and, then, to assess the value implications of these programs. We focus our attention in this study on U.S. insurers in order to control for differences that might arise from regulatory and market differences across industries. We simultaneously model the determinants of ERM and the effect of ERM on firm value. We estimate the effect of ERM on Tobin's Q, a standard proxy for firm value. We find a positive relation between firm value and the use of ERM. The ERM premium of roughly 20 percent is statistically and economically significant. Available via Athens: Wiley Online Library http://www.openathens.net
Valuing the longevity insurance acquired by delayed claiming of social security. Sun, Wei; Webb, Anthony - 24 pages. [RKN: 74877] Shelved at: Per: J.Risk Ins (Oxf) Shelved at: JOU Journal of Risk and Insurance (2011) 78 (4) : 907–930.
Individuals can claim Social Security at any age from 62 to 70, although most claim at 62. We show that expected present value calculations substantially understate both the optimal claim age and the losses resulting from early claiming because they ignore the value of the additional longevity insurance acquired because of delay. Using numerical optimization techniques, we illustrate that the optimal claim age is between 67 and 70. We calculate that the amount by which benefits payable at suboptimal ages must be increased so that a household is indifferent between claiming at those ages and the optimal combination of ages can be as high as 19.0 percent. Available via Athens: Wiley Online Library http://www.openathens.net
World insurance in 2011: Non-life ready for take-off. Swiss Reinsurance Company (2012). - Zurich: Swiss Reinsurance Company, 2012. - 44 pages. [RKN: 73986] Sigma (2012) 3
Swiss Re‘s latest sigma study reveals that global overall premiums declined 0.8% in real terms in 2011. "Last year was not a great one for premium growth, but 2012 should be a lot better as rates continue to improve in non-life markets and India and China return to robust growth in life markets," says Kurt Karl, Swiss Re‘s Chief Economist. This sigma study is the first public assessment of the performance of global insurance markets in 2011. The 84 markets where data or estimates for 2011 are available, account for 99% of global premium volume. Overall, the report is based on 147 insurance markets. http://www.swissre.com
GENERAL INSURANCE COMPANY Detection and correction of outliers in the bivariate chain–ladder method. Verdonck, T; Van Wouwe, M [RKN: 44961] Shelved at: Per: IME (Oxf) Insurance: Mathematics & Economics (2011) 49 (2) : 188-193.
The expected profit or loss of a non-life insurance company is determined for the whole of its multiple business lines. This implies the study of the claims reserving problem for a portfolio consisting of several correlated run-off triangles. A popular technique to deal with such a portfolio is the multivariate chain–ladder method of . However, it is well known that the chain–ladder method is very sensitive to outlying data. For the univariate case, we have already developed a robust version of the chain–ladder method. In this article we propose two techniques to detect and correct outlying values in a bivariate situation. The methodologies are illustrated and compared on real examples from practice. Available via Athens: ScienceDirect http://www.openathens.net
Risk appetite for a general insurance undertaking. Orros, George; Badal, Veekash; Chacko, Francis X; Garner, Michael J; Kaye, Paul; Noel, David (2011). 2011. [RKN: 43579] General Insurance Convention (2011) : 141-216.
Paper presented at [38th] annual GIRO conference, or General Insurance Convention of the UK Actuarial Professon, at BT Convention Centre, Liverpool, 11-14 October 2011 http://www.actuaries.org.uk/events/paper-presentation-archives/2011
GENERALISED LINEAR MODELS A Bayesian non-linear model for forecasting insurance loss payments. Zhang, Yanwei; Dukic, Vanja; Guszcza, James [RKN: 43396] Journal of the Royal Statistical Society, Series A (2012) 175(2) : 637-656.
We propose a Bayesian non-linear hierarchical model that addresses some of the major challenges that non-life insurance companies face when forecasting the outstanding claim amounts for which they will ultimately be liable. This approach is distinctive in several ways. First, data from individual companies are treated as repeated measurements of various cohorts of claims, thus respecting the correlation between successive observations. Second, non-linear growth curves are used to model the
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loss development process in a way that is intuitively appealing and facilitates prediction and extrapolation beyond the range of the available data. Third, a hierarchical structure is employed to reflect the natural variation of major parameters between the claim cohorts, accounting for their heterogeneity. This approach enables us to carry out inference at the level of industry, company and/or accident year, based on the full posterior distribution of all quantities of interest. In addition, prior experience and expert opinion can be incorporated in the analyses through judgementally selected prior probability distributions. The ability of the Bayesian framework to carry out simultaneous inference based on the joint posterior is of great importance for insurance solvency monitoring and industry decision making.
Copula regression. Parsa, Rahul A; Klugman, Stuart A [RKN: 44927] Shelved at: Per: Variance Variance (2011) 5(1) : 45-54.
Regression analysis is one of the most commonly used statistical methods. But in its basic form, ordinary least squares (OLS) is not suitable for actuarial applications because the relationships are often nonlinear and the probability distribution of the dependent variable may be non-normal. One approach that has been successful in overcoming these challenges is the generalized linear model (GLM), which requires that the dependent variable have a distribution from the exponential family. In this paper, we present copula regression as an alternative to OLS and GLM. The major advantage of a copula regression is that there are no restrictions on the probability distributions that can be used. In this paper, we will present the formulas and algorithms necessary for conducting a copula regression analysis using the normal copula. However, the ideas presented here can be used with any copula function that can incorporate multiple variables with varying degrees of association. http://www.variancejournal.org/issues
GIRO Conference and Exhibition 2011: Navigating risk: are actuaries at the helm? : [38th annual General Insurance Convention papers] : BT Convention Centre, Liverpool, 11-14 September 2011. Institute and Faculty of Actuaries (2011). - London: Institute and Faculty of Actuaries, 2011. - 216 pages. [RKN: 43573] Shelved at: Strg box J33 gic (Oxf) BX (Lon) Shelved at: 368
Papers presented at [38th] annual GIRO conference, or General Insurance Convention of the UK Actuarial Professon, at BT Convention Centre, Liverpool, 11-14 September 2011 http://www.actuaries.org.uk/events/paper-presentation-archives/2011
Redefining the deviance objective for generalised linear models. Lovick, Anthony C; Lee, Peter K W (2011). - London: Institute and Faculty of Actuaries, 2011. - 28 pages. [RKN: 73663] Shelved at: JOU
This paper defines the 'Case deleted' deviance - a new objective function for evaluating Generalised Linear Models, and applies this to a number of practical examples in the pricing of general insurance. The paper details practical modifications to the standard Generalsed Linear Modelling Algorithm to allow the derivation of scaled parameters from this measure to reduce potential over fitting to historical data. These scaled parameters improve the predictiveness of the model when applied to previously unseen data points, the most likely being related to future business written. The potential for over fitting has increased due to number of factors now used, particularly in pricing personal lines business and the advent of price comparison sites which has increased the penalties of mis-estimation. New material in this paper has been included in a UK patent application No. 1020091.3. Presented to the Institute and Faculty of Actuaries on 28 March 2011 (London) and 6 June 2011 (Norwich). http://www.actuaries.org.uk/research-and-resources/documents/redefining-deviance-objective-generalised-linear-models
Redefining the deviance objective for generalised linear models. Lovick, Anthony C; Lee, Peter K W (2011). 2011. [RKN: 43578] General Insurance Convention (2011) : 109-137.
Paper presented at [38th] annual GIRO conference, or General Insurance Convention of the UK Actuarial Professon, at BT Convention Centre, Liverpool, 11-14 October 2011 http://www.actuaries.org.uk/events/paper-presentation-archives/2011
A statistical basis for claims experience monitoring. Taylor, Greg Society of Actuaries, - 18 pages. [RKN: 74921] Shelved at: Per: NAAJ (Oxf) Per NAAJ (Lon) Shelved at: JOU North American Actuarial Journal (2011) 15 (4) : 535-552.
By claims experience monitoring is meant the systematic comparison of the forecasts from a claims model with claims experience as it emerges subsequently. In the event that the stochastic properties of the forecasts are known, the comparison can be represented as a collection of probabilistic statements. This is stochastic monitoring. This paper defines this process rigorously in terms of statistical hypothesis testing. If the model is a regression model (which is the case for most stochastic claims models), then the natural form of hypothesis test is a number of likelihood ratio tests, one for each parameter in the valuation model. Such testing is shown to be very easily implemented by means of generalized linear modeling software. This tests the formal structure of the claims model and is referred to as microtesting. There may be other quantities (e.g., amount of claim payments in a defined interval) that require testing for practical reasons. This sort of testing is referred to as macrotesting, and its formulation is also discussed. http://www.soa.org/news-and-publications/publications/journals/naaj/naaj-detail.aspx
Tarification des risques en assurance non-vie, une approche par modèle d'apprentissage statistique. Paglia, Antoine; Phélippé-Guinvarc'h, Martial V [RKN: 43464] Shelved at: online only Bulletin Français d'Actuariat (2011) 11 (no.22) : 49-81.
Non-life actuarial researches mainly focus on improving Generalized Linear Models. Nevertheless, this type of model sets constraints on the risk structure and on the interactions between explanatory variables. Then, a bias between the real risk and the predicted risk by the model is often observed on a part of data. Nonparametric tools such as machine learning algorithms are more efficient to explain the singularity of the policyholder. Among these models, regression trees offer the benefit of both reducing the bias and improving the readability of the results of the pricing estimation. Our study introduces a modification of the Classification And Regression Tree (CART) algorithm to take into account the specificities of insurance data-sets. It compares the results produced by this algorithm to these obtained using Generalized Linear Models. These two approaches are then applied to the pricing of a vehicle insurance portfolio. http://www.institutdesactuaires.com/bfa/
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GERMANY The effect of regulation on insurance pricing: the case of Germany. Berry-Stölzle, Thomas R; Born, Patricia - 36 pages. [RKN: 73850] Shelved at: Per: J.Risk Ins (Oxf) Shelved at: JOU Journal of Risk and Insurance (2012) 79 (1) : 129-164.
This article analyzes the impact of policy form regulation on the unit price of insurance and determinants of premium changes using the 1994 deregulation of the German property–liability market as a natural experiment. Our result show that policy form regulation did not increase prices above competitive levels. Factors influencing premium changes are significantly different for the two time periods, pre- and post-deregulation, indicating that regulation affects insurance pricing. Focusing on highly competitive lines after deregulation, we find a significant price decrease, and this decrease is offset by higher prices in the remaining other lines. Available via Athens: Wiley Online Library http://onlinelibrary.wiley.com/doi/10.1111/j.1539-6975.2010.01398.x/abstract
Implementation of enterprise risk management: evidence from the German property-liability insurance industry. Altuntas, Muhammed; Berry-Stölzle, Thomas R; Hoyt, Robert E Palgrave Macmillan, [RKN: 44916] Shelved at: Per: Geneva (Oxf) Geneva Papers on Risk and Insurance (2011) 36(3) : 414-439.
Implementing a properly functioning enterprise risk management (ERM) programme has become increasingly important for insurance companies. Unlike traditional risk management where individual risks are managed in separate silos, ERM is based on the concept of managing all relevant risks in an integrated, holistic fashion. ERM has also been growing in importance as a result of increased attention on risk management in the context of corporate governance. A recent report by The Geneva Association identified strengthening ―risk management practices‖ as one of three key measures that ―aim to strengthen financial stability‖. Despite the heightened interest in ERM by insurance managers and actuaries, there is only limited empirical evidence on how insurance companies actually implement the ERM approach. The goal of our research is to examine the implementation of the ERM components by insurers. Therefore, we surveyed all German property-liability insurance companies with premiums written in excess of 40 million euros. There are 113 such insurers and 95 of them participated in our survey, leading to a response rate of 84 per cent. The questionnaire covers a comprehensive set of dimensions of an ERM system. In addition to detailed questions about specific ERM activities, the questionnaire assesses when these ERM activities were initiated. The results document significant increases in the extent to which ERM is being implemented by these firms and details the sequence of implementation of this evolving risk management process. Available via Athens: Palgrave MacMillan http://www.openathens.net
Management strategies in multi-year enterprise risk management. Diers, Dorothea Palgrave Macmillan, [RKN: 39983] Shelved at: Per: Geneva (Oxf) Geneva Papers on Risk and Insurance (2011) 36(1) : 107-125.
In enterprise risk management, strategies should be evaluated and managed from a multi-year view. In this paper, we present a multi-year model approach and apply a multi-year risk-capital concept to enable the company's ―Own Risk and Solvency Assessment‖ as a part of enterprise risk management on a multi-year basis. We show under which assumptions an allocation method gives the ―right‖ strategic incentives. We illustrate the usefulness of the concept for managerial decision support using data from a German non-life insurer. Available via Athens: Palgrave MacMillan http://www.openathens.net
GHANA Crop price indemnified loans for farmers: a pilot experiment in rural Ghana. Karlan, Dean; Kutsoati, Ed; McMillan, Margaret; Udry, Chris - 19 pages. [RKN: 74844] Shelved at: Per: J.Risk Ins (Oxf) Shelved at: JOU Journal of Risk and Insurance (2011) 78 (1) : 37-55.
Farmers face a particular set of risks that complicate the decision to borrow. We use a randomized experiment to investigate (1) the role of crop-price risk in reducing demand for credit among farmers and (2) how risk mitigation changes farmers‘ investment decisions. In Ghana, we offer farmers loans with an indemnity component that forgives 50 percent of the loan if crop prices drop below a threshold price. A control group is offered a standard loan product at the same interest rate. Loan uptake is high among all farmers and the indemnity component has little impact on uptake or other outcomes of interest. Available via Athens: Wiley Online Library http://www.openathens.net
Participation in micro life insurance and the use of other financial services in Ghana. Giesbert, Lena; Steiner, Susan; Bendig, Mirko - 29 pages. [RKN: 74843] Shelved at: Per: J.Risk Ins (Oxf) Shelved at: JOU Journal of Risk and Insurance (2011) 78 (1) : 7-35.
This article investigates households‘ decisions to take up micro life insurance and to use other financial services. It estimates a multivariate probit model based on Ghanaian household survey data. The results suggest a mutually reinforcing relationship between the use of insurance and the use of other formal financial services. Risk-averse households and households who
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consider themselves more exposed to risk than others are found to be less likely to participate in insurance. This suggests that insurance is considered to be risky. There is indicative evidence for adverse selection and a life-cycle effect in the uptake of insurance. Available via Athens: Wiley Online Library http://www.openathens.net
GLOBALISATION Editorial: Rules of engagement: global regulatory reforms and the insurance industry. Liedtke, Patrick M Palgrave Macmillan, [RKN: 44912] Shelved at: Per: Geneva (Oxf) Geneva Papers on Risk and Insurance (2011) 36(3) : 325-329.
Available via Athens: Palgrave MacMillan http://www.openathens.net
Globalisation and convergence of international life insurance markets. Lee, Chien-Chiang; Chang, Chi-Hung Palgrave Macmillan, [RKN: 45544] Shelved at: Per: Geneva (Oxf) Geneva Papers on Risk and Insurance (2012) 37(1) : 125-154.
Using panel data of 39 countries over the period 1979–2007, this paper is the first to empirically examine the influence of the KOF index of globalisation (overall and its three main sub-indices) on the development and convergence of international life insurance markets by a panel cointegration technique. We find that globalisation has a significant impact on the development of international life insurance markets and on reducing the deviation between individual countries‘ life insurance penetration and the world average. Economic and social dimensions exert a similar effect as well, and the effect of economic globalisation is higher, while the effect of political dimension is not significant. In addition, social globalisation plays a dominant role on the interactive influence of different dimensions of globalisation, implying that socio-cultural factors are a latent factor behind economic or political influence. Finally, most countries‘ structural breaks coincide with the fast growth wave of international life insurance markets. Available via Athens: Palgrave MacMillan http://www.openathens.net
Insurance regulation: reflections for a post-crisis world. Monkiewicz, Jan; Kwon, W Jean; Liedtke, Patrick M; Kessler, Denis (2011). - Geneva: Geneva Association, 2011. - 44 pages. [RKN: 43489] Shelved at: BU/49 pam (Lon)
Dated January 2012 http://www.genevaassociation.org/PDF/BookandMonographs/GA2012-Insurance Regulation—Reflections for a Post-Crisis World.pdf
GOVERNANCE Governance and shareholder response to chief risk officer appointments. Gupta, Manu; Prakash, Puneet; Rangan, Nanda Palgrave Macmillan, [RKN: 45543] Shelved at: Per: Geneva (Oxf) Geneva Papers on Risk and Insurance (2012) 37(1) : 108-124.
This study examines the recent, significant growth in the appointments of Chief Risk Officers (CROs), the role of a CRO, and whether such appointments benefit shareholders. We find that the market is more likely to react positively to a CRO appointment for a firm with weak corporate governance. In particular, the lower the proportion of outside directors the greater is the likelihood of a positive market reaction to CRO appointments, suggesting that CRO appointments are associated with better future governance by firms‘ shareholders. Finally, firms with higher tax and product risk also experience increases in stock prices when they appoint CROs. Available via Athens: Palgrave MacMillan http://www.openathens.net
Information embedded in directors and officers insurance purchases. Gupta, Manu; Prakash, Puneet [RKN: 43632] Shelved at: Per: Geneva Geneva Papers on Risk and Insurance (2012) 37(3) : 429-451.
We examine corporate purchases of Directors and Officers (D&O) liability insurance and find that in addition to governance quality it contains managers‘ private information. In particular, we find that insider control in excess of insider share holdings is jointly associated with lower D&O coverage limits and higher firm performance. The result holds when deductibles, corporate governance characteristics and litigation risk factors are controlled for. Our finding is consistent with an asymmetric information hypothesis in financial markets which posits that managers possess private information about firm risk. Our findings differ from existing literature that shows that D&O insurance purchases primarily reflect firm's governance quality and litigation risk. The evidence supports the policy prescription advanced in earlier studies which call for mandatory public disclosure of D&O insurance purchases since it contains additional information for the market. Available via Athens: Palgrave MacMillan http://www.openathens.net
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GRADUATION A local likelihood approach to univariate graduation of mortality. Tomas, Julien [RKN: 43466] Shelved at: online only Bulletin Français d'Actuariat (2011) 11 (no.22) : 105-153.
The present article extends the theory of graduation by non-parametric methods to include situations where the response variable is not assumed to be approximatively Gaussian. We investigate the extension of the non-parametric regression technique of local polynomials to localized generalized linear models and local likelihood contexts. Local likelihood is introduced as a method of smoothing by local polynomials in non-Gaussian regression models. Two examples will be used. The applications cover the graduation of both the probability of death, and the force of mortality over the entire age range. We provide an unified method for constructing pointwise confidence intervals. Graphical tests are used to compare the graduated series obtained by local likelihood with those obtained by the Whittaker-Henderson model. http://www.institutdesactuaires.com/bfa/
GREECE Pricing in a competitive insurance market driven by fractional noise. Zimbidis, Alexandros A [RKN: 44925] Shelved at: Per: Variance Variance (2011) 5(1) : 55-67.
Motivated by the empirical evidence of the long-range dependency found within the Greek motor insurance market, we formulate a particular stochastic pricing model in a continuous framework. We assume the structure of a competitive insurance market where the business volume of each company is directly related to the existing relativity between the company‘s premium and the market‘s average premium. Using a simple demand function and modeling the movements of the market via a fractional Brownian motion, we derive the optimal premium control strategy. Finally, we support the importance of the specific approach by a short application. It is shown that the optimal premium strategy is considerably different under the absence or existence of the long-range dependency. http://www.variancejournal.org/issues
Proposal for a national earthquake insurance programme for Greece. Petseti, Aglaia; Nektarios, Milton Palgrave Macmillan, [RKN: 45665] Shelved at: Per: Geneva Geneva Papers on Risk and Insurance (2012) 37(2) : 377-400.
It is proposed that Greece undertakes the establishment of a national earthquake insurance programme for homeowners that will replace the ex post disaster relief by the State when an earthquake occurs. Greece is seismically the most active region in the whole Mediterranean. By employing four different catastrophe models, it has been estimated that the economic loss to the residential stock of a 1-in-200 year event is likely to be greater than 22 billion euros; for a 1-in-100 year event is about 14 billion euros; for an 1-in-25 year event is 5 billion euros; and for a 1-in-5 year event is 1.3 billion euros. This potential loss severity exposes the inherent limitations of the ex post funding approach to natural disasters adopted by successive Greek governments and underscores the urgent need for establishing a National Earthquake Insurance Programme. It is proposed that the earthquake coverage should be compulsory and the management of the insurance programme be based on the principle of a public–private partnership. The objective of the programme would be to provide affordable earthquake insurance, up to a maximum amount, to all homeowners, on the basis of risk-based premiums. A comprehensive and unique data bank of the residential stock in the country has been developed, which will be very useful to the local insurance industry as well as to reinsurers. Available via Athens: Palgrave MacMillan http://www.openathens.net
GUARANTEES A semi-Markov multiple state model for reverse mortgage terminations. Ji, Min; Hardy, Mary R; Li, Johnny Siu-Hang Faculty of Actuaries and Institute of Actuaries; Cambridge University Press, [RKN: 43652] Shelved at: Per: AAS (Lon) Shelved at: JOU/AAS Annals of Actuarial Science (2012) 6(2) : 235-257.
Reverse mortgages provide a mechanism for seniors to release the equity that has been built up in their home. At termination, the mortgagors are usually guaranteed to owe no more than the value of their property. The value of the reverse mortgage guarantee is heavily dependent on the maturity or termination date, which is uncertain. In this paper, we model reverse mortgage terminations using a semi-Markov multiple state model which incorporates three different modes of exit: death, entrance into a long-term care facility, and voluntary prepayment. We apply the proposed model specifically to develop the valuation formulas for roll-up mortgages in the UK and Home Equity Conversion Mortgages (HECMs) in the USA. We examine the significance of each mode of termination by valuing the contracts allowing progressively for each mode. On the basis of our model and assumptions, we find that both health related terminations and voluntary (non-health related) terminations significantly impact the contract value. In addition we analyze the premium structure for US reverse mortgage insurance, and demonstrate that premiums appear to be too high for some borrowers, and substantial cross-subsidies may result. http://www.actuaries.org.uk/research-and-resources/pages/access-journals
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HEALTH INSURANCE Claims-made and reported policies and insurer profitability in medical malpractice. Born, Patricia; Boyer, M Martin - 24 pages. [RKN: 74848] Shelved at: Per: J.Risk Ins (Oxf) Shelved at: JOU Journal of Risk and Insurance (2011) 78 (1) : 139-162.
The liability crisis of the 1970s led to the introduction of a new type of insurance policy designed to reduce the undiversifiable uncertainty associated with writing long-tail liability lines. These new claims-made and reported policies gained favor in place of the traditional occurrence coverage in the early 1980s not only in medical malpractice but also in the general liability arena. The main question we want to address in this article is why two types of contracts that cover the same risk exposure exist in the medical malpractice insurance industry whereas only one exists primarily in other insurance lines. Available via Athens: Wiley Online Library http://www.openathens.net
Disability risk management and post-injury employment of workers with back pain. Johnson, William G; Butler, Richard J; Baldwin, Marjorie L; Côté, Pierre - 21 pages. [RKN: 73820] Shelved at: JOU Risk Management and Insurance Review (2012) 15 (1) : 35-55.
We analyze the outcomes of occupational back pain among four large employers that use one or more of the following disability management practices: aggressive return to work, claims management, medical management, or time-limited job accommodations. Outcomes measured at 6 and 12 months postonset include: duration of initial work absence and the probability of returning to stable employment. Employment outcomes are better in firms with more proactive return-to-work policies than in firms with more restrictive policies. We devise a statistical test for attrition bias and conclude that sample attrition does not significantly alter our results. Available via Athens: Wiley Online Library http://www.openathens.net
The interplay between insurers’ financial and asset risks during the crisis of 2007-2009. Baranoff, Etti G; Sager, Thomas W Palgrave Macmillan, [RKN: 44914] Shelved at: Per: Geneva (Oxf) Geneva Papers on Risk and Insurance (2011) 36(3) : 348-379.
In this study we compare the interplay between capital and asset risks before and during the 2007–2009 financial crisis for the U.S. life and health insurance industries partitioned into segments by product specialisation, size and governance. The results show substantial intra-industry variation in the partial elasticity of capital with respect to asset risk, as well as significant impact of the crisis. Segment variation was driven by product focus. Most notable is the greater impact of the crisis on the U.S. insurers specialising in annuities (least risky product) than on specialists in health lines (riskiest product). During the crisis, the elasticity between asset risk and capital declined for all segments indicating that insurers‘ operation may have shifted from offsetting risk to seeking risk. Available via Athens: Palgrave MacMillan http://www.openathens.net
HEDGING Climate change, weather insurance design and hedging effectiveness. Kapphan, Ines; Calanca, Pierluigi; Holzkaemper, Annelie Palgrave Macmillan, [RKN: 45661] Shelved at: Per: Geneva Geneva Papers on Risk and Insurance (2012) 37(2) : 286-317.
Insurers have relied on historical data to design weather insurance contracts. In light of climate change, we examine the effects of this practice on the hedging effectiveness and profitability of insurance contracts. Using synthetic crop and weather data for today's and future climatic conditions we derive adjusted weather insurance contracts that account for shifts in the distribution of weather and yields. In our scenario, hedging benefits from adjusted contracts almost triple and expected profits increase by about 240 per cent. We further investigate the effect on risk reduction (for the insured) and profits (for the insurer) from hedging future weather risk with non-adjusted contracts based on historical data. In this case, insurers generate profits that are significantly smaller than for adjusted contracts, or even face substantial losses. Moreover, non-adjusted contracts that create higher profits than the adjusted counterparts cause negative hedging benefits for the insured. Available via Athens: Palgrave MacMillan http://www.openathens.net
(S,s)-adjustment strategies and hedging under Markovian dynamics. Agliardi, Elettra; Andergassen, Rainer - 20 pages. [RKN: 74786] Shelved at: Per: Geneva (Oxf) Geneva Risk and Insurance Review (2011) 36 (2) : 112-131.
We study the destabilizing effect of hedging strategies under Markovian dynamics with transaction costs. Once transaction costs are taken into account, continuous portfolio rehedging is no longer an optimal strategy. Using a non-optimizing (local in time) strategy for portfolio rebalancing, explicit dynamics for the price of the underlying asset are derived, focusing in particular on excess volatility and feedback effects of these portfolio insurance strategies. Moreover, it is shown how these latter depend on the heterogeneity of the insured payoffs. Finally, conditions are derived under which it may be still reasonable, from a practical viewpoint, to implement Black–Scholes strategies.
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Weather risk hedging in the European markets and international investment diversification. Yang, Charles C; Li, Linda Shihong; Wen, Min-Ming [RKN: 45276] Shelved at: Per: Geneva (Oxf) Geneva Risk and Insurance Review (2011) 36 (1) : 74-94.
This article analyses weather risk hedging efficiency in three European countries using weather derivatives traded at Chicago Mercantile Exchange (CME) and explores the potential of weather derivatives as a new investment asset to further diversify investors‘ portfolios. The results document that the CME European weather contracts are generally effective in hedging the temperature risk in the three European countries. However, for a specific country, weather risk hedging using other countries‘ weather indexes is generally not effective. Zero or little correlation among international weather indexes and stock market indexes indicates that weather derivatives should be an efficient investment diversifier. This research provides important insights to both weather risk hedgers and investors.
HISTORY Editorial : Moving insurance. Liedtke, Patrick M Palgrave Macmillan, [RKN: 45538] Shelved at: Per: Geneva (Oxf) Geneva Papers on Risk and Insurance (2012) 37(1) : 1-4.
Available via Athens: Palgrave MacMillan http://www.openathens.net
HOUSING MARKET Securitisation and tranching longevity and house price risk for reverse mortgage products. Yang, Sharon S Palgrave Macmillan, [RKN: 44908] Shelved at: Per: Geneva (Oxf) Geneva Papers on Risk and Insurance (2011) 36(4) : 648-674.
Reverse mortgage (RM) products are growing increasingly popular in many developed countries. This article designs a tranching security to deal with longevity and house price risks for RM products. The securitisation structure for RM products, the collateralised reverse mortgage obligation (CRMO), is similar to that for the collateralised debt obligation (CDO). However, unlike the CDO, the CRMO takes into account the dynamics of future mortality rates and house price returns instead of the default rate. To capture longevity risk for RM borrowers, this study employs the CBD model to project future mortality rates, as well as compares these results with those from the Lee-Carter model and static mortality table. The house price return dynamics is modelled using an ARMA-GARCH process. The calculation of fair spreads of CRMO in different tranches is illustrated under the risk-neutral valuation framework. On the basis of mortality experience and the programme of Home Equity Conversion Mortgage in the United States, this research demonstrates the problems of using static mortality tables and models risk for pricing fair spreads for CRMO numerically. Available via Athens: Palgrave MacMillan -- This article and others in Geneva Papers on Risk and Insurance: Issues and Practice 36(4) form part of special issue on Longevity http://www.openathens.net
Securitisation of crossover risk in reverse mortgages. Huang, Hong-Chih; Wang, Chou-Wen; Miao, Yuan-Chi Palgrave Macmillan, [RKN: 44907] Shelved at: Per: Geneva (Oxf) Geneva Papers on Risk and Insurance (2011) 36(4) : 622-647.
When the outstanding balance exceeds the housing value before the loan is settled, the insurer suffers an exposure to crossover risk induced by three risk factors: interest rates, house prices and mortality rates. With consideration of housing price risk, interest rate risk and longevity risk, we provide a three-dimensional lattice method that simultaneously captures the evolution of housing prices and short-term interest rates to calculate the fair valuation of reverse mortgages numerically. For a reverse mortgage insurer, the premium structure of reverse mortgage insurance is determined by setting the present value of the total expected claim losses equal to the present value of the premium charges. However, when the actual loss is higher than the expected loss, the insurer will incur an unexpected loss. To offset the potential loss, we also design two types of crossover bonds to transfer the unexpected loss to bond investors. Therefore, through the crossover bonds, reverse mortgage insurers can partially transfer crossover risk onto bond holders. Available via Athens: Palgrave MacMillan -- This article and others in Geneva Papers on Risk and Insurance: Issues and Practice 36(4) form part of special issue on Longevity http://www.openathens.net
HURRICANES New Orleans business recovery in the aftermath of Hurricane Katrina. LeSage, James P; Pace, R Kelley; Campanella, Richard; Liu, Xingjian [RKN: 43374] Journal of the Royal Statistical Society, Series A (2011) 174(4) : 1000-1027.
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HYPERBOLIC TRANSFORM Iterative adjustment of survival functions by composed probability distortion. Bienvenue, Alexis; Rullière, Didier - 24 pages. [RKN: 70261] Shelved at: Per: Geneva (Oxf) Geneva Risk and Insurance Review (2012) 37 (2) : 156-179.
We introduce a parametric class of composite probability distortions that can be combined to converge to a target survival function. These distortions respect analytic invertibility and stability, which are shown to be relevant in many actuarial fields. We study the asymptotic impact of such distortions on hazard rates. The paper provides an estimation methodology, including hints for initialisation. Some applications to survival data bring results for catastrophic event impact modelling. We also obtain accurate parametric representations of the mortality trend over years. Finally, we suggest a prospective mortality simulation model that comes naturally from the above analysis.
IMMUNISATION Using reverse mortgages to hedge longevity and financial risks for life insurers: a generalised immunisation approach. Wang, Jennifer L; Hsieh, Ming-Hua; Chiu, Yu-Fen Palgrave Macmillan, [RKN: 44910] Shelved at: Per: Geneva (Oxf) Geneva Papers on Risk and Insurance (2011) 36(4) : 697-717.
The launch of new innovative longevity-linked products, such as reverse mortgages, increases the complexity and challenges faced by insurers in implementing an asset-liability management strategy. With the house price dynamic and a large final payment received at the end of the policy year, a reverse mortgage provides a different liability duration pattern from an annuity. In this paper, we propose a generalised immunisation approach to obtain an optimal product portfolio for hedging the longevity and financial risks of life insurance companies. The proposed approach does not rely on specific assumptions regarding mortality models or interest rate models. As long as the scenarios generated by the adopted models are highly correlated, the proposed approach should be effective. By using stochastic mortality and interest rate models and the Monte Carlo simulation approach, we show that the proposed generalised immunisation approach can serve as an effective vehicle to control the aggregate risk of life insurance companies. The numerical results further demonstrate that adding the reverse mortgage to the insurers‘ product portfolio creates a better hedging effect and effectively reduces the total risk associated with the surplus of the life insurers. Available via Athens: Palgrave MacMillan -- This article and others in Geneva Papers on Risk and Insurance: Issues and Practice 36(4) form part of special issue on Longevity http://www.openathens.net
INDEXED ANNUITIES Index clause: analytical properties and the capitalization strategy. Zimmerman, Pavel [RKN: 44844] Shelved at: online only European Actuarial Journal (2012) 2(1) July : 149-160.
In non-life insurance, some bodily liability losses (e.g. loss of income) are paid out as annuity until specified age or death of victim. In case of excess of loss reinsurance, reinsurers often do not accept the inflation risk embedded in such losses and therefore include in the reinsurance treaty so called index clause which increases the priority by the impact of the inflation on the loss. A formula to calculate the expected reinsurance recoveries and its limiting behavior in case of presence of the index clause is derived and illustrated. A capitalization strategy which minimizes the insurer‘s loss is derived. Available online via Athens -- Published online, July 2012 http://www.openathens.net
INFORMATION Insurance pricing with complete information, state-dependent utility, and production costs. Ramsay, Colin M; Oguledo, Victor I [RKN: 45649] Shelved at: Online Only Shelved at: Online Only Insurance: Mathematics & Economics (2012) 50 (3) : 462-469.
We consider a group of identical risk-neutral insurers selling single-period indemnity insurance policies. The insurance market consists of individuals with common state-dependent utility function who are identical except for their known accident probability q. Insurers incur production costs (commonly called expenses or transaction costs by actuaries) that are proportional to the amount of insurance purchased and to the premium charged. By introducing the concept of insurance desirability, we prove that the existence of insurer expenses generates a pair of constants qmin and qmax that naturally partitions the applicant pool into three mutually exclusive and exhaustive groups of individuals: those individuals with accident probability q [0,qmin) are insurable but do not desire insurance, those individuals with accident probability q [qmin,qmax] are insurable and desire insurance, and those individuals with accident probability q (qmax,1] desire insurance but are uninsurable. We also prove that, depending on the level of q and the marginal rate of substitution between states, it may be optimal for individuals to buy complete (full) insurance, partial insurance, or no insurance at all. Finally, we prove that when q is known in monopolistic markets (i.e., markets with a single insurer), applicants may be induced to ―over insure‖ whenever partial insurance is bought.
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Available via Athens: ScienceDirect http://www.openathens.net/
INSOLVENCY Empirical evidence on the value of group-level financial information in insurer solvency surveillance. Pottier, Steven W; Sommer, David W - 16 pages. [RKN: 74770] Shelved at: JOU Risk Management and Insurance Review (2011) 14 (1) : 73-88.
The existing empirical research on insurer insolvency relies almost exclusively upon individual insurance company financial data, even though the insurance industry is dominated by group-affiliated firms. This is the first study to evaluate the benefit of using group-level data to predict insurer insolvencies for group-affiliated insurers. The study uses financial ratios from the NAIC FAST scoring system, measured at both the company level and group level, as potential predictor variables. The results indicate that group-level financial information substantially improves the predictive power of an insolvency prediction model relative to a model that uses only the analogous company-level variables. In fact, the group-level variables are found to often be substantially more powerful than company-level variables in predicting individual insurer insolvencies. These results suggest that future insolvency analysis should, whenever feasible, include group-level information to obtain higher predictive accuracy. Available via Athens: Wiley Online Library http://www.openathens.net
INSURANCE Abstract of the discussion A Meta-study of the general insurance reserving issues taskforce and reserving oversight committee research in this area between 2004 and 2009. [RKN: 45282] Shelved at: Per: BAJ (Oxf) Per: BAJ (Lon) Shelved at: BRI/ACT BAJ (2011) 16 (1) : 81-104.
http://www.actuaries.org.uk/research-and-resources/pages/members-access-journals
Aspects actuariels de la micro-assurance. Vivier, Eric [RKN: 43470] Shelved at: online only Bulletin Français d'Actuariat (2012) 12 (no.23) : 151-159.
Micro-insurance (insurance for low income people) with its scarcity of reliable data and feeble risk carriers requires an adjustment of actuarial practices. Furthermore it is the whole insurance process which has to be considered with entirely new concepts in order to bring the security needed for economic development. In the future there will be actuaries born in those societies concerned by microinsurance who will establish the foundations of such an actuarial science; in the meantime it is necessary to adjust the traditional actuarial tools to this new frame. Paper in French http://www.institutdesactuaires.com/bfa/
Catastrophes and Insurance Stocks – A Benchmarking Approach for Measuring Efficiency. West, Jason Faculty of Actuaries and Institute of Actuaries; Cambridge University Press, [RKN: 45563] Shelved at: Per: AAS (Oxf) Per: AAS (Lon) Annals of Actuarial Science (2012) 6(1) : 103-136.
This study uses the numeraire portfolio to benchmark insurance stock returns as a natural measure for detecting abnormal insurance stock returns from catastrophic events. The assumptions underlying the efficient markets hypothesis using a numeraire denominated returns approach hold for catastrophic insurance events whereas other more traditional methods such as the market model and Fama-French three factor model often fail, typically due to the accumulation of estimation errors. We construct a portfolio of Australian insurance firms and observe the market reaction to major insured catastrophic events. Using the numeraire denominated returns approach we observe no particular trend in the cumulative abnormal returns of insurance securities following a catastrophic event. Using both the traditional market model and the Fama-French three factor model however, we observe significantly positive cumulative abnormal returns following an insured catastrophic event. The errors inherent in the market model and three factor model for event studies are shown to be eliminated using the numeraire denominated returns approach. Available via Athens: Cambridge Journals http://www.actuaries.org.uk/research-and-resources/pages/access-journals
Cheap at half the price?. Maclaren, Andrew Staple Inn Actuarial Society, [RKN: 45162] Shelved at: Per: Actuary (Oxf) Per: Actuary (Lon) Shelved at: SIA/ACT The Actuary (2011) April : 29.
Andrew Maclaren looks at the float-based valuations of some insurance companies http://www.theactuary.com/archive
A credibility method for profitable cross-selling of insurance products. Thuring, Fredrik Faculty of Actuaries and Institute of Actuaries; Cambridge University Press, [RKN: 45561] Shelved at: Per: AAS (Oxf) Per: AAS (Lon) Annals of Actuarial Science (2012) 6(1) : 65-75.
A method is presented for identifying an expected profitable set of customers, to offer them an additional insurance product, by
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estimating a customer specific latent risk profile, for the additional product, by using the customer specific available data for an existing insurance product of the specific customer. For the purpose, a multivariate credibility estimator is considered and we investigate the effect of assuming that one (of two) insurance products is inactive (without available claims information) when estimating the latent risk profile. Instead, available customer specific claims information from the active existing insurance product is used to estimate the risk profile and thereafter assess whether or not to include a specific customer in an expected profitable set of customers. The method is tested using a large real data set from a Danish insurance company and it is shown that sets of customers, with up to 36% less claims than a priori expected, are produced as a result of the method. It is therefore argued that the proposed method could be considered, by an insurance company, when cross-selling insurance products to existing customers. Available via Athens: Cambridge Journals http://www.actuaries.org.uk/research-and-resources/pages/access-journals
Dependence modeling in non-life insurance using the Bernstein copula. Diers, Dorothea; Eling, Martin; Marek, Sebastian D [RKN: 45646] Shelved at: Online Only Shelved at: Online Only Insurance: Mathematics & Economics (2012) 50 (3) : 430-436.
This paper illustrates the modeling of dependence structures of non-life insurance risks using the Bernstein copula. We conduct a goodness-of-fit analysis and compare the Bernstein copula with other widely used copulas. Then, we illustrate the use of the Bernstein copula in a value-at-risk and tail-value-at-risk simulation study. For both analyses we utilize German claims data on storm, flood, and water damage insurance for calibration. Our results highlight the advantages of the Bernstein copula, including its flexibility in mapping inhomogeneous dependence structures and its easy use in a simulation context due to its representation as mixture of independent Beta densities. Practitioners and regulators working toward appropriate modeling of dependences in a risk management and solvency context can benefit from our results. Available via Athens: ScienceDirect http://www.openathens.net/
The essential role of insurance services for trade growth and development: A primer from The Geneva Association's Programme on Regulation and Supervision (PROGRES). Arkell, Julian (2011). - Geneva: Geneva Association, 2011. - 18 pages. [RKN: 45595] Shelved at: BU/JQF pam (Lon)
This document considers the essential role of insurance services in trade growth and development around the world and the main factors that influence it. In the context of the role and function of insurance in the economy and the principles and restrictions that underlie the regulation of insurance, it examines the implications of the World Trade Organization (WTO) and the Doha Development Agenda Round of trade negotiations and the work of the United Nations Commission on Trade and Development (UNCTAD) as they relate to insurance. http://genevaassociation.org/PDF/BookandMonographs/GA2011-The Essential Role of Insurance Services.pdf
Fitting insurance claims to skewed distributions: are the skew-normal and skew-student good models?. Eling, Martin [RKN: 44782] Shelved at: Online Only Shelved at: Online Only Insurance: Mathematics & Economics (2012) 51(2) : 239-248.
This paper analyzes whether the skew-normal and skew-student distributions recently discussed in the finance literature are reasonable models for describing claims in property-liability insurance. We consider two well-known datasets from actuarial science and fit a number of parametric distributions to these data. Also the non-parametric transformation kernel approach is considered as a benchmark model. We find that the skew-normal and skew-student are reasonably competitive compared to other models in the literature when describing insurance data. In addition to goodness-of-fit tests, tail risk measures such as value at risk and tail value at risk are estimated for the datasets under consideration. Available via Athens: ScienceDirect http://www.openathens.net/
Insurance accounting : A new era. Foroughi, Kamran (2011). - London: Institute and Faculty of Actuaries, 2011. - 65 pages. [RKN: 73664] Shelved at: JOU
Insurance accounting has for many years proved a challenging topic for standard setters, perparers and users, often described as a "black box". Will recent developments, in particular the July 2010 Insurance Contracts Exposure Draft, herald a new era? This paper reviews these developments, settting out key issues and implications. It concentrates on issues relevant to life insurers, although much of the content is also relevant to non-life insurers. This paper compares certain IFRS and Solvency II developments, recognising that UK insurers face challenges in implementing new financial and regulatory reporting requirements in similar timeframes. The paper considers resulting external disclosure requirements and a possible future role for supplementary information. Presented to the Institute and Faculty of Actuaries on 11 April 2011 (London) and 11 May 2011 (Edinburgh). http://www.actuaries.org.uk/research-and-resources/documents/insurance-accounting-new-era
Insurance pricing with complete information, state-dependent utility, and production costs. Ramsay, Colin M; Oguledo, Victor I [RKN: 45649] Shelved at: Online Only Shelved at: Online Only Insurance: Mathematics & Economics (2012) 50 (3) : 462-469.
We consider a group of identical risk-neutral insurers selling single-period indemnity insurance policies. The insurance market consists of individuals with common state-dependent utility function who are identical except for their known accident probability q. Insurers incur production costs (commonly called expenses or transaction costs by actuaries) that are proportional to the amount of insurance purchased and to the premium charged. By introducing the concept of insurance desirability, we prove that the existence of insurer expenses generates a pair of constants qmin and qmax that naturally partitions the applicant pool into three mutually exclusive and exhaustive groups of individuals: those individuals with accident probability q [0,qmin) are insurable but do not desire insurance, those individuals with accident probability q [qmin,qmax] are insurable and desire insurance, and those individuals with accident probability q (qmax,1] desire insurance but are uninsurable. We also prove that, depending on the level of q and the marginal rate of substitution between states, it may be optimal for individuals to buy complete (full) insurance, partial insurance, or no insurance at all. Finally, we prove that when q is known in monopolistic markets (i.e., markets with a single
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insurer), applicants may be induced to ―over insure‖ whenever partial insurance is bought. Available via Athens: ScienceDirect http://www.openathens.net/
Insurance regulation: reflections for a post-crisis world. Monkiewicz, Jan; Kwon, W Jean; Liedtke, Patrick M; Kessler, Denis (2011). - Geneva: Geneva Association, 2011. - 44 pages. [RKN: 43489] Shelved at: BU/49 pam (Lon)
Dated January 2012 http://www.genevaassociation.org/PDF/BookandMonographs/GA2012-Insurance Regulation—Reflections for a Post-Crisis World.pdf
Moving in the right direction. Patrick, Bart Staple Inn Actuarial Society, [RKN: 45205] Shelved at: Per: Actuary (Oxf) Per: Actuary (Lon) Shelved at: SIA/ACT The Actuary (2011) May : 32-33.
Bart Patrick explores how insurers are driving operational efficiency across the claims value chain. http://www.theactuary.com/archive
Non-risk price discrimination in insurance : market outcomes and public policy. Thomas, R Guy Palgrave Macmillan, [RKN: 45540] Shelved at: Per: Geneva (Oxf) Geneva Papers on Risk and Insurance (2012) 37(1) : 27-46.
This paper considers price discrimination in insurance, defined as systematic price variations based on individual customer data but unrelated to those customers‘ expected losses or other marginal costs (sometimes characterised as ―price optimisation‖). An analysis is given of one type of price discrimination, ―inertia pricing‖, where renewal prices are higher than prices for risk-equivalent new customers. The analysis suggests that the practice intensifies competition, leading to lower aggregate industry profits; customers in aggregate pay lower prices, but not all customers are better off; and the high level of switching between insurers is inefficient for society as a whole. Other forms of price discrimination may be more likely to increase aggregate industry profits. Some public policy issues relating to price discrimination in insurance are outlined, and possible policy responses by regulators are considered. It is suggested that competition will tend to lead to increased price discrimination over time, and that this may undermine public acceptance of traditional justifications for risk-related pricing. Available via Athens: Palgrave MacMillan http://www.openathens.net
On allocation of upper limits and deductibles with dependent frequencies and comonotonic severities. Li, Xiaohu; You, Yinping [RKN: 45645] Shelved at: Online Only Shelved at: Online Only Insurance: Mathematics & Economics (2012) 50 (3) : 423-429.
With the assumption of Archimedean copula for the occurrence frequencies of the risks covered by an insurance policy, this note further investigates the allocation problem of upper limits and deductibles addressed in Hua and Cheung (2008a). Sufficient conditions for a risk averse policyholder to well allocate the upper limits and the deductibles are built, respectively. Available via Athens: ScienceDirect http://www.openathens.net/
Principles for insurance regulation : An evaluation of current practices and potential reforms. Klein, Robert Palgrave Macmillan, [RKN: 45546] Shelved at: Per: Geneva (Oxf) Geneva Papers on Risk and Insurance (2012) 37(1) : 175-199.
The recent financial crisis and its cascading effects on the global economy have drawn increased attention to the regulation of financial institutions including insurance companies. While many observers would argue that insurance companies were not significant contributors to the crisis, the role of insurance companies in the financial economy and their potential vulnerability to systemic risk have become matters of considerable interest to policy-makers and regulators. In this context, this paper examines the basic economic principles that should govern the regulation of insurance and employs these principles in assessing current regulatory practices and potential reforms. Specifically, it articulates the basic rationale for insurance regulation, which is the remediation of market failures where regulation can enhance social welfare. In insurance, the principal market failures that warrant regulatory intervention are severe asymmetric information problems and principal-agent conflicts that could lead some insurance companies to incur excessive financial risk and/or engage in abusive market practices that harm consumers. This provides an economic basis for the regulation of insurers‘ financial condition and market conduct. At the same time, the regulatory measures that are employed to correct market failures should be efficient and effective. Judged against these principles, the systems for solvency and market conduct regulation in the United States warrant significant improvement. There appears to be little or no justification for regulating insurance rates in competitive markets and the states should move forward with full deregulation of insurance prices. The EU appears to be much farther ahead in terms of implementing best practices in the regulation of insurers‘ financial condition under its Solvency II initiative. It is also much closer to the desirable goal of full price deregulation than the United States. Available via Athens: Palgrave MacMillan http://www.openathens.net
Risk analysis in finance and insurance. Melnikov, Alexander V (2011). - 2nd ed. - Boca Raton, FL: Chapman & Hall/CRC, 2011. - x, 318 pages. [RKN: 44513] Shelved at: UHG/EA/AA (Lon)
State involvement in insurance markets. Swiss Reinsurance Company (2011). - Zurich: Swiss Reinsurance Company, 2011. - 32 pages. [RKN: 74774] Shelved at: JOU Sigma (2011) 3
More and more governments are leveraging private insurance skills and the growing capacity of the sector to cover catastrophe
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losses as well as a wide range of other risks, Swiss Re reveals in its latest sigma research publication. The Japanese earthquake tragedy earlier this year caused more than USD 200 billion in total property losses, but only USD 30 billion was covered by private insurance. In contrast, private insurers will pay about USD 9 billion of the USD 12 billion in total property losses from the recent Christchurch, New Zealand earthquake. http://www.swissre.com
Tackling climate risk : an insurance contribution to the COP discussions. Geneva Association's Climate Risk and Insurance Project (2011). - Geneva: Geneva Association, 2011. - 12 pages. [RKN: 45620] Shelved at: Online Shelved at: Online
The Geneva Association has issued this paper to emphasise the key role that insurance plays when it comes to dealing with climate and environmental risks and how this industry can contribute in a positive way to cope with the challenges confronting humankind. The document builds on the central messages of The Geneva Association‘s 2009 Kyoto Statement and the 2010 Developing Countries Statement, issued in collaboration with ClimateWise, the Munich Climate Insurance Initiative (MCII) and UNEP-FI. http://www.genevaassociation.org/PDF/BookandMonographs/GA2011-Tackling Climate Risk.pdf
World insurance in 2010. Swiss Reinsurance Company (2011). - Zurich: Swiss Reinsurance Company, 2011. - 44 pages. [RKN: 74775] Shelved at: JOU Sigma (2011) 2
New Swiss Re Sigma study 'World Insurance in 2010' reveals growth in global premium volume and capital. According to Swiss Re‘s latest study, world insurance premium volume increased 2.7% on an inflation-adjusted basis. Life premiums rose by 3.2%, non-life by 2.1%. Premium growth in emerging markets accelerated. The industry‘s capital and solvency improved, while low interest rates weighed on investment income. http://www.swissre.com
INSURANCE BROKING Optimal brokerage commissions for fair insurance: a first order approach. Hau, Arthur - 13 pages. [RKN: 74789] Shelved at: Per: Geneva (Oxf) Geneva Risk and Insurance Review (2011) 36 (2) : 189-201.
This paper studies a principal-agent insurance brokerage problem with a risk-averse principal (an insured) and a risk-neutral agent (a broker). The concept of ―mean-preserving, spread-reducing‖ (MPSR) effort is introduced to model the broker's activities. Using the first-order approach, it is shown that under some common conditions, the insured may ―concavify‖ the reward function to induce the risk-neutral agent to exert MPSR brokering effort. These conditions, together with an additional condition, guarantee the validity of the first-order approach even when the monotone likelihood ratio condition (used exclusively to justify the first-order approach) is violated.
INSURANCE COMPANIES An analysis of reinsurance and firm performance: evidence from the Taiwan property-liability insurance industry. Lee, Hsu-Hua; Lee, Chen-Ying [RKN: 43634] Shelved at: Per: Geneva Geneva Papers on Risk and Insurance (2012) 37(3) : 467-484.
This study investigates the relationship between reinsurance and firm performance by sourcing panel data from the 1999 to 2009 period of the property-liability insurance industry in Taiwan. The results of this investigation offer some insight that firm performance and reinsurance are interdependent. We find that insurers with higher return on assets (ROA) tend to purchase less reinsurance and insurers with higher reinsurance dependence tend to have a lower level of firm performance. Therefore, managers have to strike a balance between decreasing insolvency risk and reducing potential profitability. Other empirical results show that ROA, underwriting risks, liquidity ratio, business line concentration, return on investment (ROI) and financial holding dummy have a significant correlation with reinsurance. In addition, firm size, financial leverage, reinsurance, underwriting risks, liquidity ratio and ROI have a significant influence on firm performance. Our results have practical implications for the property-liability insurance industry and competent authorities in Taiwan. Available via Athens: Palgrave MacMillan http://www.openathens.net
The construction of the claims reserve distribution by means of a semi-Markov backward simulation model. Gismondi, Fulvio; Janssen, Jacques; Manca, Raimondo Faculty of Actuaries and Institute of Actuaries; Cambridge University Press, [RKN: 45560] Shelved at: Per: AAS (Oxf) Per: AAS (Lon) Annals of Actuarial Science (2012) 6(1) : 23-64.
The claims reserving problem is currently one of the most debated in actuarial literature. The high level of interest in this topic is due to the fact that Solvency II rules will come into operation in 2014. Indeed, it is expected that quantile computations will be compulsory in the evaluation of company risk and for this reason we think that the construction of the claims reserve random variable distribution assumes a fundamental relevance. The aim of this paper is to present a method for constructing the claims reserve distribution which can take into account IBNyR (Issued But Not yet Reported) claims in a natural way. The construction of the distribution function for each time of the observed interval is done by means of a Monte Carlo simulation model applied on a backward time semi-Markov process. It should be pointed out that this is the first time that a simulation model based on semi-Markov with backward recurrence time has been presented. The method is totally different from the models given in the current literature.
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The most important features given in the paper are: 1) for the first time the Monte Carlo simulation method is applied to a backward semi-Markov environment; 2) the Monte Carlo simulation permits the construction of the random variable of the claims reserve for each year of the studied horizon in a natural way; 3) as already pointed out, the backward process attached to the semi-Markov process permits taking into account the evaluation of the IBNyR claims in a natural way. In the last part of the paper an applicative example constructed from tables that summarise 4 years of claims from an important Italian insurance company will be given. Available via Athens: Cambridge Journals http://www.actuaries.org.uk/research-and-resources/pages/access-journals
Equitable solvent controls in a multi-period game model of risk. Malinovskii, Vsevolod K [RKN: 44878] Shelved at: Online Only Shelved at: Online Only Insurance: Mathematics & Economics (2012) 51(3) : 599-616.
In insurance two major types of cycles are known: (a) regular many years long up- and down-swings referred to as underwriting cycles and (b) irregular short-range fluctuations. The key rationale of the underwriting cycles is migration of insureds triggered by the insurers‘ price competition while the short-range fluctuations are due to unpredictable fluctuations in economic surroundings. The competition-originated cycles were modeled in the framework of a Lundberg‘s-type multi-period model of risk in [Malinovskii, 2010] and [Malinovskii, submitted for publication]. Short-range fluctuations were modeled under diverse nature scenarios in the framework of (i) diffusion (see Malinovskii, 2007 [V.K. Malinovskii (2007), Zone-adaptive control strategy for a multiperiodic model of risk, Annals of Actuarial Science, 2 , 391-409] and Malinovskii, 2009 [V.K. Malinovskii (2009), Scenario analysis for a multi-period diffusion model of risk, ASTIN Bulletin, 39, 649-676]) and (ii) Lundberg‘s-type multi-period model (see Malinovskii, 2008a [V.K. Malinovskii (2008), Adaptive control strategies and dependence of finite time ruin on the premium loading, Insurance: Mathematics and Economics, 42, 81-94]). In this paper the results of Malinovskii (2009) are extended on the Lundberg‘s-type multi-period model. Available via Athens: ScienceDirect http://www.openathens.net/
Insurance stock returns and economic growth. Zhou, Chunyang; Wu, Chongfeng; Li, Donghui; Chen, Zhian [RKN: 43631] Shelved at: Per: Geneva Geneva Papers on Risk and Insurance (2012) 37(3) : 405-428.
In this paper, we propose to use insurance stock returns as an indicator of insurance activities, and apply a dynamic panel technique to examine the link between the role of insurance and economic growth. Our empirical results show that after we control for the variations of market index returns, there is a significantly positive relationship between insurance stock returns and future economic growth. Furthermore, we also investigate how law environment and governance quality affect the link between the role of insurance and economic growth. The empirical results are consistent with our expectation that a well-defined law environment and governance quality facilitate the functioning of insurance companies, and strengthen the role of insurance in economic growth. We find generally that the effect of law and governance on the link between the role of insurance and economic growth is more significant in developed markets than in emerging markets. Available via Athens: Palgrave MacMillan http://www.openathens.net
Key performance indicators of UK insurance companies : volume 1: 2009-2010. O'Brien, Christopher D; Orton, Tim R (2011). - Nottingham: Centre for Risk & Insurance Studies, 2011. - 108 pages. [RKN: 45508] Shelved at: BU/ELCB
We have compiled data from over 180 companies (including many subsidiaries), based on what firms regard as important: their key performance indicators (KPIs). Our report sets out the KPIs of those companies, where reported in their 2009 accounts and also for 2010, for 21 listed insurers and 5 major mutuals. The report includes an Excel spreadsheet that sets out those KPIs, and also the following data items for 2008 and 2009 where reported: · Premiums: earned and written, gross and net; · Claims paid (gross); claims incurred (net); · Administration expenses; net operating expenses; · Pre-tax profit; profit after tax; · Assets; shareholders‘ equity; fund for future appropriations; · Technical provisions; and outstanding claims (gross and net of reinsurance); · New life business annual premium, single premium, APE; capital resources for long-term business and regulatory requirement (life insurers). The spreadsheet also shows the following calculated ratios: · Expense ratio; combined ratio (general insurers); and rate of return on equity. There are tables indicating the top 10 insurers by assets, premiums, shareholders‘ equity, profits, rate of return on equity, and combined ratio. The report includes a paper presented to the 33rd UK Insurance Economists‘ conference that analyses the data. Among its findings was that while some firms did not disclose KPIs, firms which were less profitable were more likely than others to disclose KPIs. Includes 1 spreadsheet located as in network location. -- Replaces "Insurance Company Performance" RKN 39236
Optimal capital structure for a property-liability insurer. D'Arcy, Stephen P; Lwin, Teresa [RKN: 43636] Shelved at: Per: Geneva Geneva Papers on Risk and Insurance (2012) 37(3) : 509-538.
Traditional finance studies have found that firm value is maximised at a mid-range level of leverage. This paper empirically tests the effect of leverage on firm value for property-liability insurers. We analysed an international data set of 96 insurers from 1992 to 2006 using two measures for firm value (price-to-earnings and market-to-book) and three measures of leverage (liabilities-to-equity, premiums-to-equity and surplus duration). We found that price-to-earnings at first increases with leverage, as measured by liabilities-to-equity and premiums-to-equity, but decreases past a certain point. Market-to-book exhibited a similar pattern for the premium-to-equity ratio but had a positive relationship with liabilities-to-equity and a negative relationship with surplus duration. Available via Athens: Palgrave MacMillan
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http://www.openathens.net
Reputational signals and capital acquisition when insurance companies go public. Carter, Richard B; Power, Mark L [RKN: 43635] Shelved at: Per: Geneva Geneva Papers on Risk and Insurance (2012) 37(3) : 485-508.
We analyse reputational signals and decisions surrounding capital acquisition by examining 76 insurance firms going public from 1996 to 2006. We first explore the relationship between proxies for insurance firm reputation and initial public offering (IPO) underwriter reputation. In general, we find that more reputable underwriters market IPOs of more reputable insurers—insurers that are less risky, more likely to be life insurers and that have higher franchise value. These results suggest that underwriter and insurer reputations are aligned and send consistent signals. Second, we show that the market requires a higher return from riskier/less reputable insurers when they go public. When we compare the performance of our insurance company sample to a matched sample of non-insurance firms, we find that the greater reputational transparency of insurers allows the market to do a better job of determining future performance. Last, we conclude by showing empirically that franchise value and the reputational posture of the insurance firms are positively related. These results contribute to the growing body of knowledge on reputational risk management and should enhance capital acquisition strategies of insurance company managers. Available via Athens: Palgrave MacMillan http://www.openathens.net
What motivates insurers to use derivatives: evidence from the United Kingdom life insurance industry. Yung-Ming, Shiu Palgrave Macmillan, [RKN: 45330] Shelved at: Per: Geneva (Oxf) Geneva Papers on Risk and Insurance (2011) 36(2) : 186-196.
Using firm-specific variables that proxy for the motivations of life insurers‘ decision to participate in derivative transactions, we examine existing theories of corporate hedging behaviour. Our findings support the evidence of previous research that risk management and scale factors explain the use of derivatives. We observe a substitution effect that insurers use on-balance-sheet hedging through structuring their assets and liabilities to reduce price risks. Available via Athens: Palgrave MacMillan http://www.openathens.net
Who benefits from building insurance groups? A welfare analysis of optimal group capital management. Schlütter, Sebastian; Gründl, Helmut [RKN: 43638] Shelved at: Per: Geneva Geneva Papers on Risk and Insurance (2012) 37(3) : 571-593.
This paper compares the shareholder-value-maximising capital structure and pricing policy of insurance groups against that of stand-alone insurers. Groups can utilise intra-group risk diversification by means of capital and risk transfer instruments. We show that using these instruments enables the group to offer insurance with less default risk and at lower premiums than is optimal for stand-alone insurers. We also take into account that shareholders of groups could find it more difficult to prevent inefficient overinvestment or cross-subsidisation, which we model by higher dead-weight costs of carrying capital. The trade-off between risk diversification on the one hand and higher dead-weight costs on the other can result in group-building being beneficial for shareholders but detrimental for policyholders. Available via Athens: Palgrave MacMillan http://www.openathens.net
INSURANCE COMPANY Optimal dividend and equity issuance problem with proportional and fixed transaction costs. Peng, Xiaofan; Chen, Mi; Guo, Junyi [RKN: 44876] Shelved at: Online Only Shelved at: Online Only Insurance: Mathematics & Economics (2012) 51(3) : 576-585.
This paper investigates the optimal dividend problem of an insurance company, which controls risk exposure by reinsurance and by issuing new equity to protect from bankruptcy. Transaction costs are incurred by these business activities: reinsurance is non-cheap, dividend is taxed and fixed costs are generated by equity issuance. The goal of the company is to maximize the expected cumulative discounted dividend minus the expected discounted costs of equity issuance. This problem is formulated as a mixed regular-singular-impulse stochastic control problem. By solving the corresponding HJB [Hamilton-Jacobi-Bellman] equation, the authors obtain the analytical solutions of the optimal return function and the optimal strategy. Available via Athens: ScienceDirect http://www.openathens.net/
INSURANCE CONTRACTS Risk margin estimation through the cost of capital approach: some conceptual issues. Floreani, Alberto Palgrave Macmillan, [RKN: 45332] Shelved at: Per: Geneva (Oxf) Geneva Papers on Risk and Insurance (2011) 36(2) : 226-253.
The Solvency II directive requires that insurance liabilities are valued using a best estimate plus a risk margin. The risk margin should be estimated using the cost of capital approach, that is the cost of the solvency capital requirement—which is computed through a value at risk measure—needed to support the insurance obligation until settlement. The unitary cost of capital applied to the future capital requirement should be fixed. This paper deals with conceptual issues relating to the risk margin estimate through the cost of capital approach. It shows that the Solvency II specification of the methodology is consistent with financial economics.
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However, the theoretical framework required (a frictionless and normally distributed world) is too far-fetched to be acceptable. Even if these conditions were satisfied, a variable unitary cost of capital must be used. Available via Athens: Palgrave MacMillan http://www.openathens.net
Value relevance of embedded value and IFRS 4 insurance contracts. Chung-Fern, Rebecca; Wen-Hsin, Hsu Palgrave Macmillan, [RKN: 45334] Shelved at: Per: Geneva (Oxf) Geneva Papers on Risk and Insurance (2011) 36(2) : 283-303.
In light of the recent exodus of foreign insurers from Taiwan and the local insurers‘ outcries against the International Financial Reporting Standard (IFRS) 4 Insurance Contracts, we examine the value relevance of financial statements for life insurance firms, with particular interests to the embedded value (EV) disclosure. We find that the EV of equity has an incremental information role for book value of equity, which indicates that the accounting mismatching problem in the insurance industry creates a demand for fair value accounting. The fair value of liabilities under IFRS 4 Phase 2 has been disputed globally by accountants, actuaries, academia and regulators. The EV model is a concept approaching the fair value model. The research findings provide important empirical evidences supporting the fair value concept of IFRS 4. Available via Athens: Palgrave MacMillan http://www.openathens.net
INSURANCE INDUSTRY A comparison of Bancassurance and traditional insurer sales channels. Chang, Pang-Ru; Peng, Jin-Lung; Fan, Chiang Ku Palgrave Macmillan, [RKN: 39977] Shelved at: Per: Geneva (Oxf) Geneva Papers on Risk and Insurance (2011) 36(1) : 76-93.
Although various sales channels exist for insurance products, no existing research compares their sales efficiency. This study offers a comparison of bancassurance and traditional sales channels in Taiwan. Using a data envelopment analysis approach, this study first computes the efficiencies of bancassurance and traditional sales channels separately. The efficiency score of the traditional sales channel is significantly higher than that of a comparable bancassurance channel. Furthermore, the efficiency relationship between the bancassurance and the traditional sales channels is independent. These findings have significant implications for the insurance industry and ongoing research in this field. Available via Athens: Palgrave MacMillan http://www.openathens.net
Editorial: Rules of engagement: global regulatory reforms and the insurance industry. Liedtke, Patrick M Palgrave Macmillan, [RKN: 44912] Shelved at: Per: Geneva (Oxf) Geneva Papers on Risk and Insurance (2011) 36(3) : 325-329.
Available via Athens: Palgrave MacMillan http://www.openathens.net
Implementation of enterprise risk management: evidence from the German property-liability insurance industry. Altuntas, Muhammed; Berry-Stölzle, Thomas R; Hoyt, Robert E Palgrave Macmillan, [RKN: 44916] Shelved at: Per: Geneva (Oxf) Geneva Papers on Risk and Insurance (2011) 36(3) : 414-439.
Implementing a properly functioning enterprise risk management (ERM) programme has become increasingly important for insurance companies. Unlike traditional risk management where individual risks are managed in separate silos, ERM is based on the concept of managing all relevant risks in an integrated, holistic fashion. ERM has also been growing in importance as a result of increased attention on risk management in the context of corporate governance. A recent report by The Geneva Association identified strengthening ―risk management practices‖ as one of three key measures that ―aim to strengthen financial stability‖. Despite the heightened interest in ERM by insurance managers and actuaries, there is only limited empirical evidence on how insurance companies actually implement the ERM approach. The goal of our research is to examine the implementation of the ERM components by insurers. Therefore, we surveyed all German property-liability insurance companies with premiums written in excess of 40 million euros. There are 113 such insurers and 95 of them participated in our survey, leading to a response rate of 84 per cent. The questionnaire covers a comprehensive set of dimensions of an ERM system. In addition to detailed questions about specific ERM activities, the questionnaire assesses when these ERM activities were initiated. The results document significant increases in the extent to which ERM is being implemented by these firms and details the sequence of implementation of this evolving risk management process. Available via Athens: Palgrave MacMillan http://www.openathens.net
Insurability in microinsurance markets : an analysis of problems and potential solutions. Biener, Christian; Eling, Martin Palgrave Macmillan, [RKN: 45542] Shelved at: Per: Geneva (Oxf) Geneva Papers on Risk and Insurance (2012) 37(1) : 77-107.
This paper provides a comprehensive analysis of the insurability of risks in microinsurance markets. Our aim is to enhance the understanding of impediments to and facilitators of microinsurance from an economic perspective and outline potential solutions. The motivation for conducting this analysis arises from two important aspects. (1) Despite strong growth of microinsurance markets in recent years, more than 90 per cent of the poor population in developing countries have limited or no access to insurance. (2) Industry practitioners frequently highlight problems in the insurability of risks that hinder the development of microinsurance. We review 131 papers and find that the most severe problems stem from insufficient resources for risk evaluation, small size of insurance groups, information asymmetries and the size of the insurance premium. On the basis of the analysis, we
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discuss a number of potential solutions such as, for example, a cooperative microinsurance architecture. Available via Athens: Palgrave MacMillan http://www.openathens.net
Insurance, systemic risk and the financial crisis. Baluch, Faisal; Mutenga, Stanley; Parsons, Chris Palgrave Macmillan, [RKN: 39984] Shelved at: Per: Geneva (Oxf) Geneva Papers on Risk and Insurance (2011) 36(1) : 126-163.
In this paper we assess the impact of the financial crisis on insurance markets and the role of the insurance industry in the crisis itself. We examine some previous ―insurance crises‖ and consider the effect of the crisis on insurance risk—the liabilities arising from contracts that insurers underwrite. We then analyse the effects of the crisis on the performance of insurers in different markets and assess the extent of systemic risk in insurance. We conclude that, while systemic risk remains lower in insurance than in the banking sector, it is not negligible and has grown in recent years, partly as a consequence of insurers‘ increasing links with banks and their recent focus on non-(traditional) insurance activities, including structured finance. We conclude by considering the structural changes in the insurance industry that are likely to result from the crisis, including possible effects on ―bancassurance‖ activity, and offer some thoughts on changes in the regulation of insurance markets that might ensue. Available via Athens: Palgrave MacMillan http://www.openathens.net
Investigating risk disclosure practices in the European insurance industry. Höring, Dirk; Gründl, Helmut Palgrave Macmillan, [RKN: 44915] Shelved at: Per: Geneva (Oxf) Geneva Papers on Risk and Insurance (2011) 36(3) : 380-413.
In light of the upcoming Solvency II Pillar 3 disclosure regulation for the insurance industry, this paper explores the risk disclosure practices in annual reports of European primary insurers in the Dow Jones Stoxx 600 Insurance Index between 2005 and 2009. On the basis of a self-constructed risk disclosure index, the study examines the relation between the extent of risk disclosure and insurance companies‘ characteristics such as size, risk, profitability, ownership dispersion, cross-listing, home country and type of insurance sold, to draw inferences regarding motives for enhanced risk disclosure based on positive accounting theory. Available via Athens: Palgrave MacMillan http://www.openathens.net
Liberalisation and market concentration impact on performance of the non-life insurance industry: the evidence from Eastern Europe. Njegomir, Vladimir; Stojic, Dragan Palgrave Macmillan, [RKN: 39982] Shelved at: Per: Geneva (Oxf) Geneva Papers on Risk and Insurance (2011) 36(1) : 94-106.
The aim of this paper is to examine market structure, conduct and performance relationship (S-C-P) hypothesis for the non-life insurance industry in Eastern European countries. Additionally, we examine the effect of liberalisation on market structure and performance. We use the country-specific fixed effects models for panel data for the period 2004–2008 allowing each cross-sectional unit to have a different intercept term serving as an unobserved random variable that is potentially correlated with the observed regressors. Three models are presented, each placing market structure, liberalisation and profitability in a distinct environment defined by related control variables. The research results support the S-C-P hypothesis in all of the observed models, showing evidence of strong influence of market structure and liberalisation on market profitability. These results could be useful in decision-making for both governments and insurance companies. Available via Athens: Palgrave MacMillan http://www.openathens.net
Ripple effect. Dodson, Antony; Rensburg, Hannes van Staple Inn Actuarial Society, [RKN: 40069] Shelved at: Per: Actuary (Oxf) Per: Actuary (Lon) Shelved at: SIA/ACT The Actuary (2011) January : 20-22.
Antony Dodson and Hannes van Rensburg look at the spillover effect of environmental disasters on the energy insurance market. http://www.theactuary.com/archive
Structure, principles and effectiveness of insurance regulation in the 21st century : Insights from Canada. Kelly, Mary; Kleffner, Anne; Leadbetter, Darrell Palgrave Macmillan, [RKN: 45545] Shelved at: Per: Geneva (Oxf) Geneva Papers on Risk and Insurance (2012) 37(1) : 155-174.
The 2007–2009 financial crisis resulted in failures of many large financial institutions and among the G8 countries, only Canada did not have to provide financial support to distressed financial institutions. We first examine the existing Canadian regulatory architecture in relationship to underlying principles arising from the public theory of regulation. Elements of the Canadian regulatory framework that contributed to the success of the insurance industry in weathering the crisis include the presence of a federal regulator who monitors system-wide issues also ensures consistent solvency standards; investment guidelines that encourage prudent risk-taking; and a holistic approach to insurer monitoring. A comparison of the Canadian experience with that of other jurisdictions highlights the importance of a holistic risk management approach to firm viability, especially in light of the inherent risks arising from complex group structures. A lesson from the crisis is the need for effective ex ante and ex post cross-border and holistic supervision as most distressed institutions belonged to large complex groups operating in multiple regulatory jurisdictions. Available via Athens: Palgrave MacMillan http://www.openathens.net
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INSURANCE LAW Butterworths insurance law 2011. (2011). - 12th ed. - London: LexisNexis Butterworths, 2011. - 3228 pages. [RKN: 63520] Shelved at: REF 368
Insurance law and economics research for natural hazard management in a changing climate : Editorial. Schwarze, Reimund Palgrave Macmillan, [RKN: 45657] Shelved at: Per: Geneva Geneva Papers on Risk and Insurance (2012) 37(2) : 201-205.
Available via Athens: Palgrave MacMillan http://www.openathens.net
Weighing up the gender factor. Banthorpe, Peter; Friedwald, Eli Staple Inn Actuarial Society, [RKN: 45200] Shelved at: Per: Actuary (Oxf) Per: Actuary (Lon) Shelved at: SIA/ACT The Actuary (2011) May : 22-23.
Peter Banthorpe and Eli Friedwald look at recent gender-neutral legislation and the knock-on effects on the insurance industry. http://www.theactuary.com/archive
INTEREST RATES Facing the interest rate challenge. Swiss Reinsurance Company (2012). - Zurich: Swiss Reinsurance Company, 2012. - 44 pages. [RKN: 70565] Sigma (2012) 4
Interest rates affect all insurers, but the impact differs by line of business and also by product. Add this to the fact that interest rates can be highly volatile, and that it would be foolish to believe that interest rates can be predicted mid- to long-term with any reasonable precision. Therefore, insurers need to be prepared for all possible interest rate scenarios. Swiss Re‘s sigma 4/2012, "Facing the interest rate challenge", explores the impact of interest rates on insurers and explains why a rapid rise in or sustained low interest rates can be a challenge for the road ahead. http://www.swissre.com
Impacts of jumps and stochastic interest rates on the fair costs of guaranteed minimum death benefit contracts. Quittard-Pinon, François; Randrianarivony, Rivo [RKN: 45275] Shelved at: Per: Geneva (Oxf) Geneva Risk and Insurance Review (2011) 36 (1) : 51-73.
The authors offer a new perspective to the field of guaranteed minimum death benefit contracts, especially for simple return premium and rising floor guarantees. A particular feature of these contracts is a guaranteed capital upon the insured's death. A complete methodology based on the generalized Fourier transform is proposed to investigate the impacts of jumps and stochastic interest rates. This paper thus extends Milevsky and Posner (2001). If jumps alone are considered, similar results are obtained, but, when stochastic interest rates are introduced, the fair costs of the guarantee feature are found to be substantially higher in this more general economy.
Interest rate risk: dimension reduction in the Swiss Solvency Test. Ambrus, Marcel; Crugnola-Humbert, Jérôme; Schmid, Martin [RKN: 44831] Shelved at: online only European Actuarial Journal (2011) 1(2) November : 159-172.
Many risk models suffer from the incorporation of too many risk dimensions, which at best only increase computational costs. However, in many cases such models suffer in addition from a poor predictive power, as either the numerous underlying parameters are not understood fully and in order to remain computable the models may be over-simplistic and therefore neglect the more subtle interactions between the main risk drivers. In this paper, we analyze the interest rate risk module of the Swiss Solvency Test Standard Model, where interest rate risk is modeled with 13 risk-factors per currency. We apply the principal component analysis to reduce the dimension of this module. The economic interpretation of the remaining risk-factors becomes obvious, improving the understanding of the model. Further, we suggest to calculate the risk-factor sensitivities at the quantile corresponding to the expected shortfall of the corresponding normally distributed risk-factor. This way the inherent non-linearities are sufficiently allowed for and a complex second order Delta–Gamma approximation could be omitted. A sample calculation based on the SST 2011 for Basler Leben AG is provided to illustrate the validity of our approach with a real world case study. Available online via Athens -- Published online, 22 December 2011 http://www.openathens.net
On the valuation of reverse mortgages with regular tenure payments. Lee, Yung-Tsung; Wang, Chou-Wen; Huang, Hong-Chih [RKN: 44862] Shelved at: Online Only Shelved at: Online Only Insurance: Mathematics & Economics (2012) 51(2) : 430-441.
For the valuation of reverse mortgages with tenure payments, this article proposes a specific analytic valuation framework with mortality risk, interest rate risk, and housing price risk that helps determine fair premiums when the present value of premiums equals the present value of contingent losses. The analytic valuation of reverse mortgages with tenure payments is more complex than the valuation with a lump sum payment. This study therefore proposes a dimension reduction technique to achieve a closed-form solution for reverse annuity mortgage insurance, conditional on the evolution of interest rates. The technique provides strong accuracy, offering important implications for lenders and insurers. Available via Athens: ScienceDirect http://www.openathens.net/
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INTERNATIONAL Globalisation and convergence of international life insurance markets. Lee, Chien-Chiang; Chang, Chi-Hung Palgrave Macmillan, [RKN: 45544] Shelved at: Per: Geneva (Oxf) Geneva Papers on Risk and Insurance (2012) 37(1) : 125-154.
Using panel data of 39 countries over the period 1979–2007, this paper is the first to empirically examine the influence of the KOF index of globalisation (overall and its three main sub-indices) on the development and convergence of international life insurance markets by a panel cointegration technique. We find that globalisation has a significant impact on the development of international life insurance markets and on reducing the deviation between individual countries‘ life insurance penetration and the world average. Economic and social dimensions exert a similar effect as well, and the effect of economic globalisation is higher, while the effect of political dimension is not significant. In addition, social globalisation plays a dominant role on the interactive influence of different dimensions of globalisation, implying that socio-cultural factors are a latent factor behind economic or political influence. Finally, most countries‘ structural breaks coincide with the fast growth wave of international life insurance markets. Available via Athens: Palgrave MacMillan http://www.openathens.net
INTERNATIONAL ASSOCIATION FOR THE STUDY OF INSURANCE ECONOMICS Editorial : Moving insurance. Liedtke, Patrick M Palgrave Macmillan, [RKN: 45538] Shelved at: Per: Geneva (Oxf) Geneva Papers on Risk and Insurance (2012) 37(1) : 1-4.
Available via Athens: Palgrave MacMillan http://www.openathens.net
INTERNATIONAL TRADE The essential role of insurance services for trade growth and development: A primer from The Geneva Association's Programme on Regulation and Supervision (PROGRES). Arkell, Julian (2011). - Geneva: Geneva Association, 2011. - 18 pages. [RKN: 45595] Shelved at: BU/JQF pam (Lon)
This document considers the essential role of insurance services in trade growth and development around the world and the main factors that influence it. In the context of the role and function of insurance in the economy and the principles and restrictions that underlie the regulation of insurance, it examines the implications of the World Trade Organization (WTO) and the Doha Development Agenda Round of trade negotiations and the work of the United Nations Commission on Trade and Development (UNCTAD) as they relate to insurance. http://genevaassociation.org/PDF/BookandMonographs/GA2011-The Essential Role of Insurance Services.pdf
INVESTMENT Weather risk hedging in the European markets and international investment diversification. Yang, Charles C; Li, Linda Shihong; Wen, Min-Ming [RKN: 45276] Shelved at: Per: Geneva (Oxf) Geneva Risk and Insurance Review (2011) 36 (1) : 74-94.
This article analyses weather risk hedging efficiency in three European countries using weather derivatives traded at Chicago Mercantile Exchange (CME) and explores the potential of weather derivatives as a new investment asset to further diversify investors‘ portfolios. The results document that the CME European weather contracts are generally effective in hedging the temperature risk in the three European countries. However, for a specific country, weather risk hedging using other countries‘ weather indexes is generally not effective. Zero or little correlation among international weather indexes and stock market indexes indicates that weather derivatives should be an efficient investment diversifier. This research provides important insights to both weather risk hedgers and investors.
INVESTMENT GUARANTEES Under what conditions is an insurance guaranty fund beneficial for policyholders?. Rymaszewski, Przemyslaw; Schmeiser, Hato; Wagner, Joël - 31 pages. [RKN: 70416] Shelved at: Per: J.Risk Ins (Oxf) Shelved at: JOU Journal of Risk and Insurance (2012) 79 (3) : 785-815.
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In this article, we derive conditions in an imperfect market setting, under which the introduction of a self-supporting insurance guaranty fund improves the position of the policyholders. When a guaranty fund is advantageous given homogeneous firms in the market, all policyholders benefit from it to the same extent, if they have the same underlying risk preferences and are charged identical premiums. In a more realistic heterogeneous setting, the introduction of an insurance guaranty fund is in general no longer beneficial for all policyholders in the same manner. Hence, systematic wealth transfers take place between the policyholders of different insurance companies. As a possible solution, and in order to counteract this effect, we introduce a framework for utility-based fund charges. Available via Athens: Wiley Online Library http://www.openathens.net
INVESTMENT MANAGEMENT Optimal control of excess-of-loss reinsurance and investment for insurers under a CEV model. Gu, Ailing; Guo, Xianping; Li, Zhongfei; Zeng, Yan [RKN: 43685] Shelved at: Online Only Shelved at: Online Only Insurance: Mathematics & Economics (2012) 51(3) : 674-684.
The optimal excess-of-loss reinsurance and investment strategies under a constant elasticity of variance (CEV) model for an insurer are considered in this paper. Assume that the insurer‘s surplus process is approximated by a Brownian motion with drift, the insurer can purchase excess-of-loss reinsurance and invest his (or her) surplus in a financial market consisting of one risk-free asset and one risky asset whose price is modeled by a CEV model, and the objective of the insurer is to maximize the expected exponential utility from terminal wealth. Two problems are studied, one being a reinsurance-investment problem and the other being an investment-only problem. Explicit expressions for optimal strategies and optimal value functions of the two problems are derived by stochastic control approach and variable change technique. Moreover, several interesting results are found, and some sensitivity analysis and numerical simulations are provided to illustrate our results. Available via Athens: ScienceDirect http://www.openathens.net/
ITALY Tax incentives and household investment in complementary pension insurance : Some recent evidence from the Italian experience. Marino, Immacolata; Pericoli, Filippo; Ventura, Luigi - 17 pages. [RKN: 74764] Shelved at: JOU Risk Management and Insurance Review (2011) 14 (2) : 247-263.
We show by a simple difference-in-difference methodology that, contrary to prior research, robustly raising the deductibility limit associated to pension fund holdings in Italy did not succeed in boosting households‘ contributions to this form of savings. Some other empirical findings also suggest that this policy measure may have not even increased the average amount of first-time contributors to such funds. In view of the specific features of the Italian market for complementary insurance (relatively young and less developed), these empirical results might be of interest to policymakers acting in countries with similar features (for instance, some of the more recent EU members). Available via Athens: Wiley Online Library http://www.openathens.net
JAPAN Foreign ownership and non-life insurer efficiency in the Japanese marketplace. Huang, Li-Ying; Ma, Yu-Luen; Pope, Nat - 32 pages. [RKN: 73821] Shelved at: JOU Risk Management and Insurance Review (2012) 15 (1) : 57-88.
Traditional shareholding patterns in Japan have experienced significant change beginning in the early 1990s. Since that time, foreign institutional shareholding has increased significantly largely at the expense of domestic financial institution ownership. This article examines whether these changes in ownership patterns share a relationship with insurer performance in the non-life insurance market. Using data from 1992 to 2005, we assess performance in terms of efficiency measures using data envelopment analyses (DEA) techniques. Our results show that higher levels of domestic financial institution ownership in Japan are associated with insurer inefficiency. Relative to that relationship, the foreign ownership–insurer efficiency relationship is found to be positive. Additionally, we find that the disparity between those relationships has become more acute since 2001 when the Japanese non-life insurance market experienced significant consolidation. Available via Athens: Wiley Online Library http://www.openathens.net
JUMP DIFFUSION Impacts of jumps and stochastic interest rates on the fair costs of guaranteed minimum death benefit contracts. Quittard-Pinon,
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François; Randrianarivony, Rivo [RKN: 45275] Shelved at: Per: Geneva (Oxf) Geneva Risk and Insurance Review (2011) 36 (1) : 51-73.
The authors offer a new perspective to the field of guaranteed minimum death benefit contracts, especially for simple return premium and rising floor guarantees. A particular feature of these contracts is a guaranteed capital upon the insured's death. A complete methodology based on the generalized Fourier transform is proposed to investigate the impacts of jumps and stochastic interest rates. This paper thus extends Milevsky and Posner (2001). If jumps alone are considered, similar results are obtained, but, when stochastic interest rates are introduced, the fair costs of the guarantee feature are found to be substantially higher in this more general economy.
LAW Butterworths insurance law 2011. (2011). - 12th ed. - London: LexisNexis Butterworths, 2011. - 3228 pages. [RKN: 63520] Shelved at: REF 368
Damages for personal injury and death: legal aspects relevant to actuarial assessments. Koch, Robert J - 24 pages. [RKN: 74815] Shelved at: Per: SAAJ (Oxf) Shelved at: JOU South African Actuarial Journal (2011) 11 : 111-134.
In this paper the actuarial assessment of damages for personal injury and death is discussed in the context of South African law. The legal framework imposes a variety of calculation rules that need to be born in mind if an actuary is to produce a quality product. This framework changes with the passage of time. The purpose of the paper is to summarise the current state of affairs and highlight issues deserving of further actuarial discussion. http://www.actuarialsociety.org.za/News-and-Publications/Publications/South-African-Actuarial-Journal-671.aspx
LEAST SQUARES Copula regression. Parsa, Rahul A; Klugman, Stuart A [RKN: 44927] Shelved at: Per: Variance Variance (2011) 5(1) : 45-54.
Regression analysis is one of the most commonly used statistical methods. But in its basic form, ordinary least squares (OLS) is not suitable for actuarial applications because the relationships are often nonlinear and the probability distribution of the dependent variable may be non-normal. One approach that has been successful in overcoming these challenges is the generalized linear model (GLM), which requires that the dependent variable have a distribution from the exponential family. In this paper, we present copula regression as an alternative to OLS and GLM. The major advantage of a copula regression is that there are no restrictions on the probability distributions that can be used. In this paper, we will present the formulas and algorithms necessary for conducting a copula regression analysis using the normal copula. However, the ideas presented here can be used with any copula function that can incorporate multiple variables with varying degrees of association. http://www.variancejournal.org/issues
LIABILITIES An academic view on the illiquidity premium and market-consistent valuation in insurance. Wüthrich, Mario V [RKN: 44807] Shelved at: online only European Actuarial Journal (2011) 1(1) July : 93-105.
The insurance industry currently discusses to which extent they can integrate an illiquidity premium into their best estimate considerations of insurance liabilities. The present position paper studies this question from an actuarial perspective that is based on market-consistent valuation. We conclude that mathematical theory does not allow for discounting insurance liabilities with an illiquidity spread. Available via Athens http://www.openathens.net
Innovation and information acquisition under time inconsistency and uncertainty. Chemarin, Sophie; Orset, Caroline - 42 pages. [RKN: 74787] Shelved at: Per: Geneva (Oxf) Geneva Risk and Insurance Review (2011) 36 (2) : 132-173.
When an agent invests in new industrial activities, he has a limited initial knowledge of his project's returns. Acquiring information allows him both to reduce the uncertainty on the dangerousness of this project and to limit potential damages that it might cause on people's health and on the environment. In this paper, we study whether there exist situations in which the agent does not acquire information. We find that an agent with time-consistent preferences, as well as an agent with hyperbolic ones, will acquire information unless its cost exceeds the direct benefit they could get with this information. Nevertheless, a hyperbolic agent may remain strategically ignorant and, when he does acquire information, he will acquire less information than a time-consistent type. Moreover, a hyperbolic-discounting type who behaves as a time-consistent agent in the future is more inclined to stay ignorant. We then emphasize that this strategic ignorance depends on the degree of precision of the information. Finally, we analyse the role that existing liability rules could play as an incentive to acquire information under uncertainty and with regard to the form of the agent's preferences.
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Market-consistent valuation of insurance liabilities by cost of capital. Mohr, Christoph - 27 pages. [RKN: 74738] Shelved at: Per: Astin Bull (Oxf) Shelved at: JOU ASTIN Bulletin (2011) 41 (2) : 315-341.
This paper investigates market-consistent valuation of insurance liabilities in the context of Solvency II among others and to some extent IFRS 4. We propose an explicit and consistent framework for the valuation of insurance liabilities which incorporates the Solvency II approach as a special case. The proposed framework is based on replication over multiple (one-year) time periods by a periodically updated portfolio of assets with reliable market prices, allowing for 'limited liability' in the sense that the replication can in general not always be continued. The asset portfolio consists of two parts: (1) assets whose market price defines the value of the insurance liabilities, and (2) capital funds used to cover risk which cannot be replicated. The capital funds give rise to capital costs; the main exogenous input in the framework is the condition on when the investment of the capital funds is acceptable. We investigate existence of the value and show that the exact calculation of the value has to be done recursively backwards in time, starting at the end of the lifetime of the insurance liabilities. We derive upper bounds on the value and, for the special case of replication by risk-free one-year zero-coupon bonds, explicit recursive formulas for calculating the value. In the paper, we only partially consider the question of the uniqueness of the value. Valuation in Solvency II and IFRS 4 is based on representing the value as a sum of a 'best estimate' and a 'risk margin'. In our framework, it turns out that this split is not natural. Nonetheless, we show that a split can be constructed as a simplification, and that it provides an upper bound on the value under suitable conditions. We illustrate the general results by explicitly calculating the value for a simple example. online access via International Actuarial Association: http://www.actuaries.org/index.cfm?lang=EN&DSP=PUBLICATIONS&ACT=ASTIN BULLETIN http://www.actuaries.org/index.cfm?lang=EN&DSP=PUBLICATIONS&ACT=ASTIN BULLETIN
LIABILITY Surety bonds with fair and unfair pricing. Wambach, Achim; Engel, Andreas R. [RKN: 45274] Shelved at: Per: Geneva (Oxf) Geneva Risk and Insurance Review (2011) 36 (1) : 36-50.
Surety bonds are instruments used in public and private procurement to avoid the problem of contractor bankruptcy. A surety company issuing such a bond guarantees to either finish the project itself or pay the bond to the procurement agency in case of contractor's bankruptcy. This situation is analysed under the assumption that the bond is either priced fairly, or a risk loading that is proportional to the money at risk is imposed. If the surety is priced fairly, full insurance (or even overinsurance) is optimal. If the surety is priced unfairly, more solvent contractors are more likely to win, thus the problem of abnormally low tenders is alleviated.
LIABILITY INSURANCE An analysis of reinsurance and firm performance: evidence from the Taiwan property-liability insurance industry. Lee, Hsu-Hua; Lee, Chen-Ying [RKN: 43634] Shelved at: Per: Geneva Geneva Papers on Risk and Insurance (2012) 37(3) : 467-484.
This study investigates the relationship between reinsurance and firm performance by sourcing panel data from the 1999 to 2009 period of the property-liability insurance industry in Taiwan. The results of this investigation offer some insight that firm performance and reinsurance are interdependent. We find that insurers with higher return on assets (ROA) tend to purchase less reinsurance and insurers with higher reinsurance dependence tend to have a lower level of firm performance. Therefore, managers have to strike a balance between decreasing insolvency risk and reducing potential profitability. Other empirical results show that ROA, underwriting risks, liquidity ratio, business line concentration, return on investment (ROI) and financial holding dummy have a significant correlation with reinsurance. In addition, firm size, financial leverage, reinsurance, underwriting risks, liquidity ratio and ROI have a significant influence on firm performance. Our results have practical implications for the property-liability insurance industry and competent authorities in Taiwan. Available via Athens: Palgrave MacMillan http://www.openathens.net
Conversion and efficiency performance changes: evidence from the U.S. property-liability insurance industry. Chen, Lih-Ru; Lai, Gene C; Wang, Jennifer L [RKN: 45273] Shelved at: Per: Geneva (Oxf) Geneva Risk and Insurance Review (2011) 36 (1) : 1-35.
This study investigates whether the conversion of U.S. property-liability insurers improves their efficiency performance before and after the conversion. We estimate relative efficiency of converting insurers and control insurers using data envelopment analysis. The Malmquist analysis is also used to measure changes in efficiency pre- and post-conversion. The evidence shows that converting insurers experience larger gains in cost efficiency and total productivity change than mutual control insurers before conversion. In addition, the empirical results indicate that converting insurers improve efficiency after conversion. These results are robust with respect to both the value-added and the financial intermediary approaches. The overall results support the efficiency hypothesis proposed by Mayers and Smith (1986).
Implementation of enterprise risk management: evidence from the German property-liability insurance industry. Altuntas, Muhammed; Berry-Stölzle, Thomas R; Hoyt, Robert E Palgrave Macmillan, [RKN: 44916] Shelved at: Per: Geneva (Oxf) Geneva Papers on Risk and Insurance (2011) 36(3) : 414-439.
Implementing a properly functioning enterprise risk management (ERM) programme has become increasingly important for insurance companies. Unlike traditional risk management where individual risks are managed in separate silos, ERM is based on the concept of managing all relevant risks in an integrated, holistic fashion. ERM has also been growing in importance as a result of increased attention on risk management in the context of corporate governance. A recent report by The Geneva Association
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identified strengthening ―risk management practices‖ as one of three key measures that ―aim to strengthen financial stability‖. Despite the heightened interest in ERM by insurance managers and actuaries, there is only limited empirical evidence on how insurance companies actually implement the ERM approach. The goal of our research is to examine the implementation of the ERM components by insurers. Therefore, we surveyed all German property-liability insurance companies with premiums written in excess of 40 million euros. There are 113 such insurers and 95 of them participated in our survey, leading to a response rate of 84 per cent. The questionnaire covers a comprehensive set of dimensions of an ERM system. In addition to detailed questions about specific ERM activities, the questionnaire assesses when these ERM activities were initiated. The results document significant increases in the extent to which ERM is being implemented by these firms and details the sequence of implementation of this evolving risk management process. Available via Athens: Palgrave MacMillan http://www.openathens.net
Information embedded in directors and officers insurance purchases. Gupta, Manu; Prakash, Puneet [RKN: 43632] Shelved at: Per: Geneva Geneva Papers on Risk and Insurance (2012) 37(3) : 429-451.
We examine corporate purchases of Directors and Officers (D&O) liability insurance and find that in addition to governance quality it contains managers‘ private information. In particular, we find that insider control in excess of insider share holdings is jointly associated with lower D&O coverage limits and higher firm performance. The result holds when deductibles, corporate governance characteristics and litigation risk factors are controlled for. Our finding is consistent with an asymmetric information hypothesis in financial markets which posits that managers possess private information about firm risk. Our findings differ from existing literature that shows that D&O insurance purchases primarily reflect firm's governance quality and litigation risk. The evidence supports the policy prescription advanced in earlier studies which call for mandatory public disclosure of D&O insurance purchases since it contains additional information for the market. Available via Athens: Palgrave MacMillan http://www.openathens.net
Optimal capital structure for a property-liability insurer. D'Arcy, Stephen P; Lwin, Teresa [RKN: 43636] Shelved at: Per: Geneva Geneva Papers on Risk and Insurance (2012) 37(3) : 509-538.
Traditional finance studies have found that firm value is maximised at a mid-range level of leverage. This paper empirically tests the effect of leverage on firm value for property-liability insurers. We analysed an international data set of 96 insurers from 1992 to 2006 using two measures for firm value (price-to-earnings and market-to-book) and three measures of leverage (liabilities-to-equity, premiums-to-equity and surplus duration). We found that price-to-earnings at first increases with leverage, as measured by liabilities-to-equity and premiums-to-equity, but decreases past a certain point. Market-to-book exhibited a similar pattern for the premium-to-equity ratio but had a positive relationship with liabilities-to-equity and a negative relationship with surplus duration. Available via Athens: Palgrave MacMillan http://www.openathens.net
LIFE ASSURANCE Facing the interest rate challenge. Swiss Reinsurance Company (2012). - Zurich: Swiss Reinsurance Company, 2012. - 44 pages. [RKN: 70565] Sigma (2012) 4
Interest rates affect all insurers, but the impact differs by line of business and also by product. Add this to the fact that interest rates can be highly volatile, and that it would be foolish to believe that interest rates can be predicted mid- to long-term with any reasonable precision. Therefore, insurers need to be prepared for all possible interest rate scenarios. Swiss Re‘s sigma 4/2012, "Facing the interest rate challenge", explores the impact of interest rates on insurers and explains why a rapid rise in or sustained low interest rates can be a challenge for the road ahead. http://www.swissre.com
Participation in micro life insurance and the use of other financial services in Ghana. Giesbert, Lena; Steiner, Susan; Bendig, Mirko - 29 pages. [RKN: 74843] Shelved at: Per: J.Risk Ins (Oxf) Shelved at: JOU Journal of Risk and Insurance (2011) 78 (1) : 7-35.
This article investigates households‘ decisions to take up micro life insurance and to use other financial services. It estimates a multivariate probit model based on Ghanaian household survey data. The results suggest a mutually reinforcing relationship between the use of insurance and the use of other formal financial services. Risk-averse households and households who consider themselves more exposed to risk than others are found to be less likely to participate in insurance. This suggests that insurance is considered to be risky. There is indicative evidence for adverse selection and a life-cycle effect in the uptake of insurance. Available via Athens: Wiley Online Library http://www.openathens.net
World insurance in 2011: Non-life ready for take-off. Swiss Reinsurance Company (2012). - Zurich: Swiss Reinsurance Company, 2012. - 44 pages. [RKN: 73986] Sigma (2012) 3
Swiss Re‘s latest sigma study reveals that global overall premiums declined 0.8% in real terms in 2011. "Last year was not a great one for premium growth, but 2012 should be a lot better as rates continue to improve in non-life markets and India and China return to robust growth in life markets," says Kurt Karl, Swiss Re‘s Chief Economist. This sigma study is the first public assessment of the performance of global insurance markets in 2011. The 84 markets where data or estimates for 2011 are
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available, account for 99% of global premium volume. Overall, the report is based on 147 insurance markets. http://www.swissre.com
LIFE INSURANCE Demutualisation, control and efficiency in the U.S. life insurance industry. Xie, Xiaoying; Lu, WeiLi; Reising, Joseph; Stohs, Mark Hoven Palgrave Macmillan, [RKN: 45331] Shelved at: Per: Geneva (Oxf) Geneva Papers on Risk and Insurance (2011) 36(2) : 197-225.
This paper examines the role of corporate governance in the demutualisation wave in the U.S. life insurance industry during the 1990s and 2000s. The efficiency hypothesis suggests a firm should experience improved performance after demutualisation and managers should only gain from superior performance. Alternately, the managerial welfare hypothesis proposes that executives gain independence of company performance. This research suggests that demutualisation is value-enhancing for firms converting through initial public offerings (IPOs), but value-neutral for firms that convert but stay private. Firms converting into public companies experience increased CEO turnover that leads to efficiency improvement. CEOs of these firms receive higher compensation after demutualisation, but most of the gain is due to a jump in incentive compensation. Firms converting but staying private do not have a similar significant increase in CEO compensation. Overall, our results provide evidence that value-enhancement, not private managerial welfare, motivates demutualisation. Available via Athens: Palgrave MacMillan http://www.openathens.net
Globalisation and convergence of international life insurance markets. Lee, Chien-Chiang; Chang, Chi-Hung Palgrave Macmillan, [RKN: 45544] Shelved at: Per: Geneva (Oxf) Geneva Papers on Risk and Insurance (2012) 37(1) : 125-154.
Using panel data of 39 countries over the period 1979–2007, this paper is the first to empirically examine the influence of the KOF index of globalisation (overall and its three main sub-indices) on the development and convergence of international life insurance markets by a panel cointegration technique. We find that globalisation has a significant impact on the development of international life insurance markets and on reducing the deviation between individual countries‘ life insurance penetration and the world average. Economic and social dimensions exert a similar effect as well, and the effect of economic globalisation is higher, while the effect of political dimension is not significant. In addition, social globalisation plays a dominant role on the interactive influence of different dimensions of globalisation, implying that socio-cultural factors are a latent factor behind economic or political influence. Finally, most countries‘ structural breaks coincide with the fast growth wave of international life insurance markets. Available via Athens: Palgrave MacMillan http://www.openathens.net
Impacts of jumps and stochastic interest rates on the fair costs of guaranteed minimum death benefit contracts. Quittard-Pinon, François; Randrianarivony, Rivo [RKN: 45275] Shelved at: Per: Geneva (Oxf) Geneva Risk and Insurance Review (2011) 36 (1) : 51-73.
The authors offer a new perspective to the field of guaranteed minimum death benefit contracts, especially for simple return premium and rising floor guarantees. A particular feature of these contracts is a guaranteed capital upon the insured's death. A complete methodology based on the generalized Fourier transform is proposed to investigate the impacts of jumps and stochastic interest rates. This paper thus extends Milevsky and Posner (2001). If jumps alone are considered, similar results are obtained, but, when stochastic interest rates are introduced, the fair costs of the guarantee feature are found to be substantially higher in this more general economy.
The interplay between insurers’ financial and asset risks during the crisis of 2007-2009. Baranoff, Etti G; Sager, Thomas W Palgrave Macmillan, [RKN: 44914] Shelved at: Per: Geneva (Oxf) Geneva Papers on Risk and Insurance (2011) 36(3) : 348-379.
In this study we compare the interplay between capital and asset risks before and during the 2007–2009 financial crisis for the U.S. life and health insurance industries partitioned into segments by product specialisation, size and governance. The results show substantial intra-industry variation in the partial elasticity of capital with respect to asset risk, as well as significant impact of the crisis. Segment variation was driven by product focus. Most notable is the greater impact of the crisis on the U.S. insurers specialising in annuities (least risky product) than on specialists in health lines (riskiest product). During the crisis, the elasticity between asset risk and capital declined for all segments indicating that insurers‘ operation may have shifted from offsetting risk to seeking risk. Available via Athens: Palgrave MacMillan http://www.openathens.net
The productivity of European life insurers: best-practice adoption vs. innovation. Bertoni, Fabio; Croce, Annalisa Palgrave Macmillan, [RKN: 45329] Shelved at: Per: Geneva (Oxf) Geneva Papers on Risk and Insurance (2011) 36(2) : 165-185.
The aim of this work is to investigate the drivers of productivity evolution in the European life insurance industry in the aftermath of the enforcement of the Third Directive. We apply Data Envelopment Analysis (DEA) to a panel of 602 life insurance companies operating in five European countries (Germany, France, Italy, Spain and the U.K.) between 1997 and 2004 and develop a generalized Malmquist efficiency decomposition to gauge the relative importance of two sources of productivity change: the improvement of best-practices via innovation, and the adoption of practices currently adopted by local or foreign best-in-class insurers. We find that productivity increased on an annual basis by 6.71 per cent; the increase has been mostly due to innovation in best-practices (6.67 per cent), while best-practice adoption contributed by a mere 0.04 per cent. Our findings also indicate that, over the period of our analysis, innovation of best-practices was attributable to technological change. We find no evidence,
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instead, that productivity has been driven by a shift in the risk profile of insurers. Available via Athens: Palgrave MacMillan http://www.openathens.net
Using reverse mortgages to hedge longevity and financial risks for life insurers: a generalised immunisation approach. Wang, Jennifer L; Hsieh, Ming-Hua; Chiu, Yu-Fen Palgrave Macmillan, [RKN: 44910] Shelved at: Per: Geneva (Oxf) Geneva Papers on Risk and Insurance (2011) 36(4) : 697-717.
The launch of new innovative longevity-linked products, such as reverse mortgages, increases the complexity and challenges faced by insurers in implementing an asset-liability management strategy. With the house price dynamic and a large final payment received at the end of the policy year, a reverse mortgage provides a different liability duration pattern from an annuity. In this paper, we propose a generalised immunisation approach to obtain an optimal product portfolio for hedging the longevity and financial risks of life insurance companies. The proposed approach does not rely on specific assumptions regarding mortality models or interest rate models. As long as the scenarios generated by the adopted models are highly correlated, the proposed approach should be effective. By using stochastic mortality and interest rate models and the Monte Carlo simulation approach, we show that the proposed generalised immunisation approach can serve as an effective vehicle to control the aggregate risk of life insurance companies. The numerical results further demonstrate that adding the reverse mortgage to the insurers‘ product portfolio creates a better hedging effect and effectively reduces the total risk associated with the surplus of the life insurers. Available via Athens: Palgrave MacMillan -- This article and others in Geneva Papers on Risk and Insurance: Issues and Practice 36(4) form part of special issue on Longevity http://www.openathens.net
Value relevance of embedded value and IFRS 4 insurance contracts. Chung-Fern, Rebecca; Wen-Hsin, Hsu Palgrave Macmillan, [RKN: 45334] Shelved at: Per: Geneva (Oxf) Geneva Papers on Risk and Insurance (2011) 36(2) : 283-303.
In light of the recent exodus of foreign insurers from Taiwan and the local insurers‘ outcries against the International Financial Reporting Standard (IFRS) 4 Insurance Contracts, we examine the value relevance of financial statements for life insurance firms, with particular interests to the embedded value (EV) disclosure. We find that the EV of equity has an incremental information role for book value of equity, which indicates that the accounting mismatching problem in the insurance industry creates a demand for fair value accounting. The fair value of liabilities under IFRS 4 Phase 2 has been disputed globally by accountants, actuaries, academia and regulators. The EV model is a concept approaching the fair value model. The research findings provide important empirical evidences supporting the fair value concept of IFRS 4. Available via Athens: Palgrave MacMillan http://www.openathens.net
What motivates insurers to use derivatives: evidence from the United Kingdom life insurance industry. Yung-Ming, Shiu Palgrave Macmillan, [RKN: 45330] Shelved at: Per: Geneva (Oxf) Geneva Papers on Risk and Insurance (2011) 36(2) : 186-196.
Using firm-specific variables that proxy for the motivations of life insurers‘ decision to participate in derivative transactions, we examine existing theories of corporate hedging behaviour. Our findings support the evidence of previous research that risk management and scale factors explain the use of derivatives. We observe a substitution effect that insurers use on-balance-sheet hedging through structuring their assets and liabilities to reduce price risks. Available via Athens: Palgrave MacMillan http://www.openathens.net
Who responds to tax reforms? : evidence from the life insurance market. Hecht, Carolin; Hanewald, Katja Palgrave Macmillan, [RKN: 45539] Shelved at: Per: Geneva (Oxf) Geneva Papers on Risk and Insurance (2012) 37(1) : 5-26.
We exploit the natural experiment of the 2005 income tax reform in Germany to study the effects of tax incentives on consumer behaviour in life insurance markets. Our empirical analysis of sociodemographic, economic and psychological household characteristics elicited in the German SAVE study shows that two very different consumer groups buy (endowment) life insurance before and after the tax reform. We find that education plays a central role in reactions to the modified tax environment. Our stylised characterisation of ―arbitrageur‖ and ―straggler‖ buyers will assist both life insurance firms and regulatory authorities in designing effective policies. Available via Athens: Palgrave MacMillan http://www.openathens.net
LIQUIDITY An academic view on the illiquidity premium and market-consistent valuation in insurance. Wüthrich, Mario V [RKN: 44807] Shelved at: online only European Actuarial Journal (2011) 1(1) July : 93-105.
The insurance industry currently discusses to which extent they can integrate an illiquidity premium into their best estimate considerations of insurance liabilities. The present position paper studies this question from an actuarial perspective that is based on market-consistent valuation. We conclude that mathematical theory does not allow for discounting insurance liabilities with an illiquidity spread. Available via Athens
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http://www.openathens.net
LOGNORMAL DISTRIBUTION Assessing adequacy of retirement income for U.S. households: a replacement ratio approach. Yuh, Yoonkyung Palgrave Macmillan, [RKN: 45335] Shelved at: Per: Geneva (Oxf) Geneva Papers on Risk and Insurance (2011) 36(2) : 304-323.
The retirement income replacement ratio is projected using the Federal Reserve's Survey of Consumer Finances. On the basis of lognormal portfolio projections and current portfolio allocation, at least 44 per cent of pre-retired households will not be able to maintain 70 per cent of permanent income standard in retirement. Households planning to retire later and taking a high financial risk in savings and investments have a higher projected replacement ratio. Households having a high proportion of non-housing assets held in equity or bonds have a higher projected replacement ratio than those having a high proportion in cash equivalents. Available via Athens: Palgrave MacMillan http://www.openathens.net
LONG-TERM What role for ―long-term insurance‖ in adaptation? : an analysis of the prospects for and pricing of multi-year insurance contracts. Maynard, Trevor; Ranger, Nicola Palgrave Macmillan, [RKN: 45662] Shelved at: Per: Geneva Geneva Papers on Risk and Insurance (2012) 37(2) : 318-339.
Multi-year insurance has been proposed as a tool to incentivise policy-holders to invest in property-level adaptation. In a world of rising natural catastrophe risks, such autonomous adaptations could have significant benefits for the property owner, the insurer and society. We review some arguments made in respect of multi-year contracts and provide new analyses on their price implications. We conclude that even under conditions of known and stationary risk, initial capital requirements could be around 50 per cent higher for a 10-year contract than an annual contract and the annual premium around 5.5 per cent higher; in the real world of changing and uncertain risks, premiums would be even higher. We also conclude that multi-year contracts have several additional disadvantages that are likely to limit their demand and availability in the general retail insurance market. For adaptation, we conclude that other tools, such as risk-based premiums and loans for adaptation tied to the property, have greater potential. Available via Athens: Palgrave MacMillan http://www.openathens.net
LONG TERM CARE COVER A semi-Markov multiple state model for reverse mortgage terminations. Ji, Min; Hardy, Mary R; Li, Johnny Siu-Hang Faculty of Actuaries and Institute of Actuaries; Cambridge University Press, [RKN: 43652] Shelved at: Per: AAS (Lon) Shelved at: JOU/AAS Annals of Actuarial Science (2012) 6(2) : 235-257.
Reverse mortgages provide a mechanism for seniors to release the equity that has been built up in their home. At termination, the mortgagors are usually guaranteed to owe no more than the value of their property. The value of the reverse mortgage guarantee is heavily dependent on the maturity or termination date, which is uncertain. In this paper, we model reverse mortgage terminations using a semi-Markov multiple state model which incorporates three different modes of exit: death, entrance into a long-term care facility, and voluntary prepayment. We apply the proposed model specifically to develop the valuation formulas for roll-up mortgages in the UK and Home Equity Conversion Mortgages (HECMs) in the USA. We examine the significance of each mode of termination by valuing the contracts allowing progressively for each mode. On the basis of our model and assumptions, we find that both health related terminations and voluntary (non-health related) terminations significantly impact the contract value. In addition we analyze the premium structure for US reverse mortgage insurance, and demonstrate that premiums appear to be too high for some borrowers, and substantial cross-subsidies may result. http://www.actuaries.org.uk/research-and-resources/pages/access-journals
LONGEVITY RISK Editorial: Longevity risk and capital markets: the 2010-2011 update. Blake, David; Courbage, Christophe; MacMinn, Richard; Sherris, Michael Palgrave Macmillan, [RKN: 44901] Shelved at: Per: Geneva (Oxf) Geneva Papers on Risk and Insurance (2011) 36(4) : 489-500.
Available via Athens: Palgrave MacMillan -- This article and others in Geneva Papers on Risk and Insurance: Issues and Practice 36(4) form part of special issue on Longevity http://www.openathens.net
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Longevity risk from the perspective of the ILS markets. Lane, Morton Palgrave Macmillan, [RKN: 44902] Shelved at: Per: Geneva (Oxf) Geneva Papers on Risk and Insurance (2011) 36(4) : 501-515.
This paper compares and contrasts the evolution of the longevity risk transfer market with the development of the Catastrophe Bond Market, more formally known as the Insurance Linked Securities (ILS) Market. The ILS market is small; the longevity market is potentially enormous. The ILS market has been around for some 15 years; the Longevity market less than 5 years. The ILS market has had a heterogeneous approach to loss measures; the longevity market has striven for homogeneity. The ILS market has used security, i.e. bond, structures; the longevity market uses derivative, i.e. swap, structures. Nearly all ILS transactions cover ―event‖ risk; nearly all longevity structures are ―aggregate‖. The paper reflects on these and other differences and speculates on the nature of the two approaches. Available via Athens: Palgrave MacMillan -- This article and others in Geneva Papers on Risk and Insurance: Issues and Practice 36(4) form part of special issue on Longevity http://www.openathens.net
Longevity risk in fair valuing level 3 assets in securitised portfolios. Mazonas, Peter Macrae; Stallard, Patrick John Eric; Graham, Lynford Palgrave Macmillan, [RKN: 44903] Shelved at: Per: Geneva (Oxf) Geneva Papers on Risk and Insurance (2011) 36(4) : 516-543.
Fair value accounting aims to establish a three-level hierarchy that distinguishes (1) readily observable measurement inputs from (2) less readily observable measurement inputs and (3) unobservable measurement inputs. Level 3 longevity valued assets will pose unique valuation risks once securitised pools of these alternative asset classes come to market as investment vehicles for pension plans and individual retirement accounts. No uniform framework is available to assure consistent fair market valuation and transparency for investor decision-making. Applying existing international auditing standards and analytical procedures (IFRS 13) will offer a platform upon which fund managers, their auditors and actuaries can agree upon uniform valuation and presentation guidelines. Application of these quasi-governmental standards will bring future liquidity to otherwise illiquid capital market instruments. This paper presents a valuation methodology consistent with fair value accounting and auditing standards. The methodology incorporates the longevity predictive modelling of Stallard in a form that is compatible with Bayes Factor weighted average valuation techniques based on the study by Kass and Raftery. The methodology is applicable to fair valuation of life settlement portfolios where the combination of too few large death benefit policies and large variances in individual life expectancy estimates currently challenge accurate valuation and periodic re-valuation. Available via Athens: Palgrave MacMillan -- This article and others in Geneva Papers on Risk and Insurance: Issues and Practice 36(4) form part of special issue on Longevity http://www.openathens.net
Securitisation and tranching longevity and house price risk for reverse mortgage products. Yang, Sharon S Palgrave Macmillan, [RKN: 44908] Shelved at: Per: Geneva (Oxf) Geneva Papers on Risk and Insurance (2011) 36(4) : 648-674.
Reverse mortgage (RM) products are growing increasingly popular in many developed countries. This article designs a tranching security to deal with longevity and house price risks for RM products. The securitisation structure for RM products, the collateralised reverse mortgage obligation (CRMO), is similar to that for the collateralised debt obligation (CDO). However, unlike the CDO, the CRMO takes into account the dynamics of future mortality rates and house price returns instead of the default rate. To capture longevity risk for RM borrowers, this study employs the CBD model to project future mortality rates, as well as compares these results with those from the Lee-Carter model and static mortality table. The house price return dynamics is modelled using an ARMA-GARCH process. The calculation of fair spreads of CRMO in different tranches is illustrated under the risk-neutral valuation framework. On the basis of mortality experience and the programme of Home Equity Conversion Mortgage in the United States, this research demonstrates the problems of using static mortality tables and models risk for pricing fair spreads for CRMO numerically. Available via Athens: Palgrave MacMillan -- This article and others in Geneva Papers on Risk and Insurance: Issues and Practice 36(4) form part of special issue on Longevity http://www.openathens.net
Securitisation of crossover risk in reverse mortgages. Huang, Hong-Chih; Wang, Chou-Wen; Miao, Yuan-Chi Palgrave Macmillan, [RKN: 44907] Shelved at: Per: Geneva (Oxf) Geneva Papers on Risk and Insurance (2011) 36(4) : 622-647.
When the outstanding balance exceeds the housing value before the loan is settled, the insurer suffers an exposure to crossover risk induced by three risk factors: interest rates, house prices and mortality rates. With consideration of housing price risk, interest rate risk and longevity risk, we provide a three-dimensional lattice method that simultaneously captures the evolution of housing prices and short-term interest rates to calculate the fair valuation of reverse mortgages numerically. For a reverse mortgage insurer, the premium structure of reverse mortgage insurance is determined by setting the present value of the total expected claim losses equal to the present value of the premium charges. However, when the actual loss is higher than the expected loss, the insurer will incur an unexpected loss. To offset the potential loss, we also design two types of crossover bonds to transfer the unexpected loss to bond investors. Therefore, through the crossover bonds, reverse mortgage insurers can partially transfer crossover risk onto bond holders. Available via Athens: Palgrave MacMillan -- This article and others in Geneva Papers on Risk and Insurance: Issues and Practice 36(4) form part of special issue on Longevity http://www.openathens.net
Securitization of longevity risk using percentile tranching (pages). Changki Kim and; Yangho Choi - 22 pages. [RKN: 74876] Shelved at: Per: J.Risk Ins (Oxf) Shelved at: JOU Journal of Risk and Insurance (2011) 78 (4) : 885–906.
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Securitizations that transfer risk to the financial markets are a potential solution to longevity risk in the annuity business. The classical Lee–Carter model is applied to generate the future stochastic survival distribution. A method to design inverse survivor bonds using percentile tranches and to calculate the security prices is presented. The percentile tranche method is a simple and practical way for the issuer to design and price the security. This method can serve to identify the risk–yield relationship, which can provide investors with clear insight regarding the appropriate choice of tranches. Available via Athens: Wiley Online Library http://www.openathens.net
Using reverse mortgages to hedge longevity and financial risks for life insurers: a generalised immunisation approach. Wang, Jennifer L; Hsieh, Ming-Hua; Chiu, Yu-Fen Palgrave Macmillan, [RKN: 44910] Shelved at: Per: Geneva (Oxf) Geneva Papers on Risk and Insurance (2011) 36(4) : 697-717.
The launch of new innovative longevity-linked products, such as reverse mortgages, increases the complexity and challenges faced by insurers in implementing an asset-liability management strategy. With the house price dynamic and a large final payment received at the end of the policy year, a reverse mortgage provides a different liability duration pattern from an annuity. In this paper, we propose a generalised immunisation approach to obtain an optimal product portfolio for hedging the longevity and financial risks of life insurance companies. The proposed approach does not rely on specific assumptions regarding mortality models or interest rate models. As long as the scenarios generated by the adopted models are highly correlated, the proposed approach should be effective. By using stochastic mortality and interest rate models and the Monte Carlo simulation approach, we show that the proposed generalised immunisation approach can serve as an effective vehicle to control the aggregate risk of life insurance companies. The numerical results further demonstrate that adding the reverse mortgage to the insurers‘ product portfolio creates a better hedging effect and effectively reduces the total risk associated with the surplus of the life insurers. Available via Athens: Palgrave MacMillan -- This article and others in Geneva Papers on Risk and Insurance: Issues and Practice 36(4) form part of special issue on Longevity http://www.openathens.net
Valuing the longevity insurance acquired by delayed claiming of social security. Sun, Wei; Webb, Anthony - 24 pages. [RKN: 74877] Shelved at: Per: J.Risk Ins (Oxf) Shelved at: JOU Journal of Risk and Insurance (2011) 78 (4) : 907–930.
Individuals can claim Social Security at any age from 62 to 70, although most claim at 62. We show that expected present value calculations substantially understate both the optimal claim age and the losses resulting from early claiming because they ignore the value of the additional longevity insurance acquired because of delay. Using numerical optimization techniques, we illustrate that the optimal claim age is between 67 and 70. We calculate that the amount by which benefits payable at suboptimal ages must be increased so that a household is indifferent between claiming at those ages and the optimal combination of ages can be as high as 19.0 percent. Available via Athens: Wiley Online Library http://www.openathens.net
LOSS A Bayesian non-linear model for forecasting insurance loss payments. Zhang, Yanwei; Dukic, Vanja; Guszcza, James [RKN: 43396] Journal of the Royal Statistical Society, Series A (2012) 175(2) : 637-656.
We propose a Bayesian non-linear hierarchical model that addresses some of the major challenges that non-life insurance companies face when forecasting the outstanding claim amounts for which they will ultimately be liable. This approach is distinctive in several ways. First, data from individual companies are treated as repeated measurements of various cohorts of claims, thus respecting the correlation between successive observations. Second, non-linear growth curves are used to model the loss development process in a way that is intuitively appealing and facilitates prediction and extrapolation beyond the range of the available data. Third, a hierarchical structure is employed to reflect the natural variation of major parameters between the claim cohorts, accounting for their heterogeneity. This approach enables us to carry out inference at the level of industry, company and/or accident year, based on the full posterior distribution of all quantities of interest. In addition, prior experience and expert opinion can be incorporated in the analyses through judgementally selected prior probability distributions. The ability of the Bayesian framework to carry out simultaneous inference based on the joint posterior is of great importance for insurance solvency monitoring and industry decision making.
Natural catastrophes and man-made disasters in 2010: a year of devastating and costly events. Swiss Reinsurance Company (2011). - Zurich: Swiss Reinsurance Company, 2011. - 40 pages. [RKN: 73660] Shelved at: JOU Sigma (2011) 1
According to Swiss Re‘s latest sigma study, worldwide economic losses from natural catastrophes and man-made disasters were USD 218 billion in 2010, more than triple the 2009 figure of USD 68 billion. The cost to the global insurance industry was more than USD 43 billion, an increase of more than 60% over the previous year. Approximately 304 000 people died in these events, the highest number since 1976. http://www.swissre.com
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LOSS FUNCTIONS A multivariate aggregate loss model. Ren, Jiandong [RKN: 44799] Shelved at: Online Only Shelved at: Online Only Insurance: Mathematics & Economics (2012) 51(2) : 402-408.
In this paper, we introduce a multivariate aggregate loss model, where multiple categories of losses are considered. The model assumes that different types of claims arrive according to a Marked Markovian arrival process (MMAP) introduced by He and Neuts (1998) [Q M He, M F Neuts (1998), Markov chains with marked transitions, Stochastic Processes and their Applications, 74: 37–52] in the queuing literature. This approach enables us to allow dependencies among the claim frequencies, and among the claim sizes, as well as between claim frequencies and claim sizes. This model extends the (univariate) Markov modulated risk processes (sometimes referred to as regime switching models) widely used in insurance and financial analysis. For the proposed model, we provide formulas for calculating the joint moments of the present value of aggregate claims occurring in any time interval (0,t]. Numerical examples are provided to show possible applications of the model. Available via Athens: ScienceDirect http://www.openathens.net/
Skew mixture models for loss distributions: a Bayesian approach. Bernardi, Mauro; Maruotti, Antonello; Petrella, Lea [RKN: 44879] Shelved at: Online Only Shelved at: Online Only Insurance: Mathematics & Economics (2012) 51(3) : 617-623.
The derivation of loss distribution from insurance data is a very interesting research topic but at the same time not an easy task. To find an analytic solution to the loss distribution may be misleading although this approach is frequently adopted in the actuarial literature. Moreover, it is well recognized that the loss distribution is strongly skewed with heavy tails and presents small, medium and large size claims which hardly can be fitted by a single analytic and parametric distribution. Here we propose a finite mixture of Skew Normal distributions that provides a better characterization of insurance data. We adopt a Bayesian approach to estimate the model, providing the likelihood and the priors for the all unknown parameters; we implement an adaptive Markov Chain Monte Carlo algorithm to approximate the posterior distribution. We apply our approach to a well known Danish fire loss data and relevant risk measures, such as Value-at-Risk and Expected Shortfall probability, are evaluated as well. Available via Athens: ScienceDirect http://www.openathens.net/
LOSS RATIOS U.S. property-casualty: underwriting cycle modeling and risk benchmarks. Wang, Shaun S; Major, John A; Hucheng, Pan (Charles); Leong, Weng Kah [RKN: 43601] Shelved at: Per: Variance Variance (2011) 5(2) : 91-114.
The risk benchmarks and underwriting cycle models presented here can be used by insurers in their enterprise risk management models. We analyze the historical underwriting cycle and develop a regime-switching model for simulating future cycles, and show its superiority to an autoregressive approach. We compute benchmarks for pricing and reserving risks by line of business and by industry segments (large national, super regional, and small regional). We also compute the historical correlation of the loss ratio, as well as the correlation of changes in the reserve estimate between lines of business. http://www.variancejournal.org/issues
LOSS RESERVING A Bayesian log-normal model for multivariate loss reserving. Shi, Peng; Basu, Sanjib; Meyers, Glenn G Society of Actuaries, - 23 pages. [RKN: 73840] Shelved at: Per: NAAJ (Oxf) Per NAAJ (Lon) Shelved at: JOU North American Actuarial Journal (2012) 16 (1) : 29-51.
The correlation among multiple lines of business plays an important role in quantifying the uncertainty of loss reserves for insurance portfolios. To accommodate correlation, most multivariate loss-reserving methods focus on the pairwise association between corresponding cells in multiple run-off triangles. However, such practice usually relies on the independence assumption across accident years and ignores the calendar year effects that could affect all open claims simultaneously and induce dependencies among loss triangles. To address this issue, we study a Bayesian log-normal model in the prediction of outstanding claims for dependent lines of business. In addition to the pairwise correlation, our method allows for an explicit examination of the correlation due to common calendar year effects. Further, different specifications of the calendar year trend are considered to reflect valuation actuaries‘ prior knowledge of claim development. In a case study, we analyze an insurance portfolio of personal and commercial auto lines from a major U.S. property-casualty insurer. It is shown that the incorporation of calendar year effects improves model fit significantly, though it contributes substantively to the predictive variability. The availability of the realizations of predicted claims permits us to perform a retrospective test, which suggests that extra prediction uncertainty is indispensable in modern risk management practices http://www.soa.org/news-and-publications/publications/journals/naaj/naaj-detail.aspx
Loss reserves and the employment status of the appointed actuary. Kelly, Mary; Kleffner, Anne; Li, Si Society of Actuaries, - 21 pages. [RKN: 70643] Shelved at: Per: NAAJ (Oxf) Per NAAJ (Lon) Shelved at: JOU North American Actuarial Journal (2012) 16 (3) : 285-305.
Property/casualty (P/C) insurers are required to establish loss reserves for unpaid losses at the time that the loss has occurred or
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is reasonably expected to have occurred. We examine factors that may impact the accurate setting of loss reserves. These include the level of rate regulation faced by the insurer and the incentives to underestimate or overestimate reserves to improve financial ratios or improve solvency scores, to reduce earnings, to defer taxes, or to smooth earnings volatility in order to meet shareholder expectations. The employment status of the Appointed Actuary, that is, whether the Appointed Actuary is an employee of the firm or a consultant, may also impact reserve accuracy. Using a variety of regression models with data from 1995 to 2010, we examine the impact of these factors on the accuracy of reserves posted by Canadian P/C insurers. Our results provide no evidence of systematic differences in the magnitude or direction of loss reserve errors between insurers that use company actuaries versus those that use consultant actuaries. However, we find that for both consultant and company actuaries positive reserve errors are associated with increases in global stock market returns and decreases in unanticipated inflation. The insurance market cycle impacts reserve errors for company actuaries and not consultant actuaries. As well, our results indicate that as the proportion of short-tailed business increases in a company, consultant actuaries are more likely to over-reserve. Similar to many previous studies using U.S. data, we do not find strong evidence regarding insurers‘ incentives to deliberately overstate or understate reserves: Loss reserves are relatively unbiased estimates of the true losses paid. Thus these findings should be welcome news to the actuarial profession in Canada and to the prudential regulator: The Appointed Actuary, regardless of employment status, provides objective and unbiased estimates of insurers‘ largest liability. http://www.soa.org/news-and-publications/publications/journals/naaj/naaj-detail.aspx
LOSS TRIANGLES Modeling dependence between loss triangles. Jong, Piet de Society of Actuaries, - 13 pages. [RKN: 73842] Shelved at: Per: NAAJ (Oxf) Per NAAJ (Lon) Shelved at: JOU North American Actuarial Journal (2012) 16 (1) : 74-86.
A critical problem in property and casualty insurance is forecasting incurred but as yet unpaid losses. Forecasts and risk margins are often based on individual loss triangles with each triangle corresponding to a different line of business. Different lines of business are often dependent, and overall risk margins must reflect this dependence. This article develops, implements, and applies a model for loss triangle dependence. The model facilitates the structuring and measurement of dependence. One possible structure is where payments in different triangles in the same calendar year are related. Dependence is modeled with a Gaussian copula, and it is moderated by quantities called communalities that measure the relative impact of cross-dependence in each triangle. Dependence can be structured in terms of factor models. Methods reduce to relatively simple calculations in the case of marginal normal distributions. Procedures are applied to U.S. loss triangle data. The impact of loss triangle dependence on risk margins is considered. http://www.soa.org/news-and-publications/publications/journals/naaj/naaj-detail.aspx
LOWER BARRIER Minimizing the ruin probability through capital injections. Nie, Ciyu; Dickson, David C M; Li, Shuanming Institute and Faculty of Actuaries; Cambridge University Press, - 15 pages. [RKN: 74951] Shelved at: Per: AAS (Oxf) Per: AAS (Lon) Annals of Actuarial Science (2011) 5(2) : 195-209.
We consider an insurer who has a fixed amount of funds allocated as the initial surplus for a risk portfolio, so that the probability of ultimate ruin for this portfolio is at a known level. We consider the question of whether the insurer can reduce this ultimate ruin probability by allocating part of the initial funds to the purchase of a reinsurance contract. This reinsurance contract would restore the insurer's surplus to a positive level k every time the surplus fell between 0 and k. The insurer's objective is to choose the level k that minimizes the ultimate ruin probability. Using different examples of reinsurance premium calculation and claim size distribution we show that this objective can be achieved, often with a substantial reduction in the ultimate ruin probability from the situation when there is no reinsurance. We also show that by purchasing reinsurance the insurer can release funds for other purposes without altering its ultimate ruin probability. Available via Athens: Cambridge Journals http://www.actuaries.org.uk/research-and-resources/pages/access-journals
MANAGEMENT Product innovation in non-life insurance. Swiss Reinsurance Company (2012). - Zurich: Swiss Reinsurance Company, 2012. [RKN: 74793] Shelved at: JOU Sigma (2011) 4
The word ―innovation‖ means different things to different people. For some, it only refers to groundbreaking discoveries that fundamentally change the competitive landscape. Against that benchmark, many observers perceive that insurers are slow to embrace product innovation, especially when applied to non-life insurance. But according to Swiss Re‘s latest sigma publication ―Product innovation in non-life insurance,‖ innovation in non-life insurance is more common than believed, although it tends to happen incrementally and be transaction led. The report discusses the incremental nature of product innovation in traditional markets, explaining how this type of innovation builds on existing knowledge or infrastructure to secure benefits for insurers and their customers alike. In addition, the report argues that even though there are limits to how far insurers can go, there may be more scope to promote product innovation within the industry.
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http://www.swissre.com
MANAGEMENT ORGANISATION STRUCTURE CEO turnover and ownership structure: evidence from the U.S. property–liability insurance industry. He, Enya; Sommer, David W - 29 pages. [RKN: 74869] Shelved at: Per: J.Risk Ins (Oxf) Shelved at: JOU Journal of Risk and Insurance (2011) 78 (3) : 673–701.
This article examines the impact of ownership structure on the relation between firm performance and chief executive officer (CEO) turnover in the U.S. property–liability insurance industry. Theoretical implications of stock versus mutual ownership structures on the performance–turnover relation are ambiguous. Our empirical results indicate that CEO turnover is less responsive to firm underwriting performance in mutual insurers compared to stock insurers. In fact, we find that while CEO turnover for stock firms is negatively related to prior performance, no such relationship is found for mutual insurers. These results hold while controlling for board structure and other relevant factors. Available via Athens: Wiley Online Library http://www.openathens.net
Separation of ownership and management: implications for risk-taking behavior. Cole, Cassandra R; He, Enya; McCullough, Kathleen A; Sommer, David W - 23 pages. [RKN: 74769] Shelved at: JOU Risk Management and Insurance Review (2011) 14 (1) : 49-71.
Issues associated with the relation between the separation of ownership and management and risk-taking behavior have been considered in an array of studies, with varying results. Due to the wide variety of ownership structures present, the property–casualty insurance industry provides an excellent setting to test the conflicting hypotheses related to separation of ownership from management and risk taking behavior. Employing a large sample of property–liability insurance companies over the period of 1996–2004, we empirically test the alternative hypotheses regarding the implications of separation of ownership from management for firms‘ risk taking behavior. The empirical tests include the ownership structures specified in prior research as well as a more detailed classification scheme. We find that each ownership structure is significantly different from every other ownership structure in terms of risk. Available via Athens: Wiley Online Library http://www.openathens.net
MARKET TRENDS Pricing in a competitive insurance market driven by fractional noise. Zimbidis, Alexandros A [RKN: 44925] Shelved at: Per: Variance Variance (2011) 5(1) : 55-67.
Motivated by the empirical evidence of the long-range dependency found within the Greek motor insurance market, we formulate a particular stochastic pricing model in a continuous framework. We assume the structure of a competitive insurance market where the business volume of each company is directly related to the existing relativity between the company‘s premium and the market‘s average premium. Using a simple demand function and modeling the movements of the market via a fractional Brownian motion, we derive the optimal premium control strategy. Finally, we support the importance of the specific approach by a short application. It is shown that the optimal premium strategy is considerably different under the absence or existence of the long-range dependency. http://www.variancejournal.org/issues
MARKOV PROCESSES Does insurance help to escape the poverty trap?—a ruin theoretic approach. Kovacevic, Raimund M; Pflug, Georg Ch - 26 pages. [RKN: 74890] Shelved at: Per: J.Risk Ins (Oxf) Shelved at: JOU Journal of Risk and Insurance (2011) 78 (4) : 1003–1028.
Poverty trapping refers to the fact that poor people in developing countries cannot escape their poverty without help from outside. This is worsened by extreme events, for example, floods or hurricanes, sending people to poverty who have not been poor before. Often, insurance is seen as a way out. This article studies poverty trapping in the context of catastrophic risk and introduces a ruin-type model, combining deterministic growth with a stochastic loss model. We analyze the properties of the resulting piecewise deterministic Markov process, especially its trapping risk, and discuss for which groups of people insurance can reduce trapping probability. Available via Athens: Wiley Online Library http://www.openathens.net
A multivariate aggregate loss model. Ren, Jiandong [RKN: 44799] Shelved at: Online Only Shelved at: Online Only Insurance: Mathematics & Economics (2012) 51(2) : 402-408.
In this paper, we introduce a multivariate aggregate loss model, where multiple categories of losses are considered. The model
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assumes that different types of claims arrive according to a Marked Markovian arrival process (MMAP) introduced by He and Neuts (1998) [Q M He, M F Neuts (1998), Markov chains with marked transitions, Stochastic Processes and their Applications, 74: 37–52] in the queuing literature. This approach enables us to allow dependencies among the claim frequencies, and among the claim sizes, as well as between claim frequencies and claim sizes. This model extends the (univariate) Markov modulated risk processes (sometimes referred to as regime switching models) widely used in insurance and financial analysis. For the proposed model, we provide formulas for calculating the joint moments of the present value of aggregate claims occurring in any time interval (0,t]. Numerical examples are provided to show possible applications of the model. Available via Athens: ScienceDirect http://www.openathens.net/
A semi-Markov multiple state model for reverse mortgage terminations. Ji, Min; Hardy, Mary R; Li, Johnny Siu-Hang Faculty of Actuaries and Institute of Actuaries; Cambridge University Press, [RKN: 43652] Shelved at: Per: AAS (Lon) Shelved at: JOU/AAS Annals of Actuarial Science (2012) 6(2) : 235-257.
Reverse mortgages provide a mechanism for seniors to release the equity that has been built up in their home. At termination, the mortgagors are usually guaranteed to owe no more than the value of their property. The value of the reverse mortgage guarantee is heavily dependent on the maturity or termination date, which is uncertain. In this paper, we model reverse mortgage terminations using a semi-Markov multiple state model which incorporates three different modes of exit: death, entrance into a long-term care facility, and voluntary prepayment. We apply the proposed model specifically to develop the valuation formulas for roll-up mortgages in the UK and Home Equity Conversion Mortgages (HECMs) in the USA. We examine the significance of each mode of termination by valuing the contracts allowing progressively for each mode. On the basis of our model and assumptions, we find that both health related terminations and voluntary (non-health related) terminations significantly impact the contract value. In addition we analyze the premium structure for US reverse mortgage insurance, and demonstrate that premiums appear to be too high for some borrowers, and substantial cross-subsidies may result. http://www.actuaries.org.uk/research-and-resources/pages/access-journals
Threshold dividend strategies for a Markov-additive risk model. Breuer, Lothar [RKN: 44835] Shelved at: online only European Actuarial Journal (2011) 1(2) November : 237-258.
We consider the following risk reserve model. The premium income is a level dependent Markov-modulated Brownian motion. Claim sizes are iid with a phase-type distribution. The claim arrival process is a Markov-modulated Poisson process. For this model the payment of dividends under a threshold dividend strategy and the time until ruin will be analysed. Available online via Athens -- Published online, 22 December 2011 http://www.openathens.net
Valuation of catastrophe equity puts with markov-modulated poisson processes. Chang, Chia-Chien; Lin, Shih-Kuei; Yu, Min-Teh - 27 pages. [RKN: 74861] Shelved at: Per: J.Risk Ins (Oxf) Shelved at: JOU Journal of Risk and Insurance (2011) 78 (2) : 447-473.
We derive the pricing formula for catastrophe equity put options (CatEPuts) by assuming catastrophic events follow a Markov Modulated Poisson process (MMPP) whose intensity varies according to the change of the Atlantic Multidecadal Oscillation (AMO) signal. U.S. hurricanes events from 1960 to 2007 show that the CatEPuts pricing errors under the MMPP(2) are smaller than the PP by 30 percent to 66 percent. The scenario analysis indicates that the MMPP outperforms the exponential growth pattern (EG) if the hurricane intensity is the AMO signal, whereas the EG may outperform the MMPP if the future climate is warming rapidly. Available via Athens: Wiley Online Library http://www.openathens.net
MATHEMATICAL MODELS Calculating catastrophe. Woo, Gordon (2011). - London: Imperial College Press, 2011. - 355 pages. [RKN: 73989] Shelved at: 363.34
Calculating Catastrophe has been written to explain, to a general readership, the underlying philosophical ideas and scientific principles that govern catastrophic events, both natural and man-made. Knowledge of the broad range of catastrophes deepens understanding of individual modes of disaster. This book will be of interest to anyone aspiring to understand catastrophes better, but will be of particular value to those engaged in public and corporate policy, and the financial markets.
Risk modelling in general insurance: from principles to practice. Gray, Roger J; Pitts, Susan M (2012). - Cambridge: Cambridge University Press for the Institute of Actuaries and the Faculty of Actuaries, 2012. - xiv, 393 pages. [RKN: 45763] Shelved at: BX/UHG (Lon) Shelved at: 368.01
Knowledge of risk models and the assessment of risk is a fundamental part of the training of actuaries and all who are involved in financial, pensions and insurance mathematics. This book provides students and others with a firm foundation in a wide range of statistical and probabilistic methods for the modelling of risk, including short term risk modelling, model based pricing, risk sharing, ruin theory and credibility. Final publication following proof copy.
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MATHEMATICS Dependence modeling in non-life insurance using the Bernstein copula. Diers, Dorothea; Eling, Martin; Marek, Sebastian D [RKN: 45646] Shelved at: Online Only Shelved at: Online Only Insurance: Mathematics & Economics (2012) 50 (3) : 430-436.
This paper illustrates the modeling of dependence structures of non-life insurance risks using the Bernstein copula. We conduct a goodness-of-fit analysis and compare the Bernstein copula with other widely used copulas. Then, we illustrate the use of the Bernstein copula in a value-at-risk and tail-value-at-risk simulation study. For both analyses we utilize German claims data on storm, flood, and water damage insurance for calibration. Our results highlight the advantages of the Bernstein copula, including its flexibility in mapping inhomogeneous dependence structures and its easy use in a simulation context due to its representation as mixture of independent Beta densities. Practitioners and regulators working toward appropriate modeling of dependences in a risk management and solvency context can benefit from our results. Available via Athens: ScienceDirect http://www.openathens.net/
Dividends and reinsurance under a penalty for ruin. Liang, Zhibin; Young, Virginia R [RKN: 45647] Shelved at: Online Only Shelved at: Online Only Insurance: Mathematics & Economics (2012) 50 (3) : 437-445.
We find the optimal dividend strategy in a diffusion risk model under a penalty for ruin, as in Thonhauser and Albrecher (2007), although we allow for both a positive and a negative penalty. Furthermore, we determine the optimal proportional reinsurance strategy, when so-called expensive reinsurance is available; that is, the premium loading on reinsurance is greater than the loading on the directly written insurance. One can think of our model as taking the one in Taksar (2000, Section 6) and adding a penalty for ruin. We use the Legendre transform to obtain the optimal dividend and reinsurance strategies. Not surprisingly, the optimal dividend strategy is a barrier strategy. Also, we investigate the effect of the penalty P on the optimal strategies. In particular, we show that the optimal barrier increases with respect to P, while the optimal proportion retained and the value function decrease with respect to P. In the end, we explore the time of ruin, and find that the expected time of ruin increases with respect to P under a net profit condition. Available via Athens: ScienceDirect http://www.openathens.net/
Insurance pricing with complete information, state-dependent utility, and production costs. Ramsay, Colin M; Oguledo, Victor I [RKN: 45649] Shelved at: Online Only Shelved at: Online Only Insurance: Mathematics & Economics (2012) 50 (3) : 462-469.
We consider a group of identical risk-neutral insurers selling single-period indemnity insurance policies. The insurance market consists of individuals with common state-dependent utility function who are identical except for their known accident probability q. Insurers incur production costs (commonly called expenses or transaction costs by actuaries) that are proportional to the amount of insurance purchased and to the premium charged. By introducing the concept of insurance desirability, we prove that the existence of insurer expenses generates a pair of constants qmin and qmax that naturally partitions the applicant pool into three mutually exclusive and exhaustive groups of individuals: those individuals with accident probability q [0,qmin) are insurable but do not desire insurance, those individuals with accident probability q [qmin,qmax] are insurable and desire insurance, and those individuals with accident probability q (qmax,1] desire insurance but are uninsurable. We also prove that, depending on the level of q and the marginal rate of substitution between states, it may be optimal for individuals to buy complete (full) insurance, partial insurance, or no insurance at all. Finally, we prove that when q is known in monopolistic markets (i.e., markets with a single insurer), applicants may be induced to ―over insure‖ whenever partial insurance is bought. Available via Athens: ScienceDirect http://www.openathens.net/
Multivariate stress scenarios and solvency. McNeil, Alexander J; Smith, Andrew D [RKN: 45634] Shelved at: Online Only Shelved at: Online Only Insurance: Mathematics & Economics (2012) 50 (3) : 299-308.
We show how the probabilistic concepts of half-space trimming and depth may be used to define convex scenario sets Qa for stress testing the risk factors that affect the solvency of an insurance company over a prescribed time period. By choosing the scenario in Qa which minimizes net asset value at the end of the time period, we propose the idea of the least solvent likely event (LSLE) as a solution to the forward stress testing problem. By considering the support function of the convex scenario set Qa, we establish theoretical properties of the LSLE when financial risk factors can be assumed to have a linear effect on the net assets of an insurer. In particular, we show that the LSLE may be interpreted as a scenario causing a loss equivalent to the Value-at-Risk (VaR) at confidence level a, provided the a-quantile is a subadditive risk measure on linear combinations of the risk factors. In this case, we also show that the LSLE has an interpretation as a per-unit allocation of capital to the underlying risk factors when the overall capital is determined according to the VaR. These insights allow us to define alternative scenario sets that relate in similar ways to coherent measures, such as expected shortfall. We also introduce the most likely ruin event (MLRE) as a solution to the problem of reverse stress testing. Available via Athens: ScienceDirect http://www.openathens.net/
On allocation of upper limits and deductibles with dependent frequencies and comonotonic severities. Li, Xiaohu; You, Yinping [RKN: 45645] Shelved at: Online Only Shelved at: Online Only Insurance: Mathematics & Economics (2012) 50 (3) : 423-429.
With the assumption of Archimedean copula for the occurrence frequencies of the risks covered by an insurance policy, this note further investigates the allocation problem of upper limits and deductibles addressed in Hua and Cheung (2008a). Sufficient conditions for a risk averse policyholder to well allocate the upper limits and the deductibles are built, respectively. Available via Athens: ScienceDirect http://www.openathens.net/
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MECHANISM DESIGN Risk-sharing contracts with asymmetric information. Bourles, Renaud; Henriet, Dominique - 30 pages. [RKN: 74941] Shelved at: Per: Geneva (Oxf) Geneva Risk and Insurance Review (2012) 37 (1) : 27-56.
We examine how risk-sharing is impacted by asymmetric information on the probability distribution of wealth. We define the optimal incentive compatible agreements in a two-agent model with two levels of wealth. When there is complete information on the probability of the different outcomes, the resulting allocation satisfies the mutuality principle (which states that everyone's final wealth depends only upon the aggregate wealth of the economy). This is no longer true when agents have private information regarding their probability distribution of wealth. Asymmetry of information (i) makes ex-post equal sharing unsustainable between two low-risk agents, and (ii) induces exchanges when agents have the same realization of wealth.
MICROINSURANCE Asymmetric information and countermeasures in early twentieth-century American short-term disability microinsurance. Murray, John E - 22 pages. [RKN: 74847] Shelved at: Per: J.Risk Ins (Oxf) Shelved at: JOU Journal of Risk and Insurance (2011) 78 (1) : 117-138.
American workers and employers a century ago formed microinsurance funds to provide sick pay to temporarily disabled workers. This article analyzes a 1908 survey of several hundred such microinsurers. Theoretically, a single cross-section may yield evidence of asymmetric information, but cannot enable the separation of moral hazard and adverse selection effects. However, microinsurance fund managers and outside observers believed they did see separate such effects and so microinsurers created separate countermeasures to mitigate these problems. This article finds prima facie evidence of asymmetric information and suggestive evidence of the separability of informational asymmetries and the effectiveness of such countermeasures. Available via Athens: Wiley Online Library http://www.openathens.net
Crop price indemnified loans for farmers: a pilot experiment in rural Ghana. Karlan, Dean; Kutsoati, Ed; McMillan, Margaret; Udry, Chris - 19 pages. [RKN: 74844] Shelved at: Per: J.Risk Ins (Oxf) Shelved at: JOU Journal of Risk and Insurance (2011) 78 (1) : 37-55.
Farmers face a particular set of risks that complicate the decision to borrow. We use a randomized experiment to investigate (1) the role of crop-price risk in reducing demand for credit among farmers and (2) how risk mitigation changes farmers‘ investment decisions. In Ghana, we offer farmers loans with an indemnity component that forgives 50 percent of the loan if crop prices drop below a threshold price. A control group is offered a standard loan product at the same interest rate. Loan uptake is high among all farmers and the indemnity component has little impact on uptake or other outcomes of interest. Available via Athens: Wiley Online Library http://www.openathens.net
Gathering pace. Reinhard, Dirk; Clarke, Daniel Staple Inn Actuarial Society, [RKN: 45473] Shelved at: Per: Actuary (Oxf) Per: Actuary (Lon) Shelved at: SIA/ACT The Actuary (2011) October : 25.
Dirk Reinhard and Daniel Clarke provide an overview of the UK‘s first Microinsurance Learning Session, hosted at Staple Inn. http://www.theactuary.com/
Insurability in microinsurance markets : an analysis of problems and potential solutions. Biener, Christian; Eling, Martin Palgrave Macmillan, [RKN: 45542] Shelved at: Per: Geneva (Oxf) Geneva Papers on Risk and Insurance (2012) 37(1) : 77-107.
This paper provides a comprehensive analysis of the insurability of risks in microinsurance markets. Our aim is to enhance the understanding of impediments to and facilitators of microinsurance from an economic perspective and outline potential solutions. The motivation for conducting this analysis arises from two important aspects. (1) Despite strong growth of microinsurance markets in recent years, more than 90 per cent of the poor population in developing countries have limited or no access to insurance. (2) Industry practitioners frequently highlight problems in the insurability of risks that hinder the development of microinsurance. We review 131 papers and find that the most severe problems stem from insufficient resources for risk evaluation, small size of insurance groups, information asymmetries and the size of the insurance premium. On the basis of the analysis, we discuss a number of potential solutions such as, for example, a cooperative microinsurance architecture. Available via Athens: Palgrave MacMillan http://www.openathens.net
Introduction to the 2011 symposium issue of JRI on Microinsurance. Churchill, Craig; Phillips, Richard D; Reinhard, Dirk - 5 pages. [RKN: 74842] Shelved at: Per: J.Risk Ins (Oxf) Shelved at: JOU Journal of Risk and Insurance (2011) 78 (1) : 1-5.
The articles in this symposium challenge academic researchers with interests from the fields of risk management and insurance, development economics, experimental economics, and others to come together to address the difficulties of designing products targeted to the poor in developing countries. Available via Athens: Wiley Online Library
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Participation in micro life insurance and the use of other financial services in Ghana. Giesbert, Lena; Steiner, Susan; Bendig, Mirko - 29 pages. [RKN: 74843] Shelved at: Per: J.Risk Ins (Oxf) Shelved at: JOU Journal of Risk and Insurance (2011) 78 (1) : 7-35.
This article investigates households‘ decisions to take up micro life insurance and to use other financial services. It estimates a multivariate probit model based on Ghanaian household survey data. The results suggest a mutually reinforcing relationship between the use of insurance and the use of other formal financial services. Risk-averse households and households who consider themselves more exposed to risk than others are found to be less likely to participate in insurance. This suggests that insurance is considered to be risky. There is indicative evidence for adverse selection and a life-cycle effect in the uptake of insurance. Available via Athens: Wiley Online Library http://www.openathens.net
The performance of microinsurance programs: a data envelopment analysis. Biener, Christian; Eling, Martin - 33 pages. [RKN: 74846] Shelved at: Per: J.Risk Ins (Oxf) Shelved at: JOU Journal of Risk and Insurance (2011) 78 (1) : 83-115.
The purpose of this research is to measure the performance of microinsurance programs using data envelopment analysis and to derive implications for the viable provision of microinsurance products. This is a worthwhile exercise given the significant limitations of the existing performance measures used in the microinsurance industry. A single and simple to interpret performance measure can overcome these limitations and provide a sophisticated tool for performance measurement within a multidimensional framework. Moreover, this technique can incorporate the important social function that microinsurers fulfill and provide powerful managerial implications. We illustrate the capabilities of data envelopment analysis using a sample of 20 microinsurance programs and recent innovations from the efficiency literature, such as the bootstrapping of efficiency scores and a truncated regression analysis of efficiency determinants. Available via Athens: Wiley Online Library http://www.openathens.net
Walking a nomadic path. Rendek, Kelly Staple Inn Actuarial Society, [RKN: 45160] Shelved at: Per: Actuary (Oxf) Per: Actuary (Lon) Shelved at: SIA/ACT The Actuary (2011) April : 22-23.
Kelly Rendek offers an insight into her year in Mongolia providing technical assistance to a microinsurance development project. http://www.theactuary.com/archive
MODELLING Bayesian multivariate Poisson models for insurance ratemaking. Bermudez, Lluis; Karlis, Dimitris [RKN: 40017] Shelved at: Per: IME (Oxf) Insurance: Mathematics & Economics (2011) 48 (2) : 226-236.
When actuaries face the problem of pricing an insurance contract that contains different types of coverage, such as a motor insurance or a homeowner‘s insurance policy, they usually assume that types of claim are independent. However, this assumption may not be realistic: several studies have shown that there is a positive correlation between types of claim. Here we introduce different multivariate Poisson regression models in order to relax the independence assumption, including zero-inflated models to account for excess of zeros and overdispersion. These models have been largely ignored to date, mainly because of their computational difficulties. Bayesian inference based on MCMC helps to resolve this problem (and also allows us to derive, for several quantities of interest, posterior summaries to account for uncertainty). Finally, these models are applied to an automobile insurance claims database with three different types of claim. We analyse the consequences for pure and loaded premiums when the independence assumption is relaxed by using different multivariate Poisson regression models together with their zero-inflated versions. Available via Athens: ScienceDirect http://www.openathens.net
Computational intelligence with applications to general insurance: a review: I – The role of statistical learning. Parodi, Pietro [RKN: 43655] Shelved at: Per: AAS (Lon) Shelved at: JOU/AAS Annals of Actuarial Science (2012) 6(2) : 307-343.
This paper argues that most of the problems that actuaries have to deal with in the context of non-life insurance can be usefully cast in the framework of computational intelligence (a.k.a. artificial intelligence), the discipline that studies the design of agents which exhibit intelligent behaviour. Finding an adequate framework for actuarial problems has more than a simply theoretical interest: it also allows a knowledge transfer from the computational intelligence discipline to general insurance, wherever techniques have been developed for problems which are common to both contexts. This has already happened in the past (neural networks, clustering, data mining have all found applications to general insurance) but not systematically, with the result that many useful computational intelligence techniques such as sparsity-based regularisation schemes (a technique for feature selection) are virtually unknown to actuaries. In this first of two papers, we will explore the role of statistical learning in actuarial modelling. We will show that risk costing, which is at the core of pricing, reserving and capital modelling, can be described as a supervised learning problem. Many activities involved in exploratory analysis, such as data mining or feature construction, can be described as unsupervised learning. A comparison of different computational intelligence methods will be carried out, and practical insurance applications (rating factor selection, IBNER analysis) will also be presented. This paper has a following part: Computational intelligence with applications to general insurance: a review: II – Dealing with uncertain knowledge, Annals of Actuarial Science 6(2): 344-380
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http://www.actuaries.org.uk/research-and-resources/pages/access-journals
Computational intelligence with applications to general insurance: a review: II – Dealing with uncertain knowledge. Parodi, Pietro [RKN: 43656] Shelved at: Per: AAS (Lon) Shelved at: JOU/AAS Annals of Actuarial Science (2012) 6(2) : 344-380.
This paper argues that most of the problems that actuaries have to deal with in the context of non-life insurance can be usefully cast in the framework of computational intelligence (a.k.a. artificial intelligence), the discipline that studies the design of agents which exhibit intelligent behaviour. Finding an adequate framework for actuarial problems has more than a simply theoretical interest: it also allows a technological transfer from the computational intelligence discipline to general insurance, wherever techniques have been developed for problems which are common to both contexts. This has already happened in the past (neural networks, clustering, data mining have all found applications to general insurance) but not in a systematic way. One of the objectives of this paper will therefore be to introduce some useful techniques such as sparsity-based regularisation and dynamic decision networks that are not yet known to the wider actuarial community. Whilst in the first part of this paper we dealt mainly with data-driven loss modelling under the assumption that all the data were accurate and fully relevant to the exercise, in this second part of the paper we explore how to deal with uncertain knowledge, whether this uncertainty comes from the fact that the data are not fully reliable (e.g. they are estimates) or from the fact that the knowledge is ―soft‖ (e.g. expert beliefs) or not fully relevant (e.g. market information on a given risk). Most importantly, we will deal with the problem of making pricing, reserving and capital decisions under uncertainty. It will be concluded that a Bayesian framework is the most adequate for dealing with uncertainty, and we will present a number of computational intelligence techniques to do this in practice. This paper has a preceding part: Computational intelligence with applications to general insurance: a review: II – The role of statistical learning, Annals of Actuarial Science 6(2): 307-343 http://www.actuaries.org.uk/research-and-resources/pages/access-journals
Dependence modeling in non-life insurance using the Bernstein copula. Diers, Dorothea; Eling, Martin; Marek, Sebastian D [RKN: 45646] Shelved at: Online Only Shelved at: Online Only Insurance: Mathematics & Economics (2012) 50 (3) : 430-436.
This paper illustrates the modeling of dependence structures of non-life insurance risks using the Bernstein copula. We conduct a goodness-of-fit analysis and compare the Bernstein copula with other widely used copulas. Then, we illustrate the use of the Bernstein copula in a value-at-risk and tail-value-at-risk simulation study. For both analyses we utilize German claims data on storm, flood, and water damage insurance for calibration. Our results highlight the advantages of the Bernstein copula, including its flexibility in mapping inhomogeneous dependence structures and its easy use in a simulation context due to its representation as mixture of independent Beta densities. Practitioners and regulators working toward appropriate modeling of dependences in a risk management and solvency context can benefit from our results. Available via Athens: ScienceDirect http://www.openathens.net/
Log-supermodularity of weight functions, ordering weighted losses, and the loading monotonicity of weighted premiums. Sendov, Hristo S; Wang, Ying; Zitikis, Ricardas [RKN: 40020] Shelved at: Per: IME (Oxf) Insurance: Mathematics & Economics (2011) 48 (2) : 257-264.
The paper is motivated by a problem concerning the monotonicity of insurance premiums with respect to their loading parameter: the larger the parameter, the larger the insurance premium is expected to be. This property, usually called the loading monotonicity, is satisfied by premiums that appear in the literature. The increased interest in constructing new insurance premiums has raised a question as to what weight functions would produce loading-monotonic premiums. In this paper, we demonstrate a decisive role of log-supermodularity or, equivalently, of total positivity of order 2 (TP2) in answering this question. As a consequence, we establish–at a stroke–the loading monotonicity of a number of well-known insurance premiums, and offer a host of further weight functions, and consequently of premiums, thus illustrating the power of the herein suggested methodology for constructing loading-monotonic insurance premiums. Available via Athens: ScienceDirect http://www.openathens.net
Redefining the deviance objective for generalised linear models. Lovick, Anthony C; Lee, Peter K W (2011). - London: Institute and Faculty of Actuaries, 2011. - 28 pages. [RKN: 73663] Shelved at: JOU
This paper defines the 'Case deleted' deviance - a new objective function for evaluating Generalised Linear Models, and applies this to a number of practical examples in the pricing of general insurance. The paper details practical modifications to the standard Generalsed Linear Modelling Algorithm to allow the derivation of scaled parameters from this measure to reduce potential over fitting to historical data. These scaled parameters improve the predictiveness of the model when applied to previously unseen data points, the most likely being related to future business written. The potential for over fitting has increased due to number of factors now used, particularly in pricing personal lines business and the advent of price comparison sites which has increased the penalties of mis-estimation. New material in this paper has been included in a UK patent application No. 1020091.3. Presented to the Institute and Faculty of Actuaries on 28 March 2011 (London) and 6 June 2011 (Norwich). http://www.actuaries.org.uk/research-and-resources/documents/redefining-deviance-objective-generalised-linear-models
Risk modelling in general insurance: from principles to practice. Gray, Roger J; Pitts, Susan M (2012). - Cambridge: Cambridge University Press for the Institute of Actuaries and the Faculty of Actuaries, 2012. - xiv, 393 pages. [RKN: 45763] Shelved at: BX/UHG (Lon) Shelved at: 368.01
Knowledge of risk models and the assessment of risk is a fundamental part of the training of actuaries and all who are involved in financial, pensions and insurance mathematics. This book provides students and others with a firm foundation in a wide range of statistical and probabilistic methods for the modelling of risk, including short term risk modelling, model based pricing, risk sharing, ruin theory and credibility. Final publication following proof copy.
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Underwater underwriters. Parodi, Pietro Staple Inn Actuarial Society, [RKN: 45111] Shelved at: Per: Actuary (Oxf) Per: Actuary (Lon) Shelved at: SIA/ACT The Actuary (2011) March : 34-36.
Pietro Parodi considers how actuaries can use different techniques in modelling insurance claims. http://www.theactuary.com/archive
MODELS Catastrophes and Insurance Stocks – A Benchmarking Approach for Measuring Efficiency. West, Jason Faculty of Actuaries and Institute of Actuaries; Cambridge University Press, [RKN: 45563] Shelved at: Per: AAS (Oxf) Per: AAS (Lon) Annals of Actuarial Science (2012) 6(1) : 103-136.
This study uses the numeraire portfolio to benchmark insurance stock returns as a natural measure for detecting abnormal insurance stock returns from catastrophic events. The assumptions underlying the efficient markets hypothesis using a numeraire denominated returns approach hold for catastrophic insurance events whereas other more traditional methods such as the market model and Fama-French three factor model often fail, typically due to the accumulation of estimation errors. We construct a portfolio of Australian insurance firms and observe the market reaction to major insured catastrophic events. Using the numeraire denominated returns approach we observe no particular trend in the cumulative abnormal returns of insurance securities following a catastrophic event. Using both the traditional market model and the Fama-French three factor model however, we observe significantly positive cumulative abnormal returns following an insured catastrophic event. The errors inherent in the market model and three factor model for event studies are shown to be eliminated using the numeraire denominated returns approach. Available via Athens: Cambridge Journals http://www.actuaries.org.uk/research-and-resources/pages/access-journals
Disasters and decentralisation. Johnston, Jason Scott Palgrave Macmillan, [RKN: 45659] Shelved at: Per: Geneva Geneva Papers on Risk and Insurance (2012) 37(2) : 228-256.
Climate change may potentially increase the magnitude of losses from natural hazards, but the United States experience shows that the primary reason for escalating losses is policy failure. It is well known that centralised, taxpayer-funded ex post disaster relief has actually encouraged development in risky jurisdictions and also weakened incentives for ex ante precautions in such jurisdictions (moral or ―charity‖ hazard). Less well known and analysed is the role played by centralised ex ante development subsidies—often masquerading as protective investment—in distorting incentives. This paper develops a simple three jurisdiction model in which homogeneous jurisdictions decide by majority vote in a centralised legislature on the centralised (federal) share of ex post loss and centralised spending an ex ante development in a Beneficiary jurisdiction, taking into account how these decisions about centralised spending impact local Beneficiary jurisdiction incentives for precautions against ex post loss. The model shows that the marginal cost of ex ante federal development spending may be greater for a Beneficiary jurisdiction than for a Contractor jurisdiction. This somewhat technical result has an observable implication: evidence that a small fraction of ex post loss in a Beneficiary jurisdiction is centrally compensated (shared across jurisdictions) is evidence that ex ante development subsidies there may be truly precautionary on net; conversely, evidence that a Beneficiary jurisdiction has a large share of its ex post hazard loss compensated by centralised disaster relief suggests that the ex ante development subsidies received by that jurisdiction did more to encourage new development and increase the amount at risk than they did to protect existing development. The model is extended to consider how ex post loss sharing impacts the demand for federally subsidised disaster insurance and other related issues. Available via Athens: Palgrave MacMillan http://www.openathens.net
Dividends and reinsurance under a penalty for ruin. Liang, Zhibin; Young, Virginia R [RKN: 45647] Shelved at: Online Only Shelved at: Online Only Insurance: Mathematics & Economics (2012) 50 (3) : 437-445.
We find the optimal dividend strategy in a diffusion risk model under a penalty for ruin, as in Thonhauser and Albrecher (2007), although we allow for both a positive and a negative penalty. Furthermore, we determine the optimal proportional reinsurance strategy, when so-called expensive reinsurance is available; that is, the premium loading on reinsurance is greater than the loading on the directly written insurance. One can think of our model as taking the one in Taksar (2000, Section 6) and adding a penalty for ruin. We use the Legendre transform to obtain the optimal dividend and reinsurance strategies. Not surprisingly, the optimal dividend strategy is a barrier strategy. Also, we investigate the effect of the penalty P on the optimal strategies. In particular, we show that the optimal barrier increases with respect to P, while the optimal proportion retained and the value function decrease with respect to P. In the end, we explore the time of ruin, and find that the expected time of ruin increases with respect to P under a net profit condition. Available via Athens: ScienceDirect http://www.openathens.net/
The impact of climate change on precipitation-related insurance risk : A study of the effect of future scenarios on residential buildings in Norway. Scheel, Ida; Hinnerichsen, Mikkel Palgrave Macmillan, [RKN: 45664] Shelved at: Per: Geneva Geneva Papers on Risk and Insurance (2012) 37(2) : 365-376.
Climate change is likely to increase the future risk of weather-related damage to buildings worldwide. This challenge is faced by society in general, but the insurance industry is particularly important in the management of the anticipated increase in future risk. In addition to adjusting premiums appropriately and gradually, they can play an important role in prevention. It is crucial to know which areas are vulnerable and to what extent. In this paper, a spatial regression model for linking weather-related insurance losses for residential buildings to meteorological and hydrological covariates is coupled with three plausible scenarios for the future climate in order to project the future number of weather-related residential building insurance losses in Norway. The model is trained on observed daily insurance loss and weather data at the municipality level. Our results indicate a dramatic increase in
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the projected future weather-related insurance risk in many parts of Norway. The procedure can be extended and applied to other areas globally. Available via Athens: Palgrave MacMillan http://www.openathens.net
MONTE CARLO TECHNIQUES The construction of the claims reserve distribution by means of a semi-Markov backward simulation model. Gismondi, Fulvio; Janssen, Jacques; Manca, Raimondo Faculty of Actuaries and Institute of Actuaries; Cambridge University Press, [RKN: 45560] Shelved at: Per: AAS (Oxf) Per: AAS (Lon) Annals of Actuarial Science (2012) 6(1) : 23-64.
The claims reserving problem is currently one of the most debated in actuarial literature. The high level of interest in this topic is due to the fact that Solvency II rules will come into operation in 2014. Indeed, it is expected that quantile computations will be compulsory in the evaluation of company risk and for this reason we think that the construction of the claims reserve random variable distribution assumes a fundamental relevance. The aim of this paper is to present a method for constructing the claims reserve distribution which can take into account IBNyR (Issued But Not yet Reported) claims in a natural way. The construction of the distribution function for each time of the observed interval is done by means of a Monte Carlo simulation model applied on a backward time semi-Markov process. It should be pointed out that this is the first time that a simulation model based on semi-Markov with backward recurrence time has been presented. The method is totally different from the models given in the current literature. The most important features given in the paper are: 1) for the first time the Monte Carlo simulation method is applied to a backward semi-Markov environment; 2) the Monte Carlo simulation permits the construction of the random variable of the claims reserve for each year of the studied horizon in a natural way; 3) as already pointed out, the backward process attached to the semi-Markov process permits taking into account the evaluation of the IBNyR claims in a natural way. In the last part of the paper an applicative example constructed from tables that summarise 4 years of claims from an important Italian insurance company will be given. Available via Athens: Cambridge Journals http://www.actuaries.org.uk/research-and-resources/pages/access-journals
MORTALITY Iterative adjustment of survival functions by composed probability distortion. Bienvenue, Alexis; Rullière, Didier - 24 pages. [RKN: 70261] Shelved at: Per: Geneva (Oxf) Geneva Risk and Insurance Review (2012) 37 (2) : 156-179.
We introduce a parametric class of composite probability distortions that can be combined to converge to a target survival function. These distortions respect analytic invertibility and stability, which are shown to be relevant in many actuarial fields. We study the asymptotic impact of such distortions on hazard rates. The paper provides an estimation methodology, including hints for initialisation. Some applications to survival data bring results for catastrophic event impact modelling. We also obtain accurate parametric representations of the mortality trend over years. Finally, we suggest a prospective mortality simulation model that comes naturally from the above analysis.
A local likelihood approach to univariate graduation of mortality. Tomas, Julien [RKN: 43466] Shelved at: online only Bulletin Français d'Actuariat (2011) 11 (no.22) : 105-153.
The present article extends the theory of graduation by non-parametric methods to include situations where the response variable is not assumed to be approximatively Gaussian. We investigate the extension of the non-parametric regression technique of local polynomials to localized generalized linear models and local likelihood contexts. Local likelihood is introduced as a method of smoothing by local polynomials in non-Gaussian regression models. Two examples will be used. The applications cover the graduation of both the probability of death, and the force of mortality over the entire age range. We provide an unified method for constructing pointwise confidence intervals. Graphical tests are used to compare the graduated series obtained by local likelihood with those obtained by the Whittaker-Henderson model. http://www.institutdesactuaires.com/bfa/
MORTALITY PROJECTIONS Impacts of jumps and stochastic interest rates on the fair costs of guaranteed minimum death benefit contracts. Quittard-Pinon, François; Randrianarivony, Rivo [RKN: 45275] Shelved at: Per: Geneva (Oxf) Geneva Risk and Insurance Review (2011) 36 (1) : 51-73.
The authors offer a new perspective to the field of guaranteed minimum death benefit contracts, especially for simple return premium and rising floor guarantees. A particular feature of these contracts is a guaranteed capital upon the insured's death. A complete methodology based on the generalized Fourier transform is proposed to investigate the impacts of jumps and stochastic interest rates. This paper thus extends Milevsky and Posner (2001). If jumps alone are considered, similar results are obtained,
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but, when stochastic interest rates are introduced, the fair costs of the guarantee feature are found to be substantially higher in this more general economy.
MORTGAGE INSURANCE The effects of macroeconomic factors on pricing mortgage insurance contracts. Chang, Chia-Chien; Wang, Chou-Wen; Yang, Chih-Yuan - 29 pages. [RKN: 70434] Shelved at: Per: J.Risk Ins (Oxf) Shelved at: JOU Journal of Risk and Insurance (2012) 79 (3) : 867-895.
Numerous empirical studies, including Abraham and Hendershott (1996), Muellbauer and Murphy (1997), Leung (2004), and Oikarinen (2009), have identified a significant relationship between housing prices and macroeconomic factors. Using a linear regression on the comovement of macroeconomic factors and housing prices, this article employs an option-pricing framework to price and hedge the fair premia of mortgage insurance (MI). Our model provides improved performance in terms of MI premium pricing, especially during periods that are characterized by high housing prices. Ignoring the impacts of macroeconomic factors on housing prices will lead to an underestimation of MI premia. Available via Athens: Wiley Online Library http://www.openathens.net
On the valuation of reverse mortgages with regular tenure payments. Lee, Yung-Tsung; Wang, Chou-Wen; Huang, Hong-Chih [RKN: 44862] Shelved at: Online Only Shelved at: Online Only Insurance: Mathematics & Economics (2012) 51(2) : 430-441.
For the valuation of reverse mortgages with tenure payments, this article proposes a specific analytic valuation framework with mortality risk, interest rate risk, and housing price risk that helps determine fair premiums when the present value of premiums equals the present value of contingent losses. The analytic valuation of reverse mortgages with tenure payments is more complex than the valuation with a lump sum payment. This study therefore proposes a dimension reduction technique to achieve a closed-form solution for reverse annuity mortgage insurance, conditional on the evolution of interest rates. The technique provides strong accuracy, offering important implications for lenders and insurers. Available via Athens: ScienceDirect http://www.openathens.net/
MORTGAGES Fresh insights - Australian/NZ home lending default risk. Gorst, Tim [RKN: 43241] Australian Actuarial Journal (2011) 17(1) : 1-25.
By using Basel 2 ('B2') risk and capital data published by the four largest Australian banks since 2008, this paper analyses Australian/NZ home lending credit default risk by comparing recent default experience against an implied 'through the cycle' default probability. Adapted and updated for the Australian Actuarial Journal from the original paper 'APS330 Home lending data - applications and insights' presented to the Institute of Actuaries of Australia, 5th Financial Services Forum, 13-14 May 2010 http://www.actuaries.asn.au/TechnicalResources/ActuaryJournals.aspx
On the valuation of reverse mortgages with regular tenure payments. Lee, Yung-Tsung; Wang, Chou-Wen; Huang, Hong-Chih [RKN: 44862] Shelved at: Online Only Shelved at: Online Only Insurance: Mathematics & Economics (2012) 51(2) : 430-441.
For the valuation of reverse mortgages with tenure payments, this article proposes a specific analytic valuation framework with mortality risk, interest rate risk, and housing price risk that helps determine fair premiums when the present value of premiums equals the present value of contingent losses. The analytic valuation of reverse mortgages with tenure payments is more complex than the valuation with a lump sum payment. This study therefore proposes a dimension reduction technique to achieve a closed-form solution for reverse annuity mortgage insurance, conditional on the evolution of interest rates. The technique provides strong accuracy, offering important implications for lenders and insurers. Available via Athens: ScienceDirect http://www.openathens.net/
Securitisation and tranching longevity and house price risk for reverse mortgage products. Yang, Sharon S Palgrave Macmillan, [RKN: 44908] Shelved at: Per: Geneva (Oxf) Geneva Papers on Risk and Insurance (2011) 36(4) : 648-674.
Reverse mortgage (RM) products are growing increasingly popular in many developed countries. This article designs a tranching security to deal with longevity and house price risks for RM products. The securitisation structure for RM products, the collateralised reverse mortgage obligation (CRMO), is similar to that for the collateralised debt obligation (CDO). However, unlike the CDO, the CRMO takes into account the dynamics of future mortality rates and house price returns instead of the default rate. To capture longevity risk for RM borrowers, this study employs the CBD model to project future mortality rates, as well as compares these results with those from the Lee-Carter model and static mortality table. The house price return dynamics is modelled using an ARMA-GARCH process. The calculation of fair spreads of CRMO in different tranches is illustrated under the risk-neutral valuation framework. On the basis of mortality experience and the programme of Home Equity Conversion Mortgage in the United States, this research demonstrates the problems of using static mortality tables and models risk for pricing fair spreads for CRMO numerically.
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Available via Athens: Palgrave MacMillan -- This article and others in Geneva Papers on Risk and Insurance: Issues and Practice 36(4) form part of special issue on Longevity http://www.openathens.net
Securitisation of crossover risk in reverse mortgages. Huang, Hong-Chih; Wang, Chou-Wen; Miao, Yuan-Chi Palgrave Macmillan, [RKN: 44907] Shelved at: Per: Geneva (Oxf) Geneva Papers on Risk and Insurance (2011) 36(4) : 622-647.
When the outstanding balance exceeds the housing value before the loan is settled, the insurer suffers an exposure to crossover risk induced by three risk factors: interest rates, house prices and mortality rates. With consideration of housing price risk, interest rate risk and longevity risk, we provide a three-dimensional lattice method that simultaneously captures the evolution of housing prices and short-term interest rates to calculate the fair valuation of reverse mortgages numerically. For a reverse mortgage insurer, the premium structure of reverse mortgage insurance is determined by setting the present value of the total expected claim losses equal to the present value of the premium charges. However, when the actual loss is higher than the expected loss, the insurer will incur an unexpected loss. To offset the potential loss, we also design two types of crossover bonds to transfer the unexpected loss to bond investors. Therefore, through the crossover bonds, reverse mortgage insurers can partially transfer crossover risk onto bond holders. Available via Athens: Palgrave MacMillan -- This article and others in Geneva Papers on Risk and Insurance: Issues and Practice 36(4) form part of special issue on Longevity http://www.openathens.net
A semi-Markov multiple state model for reverse mortgage terminations. Ji, Min; Hardy, Mary R; Li, Johnny Siu-Hang Faculty of Actuaries and Institute of Actuaries; Cambridge University Press, [RKN: 43652] Shelved at: Per: AAS (Lon) Shelved at: JOU/AAS Annals of Actuarial Science (2012) 6(2) : 235-257.
Reverse mortgages provide a mechanism for seniors to release the equity that has been built up in their home. At termination, the mortgagors are usually guaranteed to owe no more than the value of their property. The value of the reverse mortgage guarantee is heavily dependent on the maturity or termination date, which is uncertain. In this paper, we model reverse mortgage terminations using a semi-Markov multiple state model which incorporates three different modes of exit: death, entrance into a long-term care facility, and voluntary prepayment. We apply the proposed model specifically to develop the valuation formulas for roll-up mortgages in the UK and Home Equity Conversion Mortgages (HECMs) in the USA. We examine the significance of each mode of termination by valuing the contracts allowing progressively for each mode. On the basis of our model and assumptions, we find that both health related terminations and voluntary (non-health related) terminations significantly impact the contract value. In addition we analyze the premium structure for US reverse mortgage insurance, and demonstrate that premiums appear to be too high for some borrowers, and substantial cross-subsidies may result. http://www.actuaries.org.uk/research-and-resources/pages/access-journals
Using reverse mortgages to hedge longevity and financial risks for life insurers: a generalised immunisation approach. Wang, Jennifer L; Hsieh, Ming-Hua; Chiu, Yu-Fen Palgrave Macmillan, [RKN: 44910] Shelved at: Per: Geneva (Oxf) Geneva Papers on Risk and Insurance (2011) 36(4) : 697-717.
The launch of new innovative longevity-linked products, such as reverse mortgages, increases the complexity and challenges faced by insurers in implementing an asset-liability management strategy. With the house price dynamic and a large final payment received at the end of the policy year, a reverse mortgage provides a different liability duration pattern from an annuity. In this paper, we propose a generalised immunisation approach to obtain an optimal product portfolio for hedging the longevity and financial risks of life insurance companies. The proposed approach does not rely on specific assumptions regarding mortality models or interest rate models. As long as the scenarios generated by the adopted models are highly correlated, the proposed approach should be effective. By using stochastic mortality and interest rate models and the Monte Carlo simulation approach, we show that the proposed generalised immunisation approach can serve as an effective vehicle to control the aggregate risk of life insurance companies. The numerical results further demonstrate that adding the reverse mortgage to the insurers‘ product portfolio creates a better hedging effect and effectively reduces the total risk associated with the surplus of the life insurers. Available via Athens: Palgrave MacMillan -- This article and others in Geneva Papers on Risk and Insurance: Issues and Practice 36(4) form part of special issue on Longevity http://www.openathens.net
MOTIVATION What motivates insurers to use derivatives: evidence from the United Kingdom life insurance industry. Yung-Ming, Shiu Palgrave Macmillan, [RKN: 45330] Shelved at: Per: Geneva (Oxf) Geneva Papers on Risk and Insurance (2011) 36(2) : 186-196.
Using firm-specific variables that proxy for the motivations of life insurers‘ decision to participate in derivative transactions, we examine existing theories of corporate hedging behaviour. Our findings support the evidence of previous research that risk management and scale factors explain the use of derivatives. We observe a substitution effect that insurers use on-balance-sheet hedging through structuring their assets and liabilities to reduce price risks. Available via Athens: Palgrave MacMillan http://www.openathens.net
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MOTOR INSURANCE A bumpy road for insurers?. Holliday, Linden Staple Inn Actuarial Society, - 2 pages. [RKN: 74926] Shelved at: Per: Actuary (Oxf) Per: Actuary (Lon) Shelved at: JOU The Actuary (2012) January/February : 24-25.
Telematics is transforming the way motor insurance risk is assessed and priced, but can insurers rely on the data they are receiving http://www.theactuary.com/
Can vehicle maintenance records predict automobile accidents?. Bair, Shyi-Tarn; Huang, Rachel J; Wang, Kili C - 18 pages. [RKN: 70739] Shelved at: Per: J.Risk Ins (Oxf) Shelved at: JOU Journal of Risk and Insurance (2012) 79 (2) : 567-584.
This article proposes that vehicle maintenance records can provide useful information for predicting the probability that an owner will have an automobile accident. To test the hypothesis, we use a unique data set that is merged from an insurance company and a vehicle manufacturer in Taiwan. We find weak evidence to support our hypothesis. Among all the proxies for proper maintenance, we indicate that proper maintenance defined by the recommended kilometers is significantly negatively correlated with the loss probability in compulsory automobile liability insurance. The average loss probability decreases by 0.23 percent when the insured vehicle is properly maintained according to the recommended number of kilometers in the previous years, whereas the average loss probability for the overall sample is 0.49 percent. We further find that proper maintenance is insignificantly correlated with loss severity. Available via Athens: Wiley Online Library http://www.openathens.net
The impact of no-fault legislation on automobile insurance. Cole, Cassandra R; Eastman, Kevin L; Maroney, Patrick F; McCullough, Kathleen A; Macpherson, David Society of Actuaries, - 17 pages. [RKN: 70653] Shelved at: Per: NAAJ (Oxf) Per NAAJ (Lon) Shelved at: JOU North American Actuarial Journal (2012) 16 (3) : 306-322.
Since its inception, the effectiveness of no-fault legislation has been highly debated. Although some research suggests that no-fault laws are effective in reducing costs, other evidence suggests that the current no-fault systems may not meet the original objectives. This study provides a detailed assessment of the relation of no-fault laws and automobile insurance losses for the period 1994 to 2007. By examining total automobile insurance losses along with liability and personal injury protection losses, we are able to determine if and how specific provisions of the laws are related to claims costs. We find a negative relation between the presence of a no-fault law and total losses, which suggests that no-fault systems are associated with lower losses than the traditional tort system. In addition, an examination of no-fault–only states suggests that specific provisions of no-fault laws, such as thresholds and limitations on benefits, have some effect on losses. With the sunset of Colorado‘s no-fault legislation in 2003, the recent passage of Personal Injury Protection Reform in Florida, and proposed federal choice legislation, the overall impact of no-fault as well as the specific components of the laws are of heightened importance to consumers, insurers, and lawmakers. http://www.soa.org/news-and-publications/publications/journals/naaj/naaj-detail.aspx
Pricing in a competitive insurance market driven by fractional noise. Zimbidis, Alexandros A [RKN: 44925] Shelved at: Per: Variance Variance (2011) 5(1) : 55-67.
Motivated by the empirical evidence of the long-range dependency found within the Greek motor insurance market, we formulate a particular stochastic pricing model in a continuous framework. We assume the structure of a competitive insurance market where the business volume of each company is directly related to the existing relativity between the company‘s premium and the market‘s average premium. Using a simple demand function and modeling the movements of the market via a fractional Brownian motion, we derive the optimal premium control strategy. Finally, we support the importance of the specific approach by a short application. It is shown that the optimal premium strategy is considerably different under the absence or existence of the long-range dependency. http://www.variancejournal.org/issues
Running on empty. Maher, George; Staudt, Andy; Warren, Ryan Staple Inn Actuarial Society, [RKN: 45159] Shelved at: Per: Actuary (Oxf) Per: Actuary (Lon) Shelved at: SIA/ACT The Actuary (2011) April : 24-25.
George Maher, Andy Staudt and Ryan Warren analyse developments in the motor insurance industry and why insurers are making less profits. http://www.theactuary.com/archive
Un modelo bonus-malus con asignación de tarifas más competitivas en el mercado de seguro de automóviles. Pérez Sánchez; José Maria; Gómez Déniz, Emilio; Calderín Ojeda, Enrique [RKN: 44776] Anales del Instituto de Actuarios Españoles (Epoca 3a) (2011) 17 : 91-104.
http://www.actuarios.org/espa/anales.htm
Update from the Third Party Motor and the PPO Working Parties. Brown, David; MacDonnell, Sarah (2012). - London: Institute and Faculty of Actuaries, 2012. [RKN: 43526] Shelved at: Online
A key finding of the Institute and Faculty of Actuaries report is the increase in the proportion of third party accidents involving bodily injury where data shows a staggering 18% increase from 2010 to 2011. A rise in the proportion of reported accidents involving bodily injury has been a key trend for several years; however this year has seen the greatest increase ever. The Institute and Faculty of Actuaries believes that this rise is down to unprecedented activity by claims management companies. The increase in claims increased costs to insurers to the tune of approximately £400 million in 2011 The Institute and Faculty of Actuaries 3rd annual report looking at ‗third party motor and periodic payment orders (PPOs) UK claims data‘, a report which collates and analyses data from across the motor and PPO insurance industry for 2011.
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http://www.actuaries.org.uk/research-and-resources/documents/update-third-party-motor-and-ppo-working-parties
MULTIVARIATE ANALYSIS Copula regression. Parsa, Rahul A; Klugman, Stuart A [RKN: 44927] Shelved at: Per: Variance Variance (2011) 5(1) : 45-54.
Regression analysis is one of the most commonly used statistical methods. But in its basic form, ordinary least squares (OLS) is not suitable for actuarial applications because the relationships are often nonlinear and the probability distribution of the dependent variable may be non-normal. One approach that has been successful in overcoming these challenges is the generalized linear model (GLM), which requires that the dependent variable have a distribution from the exponential family. In this paper, we present copula regression as an alternative to OLS and GLM. The major advantage of a copula regression is that there are no restrictions on the probability distributions that can be used. In this paper, we will present the formulas and algorithms necessary for conducting a copula regression analysis using the normal copula. However, the ideas presented here can be used with any copula function that can incorporate multiple variables with varying degrees of association. http://www.variancejournal.org/issues
Detection and correction of outliers in the bivariate chain–ladder method. Verdonck, T; Van Wouwe, M [RKN: 44961] Shelved at: Per: IME (Oxf) Insurance: Mathematics & Economics (2011) 49 (2) : 188-193.
The expected profit or loss of a non-life insurance company is determined for the whole of its multiple business lines. This implies the study of the claims reserving problem for a portfolio consisting of several correlated run-off triangles. A popular technique to deal with such a portfolio is the multivariate chain–ladder method of . However, it is well known that the chain–ladder method is very sensitive to outlying data. For the univariate case, we have already developed a robust version of the chain–ladder method. In this article we propose two techniques to detect and correct outlying values in a bivariate situation. The methodologies are illustrated and compared on real examples from practice. Available via Athens: ScienceDirect http://www.openathens.net
A multivariate aggregate loss model. Ren, Jiandong [RKN: 44799] Shelved at: Online Only Shelved at: Online Only Insurance: Mathematics & Economics (2012) 51(2) : 402-408.
In this paper, we introduce a multivariate aggregate loss model, where multiple categories of losses are considered. The model assumes that different types of claims arrive according to a Marked Markovian arrival process (MMAP) introduced by He and Neuts (1998) [Q M He, M F Neuts (1998), Markov chains with marked transitions, Stochastic Processes and their Applications, 74: 37–52] in the queuing literature. This approach enables us to allow dependencies among the claim frequencies, and among the claim sizes, as well as between claim frequencies and claim sizes. This model extends the (univariate) Markov modulated risk processes (sometimes referred to as regime switching models) widely used in insurance and financial analysis. For the proposed model, we provide formulas for calculating the joint moments of the present value of aggregate claims occurring in any time interval (0,t]. Numerical examples are provided to show possible applications of the model. Available via Athens: ScienceDirect http://www.openathens.net/
NETHERLANDS The decline of substitute pathways into retirement : Empirical evidence from the Dutch health care sector. Euwals, Rob; van Vuren, Annemiek; van Vuuren, Daniel [RKN: 45803] Shelved at: Per: ISSR (Oxf) International Social Security Review (2012) 65 (3) : 101-122.
Early retirement schemes and disability insurance in the Netherlands have undergone several reforms in recent decades. The reforms have increased incentives for older workers to continue working and have decreased the roles of ―substitute pathways‖ into retirement. This article gives an overview of the reforms and, using administrative data for workers in the health care sector, tests a number of hypotheses about the labour market participation of older workers. The results offer two main findings: i) that the Dutch reforms have indeed been effective, as the labour force participation rate of older workers has increased; and ii) the concept of ―substitute pathways‖ has become less relevant as the use of disability insurance has been closed off as an exit route to early retirement. Nevertheless, caution is required before generalizing the implications of these Dutch findings to other OECD countries.
Restructuring of the Dutch nonlife insurance industry: consolidation, organizational form, and focus. Bikker, Jacob A; Gorter, Janko - 22 pages. [RKN: 74849] Shelved at: Per: J.Risk Ins (Oxf) Shelved at: JOU Journal of Risk and Insurance (2011) 78 (1) : 163-184.
Since the deregulation of the European insurance market in 1994, Dutch nonlife insurance firms have sized up and increased their focus. Concurrently, the stock organizational form has become increasingly dominant. This article investigates these 1995–2005 trends from a cost-efficiency perspective. We observe substantial economies of scale that are even larger for smaller firms. In line with the efficient structure hypothesis, both stocks and mutuals are found to have comparative cost advantages. Supporting the strategic focus hypothesis, we find that more specialized insurers have lower costs. Thick frontier efficiency estimates point to large cost X-inefficiencies that have moderately decreased over time. Available via Athens: Wiley Online Library http://www.openathens.net
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NEW ZEALAND Fresh insights - Australian/NZ home lending default risk. Gorst, Tim [RKN: 43241] Australian Actuarial Journal (2011) 17(1) : 1-25.
By using Basel 2 ('B2') risk and capital data published by the four largest Australian banks since 2008, this paper analyses Australian/NZ home lending credit default risk by comparing recent default experience against an implied 'through the cycle' default probability. Adapted and updated for the Australian Actuarial Journal from the original paper 'APS330 Home lending data - applications and insights' presented to the Institute of Actuaries of Australia, 5th Financial Services Forum, 13-14 May 2010 http://www.actuaries.asn.au/TechnicalResources/ActuaryJournals.aspx
NO FAULT The impact of no-fault legislation on automobile insurance. Cole, Cassandra R; Eastman, Kevin L; Maroney, Patrick F; McCullough, Kathleen A; Macpherson, David Society of Actuaries, - 17 pages. [RKN: 70653] Shelved at: Per: NAAJ (Oxf) Per NAAJ (Lon) Shelved at: JOU North American Actuarial Journal (2012) 16 (3) : 306-322.
Since its inception, the effectiveness of no-fault legislation has been highly debated. Although some research suggests that no-fault laws are effective in reducing costs, other evidence suggests that the current no-fault systems may not meet the original objectives. This study provides a detailed assessment of the relation of no-fault laws and automobile insurance losses for the period 1994 to 2007. By examining total automobile insurance losses along with liability and personal injury protection losses, we are able to determine if and how specific provisions of the laws are related to claims costs. We find a negative relation between the presence of a no-fault law and total losses, which suggests that no-fault systems are associated with lower losses than the traditional tort system. In addition, an examination of no-fault–only states suggests that specific provisions of no-fault laws, such as thresholds and limitations on benefits, have some effect on losses. With the sunset of Colorado‘s no-fault legislation in 2003, the recent passage of Personal Injury Protection Reform in Florida, and proposed federal choice legislation, the overall impact of no-fault as well as the specific components of the laws are of heightened importance to consumers, insurers, and lawmakers. http://www.soa.org/news-and-publications/publications/journals/naaj/naaj-detail.aspx
NORWAY The impact of climate change on precipitation-related insurance risk : A study of the effect of future scenarios on residential buildings in Norway. Scheel, Ida; Hinnerichsen, Mikkel Palgrave Macmillan, [RKN: 45664] Shelved at: Per: Geneva Geneva Papers on Risk and Insurance (2012) 37(2) : 365-376.
Climate change is likely to increase the future risk of weather-related damage to buildings worldwide. This challenge is faced by society in general, but the insurance industry is particularly important in the management of the anticipated increase in future risk. In addition to adjusting premiums appropriately and gradually, they can play an important role in prevention. It is crucial to know which areas are vulnerable and to what extent. In this paper, a spatial regression model for linking weather-related insurance losses for residential buildings to meteorological and hydrological covariates is coupled with three plausible scenarios for the future climate in order to project the future number of weather-related residential building insurance losses in Norway. The model is trained on observed daily insurance loss and weather data at the municipality level. Our results indicate a dramatic increase in the projected future weather-related insurance risk in many parts of Norway. The procedure can be extended and applied to other areas globally. Available via Athens: Palgrave MacMillan http://www.openathens.net
OCCUPATIONAL HEALTH Disability insurance risks : The Argentinian case. Belliard, Matias; Grushka, Carlos; De Biase, Marcelo [RKN: 45801] Shelved at: Per: ISSR (Oxf) International Social Security Review (2012) 65 (3) : 49-75.
This article analyses the risk of disability facing workers who contribute to the Argentinian Integrated Social Security System (Sistema Integrado Previsional Argentino— SIPA). Using administrative records as our source of data for the period 2000-2006, the results indicate that 1.46 workers per 1,000 became disabled annually during that period. The risk of disability rates were higher for men than for women, but increased with age for both sexes. The risk of disability rates have also been broken down by pathology and social security scheme, taking the effects of age and sex into account. To conclude, international comparisons are presented.
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Loss reduction through worker satisfaction : The case of worker's compensation. Butler, Richard J; Johnson, William G - 26 pages. [RKN: 74767] Shelved at: JOU Risk Management and Insurance Review (2011) 14 (1) : 1-26.
A prospective study of occupational low back pain (LBP) indicates loss reduction efforts in workers‘ compensation that improve workers satisfaction with the treatment of their claim significantly improves levels of recovery (reduces losses) and lowers workers‘ compensation insurance costs. The improved outcomes associated with greater worker satisfaction with the firm's treatment of their injury claim, as well as with the treatment from their health care provider, are robust to five alternative measures of back problems, including leg pain and back pain scales, measures of functional limitation, and quality of life scales. Satisfaction with effectiveness of the health care is more important in recovery than satisfaction with the provider's bedside manner. While satisfaction with health care provider significantly improves back pain and functionality at 6 months, satisfaction with the employer's treatment of the claim is equally important at 6 months and grows in quantitative importance at 1 year. Overall, higher satisfaction with claim treatment reduces the likelihood that an injury becomes an indemnity claim and results in almost a 30 percent reduction in claim costs. Available via Athens: Wiley Online Library http://www.openathens.net
OCCUPATIONAL PENSIONS A traffic light approach to solvency measurement of Swiss occupational pension funds. Braun, Alexander; Rymaszewski, Przemyslaw; Schmeiser, Hato Palgrave Macmillan, [RKN: 45333] Shelved at: Per: Geneva (Oxf) Geneva Papers on Risk and Insurance (2011) 36(2) : 254-282.
In this paper, we combine a stochastic pension fund model with a traffic light approach to solvency measurement of occupational pension funds in Switzerland. Assuming normally distributed asset returns, a closed-form solution can be derived. Despite its simplicity, we believe the model comprises the essential risk sources needed in supervisory practice. Owing to its ease of calibration, it is well suited for a regulatory application in the fragmented Swiss market, keeping costs of solvency testing at a minimum. We calibrate and implement the model for a small sample of ten Swiss pension funds in order to illustrate its application and the derivation of traffic light signals. In addition, a sensitivity analysis is conducted to identify important drivers of the shortfall probabilities for the traffic light conditions. Although our analysis concentrates solely on Switzerland, the approach could also be applied to similar pension systems. Available via Athens: Palgrave MacMillan http://www.openathens.net
OLDER WORKERS The decline of substitute pathways into retirement : Empirical evidence from the Dutch health care sector. Euwals, Rob; van Vuren, Annemiek; van Vuuren, Daniel [RKN: 45803] Shelved at: Per: ISSR (Oxf) International Social Security Review (2012) 65 (3) : 101-122.
Early retirement schemes and disability insurance in the Netherlands have undergone several reforms in recent decades. The reforms have increased incentives for older workers to continue working and have decreased the roles of ―substitute pathways‖ into retirement. This article gives an overview of the reforms and, using administrative data for workers in the health care sector, tests a number of hypotheses about the labour market participation of older workers. The results offer two main findings: i) that the Dutch reforms have indeed been effective, as the labour force participation rate of older workers has increased; and ii) the concept of ―substitute pathways‖ has become less relevant as the use of disability insurance has been closed off as an exit route to early retirement. Nevertheless, caution is required before generalizing the implications of these Dutch findings to other OECD countries.
OPTIMAL REINSURANCE Enhancing insurer value using reinsurance and value-at-risk criterion. Tan, Ken Seng; Weng, Chengguo - 32 pages. [RKN: 74944] Shelved at: Per: Geneva (Oxf) Geneva Risk and Insurance Review (2012) 37 (1) : 109-140.
The quest for optimal reinsurance design has remained an interesting problem among insurers, reinsurers, and academicians. An appropriate use of reinsurance could reduce the underwriting risk of an insurer and thereby enhance its value. This paper complements the existing research on optimal reinsurance by proposing another model for the determination of the optimal reinsurance design. The problem is formulated as a constrained optimization problem with the objective of minimizing the value-at-risk of the net risk of the insurer while subjecting to a profitability constraint. The proposed optimal reinsurance model, therefore, has the advantage of exploiting the classical tradeoff between risk and reward. Under the additional assumptions that the reinsurance premium is determined by the expectation premium principle and the ceded loss function is confined to a class of increasing and convex functions, explicit solutions are derived. Depending on the risk measure's level of confidence, the safety loading for the reinsurance premium, and the expected profit guaranteed for the insurer, we establish conditions for the existence of reinsurance. When it is optimal to cede the insurer's risk, the optimal reinsurance design could be in the form of pure stop-loss reinsurance, quota-share reinsurance, or a combination of stop-loss and quota-share reinsurance.
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Optimal insurance under multiple sources of risk with positive dependence. Lu, ZhiYi; Liu, LePing; Meng, LiLi [RKN: 44866] Shelved at: Online Only Shelved at: Online Only Insurance: Mathematics & Economics (2012) 51(2) : 462-471.
In this paper we try to derive an optimal insurance treaty when the insured faces multiple sources of risk. We show that the deductible insurance is optimal when the insurable and uninsurable risks are positively dependent or independent within the expected utility framework. A necessary condition of optimal deductible is given under some mild conditions. We compare our model with the classical one without background risk. Furthermore, the shifts of optimal deductible and expected utility by modifications of the dependence structure and the marginal are analyzed. Available via Athens: ScienceDirect http://www.openathens.net/
Optimal reinsurance revisited point of view of cedent and reinsurer. Hürlimann, Werner - 28 pages. [RKN: 74746] Shelved at: Per: Astin Bull (Oxf) Shelved at: JOU ASTIN Bulletin (2011) 41 (2) : 547-474.
It is known that the partial stop-loss contract is an optimal reinsurance form under the VaR risk measure. Assuming that market premiums are set according to the expected value principle with varying loading factors, the optimal reinsurance parameters of this contract are obtained under three alternative single and joint party reinsurance criteria: (i) strong minimum of the total retained loss VaR measure; (ii) weak minimum of the total retained loss VaR measure and maximum of the reinsurer‘s expected profit; (iii) weak minimum of the total retained loss VaR measure and minimum of the total variance risk measure. New conditions for financing in the mean simultaneously the cedent's and the reinsurer's required VaR economic capital are revealed for situations of pure risk transfer (classical reinsurance) or risk and profit transfer (design of internal reinsurance or reinsurance captive owned by the captive of a corporate firm). http://www.actuaries.org/index.cfm?lang=EN&DSP=PUBLICATIONS&ACT=ASTIN BULLETIN
OPTION PRICING Computing bounds on the expected payoff of Alternative Risk Transfer products. Villegas, Andrés M; Medaglia, Andrés L; Zuluaga, Luis F [RKN: 44786] Shelved at: Online Only Shelved at: Online Only Insurance: Mathematics & Economics (2012) 51(2) : 271-281.
The demand for integrated risk management solutions and the need for new sources of capital have led to the development of innovative risk management products that mix the characteristics of traditional insurance and financial products. Such products, usually referred as Alternative Risk Transfer (ART) products include: (re)insurance contracts that bundle several risks under a single policy; multi-trigger products where the payment of benefits depends upon the occurrence of several events; and insurance linked securities that place insurance risks in the capital market. Pricing of these complex products usually requires tailor-made complex valuation methods that combine derivative pricing and actuarial science techniques for each product, as well as strong distributional assumptions on the ART‘s underlying risk factors. We present here an alternative methodology to compute bounds on the price of ART products when there is limited information on the distribution of the underlying risk factors. In particular, we develop a general optimization-based method that computes upper and lower price bounds for different ART products using market data and possibly expert information about the underlying risk factors. These bounds are useful when the structure of the product is too complex to develop analytical or simulation valuation methods, or when the scarcity of data makes it difficult to make strong distributional assumptions on the risk factors. We illustrate our results by computing bounds on the price of a floating retention insurance contract, and a catastrophe equity put (CatEPut) option. Available via Athens: ScienceDirect http://www.openathens.net/
ORGANISATION AND METHODS Restructuring of the Dutch nonlife insurance industry: consolidation, organizational form, and focus. Bikker, Jacob A; Gorter, Janko - 22 pages. [RKN: 74849] Shelved at: Per: J.Risk Ins (Oxf) Shelved at: JOU Journal of Risk and Insurance (2011) 78 (1) : 163-184.
Since the deregulation of the European insurance market in 1994, Dutch nonlife insurance firms have sized up and increased their focus. Concurrently, the stock organizational form has become increasingly dominant. This article investigates these 1995–2005 trends from a cost-efficiency perspective. We observe substantial economies of scale that are even larger for smaller firms. In line with the efficient structure hypothesis, both stocks and mutuals are found to have comparative cost advantages. Supporting the strategic focus hypothesis, we find that more specialized insurers have lower costs. Thick frontier efficiency estimates point to large cost X-inefficiencies that have moderately decreased over time. Available via Athens: Wiley Online Library http://www.openathens.net
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PENSION PLANS Assessing adequacy of retirement income for U.S. households: a replacement ratio approach. Yuh, Yoonkyung Palgrave Macmillan, [RKN: 45335] Shelved at: Per: Geneva (Oxf) Geneva Papers on Risk and Insurance (2011) 36(2) : 304-323.
The retirement income replacement ratio is projected using the Federal Reserve's Survey of Consumer Finances. On the basis of lognormal portfolio projections and current portfolio allocation, at least 44 per cent of pre-retired households will not be able to maintain 70 per cent of permanent income standard in retirement. Households planning to retire later and taking a high financial risk in savings and investments have a higher projected replacement ratio. Households having a high proportion of non-housing assets held in equity or bonds have a higher projected replacement ratio than those having a high proportion in cash equivalents. Available via Athens: Palgrave MacMillan http://www.openathens.net
PENSIONS Assessing adequacy of retirement income for U.S. households: a replacement ratio approach. Yuh, Yoonkyung Palgrave Macmillan, [RKN: 45335] Shelved at: Per: Geneva (Oxf) Geneva Papers on Risk and Insurance (2011) 36(2) : 304-323.
The retirement income replacement ratio is projected using the Federal Reserve's Survey of Consumer Finances. On the basis of lognormal portfolio projections and current portfolio allocation, at least 44 per cent of pre-retired households will not be able to maintain 70 per cent of permanent income standard in retirement. Households planning to retire later and taking a high financial risk in savings and investments have a higher projected replacement ratio. Households having a high proportion of non-housing assets held in equity or bonds have a higher projected replacement ratio than those having a high proportion in cash equivalents. Available via Athens: Palgrave MacMillan http://www.openathens.net
An empirical analysis of the effect of financial education on graduating business students’ perceptions of their retirement planning familiarity, motivation, and preparedness. Power, Mark L; Hobbs, Jonathan M; Ober, Ashley - 17 pages. [RKN: 74771] Shelved at: JOU Risk Management and Insurance Review (2011) 14 (1) : 89-105.
Today's multifaceted and dynamic financial environment requires a high level of individual financial literacy to ensure that sound financial behaviors are the norm. Unfortunately, many individuals have limited knowledge regarding financial issues and are ill prepared to make sound financial choices. The purpose of this article was to benchmark and then determine if graduating business students‘ perception of their retirement planning familiarity, motivation, and preparedness improved after taking a semester-long course in Personal Risk Management and Insurance (PRMI). We discovered that business students were more financially literate than nonbusiness students and that business students‘ familiarity with retirement plans and personal level of readiness to make retirement planning decisions improved significantly after taking the principles class. Specifically, we showed that only 15.8 percent and 42.3 percent of the nonbusiness and business control students, respectively, felt adequately prepared to make retirement decisions, while 82 percent of the business students who completed the PRMI class felt prepared. Ex post, graduating seniors who were exposed to coursework covering life-cycle risks and options to treat those risks perceived that they are leaving college with a better ability to meet the financial challenges that await them. Last, we showed that significant differences existed in retirement plan and investment familiarity based on gender. Our findings provide support for including financial literacy as a general education requirement at colleges and universities. Available via Athens: Wiley Online Library http://www.openathens.net
Tax incentives and household investment in complementary pension insurance : Some recent evidence from the Italian experience. Marino, Immacolata; Pericoli, Filippo; Ventura, Luigi - 17 pages. [RKN: 74764] Shelved at: JOU Risk Management and Insurance Review (2011) 14 (2) : 247-263.
We show by a simple difference-in-difference methodology that, contrary to prior research, robustly raising the deductibility limit associated to pension fund holdings in Italy did not succeed in boosting households‘ contributions to this form of savings. Some other empirical findings also suggest that this policy measure may have not even increased the average amount of first-time contributors to such funds. In view of the specific features of the Italian market for complementary insurance (relatively young and less developed), these empirical results might be of interest to policymakers acting in countries with similar features (for instance, some of the more recent EU members). Available via Athens: Wiley Online Library http://www.openathens.net
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PERFORMANCE Key performance indicators of UK insurance companies : volume 1: 2009-2010. O'Brien, Christopher D; Orton, Tim R (2011). - Nottingham: Centre for Risk & Insurance Studies, 2011. - 108 pages. [RKN: 45508] Shelved at: BU/ELCB
We have compiled data from over 180 companies (including many subsidiaries), based on what firms regard as important: their key performance indicators (KPIs). Our report sets out the KPIs of those companies, where reported in their 2009 accounts and also for 2010, for 21 listed insurers and 5 major mutuals. The report includes an Excel spreadsheet that sets out those KPIs, and also the following data items for 2008 and 2009 where reported: · Premiums: earned and written, gross and net; · Claims paid (gross); claims incurred (net); · Administration expenses; net operating expenses; · Pre-tax profit; profit after tax; · Assets; shareholders‘ equity; fund for future appropriations; · Technical provisions; and outstanding claims (gross and net of reinsurance); · New life business annual premium, single premium, APE; capital resources for long-term business and regulatory requirement (life insurers). The spreadsheet also shows the following calculated ratios: · Expense ratio; combined ratio (general insurers); and rate of return on equity. There are tables indicating the top 10 insurers by assets, premiums, shareholders‘ equity, profits, rate of return on equity, and combined ratio. The report includes a paper presented to the 33rd UK Insurance Economists‘ conference that analyses the data. Among its findings was that while some firms did not disclose KPIs, firms which were less profitable were more likely than others to disclose KPIs. Includes 1 spreadsheet located as in network location. -- Replaces "Insurance Company Performance" RKN 39236
PERSONAL INJURY COMPENSATION Damages for personal injury and death: legal aspects relevant to actuarial assessments. Koch, Robert J - 24 pages. [RKN: 74815] Shelved at: Per: SAAJ (Oxf) Shelved at: JOU South African Actuarial Journal (2011) 11 : 111-134.
In this paper the actuarial assessment of damages for personal injury and death is discussed in the context of South African law. The legal framework imposes a variety of calculation rules that need to be born in mind if an actuary is to produce a quality product. This framework changes with the passage of time. The purpose of the paper is to summarise the current state of affairs and highlight issues deserving of further actuarial discussion. http://www.actuarialsociety.org.za/News-and-Publications/Publications/South-African-Actuarial-Journal-671.aspx
Index clause: analytical properties and the capitalization strategy. Zimmerman, Pavel [RKN: 44844] Shelved at: online only European Actuarial Journal (2012) 2(1) July : 149-160.
In non-life insurance, some bodily liability losses (e.g. loss of income) are paid out as annuity until specified age or death of victim. In case of excess of loss reinsurance, reinsurers often do not accept the inflation risk embedded in such losses and therefore include in the reinsurance treaty so called index clause which increases the priority by the impact of the inflation on the loss. A formula to calculate the expected reinsurance recoveries and its limiting behavior in case of presence of the index clause is derived and illustrated. A capitalization strategy which minimizes the insurer‘s loss is derived. Available online via Athens -- Published online, July 2012 http://www.openathens.net
POISSON PROCESS Bayesian multivariate Poisson models for insurance ratemaking. Bermudez, Lluis; Karlis, Dimitris [RKN: 40017] Shelved at: Per: IME (Oxf) Insurance: Mathematics & Economics (2011) 48 (2) : 226-236.
When actuaries face the problem of pricing an insurance contract that contains different types of coverage, such as a motor insurance or a homeowner‘s insurance policy, they usually assume that types of claim are independent. However, this assumption may not be realistic: several studies have shown that there is a positive correlation between types of claim. Here we introduce different multivariate Poisson regression models in order to relax the independence assumption, including zero-inflated models to account for excess of zeros and overdispersion. These models have been largely ignored to date, mainly because of their computational difficulties. Bayesian inference based on MCMC helps to resolve this problem (and also allows us to derive, for several quantities of interest, posterior summaries to account for uncertainty). Finally, these models are applied to an automobile insurance claims database with three different types of claim. We analyse the consequences for pure and loaded premiums when the independence assumption is relaxed by using different multivariate Poisson regression models together with their zero-inflated versions. Available via Athens: ScienceDirect http://www.openathens.net
Modelling dependence in insurance claims process with Lévy copulas. Avanzi, Benjamin; Cassar, Luke C; Wong, Bernard - 35 pages. [RKN: 74747] Shelved at: Per: Astin Bull (Oxf) Shelved at: JOU
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ASTIN Bulletin (2011) 41 (2) : 575-609. In this paper we investigate the potential of Lévy copulas as a tool for modelling dependence between compound Poisson processes and their applications in insurance. We analyse characteristics regarding the dependence in frequency and dependence in severity allowed by various Lévy copula models. Through the introduction of new Lévy copulas and comparison with the Clayton Lévy copula, we show that Lévy copulas allow for a great range of dependence structures. Procedures for analysing the fit of Lévy copula models are illustrated by fitting a number of Lévy copulas to a set of real data from Swiss workers compensation insurance. How to assess the fit of these models with respect to the dependence structure exhibited by the dataset is also discussed. Finally, we provide a decomposition of the trivariate compound Poisson process and discuss how trivariate Lévy copulas model dependence in this multivariate setting. http://www.actuaries.org/index.cfm?lang=EN&DSP=PUBLICATIONS&ACT=ASTIN BULLETIN
Prediction uncertainty in the Bornhuetter-Ferguson claims reserving method: revisited. Alai, D H; Merz, M; Wüthrich, Mario V Faculty of Actuaries and Institute of Actuaries; Cambridge University Press, [RKN: 39998] Shelved at: Per: AAS (Oxf) Per: AAS (Lon) Annals of Actuarial Science (2011) 5(1) : 7-17.
We revisit the stochastic model of Alai et al. (2009) for the Bornhuetter-Ferguson claims reserving method, Bornhuetter & Ferguson (1972). We derive an estimator of its conditional mean square error of prediction (MSEP) using an approach that is based on generalized linear models and maximum likelihood estimators for the model parameters. This approach leads to simple formulas, which can easily be implemented in a spreadsheet. http://www.actuaries.org.uk/research-and-resources/pages/access-journals
Seasonality modelling for catastrophe bond pricing. Hainaut, Donatien [RKN: 43469] Shelved at: online only Bulletin Français d'Actuariat (2012) 12 (no.23) : 129-150.
During the last decades, a new category of assets whose return is linked to insurance claims have appeared. Those assets, called catastrophe bonds, are primarily designed by insurers and reinsurers to transfer their risks to other categories of investors, looking for diversification. This paper proposes a method to price such bonds, when the claims arrival process is under the influence of a stochastic seasonal effect. The arrival process is modeled by a Poisson Process whose intensity is the sum of an Ornstein Uhlenbeck process and of one periodic function. The size of claims is assumed to be a positive random variable, independent of the intensity process. In this paper, we show that the expected number of claims can be inferred from the probability generating function and propose a pricing method of the fair coupon based on the Fourier Transform. To illustrate the tractability of our model, we price insurance bonds on claims resulting from tornadoes in the US. http://www.institutdesactuaires.com/bfa/
POVERTY Aspects actuariels de la micro-assurance. Vivier, Eric [RKN: 43470] Shelved at: online only Bulletin Français d'Actuariat (2012) 12 (no.23) : 151-159.
Micro-insurance (insurance for low income people) with its scarcity of reliable data and feeble risk carriers requires an adjustment of actuarial practices. Furthermore it is the whole insurance process which has to be considered with entirely new concepts in order to bring the security needed for economic development. In the future there will be actuaries born in those societies concerned by microinsurance who will establish the foundations of such an actuarial science; in the meantime it is necessary to adjust the traditional actuarial tools to this new frame. Paper in French http://www.institutdesactuaires.com/bfa/
PREMIUM CALCULATION An academic view on the illiquidity premium and market-consistent valuation in insurance. Wüthrich, Mario V [RKN: 44807] Shelved at: online only European Actuarial Journal (2011) 1(1) July : 93-105.
The insurance industry currently discusses to which extent they can integrate an illiquidity premium into their best estimate considerations of insurance liabilities. The present position paper studies this question from an actuarial perspective that is based on market-consistent valuation. We conclude that mathematical theory does not allow for discounting insurance liabilities with an illiquidity spread. Available via Athens http://www.openathens.net
Insurance pricing, reserving, and performance evaluation under external constraints on capitalization and return on equity. Ulm, Eric R - 26 pages. [RKN: 70738] Shelved at: Per: J.Risk Ins (Oxf) Shelved at: JOU Journal of Risk and Insurance (2012) 79 (2) : 541-566.
We derive formulas for calculating the premiums that should be charged on policies in a discounted cash flow model with tax reserves and required assets that are determined by regulation. We also determine the unique division of required assets into ―reserves‖ and ―capital‖ that allows the product profitability to be correctly evaluated. That is, the profit after capital charges is zero if the product achieves the return assumed in pricing. We illustrate the concepts using whole life insurance and guaranteed
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minimum death benefit examples. Available via Athens: Wiley Online Library http://www.openathens.net
Optimal reinsurance under variance related premium principles. Chi, Yichun [RKN: 44790] Shelved at: Online Only Shelved at: Online Only Insurance: Mathematics & Economics (2012) 51(2) : 310-321.
In this paper, we investigate the optimal form of reinsurance when the insurer seeks to minimize the value at risk(VaR) or the conditional value at risk(CVaR) of his/her total risk exposure. In order to exclude the moral hazard from a reinsurance treaty, both the ceded and retained loss functions are constrained to be increasing. Under the additional assumption that the reinsurance premium is calculated by a variance related principle, we show that the layer reinsurance is always optimal over both the VaR and CVaR criteria. Finally, the variance and standard deviation premium principles are applied to illustrate how to derive the optimal deductible and the upper limit of layer reinsurance. Available via Athens: ScienceDirect http://www.openathens.net/
PREMIUM RESERVES Risk processes with dependence and premium adjusted to solvency targets. Constantinescu, Corina; Maume-Deschamps, Véronique; Norberg, Ragnar [RKN: 44838] Shelved at: online only European Actuarial Journal (2012) 2(1) July : 1-20.
This paper considers risk processes with various forms of dependence between waiting times and claim amounts. The standing assumption is that the increments of the claims process possess exponential moments so that variations of the Lundberg upper bound for the probability of ruin are in reach. The traditional point of view in ruin theory is reversed: rather than studying the probability of ruin as a function of the initial reserve under fixed premium, the problem is to adjust the premium dynamically so as to obtain a given ruin probability (solvency requirement) for a fixed initial reserve (the financial capacity of the insurer). This programme is carried through in various models for the claims process, ranging from Cox processes with i.i.d. claim amounts, to conditional renewal (Sparre Andersen) processes. Available online via Athens -- Published online, July 2012 http://www.openathens.net
Threshold dividend strategies for a Markov-additive risk model. Breuer, Lothar [RKN: 44835] Shelved at: online only European Actuarial Journal (2011) 1(2) November : 237-258.
We consider the following risk reserve model. The premium income is a level dependent Markov-modulated Brownian motion. Claim sizes are iid with a phase-type distribution. The claim arrival process is a Markov-modulated Poisson process. For this model the payment of dividends under a threshold dividend strategy and the time until ruin will be analysed. Available online via Athens -- Published online, 22 December 2011 http://www.openathens.net
PREMIUMS Log-supermodularity of weight functions, ordering weighted losses, and the loading monotonicity of weighted premiums. Sendov, Hristo S; Wang, Ying; Zitikis, Ricardas [RKN: 40020] Shelved at: Per: IME (Oxf) Insurance: Mathematics & Economics (2011) 48 (2) : 257-264.
The paper is motivated by a problem concerning the monotonicity of insurance premiums with respect to their loading parameter: the larger the parameter, the larger the insurance premium is expected to be. This property, usually called the loading monotonicity, is satisfied by premiums that appear in the literature. The increased interest in constructing new insurance premiums has raised a question as to what weight functions would produce loading-monotonic premiums. In this paper, we demonstrate a decisive role of log-supermodularity or, equivalently, of total positivity of order 2 (TP2) in answering this question. As a consequence, we establish–at a stroke–the loading monotonicity of a number of well-known insurance premiums, and offer a host of further weight functions, and consequently of premiums, thus illustrating the power of the herein suggested methodology for constructing loading-monotonic insurance premiums. Available via Athens: ScienceDirect http://www.openathens.net
PRICE COMPETITION Equitable solvent controls in a multi-period game model of risk. Malinovskii, Vsevolod K [RKN: 44878] Shelved at: Online Only Shelved at: Online Only Insurance: Mathematics & Economics (2012) 51(3) : 599-616.
In insurance two major types of cycles are known: (a) regular many years long up- and down-swings referred to as underwriting cycles and (b) irregular short-range fluctuations. The key rationale of the underwriting cycles is migration of insureds triggered by the insurers‘ price competition while the short-range fluctuations are due to unpredictable fluctuations in economic surroundings.
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The competition-originated cycles were modeled in the framework of a Lundberg‘s-type multi-period model of risk in [Malinovskii, 2010] and [Malinovskii, submitted for publication]. Short-range fluctuations were modeled under diverse nature scenarios in the framework of (i) diffusion (see Malinovskii, 2007 [V.K. Malinovskii (2007), Zone-adaptive control strategy for a multiperiodic model of risk, Annals of Actuarial Science, 2 , 391-409] and Malinovskii, 2009 [V.K. Malinovskii (2009), Scenario analysis for a multi-period diffusion model of risk, ASTIN Bulletin, 39, 649-676]) and (ii) Lundberg‘s-type multi-period model (see Malinovskii, 2008a [V.K. Malinovskii (2008), Adaptive control strategies and dependence of finite time ruin on the premium loading, Insurance: Mathematics and Economics, 42, 81-94]). In this paper the results of Malinovskii (2009) are extended on the Lundberg‘s-type multi-period model. Available via Athens: ScienceDirect http://www.openathens.net/
Raising capital in an insurance oligopoly market. Hardelin, Julien; Lemoyne de Forges, Sabine - 26 pages. [RKN: 74943] Shelved at: Per: Geneva (Oxf) Geneva Risk and Insurance Review (2012) 37 (1) : 83-108.
We consider an oligopoly market where firms offer insurance coverage against a risk characterised by aggregate uncertainty. Firms behave as if they were risk averse for a standard reason of costly external finance. The model consists in a two-stage game where firms choose their internal capital level at stage one and compete on price at stage two. We characterise the subgame perfect Nash equilibria of this game and focus attention on the strategic impact of insurers capital choice. We discuss the model with regard to the insurance industry specificities and regulation.
PRICING Canonical valuation of mortality-linked securities. Li, Johnny Siu-Hang; Ng, Andrew Cheuk-Yin - 32 pages. [RKN: 74875] Shelved at: Per: J.Risk Ins (Oxf) Shelved at: JOU Journal of Risk and Insurance (2011) 78 (4) : 853–884.
A fundamental question in the study of mortality-linked securities is how to place a value on them. This is still an open question, partly because there is a lack of liquidly traded longevity indexes or securities from which we can infer the market price of risk. This article develops a framework for pricing mortality-linked securities on the basis of canonical valuation. This framework is largely nonparametric, helping us avoid parameter and model risk, which may be significant in other pricing methods. The framework is then applied to a mortality-linked security, and the results are compared against those derived from other methods. Available via Athens: Wiley Online Library http://www.openathens.net
Equilibrium pricing of general insurance policies. Emms, Paul Society of Actuaries, - 17 pages. [RKN: 70654] Shelved at: Per: NAAJ (Oxf) Per NAAJ (Lon) Shelved at: JOU North American Actuarial Journal (2012) 16 (3) : 323-349.
A model is developed for determining the price of general insurance policies in a competitive, noncooperative market. This model extends previous single-optimizer pricing models by supposing that each participant chooses an optimal pricing strategy. Specifically, prices are determined by finding a Nash equilibrium of an N-player differential game. In the game, a demand law describes the relationship between policy sales and premium, and each insurer aims to maximize its (expected) utility of wealth at the end of the planning horizon. Two features of the model are investigated in detail: the effect of limited total demand for policies, and the uncertainty in the calculation of the breakeven (or cost price) of an insurance policy. It is found that if the demand for policies is unlimited, then the equilibrium pricing strategy is identical for all insurers, and it can be found analytically for particular model parameterizations. However, if the demand for policies is limited, then, for entrants to a new line of business, there are additional asymmetric Nash equilibria with insurers alternating between maximal and minimal selling. Consequently it is proposed that the actuarial cycle is a result of price competition, limited demand, and entry of new insurers into the market. If the breakeven premium is highly volatile, then the symmetric equilibrium premium loading tends to a constant, and it is suggested that this will dampen the oscillatory pricing of new entrants. http://www.soa.org/news-and-publications/publications/journals/naaj/naaj-detail.aspx
An insurance pricing game. Haley, Joseph D - 12 pages. [RKN: 73824] Shelved at: JOU Risk Management and Insurance Review (2012) 15 (1) : 117-128.
Understanding data and statistical distributions is a fundamental part of an undergraduate business student's education. The insurance pricing game presented here gives the students a unique way to apply statistical analysis in the classroom. The game requires decision making about risk with limited information. Specifically, the students must decide what ―premium‖ to charge the members of a hypothetical risk pool. The game provides teachers with a discussion platform for numerous aspects of insurer risk pooling. Available via Athens: Wiley Online Library http://www.openathens.net
Insurance pricing with complete information, state-dependent utility, and production costs. Ramsay, Colin M; Oguledo, Victor I [RKN: 45649] Shelved at: Online Only Shelved at: Online Only Insurance: Mathematics & Economics (2012) 50 (3) : 462-469.
We consider a group of identical risk-neutral insurers selling single-period indemnity insurance policies. The insurance market consists of individuals with common state-dependent utility function who are identical except for their known accident probability q. Insurers incur production costs (commonly called expenses or transaction costs by actuaries) that are proportional to the amount of insurance purchased and to the premium charged. By introducing the concept of insurance desirability, we prove that the existence of insurer expenses generates a pair of constants qmin and qmax that naturally partitions the applicant pool into three mutually exclusive and exhaustive groups of individuals: those individuals with accident probability q [0,qmin) are insurable but do not desire insurance, those individuals with accident probability q [qmin,qmax] are insurable and desire insurance, and those individuals with accident probability q (qmax,1] desire insurance but are uninsurable. We also prove that, depending on the level of
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q and the marginal rate of substitution between states, it may be optimal for individuals to buy complete (full) insurance, partial insurance, or no insurance at all. Finally, we prove that when q is known in monopolistic markets (i.e., markets with a single insurer), applicants may be induced to ―over insure‖ whenever partial insurance is bought. Available via Athens: ScienceDirect http://www.openathens.net/
Non-risk price discrimination in insurance : market outcomes and public policy. Thomas, R Guy Palgrave Macmillan, [RKN: 45540] Shelved at: Per: Geneva (Oxf) Geneva Papers on Risk and Insurance (2012) 37(1) : 27-46.
This paper considers price discrimination in insurance, defined as systematic price variations based on individual customer data but unrelated to those customers‘ expected losses or other marginal costs (sometimes characterised as ―price optimisation‖). An analysis is given of one type of price discrimination, ―inertia pricing‖, where renewal prices are higher than prices for risk-equivalent new customers. The analysis suggests that the practice intensifies competition, leading to lower aggregate industry profits; customers in aggregate pay lower prices, but not all customers are better off; and the high level of switching between insurers is inefficient for society as a whole. Other forms of price discrimination may be more likely to increase aggregate industry profits. Some public policy issues relating to price discrimination in insurance are outlined, and possible policy responses by regulators are considered. It is suggested that competition will tend to lead to increased price discrimination over time, and that this may undermine public acceptance of traditional justifications for risk-related pricing. Available via Athens: Palgrave MacMillan http://www.openathens.net
Pricing for multiline insurer: Frictional costs, insolvency, and asset allocation. Zhang, Li; Nielson, Norma - 24 pages. [RKN: 70627] Shelved at: JOU Risk Management and Insurance Review (2012) 15 (2) : 129-152.
This article examines multiline insurance pricing based on the contingent claim approach in a limited liability and frictional costs environment. Capital allocation is based on the value of the default option, which satisfies the realistic assumption that each distinct line undertakes a pro rata share of deficit caused by insurer insolvency. Premium levels, available assets, and default risk interact with each other and reach equilibrium at the fair premium. The assets available to pay for liabilities are not predetermined or given; instead, the premium income and investment income jointly influence the available assets. The results show that equity allocation does not influence the overall fair premium. For a given expected loss, the premium-to-expected-loss ratio for firms offering multiple lines is higher than that for firms only offering a single line, due to the reduced risk achieved through diversification. Premium-to-expected-loss ratio and equity-to-expected-loss ratio vary across lines. Lines having a higher possibility or claim amount not being paid in full exhibit lower premium-to-expected-loss ratio and higher equity-to-expected-loss ratio. Positive correlation among lines of business results in lower premium-to-expected-loss ratio than when independent losses are assumed. Positive correlation between investment return and losses reduces the insolvency risk and leads to a higher premium-to-expected-loss ratio. Available online via Athens: Wiley Online Library http://onlinelibrary.wiley.com/doi/10.1111/j.1540-6296.2012.01214.x/abstract
Redefining the deviance objective for generalised linear models. Lovick, Anthony C; Lee, Peter K W (2011). - London: Institute and Faculty of Actuaries, 2011. - 28 pages. [RKN: 73663] Shelved at: JOU
This paper defines the 'Case deleted' deviance - a new objective function for evaluating Generalised Linear Models, and applies this to a number of practical examples in the pricing of general insurance. The paper details practical modifications to the standard Generalsed Linear Modelling Algorithm to allow the derivation of scaled parameters from this measure to reduce potential over fitting to historical data. These scaled parameters improve the predictiveness of the model when applied to previously unseen data points, the most likely being related to future business written. The potential for over fitting has increased due to number of factors now used, particularly in pricing personal lines business and the advent of price comparison sites which has increased the penalties of mis-estimation. New material in this paper has been included in a UK patent application No. 1020091.3. Presented to the Institute and Faculty of Actuaries on 28 March 2011 (London) and 6 June 2011 (Norwich). http://www.actuaries.org.uk/research-and-resources/documents/redefining-deviance-objective-generalised-linear-models
PROBABILITY DISTORTION Iterative adjustment of survival functions by composed probability distortion. Bienvenue, Alexis; Rullière, Didier - 24 pages. [RKN: 70261] Shelved at: Per: Geneva (Oxf) Geneva Risk and Insurance Review (2012) 37 (2) : 156-179.
We introduce a parametric class of composite probability distortions that can be combined to converge to a target survival function. These distortions respect analytic invertibility and stability, which are shown to be relevant in many actuarial fields. We study the asymptotic impact of such distortions on hazard rates. The paper provides an estimation methodology, including hints for initialisation. Some applications to survival data bring results for catastrophic event impact modelling. We also obtain accurate parametric representations of the mortality trend over years. Finally, we suggest a prospective mortality simulation model that comes naturally from the above analysis.
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PRODUCTS A credibility method for profitable cross-selling of insurance products. Thuring, Fredrik Faculty of Actuaries and Institute of Actuaries; Cambridge University Press, [RKN: 45561] Shelved at: Per: AAS (Oxf) Per: AAS (Lon) Annals of Actuarial Science (2012) 6(1) : 65-75.
A method is presented for identifying an expected profitable set of customers, to offer them an additional insurance product, by estimating a customer specific latent risk profile, for the additional product, by using the customer specific available data for an existing insurance product of the specific customer. For the purpose, a multivariate credibility estimator is considered and we investigate the effect of assuming that one (of two) insurance products is inactive (without available claims information) when estimating the latent risk profile. Instead, available customer specific claims information from the active existing insurance product is used to estimate the risk profile and thereafter assess whether or not to include a specific customer in an expected profitable set of customers. The method is tested using a large real data set from a Danish insurance company and it is shown that sets of customers, with up to 36% less claims than a priori expected, are produced as a result of the method. It is therefore argued that the proposed method could be considered, by an insurance company, when cross-selling insurance products to existing customers. Available via Athens: Cambridge Journals http://www.actuaries.org.uk/research-and-resources/pages/access-journals
PROFIT AND LOSS The impact of CEO turnover on property–liability insurer performance. He, Enya; Sommer, David W; Xie, Xiaoying - 26 pages. [RKN: 74866] Shelved at: Per: J.Risk Ins (Oxf) Shelved at: JOU Journal of Risk and Insurance (2011) 78 (3) : 583-608.
Chief executive officer (CEO) turnover has long been an important topic in the academic literature. Previous research has focused mostly on the rationale for CEO turnovers, or circumstances that lead to CEO changes, with much less attention paid to how CEO turnovers affect future firm performance. We extend the literature regarding the impact of CEO turnover on performance using data for U.S. property-liability insurers. Measuring firm performance with cost efficiency (CE) and revenue efficiency (RE) scores, we find strong support for the hypothesis that firms with a CEO turnover, especially those with a nonroutine turnover, experience more favorable performance changes than firms without a CEO turnover. Available via Athens: Wiley Online Library http://www.openathens.net
PROPERTY INSURANCE An analysis of contingent commission use by property-liability insurers. Colquitt, L Lee; McCullough, Kathleen A; Sommer, David W - 15 pages. [RKN: 74760] Shelved at: JOU Risk Management and Insurance Review (2011) 14 (2) : 157-171.
The payment of contingent commissions in the property–liability insurance industry has long been commonplace, but recent events have made the practice highly controversial. Even prior to these events, wide variation existed among insurers in their use of contingent commissions. In this article, we examine the determinants of whether or not an insurer chooses to pay contingent commissions at all, as well as the determinants of the extent of their use for those insurers that pay them. We find a number of variables that have a significant relation to the use and extent of use of contingent commissions. Available via Athens: Wiley Online Library http://www.openathens.net
An analysis of reinsurance and firm performance: evidence from the Taiwan property-liability insurance industry. Lee, Hsu-Hua; Lee, Chen-Ying [RKN: 43634] Shelved at: Per: Geneva Geneva Papers on Risk and Insurance (2012) 37(3) : 467-484.
This study investigates the relationship between reinsurance and firm performance by sourcing panel data from the 1999 to 2009 period of the property-liability insurance industry in Taiwan. The results of this investigation offer some insight that firm performance and reinsurance are interdependent. We find that insurers with higher return on assets (ROA) tend to purchase less reinsurance and insurers with higher reinsurance dependence tend to have a lower level of firm performance. Therefore, managers have to strike a balance between decreasing insolvency risk and reducing potential profitability. Other empirical results show that ROA, underwriting risks, liquidity ratio, business line concentration, return on investment (ROI) and financial holding dummy have a significant correlation with reinsurance. In addition, firm size, financial leverage, reinsurance, underwriting risks, liquidity ratio and ROI have a significant influence on firm performance. Our results have practical implications for the property-liability insurance industry and competent authorities in Taiwan. Available via Athens: Palgrave MacMillan http://www.openathens.net
Are territorial rating models outdated in residential property insurance markets? : Evidence from the Florida property insurance market. Nyce, Charles; Maroney, Patrick - 32 pages. [RKN: 74762] Shelved at: JOU Risk Management and Insurance Review (2011) 14 (2) : 201-232.
The fundamental shift in rating methodology from historical loss costs to catastrophe modeling for windstorm coverage calls into
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question the accuracy of rates developed using rating territories. Using premiums and modeled average annual loss (AAL) estimates from Citizens Property Insurance Corporation (Citizens) in Florida, this article analyzes the use of distance to coast (DtC) as a rating variable in providing coverage for the windstorm peril in homeowners insurance. Catastrophe models used to generate AAL costs do not rely on the same application of the law of large numbers as using historical loss costs and thus allows for more granular pricing of the windstorm peril. The results show that DtC, a rating variable that is property specific, more closely aligns premiums and AALs than territorial rating, and allows more granular pricing of the windstorm peril. More granular risk based pricing provides better incentives for homeowners regarding location and mitigation choices and may help reduce aggregate exposure to windstorm damages in the long run. Available via Athens: Wiley Online Library http://www.openathens.net
Conversion and efficiency performance changes: evidence from the U.S. property-liability insurance industry. Chen, Lih-Ru; Lai, Gene C; Wang, Jennifer L [RKN: 45273] Shelved at: Per: Geneva (Oxf) Geneva Risk and Insurance Review (2011) 36 (1) : 1-35.
This study investigates whether the conversion of U.S. property-liability insurers improves their efficiency performance before and after the conversion. We estimate relative efficiency of converting insurers and control insurers using data envelopment analysis. The Malmquist analysis is also used to measure changes in efficiency pre- and post-conversion. The evidence shows that converting insurers experience larger gains in cost efficiency and total productivity change than mutual control insurers before conversion. In addition, the empirical results indicate that converting insurers improve efficiency after conversion. These results are robust with respect to both the value-added and the financial intermediary approaches. The overall results support the efficiency hypothesis proposed by Mayers and Smith (1986).
The impact of climate change on precipitation-related insurance risk : A study of the effect of future scenarios on residential buildings in Norway. Scheel, Ida; Hinnerichsen, Mikkel Palgrave Macmillan, [RKN: 45664] Shelved at: Per: Geneva Geneva Papers on Risk and Insurance (2012) 37(2) : 365-376.
Climate change is likely to increase the future risk of weather-related damage to buildings worldwide. This challenge is faced by society in general, but the insurance industry is particularly important in the management of the anticipated increase in future risk. In addition to adjusting premiums appropriately and gradually, they can play an important role in prevention. It is crucial to know which areas are vulnerable and to what extent. In this paper, a spatial regression model for linking weather-related insurance losses for residential buildings to meteorological and hydrological covariates is coupled with three plausible scenarios for the future climate in order to project the future number of weather-related residential building insurance losses in Norway. The model is trained on observed daily insurance loss and weather data at the municipality level. Our results indicate a dramatic increase in the projected future weather-related insurance risk in many parts of Norway. The procedure can be extended and applied to other areas globally. Available via Athens: Palgrave MacMillan http://www.openathens.net
Implementation of enterprise risk management: evidence from the German property-liability insurance industry. Altuntas, Muhammed; Berry-Stölzle, Thomas R; Hoyt, Robert E Palgrave Macmillan, [RKN: 44916] Shelved at: Per: Geneva (Oxf) Geneva Papers on Risk and Insurance (2011) 36(3) : 414-439.
Implementing a properly functioning enterprise risk management (ERM) programme has become increasingly important for insurance companies. Unlike traditional risk management where individual risks are managed in separate silos, ERM is based on the concept of managing all relevant risks in an integrated, holistic fashion. ERM has also been growing in importance as a result of increased attention on risk management in the context of corporate governance. A recent report by The Geneva Association identified strengthening ―risk management practices‖ as one of three key measures that ―aim to strengthen financial stability‖. Despite the heightened interest in ERM by insurance managers and actuaries, there is only limited empirical evidence on how insurance companies actually implement the ERM approach. The goal of our research is to examine the implementation of the ERM components by insurers. Therefore, we surveyed all German property-liability insurance companies with premiums written in excess of 40 million euros. There are 113 such insurers and 95 of them participated in our survey, leading to a response rate of 84 per cent. The questionnaire covers a comprehensive set of dimensions of an ERM system. In addition to detailed questions about specific ERM activities, the questionnaire assesses when these ERM activities were initiated. The results document significant increases in the extent to which ERM is being implemented by these firms and details the sequence of implementation of this evolving risk management process. Available via Athens: Palgrave MacMillan http://www.openathens.net
Optimal capital structure for a property-liability insurer. D'Arcy, Stephen P; Lwin, Teresa [RKN: 43636] Shelved at: Per: Geneva Geneva Papers on Risk and Insurance (2012) 37(3) : 509-538.
Traditional finance studies have found that firm value is maximised at a mid-range level of leverage. This paper empirically tests the effect of leverage on firm value for property-liability insurers. We analysed an international data set of 96 insurers from 1992 to 2006 using two measures for firm value (price-to-earnings and market-to-book) and three measures of leverage (liabilities-to-equity, premiums-to-equity and surplus duration). We found that price-to-earnings at first increases with leverage, as measured by liabilities-to-equity and premiums-to-equity, but decreases past a certain point. Market-to-book exhibited a similar pattern for the premium-to-equity ratio but had a positive relationship with liabilities-to-equity and a negative relationship with surplus duration. Available via Athens: Palgrave MacMillan http://www.openathens.net
Proposal for a national earthquake insurance programme for Greece. Petseti, Aglaia; Nektarios, Milton Palgrave Macmillan, [RKN: 45665] Shelved at: Per: Geneva
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Geneva Papers on Risk and Insurance (2012) 37(2) : 377-400. It is proposed that Greece undertakes the establishment of a national earthquake insurance programme for homeowners that will replace the ex post disaster relief by the State when an earthquake occurs. Greece is seismically the most active region in the whole Mediterranean. By employing four different catastrophe models, it has been estimated that the economic loss to the residential stock of a 1-in-200 year event is likely to be greater than 22 billion euros; for a 1-in-100 year event is about 14 billion euros; for an 1-in-25 year event is 5 billion euros; and for a 1-in-5 year event is 1.3 billion euros. This potential loss severity exposes the inherent limitations of the ex post funding approach to natural disasters adopted by successive Greek governments and underscores the urgent need for establishing a National Earthquake Insurance Programme. It is proposed that the earthquake coverage should be compulsory and the management of the insurance programme be based on the principle of a public–private partnership. The objective of the programme would be to provide affordable earthquake insurance, up to a maximum amount, to all homeowners, on the basis of risk-based premiums. A comprehensive and unique data bank of the residential stock in the country has been developed, which will be very useful to the local insurance industry as well as to reinsurers. Available via Athens: Palgrave MacMillan http://www.openathens.net
Risk and insurability of storm damages to residential buildings in Austria. Prettenthaler, Franz; Albrecher, Hansjorg; Koberla, Judith; Kortschak, Dominik Palgrave Macmillan, [RKN: 45663] Shelved at: Per: Geneva Geneva Papers on Risk and Insurance (2012) 37(2) : 340-364.
This paper develops a stochastic model to assess storm risk in Austria, which relates wind speed and actual losses. By virtue of a building-stock-value-weighted wind index, we use suitably normalised historical loss data of residential buildings over 12 years and corresponding wind speed data to calibrate the model. Subsequently, additional wind speed data is used to generate further scenarios and to obtain loss curves for storm risk that give rise to storm insurance loss quantiles and corresponding solvency capital requirements both on the aggregate and on the regional level. We also investigate the diversification effect across regions and use tools from extreme value theory to assess the insurability of storm risk in Austria in general. Available via Athens: Palgrave MacMillan http://www.openathens.net
Risk valuation of property-casualty insurers. Major, John A [RKN: 43603] Shelved at: Per: Variance Variance (2011) 5(2) : 124-140.
Risk valuation is the process of assigning a monetary value to a transformation of risk. Risk transformation can come about through changes in the operation of a business, explicit risk transfer mechanisms, financial changes, etc. This paper reviews the application of valuation techniques to address the question: ―Does this risk transformation create or destroy shareholder value?‖ Four broad classes of valuation models are compared: actuarial appraisal/valuation, economic capital, firm life annuity, and optimal dividends. Their key differences are seen to lie in their treatment of the firm‘s mortality and the circumstances under which recapitalization can occur. http://www.variancejournal.org/issues
What role for ―long-term insurance‖ in adaptation? : an analysis of the prospects for and pricing of multi-year insurance contracts. Maynard, Trevor; Ranger, Nicola Palgrave Macmillan, [RKN: 45662] Shelved at: Per: Geneva Geneva Papers on Risk and Insurance (2012) 37(2) : 318-339.
Multi-year insurance has been proposed as a tool to incentivise policy-holders to invest in property-level adaptation. In a world of rising natural catastrophe risks, such autonomous adaptations could have significant benefits for the property owner, the insurer and society. We review some arguments made in respect of multi-year contracts and provide new analyses on their price implications. We conclude that even under conditions of known and stationary risk, initial capital requirements could be around 50 per cent higher for a 10-year contract than an annual contract and the annual premium around 5.5 per cent higher; in the real world of changing and uncertain risks, premiums would be even higher. We also conclude that multi-year contracts have several additional disadvantages that are likely to limit their demand and availability in the general retail insurance market. For adaptation, we conclude that other tools, such as risk-based premiums and loans for adaptation tied to the property, have greater potential. Available via Athens: Palgrave MacMillan http://www.openathens.net
PROPERTY PRICES The effects of macroeconomic factors on pricing mortgage insurance contracts. Chang, Chia-Chien; Wang, Chou-Wen; Yang, Chih-Yuan - 29 pages. [RKN: 70434] Shelved at: Per: J.Risk Ins (Oxf) Shelved at: JOU Journal of Risk and Insurance (2012) 79 (3) : 867-895.
Numerous empirical studies, including Abraham and Hendershott (1996), Muellbauer and Murphy (1997), Leung (2004), and Oikarinen (2009), have identified a significant relationship between housing prices and macroeconomic factors. Using a linear regression on the comovement of macroeconomic factors and housing prices, this article employs an option-pricing framework to price and hedge the fair premia of mortgage insurance (MI). Our model provides improved performance in terms of MI premium pricing, especially during periods that are characterized by high housing prices. Ignoring the impacts of macroeconomic factors on housing prices will lead to an underestimation of MI premia. Available via Athens: Wiley Online Library http://www.openathens.net
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PROSPECT THEORY Corporate management of highly dynamic risks : Evidence from the demand for terrorism insurance in Germany. Thomann, Christian; Pascalau, Razvan; von der Schulenburg, J Mattias Graf - 26 pages. [RKN: 74942] Shelved at: Per: Geneva (Oxf) Geneva Risk and Insurance Review (2012) 37 (1) : 57-82.
This paper investigates a corporation's risk management response to highly dynamic risks. Using a unique data set on the German terrorist insurance market, the paper tests whether corporate risk managers have a clear understanding of the probability distribution of highly dynamic risks or if risk managers learn from severe losses and base their decisions upon day-to-day experience. The paper further investigates whether risk managers become more confident in their risk management decisions over time. For this purpose, we apply Viscusi's prospective reference theory to a corporate context. We find that firms learn from single events when making their risk management decisions, and that risk managers become more confident with their risk management decisions over time.
PRUDENCE Beyond risk aversion: Why, how and what's next? : EGRIE Keynote Address. Eeckhoudt, Louis - 15 pages. [RKN: 70260] Shelved at: Per: Geneva (Oxf) Geneva Risk and Insurance Review (2012) 37 (2) : 141-155.
Risk attitudes other than risk aversion (e.g. prudence and temperance) are becoming important both in theoretical and empirical work. While the literature has mainly focused its attention on the intensity of such risk attitudes (e.g. the concepts of absolute prudence and absolute temperance), I consider here an alternative approach related to the direction of these attitudes (i.e. the sign of the successive derivatives of the utility function).
RANDOM PROCESSES Correlated random effects for hurdle models applied to claim counts. Boucher, Jean-Philippe; Denuit, Michel; Guillén, Montserrat [RKN: 44926] Shelved at: Per: Variance Variance (2011) 5(1) : 68-81.
New models for panel data that consist of a generalization of the hurdle model are presented and are applied to modeling a panel of claim counts. Correlated random effects are assumed for the two processes involved to allow for dependence among all the contracts held by the same insured. A method to obtain a posteriori distribution of the random effects as well as predictive distributions of the number of claims is presented. A numerical illustration of reported insurance claims shows that if independence between random effects is assumed, then the variance of a priori premiums may be underestimated. If dependence between random effects is considered, then the predicted number of claims given past observations and covariate information and its variance is also larger than the one obtained when independence is assumed. http://www.variancejournal.org/issues
RANDOM WALK MODEL Second order asymptotics for ruin probabilities in a renewal risk model with heavy-tailed claims. Lin, Jianxi [RKN: 44861] Shelved at: Online Only Shelved at: Online Only Insurance: Mathematics & Economics (2012) 51(2) : 422-429.
In this paper, we establish the second order asymptotics of ruin probabilities of a renewal risk model under the condition that the equilibrium distribution of claim sizes belongs to a rather general heavy-tailed distribution subclass—the class of second order subexponential distributions with finite mean. What is more, this requirement is proved to be necessary. Furthermore, a rather general sufficient condition on the claim size distribution itself is presented. Moreover, an extension to the case of random walk is also included. Available via Athens: ScienceDirect http://www.openathens.net/
RATEMAKING Bayesian multivariate Poisson models for insurance ratemaking. Bermudez, Lluis; Karlis, Dimitris [RKN: 40017] Shelved at: Per: IME (Oxf) Insurance: Mathematics & Economics (2011) 48 (2) : 226-236.
When actuaries face the problem of pricing an insurance contract that contains different types of coverage, such as a motor insurance or a homeowner‘s insurance policy, they usually assume that types of claim are independent. However, this assumption may not be realistic: several studies have shown that there is a positive correlation between types of claim. Here we introduce different multivariate Poisson regression models in order to relax the independence assumption, including zero-inflated models to
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account for excess of zeros and overdispersion. These models have been largely ignored to date, mainly because of their computational difficulties. Bayesian inference based on MCMC helps to resolve this problem (and also allows us to derive, for several quantities of interest, posterior summaries to account for uncertainty). Finally, these models are applied to an automobile insurance claims database with three different types of claim. We analyse the consequences for pure and loaded premiums when the independence assumption is relaxed by using different multivariate Poisson regression models together with their zero-inflated versions. Available via Athens: ScienceDirect http://www.openathens.net
REFORM Regulation and reform of rating agencies in the European Union : an insurance industry perspective. Theis, Anja; Wolgast, Michael Palgrave Macmillan, [RKN: 45541] Shelved at: Per: Geneva (Oxf) Geneva Papers on Risk and Insurance (2012) 37(1) : 47-76.
This article investigates the current discussion on the regulatory framework for credit rating agencies (CRAs) from the perspective of the insurance industry, focusing on the European Union. It becomes apparent that the new European system of regulation and supervision of CRAs conforms well to general principles of economic theory and can be expected to resolve many issues of concern. In contrast, some of the additional policy options currently discussed in Europe could involve substantial costs and risks for market participants and the financial system without contributing further to the objectives of CRA reform. Available via Athens: Palgrave MacMillan http://www.openathens.net
Who responds to tax reforms? : evidence from the life insurance market. Hecht, Carolin; Hanewald, Katja Palgrave Macmillan, [RKN: 45539] Shelved at: Per: Geneva (Oxf) Geneva Papers on Risk and Insurance (2012) 37(1) : 5-26.
We exploit the natural experiment of the 2005 income tax reform in Germany to study the effects of tax incentives on consumer behaviour in life insurance markets. Our empirical analysis of sociodemographic, economic and psychological household characteristics elicited in the German SAVE study shows that two very different consumer groups buy (endowment) life insurance before and after the tax reform. We find that education plays a central role in reactions to the modified tax environment. Our stylised characterisation of ―arbitrageur‖ and ―straggler‖ buyers will assist both life insurance firms and regulatory authorities in designing effective policies. Available via Athens: Palgrave MacMillan http://www.openathens.net
REGRESSION Copula regression. Parsa, Rahul A; Klugman, Stuart A [RKN: 44927] Shelved at: Per: Variance Variance (2011) 5(1) : 45-54.
Regression analysis is one of the most commonly used statistical methods. But in its basic form, ordinary least squares (OLS) is not suitable for actuarial applications because the relationships are often nonlinear and the probability distribution of the dependent variable may be non-normal. One approach that has been successful in overcoming these challenges is the generalized linear model (GLM), which requires that the dependent variable have a distribution from the exponential family. In this paper, we present copula regression as an alternative to OLS and GLM. The major advantage of a copula regression is that there are no restrictions on the probability distributions that can be used. In this paper, we will present the formulas and algorithms necessary for conducting a copula regression analysis using the normal copula. However, the ideas presented here can be used with any copula function that can incorporate multiple variables with varying degrees of association. http://www.variancejournal.org/issues
REGULATION The cost of duplicative regulation: evidence from risk retention groups. Leverty, J Tyler - 24 pages. [RKN: 73849] Shelved at: Per: J.Risk Ins (Oxf) Shelved at: JOU Journal of Risk and Insurance (2012) 79 (1) : 105-128.
A vast majority of insurers are regulated by each state in which they conduct business; however, a small subset of specialized firms, risk retention groups (RRGs), are largely exempt from most aspects of duplicative regulation no matter how many states they operate. This article analyzes the differences between RRGs and standard insurers specializing in commercial liability insurance to determine the cost of duplicative regulation. The costs associated with multi-state regulation are significantly higher than those for single-entity regulation. These high regulatory compliance costs reduce the technical efficiency of firms, deter firms from operating in additional states, and increase the price of insurance. Available via Athens: Wiley Online Library http://www.openathens.net
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Editorial: Rules of engagement: global regulatory reforms and the insurance industry. Liedtke, Patrick M Palgrave Macmillan, [RKN: 44912] Shelved at: Per: Geneva (Oxf) Geneva Papers on Risk and Insurance (2011) 36(3) : 325-329.
Available via Athens: Palgrave MacMillan http://www.openathens.net
The effect of regulation on insurance pricing: the case of Germany. Berry-Stölzle, Thomas R; Born, Patricia - 36 pages. [RKN: 73850] Shelved at: Per: J.Risk Ins (Oxf) Shelved at: JOU Journal of Risk and Insurance (2012) 79 (1) : 129-164.
This article analyzes the impact of policy form regulation on the unit price of insurance and determinants of premium changes using the 1994 deregulation of the German property–liability market as a natural experiment. Our result show that policy form regulation did not increase prices above competitive levels. Factors influencing premium changes are significantly different for the two time periods, pre- and post-deregulation, indicating that regulation affects insurance pricing. Focusing on highly competitive lines after deregulation, we find a significant price decrease, and this decrease is offset by higher prices in the remaining other lines. Available via Athens: Wiley Online Library http://onlinelibrary.wiley.com/doi/10.1111/j.1539-6975.2010.01398.x/abstract
Insurance regulation: reflections for a post-crisis world. Monkiewicz, Jan; Kwon, W Jean; Liedtke, Patrick M; Kessler, Denis (2011). - Geneva: Geneva Association, 2011. - 44 pages. [RKN: 43489] Shelved at: BU/49 pam (Lon)
Dated January 2012 http://www.genevaassociation.org/PDF/BookandMonographs/GA2012-Insurance Regulation—Reflections for a Post-Crisis World.pdf
Multiperiod insurance supervision: top-down models. Eisele, Karl-Theodor; Artzner, Philippe [RKN: 44808] Shelved at: online only European Actuarial Journal (2011) 1(1) July : 107-130.
We describe a top-down procedure for the supervisory accounting of insurance companies with special emphasis on market impacts. The technical tools are a multiperiod risk assessment, a market consistent best estimate and an eligible asset. First, to avoid supervisory arbitrage by financial market instruments, the risk assessment is bounded by a market consistent best estimate. Applied to the risk bearing capital, i.e. asset value minus best estimate of obligations, the risk assessment immediately gives the free capital which has to be positive for acceptability. Next, optimal hedging of the obligation process by suitable asset portfolios yields the supervisory provision as the minimal initial value of a portfolio acceptable with respect to the given obligations. The problem to attain this minimal value leads to the definition of an optimal replicating portfolio. A further task of supervision is the determination of the ‗‗Fremd‘‘-capital in the supervisory balance sheet. This is formalized by the cost-of-capital method, i.e. a fictitious standardized transfer of the obligations to new investors on the market. The regulated price of such a transfer leads to the technical provision and the risk margin as ‗‗Fremd‘‘-capital items. Finally, the additional financial risks within the insurance‘s real asset portfolio are taken care of by the solvency capital requirement defined as the minimal acceptable ‗‗Eigen‘‘-capital for a given business plan. It measures the adequacy or inadequacy of the trading risks incorporated in the portfolio with respect to the obligation risks. An optimal replicating portfolio is characterized by a minimal solvency capital requirement. Solvency II and the Swiss Solvency Test (SST) are defined as bottom-up models. In the forthcoming paper Eisele and Artzner (2011), we shall show how bottom-up and top-down models can be made congruent. Available online via Athens http://www.openathens.net
Principles for insurance regulation : An evaluation of current practices and potential reforms. Klein, Robert Palgrave Macmillan, [RKN: 45546] Shelved at: Per: Geneva (Oxf) Geneva Papers on Risk and Insurance (2012) 37(1) : 175-199.
The recent financial crisis and its cascading effects on the global economy have drawn increased attention to the regulation of financial institutions including insurance companies. While many observers would argue that insurance companies were not significant contributors to the crisis, the role of insurance companies in the financial economy and their potential vulnerability to systemic risk have become matters of considerable interest to policy-makers and regulators. In this context, this paper examines the basic economic principles that should govern the regulation of insurance and employs these principles in assessing current regulatory practices and potential reforms. Specifically, it articulates the basic rationale for insurance regulation, which is the remediation of market failures where regulation can enhance social welfare. In insurance, the principal market failures that warrant regulatory intervention are severe asymmetric information problems and principal-agent conflicts that could lead some insurance companies to incur excessive financial risk and/or engage in abusive market practices that harm consumers. This provides an economic basis for the regulation of insurers‘ financial condition and market conduct. At the same time, the regulatory measures that are employed to correct market failures should be efficient and effective. Judged against these principles, the systems for solvency and market conduct regulation in the United States warrant significant improvement. There appears to be little or no justification for regulating insurance rates in competitive markets and the states should move forward with full deregulation of insurance prices. The EU appears to be much farther ahead in terms of implementing best practices in the regulation of insurers‘ financial condition under its Solvency II initiative. It is also much closer to the desirable goal of full price deregulation than the United States. Available via Athens: Palgrave MacMillan http://www.openathens.net
Regulation and reform of rating agencies in the European Union : an insurance industry perspective. Theis, Anja; Wolgast, Michael Palgrave Macmillan, [RKN: 45541] Shelved at: Per: Geneva (Oxf) Geneva Papers on Risk and Insurance (2012) 37(1) : 47-76.
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This article investigates the current discussion on the regulatory framework for credit rating agencies (CRAs) from the perspective of the insurance industry, focusing on the European Union. It becomes apparent that the new European system of regulation and supervision of CRAs conforms well to general principles of economic theory and can be expected to resolve many issues of concern. In contrast, some of the additional policy options currently discussed in Europe could involve substantial costs and risks for market participants and the financial system without contributing further to the objectives of CRA reform. Available via Athens: Palgrave MacMillan http://www.openathens.net
Risk management and the global banking crisis: lessons for insurance solvency regulation. Ashby, Simon Palgrave Macmillan, [RKN: 44913] Shelved at: Per: Geneva (Oxf) Geneva Papers on Risk and Insurance (2011) 36(3) : 330-347.
This paper investigates the causes of the banking crisis and the resulting lessons that need to be learned for insurance regulation. The paper argues that the banking crisis was predominantly caused by weaknesses in the management and regulation of banks, weaknesses that lead to problems such as flawed compensation schemes, poor risk management communication and an over-reliance on mathematical risk models. On the basis of these findings, doubts are expressed about the direction of certain insurance regulatory reforms—such as the focus on capital requirements and quantitative risk assessment (the so-called ―Pillar I‖ of most reforms). It is also recommended that a more balanced approach to insurance regulation should be implemented, which places much greater emphasis on enhancing risk management guidance and supervisory tools (Pillar II) and improving disclosure rules (Pillar III). Available via Athens: Palgrave MacMillan http://www.openathens.net
State involvement in insurance markets. Swiss Reinsurance Company (2011). - Zurich: Swiss Reinsurance Company, 2011. - 32 pages. [RKN: 74774] Shelved at: JOU Sigma (2011) 3
More and more governments are leveraging private insurance skills and the growing capacity of the sector to cover catastrophe losses as well as a wide range of other risks, Swiss Re reveals in its latest sigma research publication. The Japanese earthquake tragedy earlier this year caused more than USD 200 billion in total property losses, but only USD 30 billion was covered by private insurance. In contrast, private insurers will pay about USD 9 billion of the USD 12 billion in total property losses from the recent Christchurch, New Zealand earthquake. http://www.swissre.com
REINSURANCE An analysis of reinsurance and firm performance: evidence from the Taiwan property-liability insurance industry. Lee, Hsu-Hua; Lee, Chen-Ying [RKN: 43634] Shelved at: Per: Geneva Geneva Papers on Risk and Insurance (2012) 37(3) : 467-484.
This study investigates the relationship between reinsurance and firm performance by sourcing panel data from the 1999 to 2009 period of the property-liability insurance industry in Taiwan. The results of this investigation offer some insight that firm performance and reinsurance are interdependent. We find that insurers with higher return on assets (ROA) tend to purchase less reinsurance and insurers with higher reinsurance dependence tend to have a lower level of firm performance. Therefore, managers have to strike a balance between decreasing insolvency risk and reducing potential profitability. Other empirical results show that ROA, underwriting risks, liquidity ratio, business line concentration, return on investment (ROI) and financial holding dummy have a significant correlation with reinsurance. In addition, firm size, financial leverage, reinsurance, underwriting risks, liquidity ratio and ROI have a significant influence on firm performance. Our results have practical implications for the property-liability insurance industry and competent authorities in Taiwan. Available via Athens: Palgrave MacMillan http://www.openathens.net
Capital tranching: a RAROC [Return on risk-adjusted capital] approach to assessing reinsurance cost effectiveness. Mango, Donald; Major, John; Adler, Avraham; Bunick, Claude (2012). 2012. [RKN: 43555] General Insurance Convention (2012) : 99-112.
Paper presented at [39th] annual GIRO conference, or General Insurance Convention of the UK Actuarial Professon, at Square Conference Centre, Brussels, 18-21 September 2012 http://www.actuaries.org.uk/events/paper-presentation-archives/2012
Catastrophe bonds, reinsurance, and the optimal collateralization of risk transfer. Lakdawalla, Darius; Zanjani, George - 28 pages. [RKN: 70709] Shelved at: Per: J.Risk Ins (Oxf) Shelved at: JOU Journal of Risk and Insurance (2012) 79 (2) : 449-476.
Catastrophe bonds feature full collateralization of the underlying risk transfer and thus abandon the reinsurance principle of economizing on collateral through diversification of risk transfer. Our analysis demonstrates that this feature places limits on catastrophe bond penetration, even if the structure possesses frictional cost advantages over reinsurance. However, we also show that catastrophe bonds have important uses when buyers and reinsurers cannot contract over the division of assets in the event of insolvency and, more generally, cannot write contracts with a full menu of state-contingent payments. In this environment, segregation of collateral—in the form of multiple reinsurance companies, as well as catastrophe bond vehicles—can ameliorate inefficiencies due to reinsurance contracting constraints by improving welfare for those exposed to default risk. Numerical simulation illustrates how catastrophe bonds improve efficiency in market niches with correlated risks, or with uneven exposure of buyers to reinsurer default. Available via Athens: Wiley Online Library
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http://www.openathens.net
Computing bounds on the expected payoff of Alternative Risk Transfer products. Villegas, Andrés M; Medaglia, Andrés L; Zuluaga, Luis F [RKN: 44786] Shelved at: Online Only Shelved at: Online Only Insurance: Mathematics & Economics (2012) 51(2) : 271-281.
The demand for integrated risk management solutions and the need for new sources of capital have led to the development of innovative risk management products that mix the characteristics of traditional insurance and financial products. Such products, usually referred as Alternative Risk Transfer (ART) products include: (re)insurance contracts that bundle several risks under a single policy; multi-trigger products where the payment of benefits depends upon the occurrence of several events; and insurance linked securities that place insurance risks in the capital market. Pricing of these complex products usually requires tailor-made complex valuation methods that combine derivative pricing and actuarial science techniques for each product, as well as strong distributional assumptions on the ART‘s underlying risk factors. We present here an alternative methodology to compute bounds on the price of ART products when there is limited information on the distribution of the underlying risk factors. In particular, we develop a general optimization-based method that computes upper and lower price bounds for different ART products using market data and possibly expert information about the underlying risk factors. These bounds are useful when the structure of the product is too complex to develop analytical or simulation valuation methods, or when the scarcity of data makes it difficult to make strong distributional assumptions on the risk factors. We illustrate our results by computing bounds on the price of a floating retention insurance contract, and a catastrophe equity put (CatEPut) option. Available via Athens: ScienceDirect http://www.openathens.net/
Dividends and reinsurance under a penalty for ruin. Liang, Zhibin; Young, Virginia R [RKN: 45647] Shelved at: Online Only Shelved at: Online Only Insurance: Mathematics & Economics (2012) 50 (3) : 437-445.
We find the optimal dividend strategy in a diffusion risk model under a penalty for ruin, as in Thonhauser and Albrecher (2007), although we allow for both a positive and a negative penalty. Furthermore, we determine the optimal proportional reinsurance strategy, when so-called expensive reinsurance is available; that is, the premium loading on reinsurance is greater than the loading on the directly written insurance. One can think of our model as taking the one in Taksar (2000, Section 6) and adding a penalty for ruin. We use the Legendre transform to obtain the optimal dividend and reinsurance strategies. Not surprisingly, the optimal dividend strategy is a barrier strategy. Also, we investigate the effect of the penalty P on the optimal strategies. In particular, we show that the optimal barrier increases with respect to P, while the optimal proportion retained and the value function decrease with respect to P. In the end, we explore the time of ruin, and find that the expected time of ruin increases with respect to P under a net profit condition. Available via Athens: ScienceDirect http://www.openathens.net/
Effects of risk management on cost efficiency and cost function of the U.S. Property and liability insurers. Lin, Hong-Jen; Wen, Min-Ming; Yang, Charles C Society of Actuaries, - 12 pages. [RKN: 74918] Shelved at: Per: NAAJ (Oxf) Per NAAJ (Lon) Shelved at: JOU North American Actuarial Journal (2011) 15 (4) : 487-498.
This paper adopts the one-step stochastic frontier approach to investigate the impact of risk management tools of derivatives and reinsurance on cost efficiency of U.S. property-liability insurance companies. The stochastic frontier approach considers both the mean and variance of cost efficiency. The sample includes both stock and mutual insurers. Among the findings, the cost function of the entire sample carries the concavity feature, and insurers tend to use financial derivatives for firm value creation. The results also show that for the entire sample the use of derivatives enhances the mean of cost efficiency but accompanied with larger efficiency volatility. Nevertheless, the utilization of financial derivatives mitigates efficiency volatility for mutual insurers. This research provides important insights for the practice of risk management in the property-liability insurance industry. http://www.soa.org/news-and-publications/publications/journals/naaj/naaj-detail.aspx
Game theory in general insurance: how to outdo your adversaries while they are trying to outdo you. Yao, Ji; Rourke, Tim; Iwanik, Jan (2012). 2012. [RKN: 43556] General Insurance Convention (2012) : 113-187.
Paper presented at [39th] annual GIRO conference, or General Insurance Convention of the UK Actuarial Professon, at Square Conference Centre, Brussels, 18-21 September 2012 http://www.actuaries.org.uk/events/paper-presentation-archives/2012
GIRO Conference and Exhibition 2012: Juggling uncertainty: the actuary's part to play : [39th annual General Insurance Convention papers] : SQUARE Conference Centre, Brussels, 18-21 September 2012. Institute and Faculty of Actuaries (2012). - London: Institute and Faculty of Actuaries, 2012. - 457 pages. [RKN: 43552] Shelved at: Strg box J33 gic (Oxf) BX (Lon) Shelved at: 368
Papers presented at [39th] annual GIRO conference, or General Insurance Convention of the UK Actuarial Professon, at Square Conference Centre, Brussels, 18-21 September 2012 http://www.actuaries.org.uk/events/residential/giro-conference-and-exhibition-2012
Impact of counterparty risk on the reinsurance market. Bernard, Carole; Ludkovski, Mike Society of Actuaries, - 25 pages. [RKN: 73843] Shelved at: Per: NAAJ (Oxf) Per NAAJ (Lon) Shelved at: JOU North American Actuarial Journal (2012) 16 (1) : 87-111.
We investigate the impact of counterparty risk (from the insurer‘s viewpoint) on contract design in the reinsurance market. We study a multiplicative default risk model with partial recovery and where the probability of the reinsurer‘s default depends on the loss incurred by the insurer. The reinsurer (reinsurance seller) is assumed to be risk-neutral, while the insurer (reinsurance buyer) is risk-averse and uses either expected utility or a conditional tail expectation risk criterion. We show that generally the reinsurance buyer wishes to overinsure above a deductible level, and that many of the standard comparative statics cease to hold. We also derive the properties of stop-loss insurance in our model and consider the possibility of divergent beliefs about the default probability. Classical results are recovered when default risk is loss-independent or there is zero recovery rate. Results are
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illustrated with numerical examples. http://www.soa.org/news-and-publications/publications/journals/naaj/naaj-detail.aspx
L'analyse de la rentabilité vue par la formule standard. Derien, Anthony; Le Floc'h, Emmanuel [RKN: 43465] Shelved at: online only Bulletin Français d'Actuariat (2011) 11 (no.22) : 83-104.
The standard formula is mainly viewed as a basic formula to evaluate the regulatory capital, the internal model being commonly considered as a more powerful tool to adopt a proactive approach as defined in the ``Use Test'' (capital allocation, reinsurance, ...). The main arguments of the standard formula are the rigidity and the lack of flexibility to fit the risk profile of the insurance company. This research aims to demonstrate that the standard formula can have a more important contribution in the enterprise risk management with the production of keys indicator. http://www.institutdesactuaires.com/bfa/
Mean–variance efficient strategies in proportional reinsurance under group correlation in a gaussian framework. Pressacco, Flavio; Serafini, Paolo; Ziani, Laura [RKN: 44830] Shelved at: online only European Actuarial Journal (2011) 1(1) Supplement 2 : 433-454.
The paper concerns optimal mean–variance proportional reinsurance under group correlation. In order to solve the corresponding constrained quadratic optimization problem, we make large recourse both to the smart friendly technique originally proposed by B. de Finetti in his pioneering paper (Giornale Istituto Italiano Attuari 9:1–88, 1940) and to the well known Karush–Kuhn–Tucker conditions for constrained optimization. We offer closed form results and insightful considerations about the problem. In detail, we give closed form formulae to express the efficient mean–variance retention set both in the retention space and in the mean–variance one. Available online via Athens -- Selected paper presented during the 19th International Actuarial Association AFIR Colloquium in Munich, Germany, 2009 http://www.openathens.net
Minimal cost of a Brownian risk without ruin. Luo, Shangzhen; Taksar, Michael [RKN: 43686] Shelved at: Online Only Shelved at: Online Only Insurance: Mathematics & Economics (2012) 51(3) : 685-693.
In this paper, we study an optimal stochastic control problem for an insurance company whose surplus process is modeled by a Brownian motion with drift (the diffusion approximation model). The company can purchase reinsurance to lower its risk and receive cash injections at discrete times to avoid ruin. Proportional reinsurance and excess-of-loss reinsurance are considered. The objective is to find an optimal reinsurance and cash injection strategy that minimizes the total cost to keep the surplus process non-negative (without ruin). Here the cost function is defined as the total discounted value of the injections. The minimal cost function is found explicitly by solving the according quasi-variational inequalities (QVIs). Its associated optimal reinsurance-injection control policy is also found. Available via Athens: ScienceDirect http://www.openathens.net/
Natural catastrophes and man-made disasters in 2011 : Historic losses surface from record earthquakes and floods. Swiss Reinsurance Company - Zurich: Swiss Reinsurance Company, - 44 pages. [RKN: 73945] Sigma (2012) 2
2011 saw unprecedented economic losses of USD 370 billion from natural catastrophes and man-made disasters. Despite immense insured losses of USD 116 billion (a 142% increase over the previous year) arising from record earthquake and flood losses, the insurance industry weathered the year well and played a key role in risk management and post-disaster recovery financing. http://www.swissre.com
Optimal reinsurance and investment for a jump diffusion risk process under the CEV model. Lin, Xiang; Li, Yanfang Society of Actuaries, - 15 pages. [RKN: 74827] Shelved at: Per: NAAJ (Oxf) Per NAAJ (Lon) Shelved at: JOU North American Actuarial Journal (2011) 15 (3) : 417-431.
We consider an optimal reinsurance-investment problem of an insurer whose surplus process follows a jump-diffusion model. In our model the insurer transfers part of the risk due to insurance claims via a proportional reinsurance and invests the surplus in a ‗‗simplified‘‘ financial market consisting of a risk-free asset and a risky asset. The dynamics of the risky asset are governed by a constant elasticity of variance model to incorporate conditional heteroscedasticity. The objective of the insurer is to choose an optimal reinsurance-investment strategy so as to maximize the expected exponential utility of terminal wealth. We investigate the problem using the Hamilton-Jacobi-Bellman dynamic programming approach. Explicit forms for the optimal reinsurance investment strategy and the corresponding value function are obtained. Numerical examples are provided to illustrate how the optimal investment-reinsurance policy changes when the model parameters vary. http://www.soa.org/news-and-publications/publications/journals/naaj/naaj-detail.aspx
Optimal reinsurance under VaR and CVaR risk measures. Chi, Yichun; Tan, Ken Seng - 23 pages. [RKN: 74744] Shelved at: Per: Astin Bull (Oxf) Shelved at: JOU ASTIN Bulletin (2011) 41 (2) : 487-509.
In this paper, we study two classes of optimal reinsurance models by minimizing the total risk exposure of an insurer under the criteria of value at risk (VaR) and conditional value at risk (CVaR). We assume that the reinsurance premium is calculated according to the expected value principle. Explicit solutions for the optimal reinsurance policies are derived over ceded loss functions with increasing degrees of generality. More precisely, we establish formally that under the VaR minimization model, (i) the stop-loss reinsurance is optimal among the class of increasing convex ceded loss functions; (ii) when the constraints on both ceded and retained loss functions are relaxed to increasing functions, the stop-loss reinsurance with an upper limit is shown to be optimal; (iii) and finally under the set of general increasing and left-continuous retained loss functions, the truncated stop-loss reinsurance is shown to be optimal. In contrast, under CVaR risk measure, the stop-loss reinsurance is shown to be always optimal. These results suggest that the VaR-based reinsurance models are sensitive with respect to the constraints imposed on
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both ceded and retained loss functions while the corresponding CVaR-based reinsurance models are quite robust. http://www.actuaries.org/index.cfm?lang=EN&DSP=PUBLICATIONS&ACT=ASTIN BULLETIN
Optimal reinsurance under variance related premium principles. Chi, Yichun [RKN: 44790] Shelved at: Online Only Shelved at: Online Only Insurance: Mathematics & Economics (2012) 51(2) : 310-321.
In this paper, we investigate the optimal form of reinsurance when the insurer seeks to minimize the value at risk(VaR) or the conditional value at risk(CVaR) of his/her total risk exposure. In order to exclude the moral hazard from a reinsurance treaty, both the ceded and retained loss functions are constrained to be increasing. Under the additional assumption that the reinsurance premium is calculated by a variance related principle, we show that the layer reinsurance is always optimal over both the VaR and CVaR criteria. Finally, the variance and standard deviation premium principles are applied to illustrate how to derive the optimal deductible and the upper limit of layer reinsurance. Available via Athens: ScienceDirect http://www.openathens.net/
Reinsurance and capital structure: evidence from the United Kingdom non-life insurance industry. Shiu, Yung-Ming - 20 pages. [RKN: 74862] Shelved at: Per: J.Risk Ins (Oxf) Shelved at: JOU Journal of Risk and Insurance (2011) 78 (2) : 475-494.
Using a data set consisting of statutory returns of U.K. non-life insurers from 1985 to 2002, I find that insurers with higher leverage tend to purchase more reinsurance, and insurers with higher reinsurance dependence tend to have a higher level of debt. My results are consistent with the expected bankruptcy costs argument, agency costs theory, risk-bearing hypothesis, and renting capital hypothesis. I also find that the impact of leverage on reinsurance will be weaker for insurers that use more derivatives than those that use less. Moreover, high levels of derivative use increase the leverage gains attributable to reinsurance. Available via Athens: Wiley Online Library http://www.openathens.net
Reinsurance purchases, contingent commission payments and insurer reserve estimation. Browne, Mark J; Lu, Lan; Lei, Yu [RKN: 43633] Shelved at: Per: Geneva Geneva Papers on Risk and Insurance (2012) 37(3) : 452-466.
Prior studies on errors in reserve estimation suggest that insurers manage loss reserves to achieve corporate goals, including tax minimisation and income smoothing. Analysing U.S. property and casualty insurance industry data, we find a relationship between reserve errors and the purchase of reinsurance. A relationship is also found between reserve errors and the payment of contingent commissions. Since reserve errors may be costly in both instances, insurers who purchase reinsurance and those who pay contingent commissions may have a greater incentive to reserve accurately than other insurers. We find that in these cases insurers report smaller over-reserving errors. Available via Athens: Palgrave MacMillan http://www.openathens.net
Reinsurance structure and shareholder value. Karim, James (2012). 2012. [RKN: 43558] General Insurance Convention (2012) : 361-383.
Paper presented at [39th] annual GIRO conference, or General Insurance Convention of the UK Actuarial Professon, at Square Conference Centre, Brussels, 18-21 September 2012 http://www.actuaries.org.uk/events/paper-presentation-archives/2012
Risk valuation of property-casualty insurers. Major, John A [RKN: 43603] Shelved at: Per: Variance Variance (2011) 5(2) : 124-140.
Risk valuation is the process of assigning a monetary value to a transformation of risk. Risk transformation can come about through changes in the operation of a business, explicit risk transfer mechanisms, financial changes, etc. This paper reviews the application of valuation techniques to address the question: ―Does this risk transformation create or destroy shareholder value?‖ Four broad classes of valuation models are compared: actuarial appraisal/valuation, economic capital, firm life annuity, and optimal dividends. Their key differences are seen to lie in their treatment of the firm‘s mortality and the circumstances under which recapitalization can occur. http://www.variancejournal.org/issues
Worst-case-optimal dynamic reinsurance for large claims. Korn, Ralf; Menkens, Olaf; Steffensen, Mogens [RKN: 44839] Shelved at: online only European Actuarial Journal (2012) 2(1) July : 21-48.
We control the surplus process of a non-life insurance company by dynamic proportional reinsurance. The objective is to maximize expected (utility of the) surplus under the worst-case claim development. In the large claim case with a worst-case upper limit on claim numbers and claim sizes, we find the optimal reinsurance strategy in a differential game setting where the insurance company plays against mother nature. We analyze the resulting strategy and illustrate its characteristics numerically. A crucial feature of our result is that the optimal strategy is robust to claim number and size modeling and robust to the choice of utility function. This robustness makes a strong case for our approach. Numerical examples illustrate the characteristics of the new approach. We analyze the optimal strategy, e.g. in terms of the more conventional, in the insurance context, objective of minimizing the probability of ruin. Finally, we calculate the intrinsic risk-free return of the model and we show that the principle of Markowitz—don‘t put all your eggs in one basket—does not hold in this setting. Available online via Athens -- Published online, July 2012 http://www.openathens.net
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REINSURANCE COLLATERAL An executive's handbook for understanding and risk managing unit linked guarantees. Maher, J; Corrigan, J; Bentley, A; Diffey, W - 55 pages. [RKN: 73954] Shelved at: Per: BAJ (Oxf) Per: BAJ (Lon) Shelved at: REF BAJ (2012) 17 (1) : 71-125.
The focus of this paper is the identification, and more importantly, sustainable management, of risks embedded in guarantees attaching to unit linked savings and retirement contracts (as commonly referred to as GMxBs). In developing customer centric guarantees that are not readily transferrable to the capital markets, insurance undertakings require the skills and resources to hedge the guarantees within their own balance sheet (or with a temporary use of packaged solutions such as reinsurance). In taking on the guarantee manufacture task insurers are departing from areas of historic competence and need to develop a comprehensive understanding of all elements of market risk replication. These include both first order market exposures as well as the material second order risks associated with market micro structure. The paper seeks to integrate this comprehensive analysis within a practitioner focused framework and concludes with a senior executive summary of ―Seven key considerations in successful guarantee manufacture‖. http://www.actuaries.org.uk/research-and-resources/pages/members-access-journals
An executive's handbook for understanding and risk managing unit linked guarantees : Abstract of the Edinburgh discussion. Maher, James - 11 pages. [RKN: 73956] Shelved at: Per: BAJ (Oxf) Per: BAJ (Lon) Shelved at: REF BAJ (2012) 17 (1) : 142-152.
Institute and Faculty of Actuaries, 15 November 2010. http://www.actuaries.org.uk/research-and-resources/pages/members-access-journals
RENEWAL PROCESS Precise large deviations of aggregate claims in a size-dependent renewal risk model. Chen, Yiqing; Yuen, Kam C [RKN: 44865] Shelved at: Online Only Shelved at: Online Only Insurance: Mathematics & Economics (2012) 51(2) : 457-461.
Consider a renewal risk model in which claim sizes and inter-arrival times correspondingly form a sequence of independent and identically distributed random pairs, with each pair obeying a dependence structure described via the conditional distribution of the inter-arrival time given the subsequent claim size being large. We study large deviations of the aggregate amount of claims. For a heavy-tailed case, we obtain a precise large-deviation formula, which agrees with existing ones in the literature. Available via Athens: ScienceDirect http://www.openathens.net/
RENEWAL THEORY Second order asymptotics for ruin probabilities in a renewal risk model with heavy-tailed claims. Lin, Jianxi [RKN: 44861] Shelved at: Online Only Shelved at: Online Only Insurance: Mathematics & Economics (2012) 51(2) : 422-429.
In this paper, we establish the second order asymptotics of ruin probabilities of a renewal risk model under the condition that the equilibrium distribution of claim sizes belongs to a rather general heavy-tailed distribution subclass—the class of second order subexponential distributions with finite mean. What is more, this requirement is proved to be necessary. Furthermore, a rather general sufficient condition on the claim size distribution itself is presented. Moreover, an extension to the case of random walk is also included. Available via Athens: ScienceDirect http://www.openathens.net/
REPUTATION RISK Reputational signals and capital acquisition when insurance companies go public. Carter, Richard B; Power, Mark L [RKN: 43635] Shelved at: Per: Geneva Geneva Papers on Risk and Insurance (2012) 37(3) : 485-508.
We analyse reputational signals and decisions surrounding capital acquisition by examining 76 insurance firms going public from 1996 to 2006. We first explore the relationship between proxies for insurance firm reputation and initial public offering (IPO) underwriter reputation. In general, we find that more reputable underwriters market IPOs of more reputable insurers—insurers that are less risky, more likely to be life insurers and that have higher franchise value. These results suggest that underwriter and insurer reputations are aligned and send consistent signals. Second, we show that the market requires a higher return from riskier/less reputable insurers when they go public. When we compare the performance of our insurance company sample to a matched sample of non-insurance firms, we find that the greater reputational transparency of insurers allows the market to do a better job of determining future performance. Last, we conclude by showing empirically that franchise value and the reputational posture of the insurance firms are positively related. These results contribute to the growing body of knowledge on reputational risk management and should enhance capital acquisition strategies of insurance company managers. Available via Athens: Palgrave MacMillan
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http://www.openathens.net
RESEARCH Walking a nomadic path. Rendek, Kelly Staple Inn Actuarial Society, [RKN: 45160] Shelved at: Per: Actuary (Oxf) Per: Actuary (Lon) Shelved at: SIA/ACT The Actuary (2011) April : 22-23.
Kelly Rendek offers an insight into her year in Mongolia providing technical assistance to a microinsurance development project. http://www.theactuary.com/archive
RESERVE RISK Reinsurance purchases, contingent commission payments and insurer reserve estimation. Browne, Mark J; Lu, Lan; Lei, Yu [RKN: 43633] Shelved at: Per: Geneva Geneva Papers on Risk and Insurance (2012) 37(3) : 452-466.
Prior studies on errors in reserve estimation suggest that insurers manage loss reserves to achieve corporate goals, including tax minimisation and income smoothing. Analysing U.S. property and casualty insurance industry data, we find a relationship between reserve errors and the purchase of reinsurance. A relationship is also found between reserve errors and the payment of contingent commissions. Since reserve errors may be costly in both instances, insurers who purchase reinsurance and those who pay contingent commissions may have a greater incentive to reserve accurately than other insurers. We find that in these cases insurers report smaller over-reserving errors. Available via Athens: Palgrave MacMillan http://www.openathens.net
RESERVING Forecasting in an extended chain-ladder-type model. Kuang, Di; Nielsen, Bent; Nielsen, Jens Perch - 15 pages. [RKN: 74857] Shelved at: Per: J.Risk Ins (Oxf) Shelved at: JOU Journal of Risk and Insurance (2011) 78 (2) : 345-359.
Reserving in general insurance is often done using chain-ladder-type methods. We propose a method aimed at situations where there is a sudden change in the economic environment affecting the policies for all accident years in the reserving triangle. It is shown that methods for forecasting nonstationary time series are helpful. We illustrate the method using data published in Barnett and Zehnwirth (2000, pp. 245–321). These data illustrate features we also found in data from the general insurer RSA during the recent credit crunch. Available via Athens: Wiley Online Library http://www.openathens.net
GIRO Conference and Exhibition 2012: Juggling uncertainty: the actuary's part to play : [39th annual General Insurance Convention papers] : SQUARE Conference Centre, Brussels, 18-21 September 2012. Institute and Faculty of Actuaries (2012). - London: Institute and Faculty of Actuaries, 2012. - 457 pages. [RKN: 43552] Shelved at: Strg box J33 gic (Oxf) BX (Lon) Shelved at: 368
Papers presented at [39th] annual GIRO conference, or General Insurance Convention of the UK Actuarial Professon, at Square Conference Centre, Brussels, 18-21 September 2012 http://www.actuaries.org.uk/events/residential/giro-conference-and-exhibition-2012
A Meta-study of the General Insurance Reserving Issues Taskforce and Reserving Oversight Committee Research in this area between 2004 and 2009. Gibson, E R; Barlow, C; Bruce, N A; Felisky, K M; Fisher, S; Hilary, N; Hilder, Ian M; Kam, Hanna; Matthews, Peter N; Winter, R [RKN: 45281] Shelved at: Per: BAJ (Oxf) Per: BAJ (Lon) Shelved at: BRI/ACT BAJ (2011) 16 (1) : 63-80.
http://www.actuaries.org.uk/research-and-resources/pages/members-access-journals
Property–liability insurer reserve error: motive, manipulation, or mistake. Grace, Martin F; Leverty, J Tyler - 30 pages. [RKN: 70705] Shelved at: Per: J.Risk Ins (Oxf) Shelved at: JOU Journal of Risk and Insurance (2012) 79 (2) : 351-380.
We use two reserve error definitions found in the literature to investigate the joint impact of previously studied incentives on the magnitude of reserve error. We find many prior conclusions are dependent upon the restricted setting in which the hypotheses are tested and on the definition of the reserve error. We find strong evidence that financially weak insurers underreserve to a greater extent than other insurers. However, our evidence casts doubt on the conclusion that insurers manipulate reserves to avoid solvency monitoring. We also find insurers increase reserves for tax purposes and to reduce the impact of regulatory rate suppression. Available via Athens: Wiley Online Library http://www.openathens.net
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Reserving on a contract-by-contract basis. Monk, Joe; Brink, Peter; Hudson, Kathryn; Peet, Katherine; Raw, Leith (2012). 2012. [RKN: 43559] General Insurance Convention (2012) : 385-389.
Paper presented at [39th] annual GIRO conference, or General Insurance Convention of the UK Actuarial Professon, at Square Conference Centre, Brussels, 18-21 September 2012 http://www.actuaries.org.uk/events/paper-presentation-archives/2012
Triangle-free reserving. Parodi, Pietro (2012). 2012. [RKN: 43561] General Insurance Convention (2012) : 407-457.
Paper presented at [39th] annual GIRO conference, or General Insurance Convention of the UK Actuarial Professon, at Square Conference Centre, Brussels, 18-21 September 2012 http://www.actuaries.org.uk/events/paper-presentation-archives/2012
Venturing out of the cave. Fulcher, Graham Staple Inn Actuarial Society, - 1 pages. [RKN: 74923 ] Shelved at: Per: Actuary (Oxf) Per: Actuary (Lon) Shelved at: JOU The Actuary (2012) January/February : 10.
Graham Fulcher says the industry could benefit from a reality check when it comes to reserving http://www.theactuary.com/
RETIREMENT Assessing adequacy of retirement income for U.S. households: a replacement ratio approach. Yuh, Yoonkyung Palgrave Macmillan, [RKN: 45335] Shelved at: Per: Geneva (Oxf) Geneva Papers on Risk and Insurance (2011) 36(2) : 304-323.
The retirement income replacement ratio is projected using the Federal Reserve's Survey of Consumer Finances. On the basis of lognormal portfolio projections and current portfolio allocation, at least 44 per cent of pre-retired households will not be able to maintain 70 per cent of permanent income standard in retirement. Households planning to retire later and taking a high financial risk in savings and investments have a higher projected replacement ratio. Households having a high proportion of non-housing assets held in equity or bonds have a higher projected replacement ratio than those having a high proportion in cash equivalents. Available via Athens: Palgrave MacMillan http://www.openathens.net
An empirical analysis of the effect of financial education on graduating business students’ perceptions of their retirement planning familiarity, motivation, and preparedness. Power, Mark L; Hobbs, Jonathan M; Ober, Ashley - 17 pages. [RKN: 74771] Shelved at: JOU Risk Management and Insurance Review (2011) 14 (1) : 89-105.
Today's multifaceted and dynamic financial environment requires a high level of individual financial literacy to ensure that sound financial behaviors are the norm. Unfortunately, many individuals have limited knowledge regarding financial issues and are ill prepared to make sound financial choices. The purpose of this article was to benchmark and then determine if graduating business students‘ perception of their retirement planning familiarity, motivation, and preparedness improved after taking a semester-long course in Personal Risk Management and Insurance (PRMI). We discovered that business students were more financially literate than nonbusiness students and that business students‘ familiarity with retirement plans and personal level of readiness to make retirement planning decisions improved significantly after taking the principles class. Specifically, we showed that only 15.8 percent and 42.3 percent of the nonbusiness and business control students, respectively, felt adequately prepared to make retirement decisions, while 82 percent of the business students who completed the PRMI class felt prepared. Ex post, graduating seniors who were exposed to coursework covering life-cycle risks and options to treat those risks perceived that they are leaving college with a better ability to meet the financial challenges that await them. Last, we showed that significant differences existed in retirement plan and investment familiarity based on gender. Our findings provide support for including financial literacy as a general education requirement at colleges and universities. Available via Athens: Wiley Online Library http://www.openathens.net
REVIEWS The Geneva Risk and Insurance Review 2010: we have learned much since Willett and Knight . Outreville, Jean-François Palgrave Macmillan, [RKN: 44919] Shelved at: Per: Geneva (Oxf) Geneva Papers on Risk and Insurance (2011) 36(3) : 476-487.
The purpose of this paper is to review and summarise the papers published in The Geneva Risk and Insurance Review in 2010. Historical reference to Willet and Knight is emphasised to illustrate the importance of risk and uncertainty in our modern economies and how it is still the starting point of economic research not only in public finance as proposed by Agnar Sandmo [Uncertainty in the theory of public finance, Geneva Risk and Insurance Review (2010) 35(1):1-18] but also in other papers published in this volume. Many issues touch upon anomalies like adverse selection, asymmetric information, moral hazard and rating restrictions that can influence the performance of insurance markets. These issues are of particular relevance for insurers
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and the proper functioning of insurance markets. Available via Athens: Palgrave MacMillan http://www.openathens.net
RISK Dependence modeling in non-life insurance using the Bernstein copula. Diers, Dorothea; Eling, Martin; Marek, Sebastian D [RKN: 45646] Shelved at: Online Only Shelved at: Online Only Insurance: Mathematics & Economics (2012) 50 (3) : 430-436.
This paper illustrates the modeling of dependence structures of non-life insurance risks using the Bernstein copula. We conduct a goodness-of-fit analysis and compare the Bernstein copula with other widely used copulas. Then, we illustrate the use of the Bernstein copula in a value-at-risk and tail-value-at-risk simulation study. For both analyses we utilize German claims data on storm, flood, and water damage insurance for calibration. Our results highlight the advantages of the Bernstein copula, including its flexibility in mapping inhomogeneous dependence structures and its easy use in a simulation context due to its representation as mixture of independent Beta densities. Practitioners and regulators working toward appropriate modeling of dependences in a risk management and solvency context can benefit from our results. Available via Athens: ScienceDirect http://www.openathens.net/
Disability insurance risks : The Argentinian case. Belliard, Matias; Grushka, Carlos; De Biase, Marcelo [RKN: 45801] Shelved at: Per: ISSR (Oxf) International Social Security Review (2012) 65 (3) : 49-75.
This article analyses the risk of disability facing workers who contribute to the Argentinian Integrated Social Security System (Sistema Integrado Previsional Argentino— SIPA). Using administrative records as our source of data for the period 2000-2006, the results indicate that 1.46 workers per 1,000 became disabled annually during that period. The risk of disability rates were higher for men than for women, but increased with age for both sexes. The risk of disability rates have also been broken down by pathology and social security scheme, taking the effects of age and sex into account. To conclude, international comparisons are presented.
Dividends and reinsurance under a penalty for ruin. Liang, Zhibin; Young, Virginia R [RKN: 45647] Shelved at: Online Only Shelved at: Online Only Insurance: Mathematics & Economics (2012) 50 (3) : 437-445.
We find the optimal dividend strategy in a diffusion risk model under a penalty for ruin, as in Thonhauser and Albrecher (2007), although we allow for both a positive and a negative penalty. Furthermore, we determine the optimal proportional reinsurance strategy, when so-called expensive reinsurance is available; that is, the premium loading on reinsurance is greater than the loading on the directly written insurance. One can think of our model as taking the one in Taksar (2000, Section 6) and adding a penalty for ruin. We use the Legendre transform to obtain the optimal dividend and reinsurance strategies. Not surprisingly, the optimal dividend strategy is a barrier strategy. Also, we investigate the effect of the penalty P on the optimal strategies. In particular, we show that the optimal barrier increases with respect to P, while the optimal proportion retained and the value function decrease with respect to P. In the end, we explore the time of ruin, and find that the expected time of ruin increases with respect to P under a net profit condition. Available via Athens: ScienceDirect http://www.openathens.net/
Insurance, systemic risk and the financial crisis. Baluch, Faisal; Mutenga, Stanley; Parsons, Chris Palgrave Macmillan, [RKN: 39984] Shelved at: Per: Geneva (Oxf) Geneva Papers on Risk and Insurance (2011) 36(1) : 126-163.
In this paper we assess the impact of the financial crisis on insurance markets and the role of the insurance industry in the crisis itself. We examine some previous ―insurance crises‖ and consider the effect of the crisis on insurance risk—the liabilities arising from contracts that insurers underwrite. We then analyse the effects of the crisis on the performance of insurers in different markets and assess the extent of systemic risk in insurance. We conclude that, while systemic risk remains lower in insurance than in the banking sector, it is not negligible and has grown in recent years, partly as a consequence of insurers‘ increasing links with banks and their recent focus on non-(traditional) insurance activities, including structured finance. We conclude by considering the structural changes in the insurance industry that are likely to result from the crisis, including possible effects on ―bancassurance‖ activity, and offer some thoughts on changes in the regulation of insurance markets that might ensue. Available via Athens: Palgrave MacMillan http://www.openathens.net
On allocation of upper limits and deductibles with dependent frequencies and comonotonic severities. Li, Xiaohu; You, Yinping [RKN: 45645] Shelved at: Online Only Shelved at: Online Only Insurance: Mathematics & Economics (2012) 50 (3) : 423-429.
With the assumption of Archimedean copula for the occurrence frequencies of the risks covered by an insurance policy, this note further investigates the allocation problem of upper limits and deductibles addressed in Hua and Cheung (2008a). Sufficient conditions for a risk averse policyholder to well allocate the upper limits and the deductibles are built, respectively. Available via Athens: ScienceDirect http://www.openathens.net/
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Risk and insurability of storm damages to residential buildings in Austria. Prettenthaler, Franz; Albrecher, Hansjorg; Koberla, Judith; Kortschak, Dominik Palgrave Macmillan, [RKN: 45663] Shelved at: Per: Geneva Geneva Papers on Risk and Insurance (2012) 37(2) : 340-364.
This paper develops a stochastic model to assess storm risk in Austria, which relates wind speed and actual losses. By virtue of a building-stock-value-weighted wind index, we use suitably normalised historical loss data of residential buildings over 12 years and corresponding wind speed data to calibrate the model. Subsequently, additional wind speed data is used to generate further scenarios and to obtain loss curves for storm risk that give rise to storm insurance loss quantiles and corresponding solvency capital requirements both on the aggregate and on the regional level. We also investigate the diversification effect across regions and use tools from extreme value theory to assess the insurability of storm risk in Austria in general. Available via Athens: Palgrave MacMillan http://www.openathens.net
Risk margin estimation through the cost of capital approach: some conceptual issues. Floreani, Alberto Palgrave Macmillan, [RKN: 45332] Shelved at: Per: Geneva (Oxf) Geneva Papers on Risk and Insurance (2011) 36(2) : 226-253.
The Solvency II directive requires that insurance liabilities are valued using a best estimate plus a risk margin. The risk margin should be estimated using the cost of capital approach, that is the cost of the solvency capital requirement—which is computed through a value at risk measure—needed to support the insurance obligation until settlement. The unitary cost of capital applied to the future capital requirement should be fixed. This paper deals with conceptual issues relating to the risk margin estimate through the cost of capital approach. It shows that the Solvency II specification of the methodology is consistent with financial economics. However, the theoretical framework required (a frictionless and normally distributed world) is too far-fetched to be acceptable. Even if these conditions were satisfied, a variable unitary cost of capital must be used. Available via Athens: Palgrave MacMillan http://www.openathens.net
September 11 - Ten years on : Lasting impact on the world of risk and insurance. Liedtke, Patrick M; Schanz, Kai-Uwe (2011). - Geneva: Geneva Association, 2011. - 95 pages. [RKN: 73687] Shelved at: Online only
The Geneva Reports Series tackles issues of strategic importance to the insurance industry that warrant special attention and particular analysis. http://www.genevaassociation.org/Home/Results.aspx?mode=free&keyword=geneva%20report
Weather risk hedging in the European markets and international investment diversification. Yang, Charles C; Li, Linda Shihong; Wen, Min-Ming [RKN: 45276] Shelved at: Per: Geneva (Oxf) Geneva Risk and Insurance Review (2011) 36 (1) : 74-94.
This article analyses weather risk hedging efficiency in three European countries using weather derivatives traded at Chicago Mercantile Exchange (CME) and explores the potential of weather derivatives as a new investment asset to further diversify investors‘ portfolios. The results document that the CME European weather contracts are generally effective in hedging the temperature risk in the three European countries. However, for a specific country, weather risk hedging using other countries‘ weather indexes is generally not effective. Zero or little correlation among international weather indexes and stock market indexes indicates that weather derivatives should be an efficient investment diversifier. This research provides important insights to both weather risk hedgers and investors.
RISK ANALYSIS Fast remote but not extreme quantiles with multiple factors: applications to Solvency II and Enterprise Risk Management. Chauvigny, Matthieu; Devineau, Laurent; Loisel, Stéphane; Maume-Deschamps, Véronique [RKN: 44809] Shelved at: online only European Actuarial Journal (2011) 1(1) July : 131-157.
For operational purposes, in Enterprise Risk Management or in insurance for example, it may be important to estimate remote (but not extreme) quantiles of some function f of some random vector. The call to f may be time- and resource-consuming so that one aims at reducing as much as possible the number of calls to f. In this paper, we propose some ways to address this problem of general interest. We then numerically analyze the performance of the method on insurance and Enterprise Risk Management real-world case studies. Available online via Athens http://www.openathens.net
Risk valuation of property-casualty insurers. Major, John A [RKN: 43603] Shelved at: Per: Variance Variance (2011) 5(2) : 124-140.
Risk valuation is the process of assigning a monetary value to a transformation of risk. Risk transformation can come about through changes in the operation of a business, explicit risk transfer mechanisms, financial changes, etc. This paper reviews the application of valuation techniques to address the question: ―Does this risk transformation create or destroy shareholder value?‖ Four broad classes of valuation models are compared: actuarial appraisal/valuation, economic capital, firm life annuity, and optimal dividends. Their key differences are seen to lie in their treatment of the firm‘s mortality and the circumstances under which recapitalization can occur. http://www.variancejournal.org/issues
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RISK APPETITE GIRO Conference and Exhibition 2011: Navigating risk: are actuaries at the helm? : [38th annual General Insurance Convention papers] : BT Convention Centre, Liverpool, 11-14 September 2011. Institute and Faculty of Actuaries (2011). - London: Institute and Faculty of Actuaries, 2011. - 216 pages. [RKN: 43573] Shelved at: Strg box J33 gic (Oxf) BX (Lon) Shelved at: 368
Papers presented at [38th] annual GIRO conference, or General Insurance Convention of the UK Actuarial Professon, at BT Convention Centre, Liverpool, 11-14 September 2011 http://www.actuaries.org.uk/events/paper-presentation-archives/2011
Risk appetite for a general insurance undertaking. Orros, George; Badal, Veekash; Chacko, Francis X; Garner, Michael J; Kaye, Paul; Noel, David (2011). 2011. [RKN: 43579] General Insurance Convention (2011) : 141-216.
Paper presented at [38th] annual GIRO conference, or General Insurance Convention of the UK Actuarial Professon, at BT Convention Centre, Liverpool, 11-14 October 2011 http://www.actuaries.org.uk/events/paper-presentation-archives/2011
RISK AVERSION Beyond risk aversion: Why, how and what's next? : EGRIE Keynote Address. Eeckhoudt, Louis - 15 pages. [RKN: 70260] Shelved at: Per: Geneva (Oxf) Geneva Risk and Insurance Review (2012) 37 (2) : 141-155.
Risk attitudes other than risk aversion (e.g. prudence and temperance) are becoming important both in theoretical and empirical work. While the literature has mainly focused its attention on the intensity of such risk attitudes (e.g. the concepts of absolute prudence and absolute temperance), I consider here an alternative approach related to the direction of these attitudes (i.e. the sign of the successive derivatives of the utility function).
Raising capital in an insurance oligopoly market. Hardelin, Julien; Lemoyne de Forges, Sabine - 26 pages. [RKN: 74943] Shelved at: Per: Geneva (Oxf) Geneva Risk and Insurance Review (2012) 37 (1) : 83-108.
We consider an oligopoly market where firms offer insurance coverage against a risk characterised by aggregate uncertainty. Firms behave as if they were risk averse for a standard reason of costly external finance. The model consists in a two-stage game where firms choose their internal capital level at stage one and compete on price at stage two. We characterise the subgame perfect Nash equilibria of this game and focus attention on the strategic impact of insurers capital choice. We discuss the model with regard to the insurance industry specificities and regulation.
Risk aversion, downside risk aversion and paying for stochastic improvements. Chiu, W Henry - 27 pages. [RKN: 74940] Shelved at: Per: Geneva (Oxf) Geneva Risk and Insurance Review (2012) 37 (1) : 1-26.
This paper considers the relationship between risk preferences and the willingness to pay for stochastic improvements. We show that if the stochastic improvement satisfies a double-crossing condition, then a decision maker with utility v is willing to pay more than a decision maker with utility u, if v is both more risk averse and less downside risk averse than u. As the condition always holds in the case of self-protection, the result implies novel characterizations of individuals‘ willingness to pay to reduce the probability of loss. By establishing a general result on the correspondence between an individual's willingness to pay, and his optimal purchase of stochastic improvement when there is a given relationship between stochastic improvements and the amount paid for them, we further show that all results on the willingness to pay can be applied directly to characterize the conditions under which a more risk averse individual will optimally choose to buy more stochastic improvement. Generalizations of existing results on optimal choice of self-protection can be obtained as corollaries.
Separation of ownership and management: implications for risk-taking behavior. Cole, Cassandra R; He, Enya; McCullough, Kathleen A; Sommer, David W - 23 pages. [RKN: 74769] Shelved at: JOU Risk Management and Insurance Review (2011) 14 (1) : 49-71.
Issues associated with the relation between the separation of ownership and management and risk-taking behavior have been considered in an array of studies, with varying results. Due to the wide variety of ownership structures present, the property–casualty insurance industry provides an excellent setting to test the conflicting hypotheses related to separation of ownership from management and risk taking behavior. Employing a large sample of property–liability insurance companies over the period of 1996–2004, we empirically test the alternative hypotheses regarding the implications of separation of ownership from management for firms‘ risk taking behavior. The empirical tests include the ownership structures specified in prior research as well as a more detailed classification scheme. We find that each ownership structure is significantly different from every other ownership structure in terms of risk. Available via Athens: Wiley Online Library http://www.openathens.net
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RISK BASED CAPITAL Capital tranching: a RAROC [Return on risk-adjusted capital] approach to assessing reinsurance cost effectiveness. Mango, Donald; Major, John; Adler, Avraham; Bunick, Claude (2012). 2012. [RKN: 43555] General Insurance Convention (2012) : 99-112.
Paper presented at [39th] annual GIRO conference, or General Insurance Convention of the UK Actuarial Professon, at Square Conference Centre, Brussels, 18-21 September 2012 http://www.actuaries.org.uk/events/paper-presentation-archives/2012
Excess based allocation of risk capital. van Gulick, Gerwald; de Waegenaere, Anja; Norde, Henk [RKN: 44987] Shelved at: Per: IME (Oxf) Insurance: Mathematics & Economics (2012) 50 (1) : 26-42.
In this paper we propose a new rule to allocate risk capital to portfolios or divisions within a firm. Specifically, we determine the capital allocation that minimizes the excesses of sets of portfolios in a lexicographical sense. The excess of a set of portfolios is defined as the expected loss of that set of portfolios in excess of the amount of risk capital allocated to them. The underlying idea is that large excesses are undesirable, and therefore the goal is to determine the allocation for which the largest excess is as small as possible. We show that this allocation rule yields a unique allocation, and that it satisfies some desirable properties. We also show that the allocation can be determined by solving a series of linear programming problems. Available via Athens: ScienceDirect http://www.openathens.net/
Game theory in general insurance: how to outdo your adversaries while they are trying to outdo you. Yao, Ji; Rourke, Tim; Iwanik, Jan (2012). 2012. [RKN: 43556] General Insurance Convention (2012) : 113-187.
Paper presented at [39th] annual GIRO conference, or General Insurance Convention of the UK Actuarial Professon, at Square Conference Centre, Brussels, 18-21 September 2012 http://www.actuaries.org.uk/events/paper-presentation-archives/2012
GIRO Conference and Exhibition 2012: Juggling uncertainty: the actuary's part to play : [39th annual General Insurance Convention papers] : SQUARE Conference Centre, Brussels, 18-21 September 2012. Institute and Faculty of Actuaries (2012). - London: Institute and Faculty of Actuaries, 2012. - 457 pages. [RKN: 43552] Shelved at: Strg box J33 gic (Oxf) BX (Lon) Shelved at: 368
Papers presented at [39th] annual GIRO conference, or General Insurance Convention of the UK Actuarial Professon, at Square Conference Centre, Brussels, 18-21 September 2012 http://www.actuaries.org.uk/events/residential/giro-conference-and-exhibition-2012
Insurance risk capital for the Sparre Andersen model with geometric Lévy stochastic returns. Hürlimann, Werner [RKN: 44834] Shelved at: online only European Actuarial Journal (2011) 1(2) November : 215-235.
Some multi-period insurance risk economic capital models that include the effects of heavy-tail claims and random returns are considered. They are based on the Sparre Andersen risk model with geometric Lévy stochastic returns. The random accumulated surplus over an arbitrary finite time horizon is decomposed into insurance risk, market risk and future profit components. A protection against the solvency risk of the policyholders is obtained by applying the VaR (CVaR) measure to the insurance risk component and defines a multi-period insurance risk VaR (CVaR) economic capital. A classical asymptotic result by Resnick and Willekens [Ref. 28: Resnick SI, Willekens E (1991) Moving averages with random coefficients and random coefficient autoregressive models. Comm. Statist. Stochastic Models 7(4):511–525] on the tail probability of moving averages with random coefficients is applied to the accumulated aggregate claims random variable for claim size distributions with regularly varying tail to derive asymptotic formulas for these multi-period insurance risk economic capitals. Numerical examples with a Pareto claim size distribution reveal interesting features and differences between these two solvency rules. Since the preceding results exclude the log-normal and the heavy-tailed Weibull claim size distributions, we consider also an extension to sub-exponential claim sizes for the compound Poisson model with constant force of interest, which is based on Hao and Tang [Ref. 12: Hao X, Tang Q (2008) A uniform asymptotic estimate for discounted aggregate claims with subexponential tails. Insurance Math. Econom. 43(1):116–120]. The obtained results are compared with the standard Solvency II specification of the non-life insurance risk. Available online via Athens -- Published online, 22 December 2011 http://www.openathens.net
RISK CLASSIFICATION Tarification des risques en assurance non-vie, une approche par modèle d'apprentissage statistique. Paglia, Antoine; Phélippé-Guinvarc'h, Martial V [RKN: 43464] Shelved at: online only Bulletin Français d'Actuariat (2011) 11 (no.22) : 49-81.
Non-life actuarial researches mainly focus on improving Generalized Linear Models. Nevertheless, this type of model sets constraints on the risk structure and on the interactions between explanatory variables. Then, a bias between the real risk and the predicted risk by the model is often observed on a part of data. Nonparametric tools such as machine learning algorithms are more efficient to explain the singularity of the policyholder. Among these models, regression trees offer the benefit of both reducing the bias and improving the readability of the results of the pricing estimation. Our study introduces a modification of the Classification And Regression Tree (CART) algorithm to take into account the specificities of insurance data-sets. It compares the results produced by this algorithm to these obtained using Generalized Linear Models. These two approaches are then applied to the pricing of a vehicle insurance portfolio. http://www.institutdesactuaires.com/bfa/
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RISK (INSURANCE) Optimal insurance under multiple sources of risk with positive dependence. Lu, ZhiYi; Liu, LePing; Meng, LiLi [RKN: 44866] Shelved at: Online Only Shelved at: Online Only Insurance: Mathematics & Economics (2012) 51(2) : 462-471.
In this paper we try to derive an optimal insurance treaty when the insured faces multiple sources of risk. We show that the deductible insurance is optimal when the insurable and uninsurable risks are positively dependent or independent within the expected utility framework. A necessary condition of optimal deductible is given under some mild conditions. We compare our model with the classical one without background risk. Furthermore, the shifts of optimal deductible and expected utility by modifications of the dependence structure and the marginal are analyzed. Available via Athens: ScienceDirect http://www.openathens.net/
Risk modelling in general insurance: from principles to practice. Gray, Roger J; Pitts, Susan M (2012). - Cambridge: Cambridge University Press for the Institute of Actuaries and the Faculty of Actuaries, 2012. - xiv, 393 pages. [RKN: 45763] Shelved at: BX/UHG (Lon) Shelved at: 368.01
Knowledge of risk models and the assessment of risk is a fundamental part of the training of actuaries and all who are involved in financial, pensions and insurance mathematics. This book provides students and others with a firm foundation in a wide range of statistical and probabilistic methods for the modelling of risk, including short term risk modelling, model based pricing, risk sharing, ruin theory and credibility. Final publication following proof copy.
Risk processes with dependence and premium adjusted to solvency targets. Constantinescu, Corina; Maume-Deschamps, Véronique; Norberg, Ragnar [RKN: 44838] Shelved at: online only European Actuarial Journal (2012) 2(1) July : 1-20.
This paper considers risk processes with various forms of dependence between waiting times and claim amounts. The standing assumption is that the increments of the claims process possess exponential moments so that variations of the Lundberg upper bound for the probability of ruin are in reach. The traditional point of view in ruin theory is reversed: rather than studying the probability of ruin as a function of the initial reserve under fixed premium, the problem is to adjust the premium dynamically so as to obtain a given ruin probability (solvency requirement) for a fixed initial reserve (the financial capacity of the insurer). This programme is carried through in various models for the claims process, ranging from Cox processes with i.i.d. claim amounts, to conditional renewal (Sparre Andersen) processes. Available online via Athens -- Published online, July 2012 http://www.openathens.net
RISK MANAGEMENT Canonical valuation of mortality-linked securities. Li, Johnny Siu-Hang; Ng, Andrew Cheuk-Yin - 32 pages. [RKN: 74875] Shelved at: Per: J.Risk Ins (Oxf) Shelved at: JOU Journal of Risk and Insurance (2011) 78 (4) : 853–884.
A fundamental question in the study of mortality-linked securities is how to place a value on them. This is still an open question, partly because there is a lack of liquidly traded longevity indexes or securities from which we can infer the market price of risk. This article develops a framework for pricing mortality-linked securities on the basis of canonical valuation. This framework is largely nonparametric, helping us avoid parameter and model risk, which may be significant in other pricing methods. The framework is then applied to a mortality-linked security, and the results are compared against those derived from other methods. Available via Athens: Wiley Online Library http://www.openathens.net
Chief Executive officer incentives, monitoring, and corporate risk management : Evidence from insurance use. Adams, Mike; Lin, Chen; Zou, Hong - 32 pages. [RKN: 74865] Shelved at: Per: J.Risk Ins (Oxf) Shelved at: JOU Journal of Risk and Insurance (2011) 78 (3) : 551-582.
Corporate governance and risk management issues have received prominent publicity in recent years following several major company failures such as Bear Stearns and Lehman Brothers. While prior studies have examined this issue within the context of derivatives‘ trading, little is known regarding the linkage between corporate governance and alternative corporate risk management activities such as insurance. Using a detailed firm survey conducted by the World Bank (2004), we examine the impacts of various governance monitoring mechanisms and chief executive officer (CEO) characteristics on the corporate insurance decision. Overall, our results suggest that both monitoring mechanisms and managerial incentives induce the corporate purchase of property insurance. However, the purchase of property insurance for managerial self-interest is only prevalent in firms subject to lax monitoring, and the determinants of insurance purchases are more in line with the prediction of the economic theory in firms with strong monitoring. In addition, our study contributes a number of new insights into the determinants of corporate purchase of property insurance. Available via Athens: Wiley Online Library http://www.openathens.net
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A comparative study of public-private catastrophe insurance systems : Lessons from current practices. Paudel, Youbaraj Palgrave Macmillan, [RKN: 45660] Shelved at: Per: Geneva Geneva Papers on Risk and Insurance (2012) 37(2) : 257-285.
Natural disasters risk is increasing in several regions around the world as a result of socio-economic development and climate change. This indicates the importance of establishing affordable and sustainable natural disaster risk management and compensation arrangements. Given the complexity of insuring extreme risks, insurers and governments often cooperate in catastrophe insurance systems. This paper presents a comparative study of the main components and a broad range of indicators of fully private and fully public, as well as public-private (PP) insurance systems, for extreme events, in ten countries. This analysis results in the following nine main recommendations for policymakers who aim to establish new, or improve existing, insurance arrangements for natural disasters: (1) mandatory participation requirements are advisable to achieve a high market penetration rate; (2) adequate monitoring and enforcement mechanisms need to be put in place to ensure compliance with these requirements; (3) the government needs to take responsibility for part of the (extreme) damage in order to keep an insurance system financially viable and affordable; (4) private insurance companies should participate in a PP insurance scheme by selling and administering policies and by covering medium-sized losses; (5) the integration in systems of risk transferring mechanisms is advisable; (6) it is advisable that governments stimulate the building-up of insurers‘ reserves by providing tax exemptions; (7) risk mitigation policies should be carefully integrated in a natural disaster insurance system; (8) a detailed assessment and mapping of risk provides the basis for an effective mitigation policy; (9) insurance should provide financial incentives for policyholders to take risk mitigation measures. Available via Athens: Palgrave MacMillan http://www.openathens.net
Corporate management of highly dynamic risks : Evidence from the demand for terrorism insurance in Germany. Thomann, Christian; Pascalau, Razvan; von der Schulenburg, J Mattias Graf - 26 pages. [RKN: 74942] Shelved at: Per: Geneva (Oxf) Geneva Risk and Insurance Review (2012) 37 (1) : 57-82.
This paper investigates a corporation's risk management response to highly dynamic risks. Using a unique data set on the German terrorist insurance market, the paper tests whether corporate risk managers have a clear understanding of the probability distribution of highly dynamic risks or if risk managers learn from severe losses and base their decisions upon day-to-day experience. The paper further investigates whether risk managers become more confident in their risk management decisions over time. For this purpose, we apply Viscusi's prospective reference theory to a corporate context. We find that firms learn from single events when making their risk management decisions, and that risk managers become more confident with their risk management decisions over time.
Disability risk management and post-injury employment of workers with back pain. Johnson, William G; Butler, Richard J; Baldwin, Marjorie L; Côté, Pierre - 21 pages. [RKN: 73820] Shelved at: JOU Risk Management and Insurance Review (2012) 15 (1) : 35-55.
We analyze the outcomes of occupational back pain among four large employers that use one or more of the following disability management practices: aggressive return to work, claims management, medical management, or time-limited job accommodations. Outcomes measured at 6 and 12 months postonset include: duration of initial work absence and the probability of returning to stable employment. Employment outcomes are better in firms with more proactive return-to-work policies than in firms with more restrictive policies. We devise a statistical test for attrition bias and conclude that sample attrition does not significantly alter our results. Available via Athens: Wiley Online Library http://www.openathens.net
Do U.S. insurance firms offer the ―wrong‖ incentives to their executives?. Milidonis, Andreas; Stathopoulos, Konstantinos - 30 pages. [RKN: 74868] Shelved at: Per: J.Risk Ins (Oxf) Shelved at: JOU Journal of Risk and Insurance (2011) 78 (3) : 643–672.
We examine the relation between executive compensation and market-implied default risk for listed insurance firms from 1992 to 2007. Shareholders are expected to encourage managerial risk sharing through equity-based incentive compensation. We find that long-term incentives and other share-based plans do not affect the default risk faced by firms. However, the extensive use of stock options leads to higher future default risk for insurance firms. We argue that this is because option-based incentives induce managerial risk-taking behavior, which seeks to maximize managerial payoff through equity volatility. This could be detrimental to the interests of shareholders, especially during a financial crisis. Available via Athens: Wiley Online Library http://www.openathens.net
Does insurance help to escape the poverty trap?—a ruin theoretic approach. Kovacevic, Raimund M; Pflug, Georg Ch - 26 pages. [RKN: 74890] Shelved at: Per: J.Risk Ins (Oxf) Shelved at: JOU Journal of Risk and Insurance (2011) 78 (4) : 1003–1028.
Poverty trapping refers to the fact that poor people in developing countries cannot escape their poverty without help from outside. This is worsened by extreme events, for example, floods or hurricanes, sending people to poverty who have not been poor before. Often, insurance is seen as a way out. This article studies poverty trapping in the context of catastrophic risk and introduces a ruin-type model, combining deterministic growth with a stochastic loss model. We analyze the properties of the resulting piecewise deterministic Markov process, especially its trapping risk, and discuss for which groups of people insurance can reduce trapping probability. Available via Athens: Wiley Online Library http://www.openathens.net
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Effects of risk management on cost efficiency and cost function of the U.S. Property and liability insurers. Lin, Hong-Jen; Wen, Min-Ming; Yang, Charles C Society of Actuaries, - 12 pages. [RKN: 74918] Shelved at: Per: NAAJ (Oxf) Per NAAJ (Lon) Shelved at: JOU North American Actuarial Journal (2011) 15 (4) : 487-498.
This paper adopts the one-step stochastic frontier approach to investigate the impact of risk management tools of derivatives and reinsurance on cost efficiency of U.S. property-liability insurance companies. The stochastic frontier approach considers both the mean and variance of cost efficiency. The sample includes both stock and mutual insurers. Among the findings, the cost function of the entire sample carries the concavity feature, and insurers tend to use financial derivatives for firm value creation. The results also show that for the entire sample the use of derivatives enhances the mean of cost efficiency but accompanied with larger efficiency volatility. Nevertheless, the utilization of financial derivatives mitigates efficiency volatility for mutual insurers. This research provides important insights for the practice of risk management in the property-liability insurance industry. http://www.soa.org/news-and-publications/publications/journals/naaj/naaj-detail.aspx
An empirical examination of stakeholder groups as monitoring sources in corporate governance . Cole, Cassandra R; He, Enya; McCullough, Kathleen A; Semykina, Anastasia; Sommer, David W - 28 pages. [RKN: 74870] Shelved at: Per: J.Risk Ins (Oxf) Shelved at: JOU Journal of Risk and Insurance (2011) 78 (3) : 703-730.
Insurers are formally and informally monitored by a variety of stakeholders, including reinsurers, agents, outside board members, and regulators. While other studies have generally examined these stakeholders separately, they have not accounted for the fact that there is some relation among the stakeholder groups, and the presence of these groups is likely to be jointly determined. By empirically controlling for these potential interrelations, we create a more complete assessment of the impact of these stakeholders/monitors on insurers‘ risk taking. Specifically, we find that the presence of some stakeholders offsets the degree or presence of others, and that most stakeholders/monitors are associated with a reduction of overall firm risk. Available via Athens: Wiley Online Library http://www.openathens.net
Foreign ownership and non-life insurer efficiency in the Japanese marketplace. Huang, Li-Ying; Ma, Yu-Luen; Pope, Nat - 32 pages. [RKN: 73821] Shelved at: JOU Risk Management and Insurance Review (2012) 15 (1) : 57-88.
Traditional shareholding patterns in Japan have experienced significant change beginning in the early 1990s. Since that time, foreign institutional shareholding has increased significantly largely at the expense of domestic financial institution ownership. This article examines whether these changes in ownership patterns share a relationship with insurer performance in the non-life insurance market. Using data from 1992 to 2005, we assess performance in terms of efficiency measures using data envelopment analyses (DEA) techniques. Our results show that higher levels of domestic financial institution ownership in Japan are associated with insurer inefficiency. Relative to that relationship, the foreign ownership–insurer efficiency relationship is found to be positive. Additionally, we find that the disparity between those relationships has become more acute since 2001 when the Japanese non-life insurance market experienced significant consolidation. Available via Athens: Wiley Online Library http://www.openathens.net
Fuel risk management at American electric power. Buck, Douglas; Elliott, Dwayne; Niehaus, Greg; Rives, Bill; Thomas, Laura - 22 pages. [RKN: 73818] Shelved at: JOU Risk Management and Insurance Review (2012) 15 (1) : 1-22.
The senior management team and board of directors at American Electric Power (AEP) have emphasized the importance of an Enterprise Risk Management approach for dealing with the wide array of risk exposures that the firm faces. Senior management has put in place a risk governance structure that facilitates the identification of major risk exposures, assesses their impact on the firm's overall risk profile, and interacts the risk management process with the strategic planning process. Central to this structure is the firm's Risk Executive Committee, which includes the senior leadership of the firm and the Enterprise Risk Oversight staff. Members of the AEP Enterprise Risk Oversight group have just returned from a meeting of the Risk Executive Committee. The discussion at the meeting focused on an event that recently came to the firm's attention—an unexpected disruption in the firm's coal supply over the coming year due to necessary repairs in railroad facilities near the coal source. By the end of the week, the Enterprise Risk Oversight group needs to communicate with the relevant teams within the organization as part of its effort to identify the potential repercussions of the event for the enterprise. In addition, the Risk Executive Committee would like the groups to identify other possible adverse events that could occur and steps that should be taken now in preparation. Available via Athens: Wiley Online Library http://www.openathens.net
Impact of counterparty risk on the reinsurance market. Bernard, Carole; Ludkovski, Mike Society of Actuaries, - 25 pages. [RKN: 73843] Shelved at: Per: NAAJ (Oxf) Per NAAJ (Lon) Shelved at: JOU North American Actuarial Journal (2012) 16 (1) : 87-111.
We investigate the impact of counterparty risk (from the insurer‘s viewpoint) on contract design in the reinsurance market. We study a multiplicative default risk model with partial recovery and where the probability of the reinsurer‘s default depends on the loss incurred by the insurer. The reinsurer (reinsurance seller) is assumed to be risk-neutral, while the insurer (reinsurance buyer) is risk-averse and uses either expected utility or a conditional tail expectation risk criterion. We show that generally the reinsurance buyer wishes to overinsure above a deductible level, and that many of the standard comparative statics cease to hold. We also derive the properties of stop-loss insurance in our model and consider the possibility of divergent beliefs about the default probability. Classical results are recovered when default risk is loss-independent or there is zero recovery rate. Results are illustrated with numerical examples. http://www.soa.org/news-and-publications/publications/journals/naaj/naaj-detail.aspx
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Index insurance, probabilistic climate forecasts, and production. Carriquiry, Miguel A; Osgood, Daniel E - 14 pages. [RKN: 73855] Shelved at: Per: J.Risk Ins (Oxf) Shelved at: JOU Journal of Risk and Insurance (2012) 79 (1) : 287-300.
Index insurance and probabilistic seasonal forecasts are becoming available in developing countries to help farmers manage climate risks in production. Although these tools are intimately related, work has not been done to formalize the connections between them. We investigate the relationship between the tools through a model of input choice under uncertainty, forecasts, and insurance. While it is possible for forecasts to undermine insurance, we find that when contracts are appropriately designed, there are important synergies between forecasts, insurance, and effective input use. Used together, these tools overcome barriers preventing the use of imperfect information in production decision making. Available via Athens: Wiley Online Library http://www.openathens.net
Institutional ownership stability and risk taking: evidence from the life–health insurance industry. Cheng, Jiang; Elyasiani, Elyas; Jia, Jingyi - 33 pages. [RKN: 74867] Shelved at: Per: J.Risk Ins (Oxf) Shelved at: JOU Journal of Risk and Insurance (2011) 78 (3) : 609–641.
We investigate the relationship between risk taking of life–health (LH) insurers and stability of their institutional ownership within a simultaneous equation system model. Three main results are obtained. First, stable institutional ownership of is associated with lower total risk of LH insurers, supporting the prudent-man law hypothesis. Second, when investors are sorted in terms of stringency of the prudent-man restrictions, their negative effect on risk holds for all, except insurance companies, as owners of LH insurers. Third, large institutional owners do not raise the riskiness of the investee-firms, as proposed by the large shareholder hypothesis. Regulatory implications are drawn. Available via Athens: Wiley Online Library http://www.openathens.net
An insurance pricing game. Haley, Joseph D - 12 pages. [RKN: 73824] Shelved at: JOU Risk Management and Insurance Review (2012) 15 (1) : 117-128.
Understanding data and statistical distributions is a fundamental part of an undergraduate business student's education. The insurance pricing game presented here gives the students a unique way to apply statistical analysis in the classroom. The game requires decision making about risk with limited information. Specifically, the students must decide what ―premium‖ to charge the members of a hypothetical risk pool. The game provides teachers with a discussion platform for numerous aspects of insurer risk pooling. Available via Athens: Wiley Online Library http://www.openathens.net
Insurance protection funds in the European Union—Quo Vadis?. Monkiewicz, Marek - 18 pages. [RKN: 73822] Shelved at: JOU Risk Management and Insurance Review (2012) 15 (1) : 89-106.
Contrary to the development in other major insurance markets in the world only 13 out of 27 EU member states have introduced until now some type of insurance protection funds (IPF). As a result around a third of the market is without any collective protection. There is also a continuous debate since 2001 among the member states on the need for such a system at the community level. The experiences of the latest financial crisis have raised new arguments for reorganizing the existing system to avoid regulatory arbitrage and to strengthen consumer security. Even the prospective implementation of provisions strengthening supervisory bodies, and the new solvency directive (so-called Solvency II) are not fail-safe solutions. This article is an attempt to review the current situation as regards IPF in the EU and to discuss possible development scenarios. Available via Athens: Wiley Online Library http://www.openathens.net
Insuring ever-evolving commercial risks. Swiss Reinsurance Company (2012). - Zurich: Swiss Reinsurance Company, 2012. - 40 pages. [RKN: 70571] Shelved at: JOU Sigma (2012) 5
Commercial insurance helps companies to manage risks and find new ways to innovate, grow, and stabilise their earning. Swiss Re‘s sigma 5/2012, "Insuring ever-evolving commercial risks", explores the different commercial insurance markets and business lines in today's rapidly changing risk environment, and provides a glimpse of the profitability outlook for commercial insurance in the future. Globally, commercial insurance is an over USD 600 billion business. The US is by far the world's biggest commercial insurance market, with USD 237 billion in premiums in 2010 (or a 40% share). Japan and China follow, with USD 35 billion and USD 31 billion in premiums, respectively. In high-growth markets, where the economy tends to be expanding and insurance penetration tends to be increasing, commercial insurance growth outpaces advanced markets by a factor of two to three. http://www.swissre.com
The interplay between insurers’ financial and asset risks during the crisis of 2007-2009. Baranoff, Etti G; Sager, Thomas W Palgrave Macmillan, [RKN: 44914] Shelved at: Per: Geneva (Oxf) Geneva Papers on Risk and Insurance (2011) 36(3) : 348-379.
In this study we compare the interplay between capital and asset risks before and during the 2007–2009 financial crisis for the U.S. life and health insurance industries partitioned into segments by product specialisation, size and governance. The results show substantial intra-industry variation in the partial elasticity of capital with respect to asset risk, as well as significant impact of the crisis. Segment variation was driven by product focus. Most notable is the greater impact of the crisis on the U.S. insurers specialising in annuities (least risky product) than on specialists in health lines (riskiest product). During the crisis, the elasticity between asset risk and capital declined for all segments indicating that insurers‘ operation may have shifted from offsetting risk to seeking risk. Available via Athens: Palgrave MacMillan http://www.openathens.net
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Modeling dependence between loss triangles. Jong, Piet de Society of Actuaries, - 13 pages. [RKN: 73842] Shelved at: Per: NAAJ (Oxf) Per NAAJ (Lon) Shelved at: JOU North American Actuarial Journal (2012) 16 (1) : 74-86.
A critical problem in property and casualty insurance is forecasting incurred but as yet unpaid losses. Forecasts and risk margins are often based on individual loss triangles with each triangle corresponding to a different line of business. Different lines of business are often dependent, and overall risk margins must reflect this dependence. This article develops, implements, and applies a model for loss triangle dependence. The model facilitates the structuring and measurement of dependence. One possible structure is where payments in different triangles in the same calendar year are related. Dependence is modeled with a Gaussian copula, and it is moderated by quantities called communalities that measure the relative impact of cross-dependence in each triangle. Dependence can be structured in terms of factor models. Methods reduce to relatively simple calculations in the case of marginal normal distributions. Procedures are applied to U.S. loss triangle data. The impact of loss triangle dependence on risk margins is considered. http://www.soa.org/news-and-publications/publications/journals/naaj/naaj-detail.aspx
Optimal reinsurance and investment for a jump diffusion risk process under the CEV model. Lin, Xiang; Li, Yanfang Society of Actuaries, - 15 pages. [RKN: 74827] Shelved at: Per: NAAJ (Oxf) Per NAAJ (Lon) Shelved at: JOU North American Actuarial Journal (2011) 15 (3) : 417-431.
We consider an optimal reinsurance-investment problem of an insurer whose surplus process follows a jump-diffusion model. In our model the insurer transfers part of the risk due to insurance claims via a proportional reinsurance and invests the surplus in a ‗‗simplified‘‘ financial market consisting of a risk-free asset and a risky asset. The dynamics of the risky asset are governed by a constant elasticity of variance model to incorporate conditional heteroscedasticity. The objective of the insurer is to choose an optimal reinsurance-investment strategy so as to maximize the expected exponential utility of terminal wealth. We investigate the problem using the Hamilton-Jacobi-Bellman dynamic programming approach. Explicit forms for the optimal reinsurance investment strategy and the corresponding value function are obtained. Numerical examples are provided to illustrate how the optimal investment-reinsurance policy changes when the model parameters vary. http://www.soa.org/news-and-publications/publications/journals/naaj/naaj-detail.aspx
Pricing for multiline insurer: Frictional costs, insolvency, and asset allocation. Zhang, Li; Nielson, Norma - 24 pages. [RKN: 70627] Shelved at: JOU Risk Management and Insurance Review (2012) 15 (2) : 129-152.
This article examines multiline insurance pricing based on the contingent claim approach in a limited liability and frictional costs environment. Capital allocation is based on the value of the default option, which satisfies the realistic assumption that each distinct line undertakes a pro rata share of deficit caused by insurer insolvency. Premium levels, available assets, and default risk interact with each other and reach equilibrium at the fair premium. The assets available to pay for liabilities are not predetermined or given; instead, the premium income and investment income jointly influence the available assets. The results show that equity allocation does not influence the overall fair premium. For a given expected loss, the premium-to-expected-loss ratio for firms offering multiple lines is higher than that for firms only offering a single line, due to the reduced risk achieved through diversification. Premium-to-expected-loss ratio and equity-to-expected-loss ratio vary across lines. Lines having a higher possibility or claim amount not being paid in full exhibit lower premium-to-expected-loss ratio and higher equity-to-expected-loss ratio. Positive correlation among lines of business results in lower premium-to-expected-loss ratio than when independent losses are assumed. Positive correlation between investment return and losses reduces the insolvency risk and leads to a higher premium-to-expected-loss ratio. Available online via Athens: Wiley Online Library http://onlinelibrary.wiley.com/doi/10.1111/j.1540-6296.2012.01214.x/abstract
Risk analysis in finance and insurance. Melnikov, Alexander V (2011). - 2nd ed. - Boca Raton, FL: Chapman & Hall/CRC, 2011. - x, 318 pages. [RKN: 44513] Shelved at: UHG/EA/AA (Lon)
Risk management for insurers : Risk control, economic capital and Solvency II. Doff, René (2011). - 2nd ed. - London: Risk Books, 2011. - xi, 322 pages. [RKN: 45485] Shelved at: BX/BXP/BUG (Lon) Shelved at: 519.287
All over the globe insurers are facing the impact of the turmoil on the financial markets, making it more crucial than ever to fully understand how to implement risk management best practice. In this timely second edition, industry expert René Doff argues that Solvency II, which aims to improve standards of risk assessment, should be regarded as an opportunity. Solvency II will provide incentives for insurance companies to improve their risk management systems and will allow you to benefit from the risk management efforts in the context of supervision.
Securitization of longevity risk using percentile tranching (pages). Changki Kim and; Yangho Choi - 22 pages. [RKN: 74876] Shelved at: Per: J.Risk Ins (Oxf) Shelved at: JOU Journal of Risk and Insurance (2011) 78 (4) : 885–906.
Securitizations that transfer risk to the financial markets are a potential solution to longevity risk in the annuity business. The classical Lee–Carter model is applied to generate the future stochastic survival distribution. A method to design inverse survivor bonds using percentile tranches and to calculate the security prices is presented. The percentile tranche method is a simple and practical way for the issuer to design and price the security. This method can serve to identify the risk–yield relationship, which can provide investors with clear insight regarding the appropriate choice of tranches. Available via Athens: Wiley Online Library http://www.openathens.net
Statistical tools for finance and insurance. Cizek, Pavel; Hardle, Wolfgang Karl; Weron, Rafal (2011). - 2nd ed. - London: Springer, 2011. - 420 pages. [RKN: 73685] Shelved at: 519.5
Statistical Tools for Finance and Insurance presents ready-to-use solutions, theoretical developments and method construction for many practical problems in quantitative finance and insurance. Written by practitioners and leading academics in the field, this
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book offers a unique combination of topics from which every market analyst and risk manager will benefit. Features of the significantly enlarged and revised second edition: Offers insight into new methods and the applicability of the stochastic technologyProvides the tools, instruments and (online) algorithms for recent techniques in quantitative finance and modern treatments in insurance calculations. Covers topics such as - expected shortfall for heavy tailed and mixture distributions* - pricing of variance swaps* - volatility smile calibration in FX markets - pricing of catastrophe bonds and temperature derivatives* - building loss models and ruin probability approximation - insurance pricing with GLM* - equity linked retirement plans* (new topics in the second edition marked with*) Presents extensive examples
Strategic market entry project. Ferguson, William L; Ferguson, Tamela - 11 pages. [RKN: 74704] Shelved at: JOU Risk Management and Insurance Review (2011) 14 (1) : 145-155.
Successful risk management is critical to top level decision makers in any organization, involving fundamental strategic policy and planning to identify and allocate scarce resources to projects or activities that generate sustainable competitive advantage and maximize available long-term growth opportunities, or even survival. This article describes a flexible group project wherein students of risk management and insurance (RMI) may gain additional exposure and experience with applications of fundamental strategic management theory in the context of their particular RMI major coursework. The Project may be a useful tool in helping RMI students further develop their research and presentation skills, as well as enhance critical strategic decision making; exposure to cultural, regional or globalization issues; application of fundamental strategic management concepts; and knowledge of current events. While this Project was developed primarily for RMI students, students across business disciplines also may benefit from participation. Available via Athens: Wiley Online Library http://www.openathens.net
Tabletop disaster exercise to enhance risk management education. Nielson, Norma L; Kitching, Brian - 12 pages. [RKN: 73819] Shelved at: JOU Risk Management and Insurance Review (2012) 15 (1) : 23-34.
This article describes a disaster planning exercise undertaken by a University class of risk management students Available via Athens: Wiley Online Library http://www.openathens.net
The use of postloss financing of catastrophic risk. Cole, Cassandra R; Macpherson, David A; Maroney, Patrick F; McCullough, Kathleen A; Newman, James W (Jay); Nyce, Charles - 34 pages. [RKN: 74765] Shelved at: JOU Risk Management and Insurance Review (2011) 14 (2) : 265-298.
Catastrophic risk financing is a critical issue for many states. At the epicenter of the debate is the role of the state government in helping homeowners finance catastrophic storm risk. In general, states have used a variety of pre- and postloss strategies, including rate regulation, residual markets, guaranty funds, and postloss assessment structures. However, several states, including Florida, Louisiana, Mississippi, and Texas have used strategies that involve potentially large postloss funding of hurricane risk. In some cases, the structure of the postloss financing mechanism is likely to create significant assessments and subsidies. This article examines the role of state government in catastrophe financing, focusing primarily on postloss financing methods. Specifically, the article provides a discussion of the advantages and disadvantages of the postloss catastrophe financing as well as the political forces that motivate the use of this approach. Further, given the potential magnitude of postloss assessments and related subsidies, we use the Florida homeowners market to illustrate the implications of the state's decisions. This allows for a concrete discussion of the impact and viability of postloss financing mechanisms. Available via Athens: Wiley Online Library http://www.openathens.net
Using technology to encourage critical thinking and optimal decision making in risk management education. Garvey, John; Buckley, Patrick - 11 pages. [RKN: 74766] Shelved at: JOU Risk Management and Insurance Review (2011) 14 (2) : 299-309.
This article draws a link between the risk management failures in the financial services industry and the educational philosophy and teaching constraints at business schools. An innovative application of prediction market technology within business education is proposed as a method that can be used to encourage students to think about risk in an open and flexible way. This article explains how prediction markets also provide students with the necessary experience to critically evaluate and stress-test quantitative risk modeling techniques later in their academic and professional careers. Available via Athens: Wiley Online Library http://www.openathens.net
The value of enterprise risk management. Hoyt, Robert E; Liebenberg, Andre P - 28 pages. [RKN: 74873] Shelved at: Per: J.Risk Ins (Oxf) Shelved at: JOU Journal of Risk and Insurance (2011) 78 (4) : 795–822.
Enterprise risk management (ERM) has been the topic of increased media attention in recent years. The objective of this study is to measure the extent to which specific firms have implemented ERM programs and, then, to assess the value implications of these programs. We focus our attention in this study on U.S. insurers in order to control for differences that might arise from regulatory and market differences across industries. We simultaneously model the determinants of ERM and the effect of ERM on firm value. We estimate the effect of ERM on Tobin's Q, a standard proxy for firm value. We find a positive relation between firm value and the use of ERM. The ERM premium of roughly 20 percent is statistically and economically significant. Available via Athens: Wiley Online Library http://www.openathens.net
Who benefits from building insurance groups? A welfare analysis of optimal group capital management. Schlütter, Sebastian; Gründl, Helmut [RKN: 43638] Shelved at: Per: Geneva Geneva Papers on Risk and Insurance (2012) 37(3) : 571-593.
This paper compares the shareholder-value-maximising capital structure and pricing policy of insurance groups against that of
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stand-alone insurers. Groups can utilise intra-group risk diversification by means of capital and risk transfer instruments. We show that using these instruments enables the group to offer insurance with less default risk and at lower premiums than is optimal for stand-alone insurers. We also take into account that shareholders of groups could find it more difficult to prevent inefficient overinvestment or cross-subsidisation, which we model by higher dead-weight costs of carrying capital. The trade-off between risk diversification on the one hand and higher dead-weight costs on the other can result in group-building being beneficial for shareholders but detrimental for policyholders. Available via Athens: Palgrave MacMillan http://www.openathens.net
RISK MEASUREMENT Analysis of the discounted sum of ascending ladder heights. Cossette, Hélène; Landriault, David; Marceau, Etienne; Moutanabbir, Khouzeima [RKN: 44798] Shelved at: Online Only Shelved at: Online Only Insurance: Mathematics & Economics (2012) 51(2) : 393-401.
Within the Sparre Andersen risk model, the ruin probability corresponds to the survival function of the maximal aggregate loss. It is well known that the maximum aggregate loss follows a compound geometric distribution, in which the summands consist of the ascending ladder heights. In the present paper, we propose to investigate the distribution of the discounted sum of ascending ladder heights over a finite or an infinite-time intervals. In particular, the moments of the discounted sum of ascending ladder heights over a finite and an infinite-time intervals are derived in both the classical compound Poisson risk model and the Sparre Andersen risk model with exponential claims. The application of a particular Gerber-Shiu functional is central to the derivation of these results, as is the mixed Erlang distributional assumption. Finally, we define VaR and TVaR risk measures in terms of the discounted sum of ascending ladder heights. We use a moment-matching method to approximate the distribution of the discounted sum of ascending ladder heights allowing the computation of the VaR and TVaR risk measures. We conclude this paper with a numerical example illustrating different topics discussed in the paper. Available via Athens: ScienceDirect http://www.openathens.net/
Investigating risk disclosure practices in the European insurance industry. Höring, Dirk; Gründl, Helmut Palgrave Macmillan, [RKN: 44915] Shelved at: Per: Geneva (Oxf) Geneva Papers on Risk and Insurance (2011) 36(3) : 380-413.
In light of the upcoming Solvency II Pillar 3 disclosure regulation for the insurance industry, this paper explores the risk disclosure practices in annual reports of European primary insurers in the Dow Jones Stoxx 600 Insurance Index between 2005 and 2009. On the basis of a self-constructed risk disclosure index, the study examines the relation between the extent of risk disclosure and insurance companies‘ characteristics such as size, risk, profitability, ownership dispersion, cross-listing, home country and type of insurance sold, to draw inferences regarding motives for enhanced risk disclosure based on positive accounting theory. Available via Athens: Palgrave MacMillan http://www.openathens.net
Minimizing the cost of risk with simulation optimization technique. Lei, Yu - 24 pages. [RKN: 74703] Shelved at: JOU Risk Management and Insurance Review (2011) 14 (1) : 121-144.
For risk managers, one overarching goal is to help their organizations maximize stakeholders‘ value, which can be achieved by minimizing the cost of risk. Oftentimes such optimization decisions have to be made under uncertainty. This article presents a teaching note that demonstrates how to use simulation-based software to run optimization involving uncertain factors. Specifically, a hypothetical example regarding workers‘ compensation claims cost was created to provide a step-by-step instruction for conducting simulation optimization. Available via Athens: Wiley Online Library http://www.openathens.net
Multivariate stress scenarios and solvency. McNeil, Alexander J; Smith, Andrew D [RKN: 45634] Shelved at: Online Only Shelved at: Online Only Insurance: Mathematics & Economics (2012) 50 (3) : 299-308.
We show how the probabilistic concepts of half-space trimming and depth may be used to define convex scenario sets Qa for stress testing the risk factors that affect the solvency of an insurance company over a prescribed time period. By choosing the scenario in Qa which minimizes net asset value at the end of the time period, we propose the idea of the least solvent likely event (LSLE) as a solution to the forward stress testing problem. By considering the support function of the convex scenario set Qa, we establish theoretical properties of the LSLE when financial risk factors can be assumed to have a linear effect on the net assets of an insurer. In particular, we show that the LSLE may be interpreted as a scenario causing a loss equivalent to the Value-at-Risk (VaR) at confidence level a, provided the a-quantile is a subadditive risk measure on linear combinations of the risk factors. In this case, we also show that the LSLE has an interpretation as a per-unit allocation of capital to the underlying risk factors when the overall capital is determined according to the VaR. These insights allow us to define alternative scenario sets that relate in similar ways to coherent measures, such as expected shortfall. We also introduce the most likely ruin event (MLRE) as a solution to the problem of reverse stress testing. Available via Athens: ScienceDirect http://www.openathens.net/
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Optimal capital allocation principles. Dhaene, Jan; Tsanakas, Andreas; Valdez, Emiliano A; Vanduffel, Steven - 28 pages. [RKN: 73845] Shelved at: Per: J.Risk Ins (Oxf) Shelved at: JOU Journal of Risk and Insurance (2012) 79 (1) : 1–28.
This article develops a unifying framework for allocating the aggregate capital of a financial firm to its business units. The approach relies on an optimization argument, requiring that the weighted sum of measures for the deviations of the business unit's losses from their respective allocated capitals be minimized. The approach is fair insofar as it requires capital to be close to the risk that necessitates holding it. The approach is additionally very flexible in the sense that different forms of the objective function can reflect alternative definitions of corporate risk tolerance. Owing to this flexibility, the general framework reproduces several capital allocation methods that appear in the literature and allows for alternative interpretations and possible extensions. Available via Athens: Wiley Online Library http://www.openathens.net
The value of enterprise risk management. Hoyt, Robert E; Liebenberg, Andre P - 28 pages. [RKN: 74873] Shelved at: Per: J.Risk Ins (Oxf) Shelved at: JOU Journal of Risk and Insurance (2011) 78 (4) : 795–822.
Enterprise risk management (ERM) has been the topic of increased media attention in recent years. The objective of this study is to measure the extent to which specific firms have implemented ERM programs and, then, to assess the value implications of these programs. We focus our attention in this study on U.S. insurers in order to control for differences that might arise from regulatory and market differences across industries. We simultaneously model the determinants of ERM and the effect of ERM on firm value. We estimate the effect of ERM on Tobin's Q, a standard proxy for firm value. We find a positive relation between firm value and the use of ERM. The ERM premium of roughly 20 percent is statistically and economically significant. Available via Athens: Wiley Online Library http://www.openathens.net
RISK PREMIA Are the dimensions of private information more multiple than expected? : Information asymmetries in the market of supplementary private health insurance in england. Karlsson, Martin; Klohn, Florian; Rickayzen, Ben (2012). - London: Cass Business School, 2012. - 30 pages. [RKN: 73994]
Our study re-examines standard econometric approaches for the detection of information asymmetries on insurance markets. We claim that evidence based on a standard framework with 2 equations, which uses potential sources of information asymmetries, should stress the importance of heterogeneity in the parameters. We argue that conclusions derived from this methodology can be misleading if the estimated coefficients in such an `unused characteristics' framework are driven by different parts of the population. We show formally that an individual's expected risk from the perspective of insurance, conditioned on certain characteristics (which are not used for calculating the risk premium), can equal the population's expectation in risk { although such characteristics are both related to risk and insurance probability, which is usually interpreted as an indicator of information asymmetries. We provide empirical evidence on the existence of information asymmetries in the market for supplementary private health insurance in the UK. Overall, we found evidence for advantageous selection into the private risk pool; i.e. people with lower health risk tend to insure more. The main drivers of this phenomenon seem to be characteristics such as income and wealth. Nevertheless, we also found parameter heterogeneity to be relevant, leading to possible misinterpretation if the standard `unused characteristics' approach is applied. 1995 onwards available online. Download as PDF. http://www.cass.city.ac.uk/research-and-faculty/faculties/faculty-of-actuarial-science-and-insurance/publications/actuarial-research-reports
RISK SHARING Risk-sharing contracts with asymmetric information. Bourles, Renaud; Henriet, Dominique - 30 pages. [RKN: 74941] Shelved at: Per: Geneva (Oxf) Geneva Risk and Insurance Review (2012) 37 (1) : 27-56.
We examine how risk-sharing is impacted by asymmetric information on the probability distribution of wealth. We define the optimal incentive compatible agreements in a two-agent model with two levels of wealth. When there is complete information on the probability of the different outcomes, the resulting allocation satisfies the mutuality principle (which states that everyone's final wealth depends only upon the aggregate wealth of the economy). This is no longer true when agents have private information regarding their probability distribution of wealth. Asymmetry of information (i) makes ex-post equal sharing unsustainable between two low-risk agents, and (ii) induces exchanges when agents have the same realization of wealth.
RISK TRANSFER Catastrophe bonds, reinsurance, and the optimal collateralization of risk transfer. Lakdawalla, Darius; Zanjani, George - 28 pages. [RKN: 70709] Shelved at: Per: J.Risk Ins (Oxf) Shelved at: JOU Journal of Risk and Insurance (2012) 79 (2) : 449-476.
Catastrophe bonds feature full collateralization of the underlying risk transfer and thus abandon the reinsurance principle of economizing on collateral through diversification of risk transfer. Our analysis demonstrates that this feature places limits on
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catastrophe bond penetration, even if the structure possesses frictional cost advantages over reinsurance. However, we also show that catastrophe bonds have important uses when buyers and reinsurers cannot contract over the division of assets in the event of insolvency and, more generally, cannot write contracts with a full menu of state-contingent payments. In this environment, segregation of collateral—in the form of multiple reinsurance companies, as well as catastrophe bond vehicles—can ameliorate inefficiencies due to reinsurance contracting constraints by improving welfare for those exposed to default risk. Numerical simulation illustrates how catastrophe bonds improve efficiency in market niches with correlated risks, or with uneven exposure of buyers to reinsurer default. Available via Athens: Wiley Online Library http://www.openathens.net
RUIN PROBABILITY The joint distribution of the time to ruin and the number of claims until ruin in the classical risk model. Dickson, David C M (2011). - Victoria: University of Melbourne, 2011. - 15 pages. [RKN: 74756]
We use probabilistic arguments to derive an expression for the joint density of the time of ruin and the number of claims until ruin in the classical risk model. From this we obtain a general expression for the probability function of the number of claims until ruin. We also consider the moments of the number of claims until ruin and illustrate our results in the case of exponentially distributed individual claims. We find a very strong correlation between the number of claims until ruin and the time of ruin in this case. Finally, we briefly discuss joint distributions involving the surplus prior to ruin and deficit at ruin. No.1 (1993) onwards available online. Download as PDF. http://www.economics.unimelb.edu.au/ACT/papers.shtml
Minimizing the ruin probability through capital injections. Nie, Ciyu; Dickson, David C M; Li, Shuanming Institute and Faculty of Actuaries; Cambridge University Press, - 15 pages. [RKN: 74951] Shelved at: Per: AAS (Oxf) Per: AAS (Lon) Annals of Actuarial Science (2011) 5(2) : 195-209.
We consider an insurer who has a fixed amount of funds allocated as the initial surplus for a risk portfolio, so that the probability of ultimate ruin for this portfolio is at a known level. We consider the question of whether the insurer can reduce this ultimate ruin probability by allocating part of the initial funds to the purchase of a reinsurance contract. This reinsurance contract would restore the insurer's surplus to a positive level k every time the surplus fell between 0 and k. The insurer's objective is to choose the level k that minimizes the ultimate ruin probability. Using different examples of reinsurance premium calculation and claim size distribution we show that this objective can be achieved, often with a substantial reduction in the ultimate ruin probability from the situation when there is no reinsurance. We also show that by purchasing reinsurance the insurer can release funds for other purposes without altering its ultimate ruin probability. Available via Athens: Cambridge Journals http://www.actuaries.org.uk/research-and-resources/pages/access-journals
Modeling insurance claims via a mixture exponential model combined with peaks-over-threshold approach. Lee, David; Li, Wai Keung; Wong, Tony Siu Tong [RKN: 44873] Shelved at: Online Only Shelved at: Online Only Insurance: Mathematics & Economics (2012) 51(3) : 538-550.
We consider a model which allows data-driven threshold selection in extreme value analysis. A mixture exponential distribution is employed as the thin-tailed distribution in view of the special structure of insurance claims, where individuals are often grouped into categories. An EM algorithm-based procedure is described in model fitting. We then demonstrate how a multi-level fitting procedure will substantially reduce computation time when the data set is large. The fitted model is applied to derive statistics such as return level and expected tail loss of the claim distribution, and ruin probability bounds are obtained. Finally we propose a statistical test to justify the choice of mixture exponential distribution over the homogeneous exponential distribution in terms of improved fit. Available via Athens: ScienceDirect http://www.openathens.net/
Properties of a risk measure derived from ruin theory. Truffin, Julien; Albrecher, Hansjoerg; Denuit, Michel M - 15 pages. [RKN: 74788] Shelved at: Per: Geneva (Oxf) Geneva Risk and Insurance Review (2011) 36 (2) : 174-188.
This paper studies a risk measure inherited from ruin theory and investigates some of its properties. Specifically, we consider a value-at-risk (VaR)-type risk measure defined as the smallest initial capital needed to ensure that the ultimate ruin probability is less than a given level. This VaR-type risk measure turns out to be equivalent to the VaR of the maximal deficit of the ruin process in infinite time. A related Tail-VaR-type risk measure is also discussed.
Risk processes with dependence and premium adjusted to solvency targets. Constantinescu, Corina; Maume-Deschamps, Véronique; Norberg, Ragnar [RKN: 44838] Shelved at: online only European Actuarial Journal (2012) 2(1) July : 1-20.
This paper considers risk processes with various forms of dependence between waiting times and claim amounts. The standing assumption is that the increments of the claims process possess exponential moments so that variations of the Lundberg upper bound for the probability of ruin are in reach. The traditional point of view in ruin theory is reversed: rather than studying the probability of ruin as a function of the initial reserve under fixed premium, the problem is to adjust the premium dynamically so as to obtain a given ruin probability (solvency requirement) for a fixed initial reserve (the financial capacity of the insurer). This
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programme is carried through in various models for the claims process, ranging from Cox processes with i.i.d. claim amounts, to conditional renewal (Sparre Andersen) processes. Available online via Athens -- Published online, July 2012 http://www.openathens.net
Second order asymptotics for ruin probabilities in a renewal risk model with heavy-tailed claims. Lin, Jianxi [RKN: 44861] Shelved at: Online Only Shelved at: Online Only Insurance: Mathematics & Economics (2012) 51(2) : 422-429.
In this paper, we establish the second order asymptotics of ruin probabilities of a renewal risk model under the condition that the equilibrium distribution of claim sizes belongs to a rather general heavy-tailed distribution subclass—the class of second order subexponential distributions with finite mean. What is more, this requirement is proved to be necessary. Furthermore, a rather general sufficient condition on the claim size distribution itself is presented. Moreover, an extension to the case of random walk is also included. Available via Athens: ScienceDirect http://www.openathens.net/
RUIN THEORY Analysis of the discounted sum of ascending ladder heights. Cossette, Hélène; Landriault, David; Marceau, Etienne; Moutanabbir, Khouzeima [RKN: 44798] Shelved at: Online Only Shelved at: Online Only Insurance: Mathematics & Economics (2012) 51(2) : 393-401.
Within the Sparre Andersen risk model, the ruin probability corresponds to the survival function of the maximal aggregate loss. It is well known that the maximum aggregate loss follows a compound geometric distribution, in which the summands consist of the ascending ladder heights. In the present paper, we propose to investigate the distribution of the discounted sum of ascending ladder heights over a finite or an infinite-time intervals. In particular, the moments of the discounted sum of ascending ladder heights over a finite and an infinite-time intervals are derived in both the classical compound Poisson risk model and the Sparre Andersen risk model with exponential claims. The application of a particular Gerber-Shiu functional is central to the derivation of these results, as is the mixed Erlang distributional assumption. Finally, we define VaR and TVaR risk measures in terms of the discounted sum of ascending ladder heights. We use a moment-matching method to approximate the distribution of the discounted sum of ascending ladder heights allowing the computation of the VaR and TVaR risk measures. We conclude this paper with a numerical example illustrating different topics discussed in the paper. Available via Athens: ScienceDirect http://www.openathens.net/
Asymptotic distributions of the overshoot and undershoots for the Lévy insurance risk process in the Cramér and convolution equivalent cases. Griffin, Philip S; Maller, Ross A; Van Schaik, Kees [RKN: 44797] Shelved at: Online Only Shelved at: Online Only Insurance: Mathematics & Economics (2012) 51(2) : 382-392.
Recent models of the insurance risk process use a Lévy process to generalise the traditional Cramér-Lundberg compound Poisson model. This paper is concerned with the behaviour of the distributions of the overshoot and undershoots of a high level, for a Lévy process which drifts to -8 and satisfies a Cramér or a convolution equivalent condition. We derive these asymptotics under minimal conditions in the Cramér case, and compare them with known results for the convolution equivalent case, drawing attention to the striking and unexpected fact that they become identical when certain parameters tend to equality. Thus, at least regarding these quantities, the ―medium-heavy‖ tailed convolution equivalent model segues into the ―light-tailed‖ Cramér model in a natural way. This suggests a usefully expanded flexibility for modelling the insurance risk process. We illustrate this relationship by comparing the asymptotic distributions obtained for the overshoot and undershoots, assuming the Lévy process belongs to the ―GTSC‖ class. Available via Athens: ScienceDirect http://www.openathens.net/
Modeling credit value adjustment with downgrade-triggered termination clause using a ruin theoretic approach. Feng, Runhuan; Volkmer, Hans W [RKN: 44800] Shelved at: Online Only Shelved at: Online Only Insurance: Mathematics & Economics (2012) 51(2) : 409-421.
Downgrade-triggered termination clause is a recent innovation in credit risk management to control counterparty credit risk. It allows one party of an over-the-counter derivative to close off its position at marked-to-market price when the other party‘s credit rating downgrades to an agreed alarming level. Although the default risk is significantly reduced, the non-defaulting party may still suffer losses in case that the other party defaults without triggering the termination clause prior to default. At the heart of the valuation of credit risk adjustment (CVA) is the computation of the probability of default. We employ techniques from ruin theory and complex analysis to provide solutions for probabilities of default, which in turn lead to very efficient and accurate algorithms for computing CVA. The underlying risk model in question is an extension of the commercially available KMV–Merton model and hence can be easily implemented. We provide a hypothetical example of CVA computation for an interest-rate swap with downgrade-triggered termination clause. The paper also contributes to ruin theory by presenting some new results on finite-time ruin probabilities in a jump-diffusion risk model. Available via Athens: ScienceDirect http://www.openathens.net/
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SCENARIO GENERATION Multivariate stress scenarios and solvency. McNeil, Alexander J; Smith, Andrew D [RKN: 45634] Shelved at: Online Only Shelved at: Online Only Insurance: Mathematics & Economics (2012) 50 (3) : 299-308.
We show how the probabilistic concepts of half-space trimming and depth may be used to define convex scenario sets Qa for stress testing the risk factors that affect the solvency of an insurance company over a prescribed time period. By choosing the scenario in Qa which minimizes net asset value at the end of the time period, we propose the idea of the least solvent likely event (LSLE) as a solution to the forward stress testing problem. By considering the support function of the convex scenario set Qa, we establish theoretical properties of the LSLE when financial risk factors can be assumed to have a linear effect on the net assets of an insurer. In particular, we show that the LSLE may be interpreted as a scenario causing a loss equivalent to the Value-at-Risk (VaR) at confidence level a, provided the a-quantile is a subadditive risk measure on linear combinations of the risk factors. In this case, we also show that the LSLE has an interpretation as a per-unit allocation of capital to the underlying risk factors when the overall capital is determined according to the VaR. These insights allow us to define alternative scenario sets that relate in similar ways to coherent measures, such as expected shortfall. We also introduce the most likely ruin event (MLRE) as a solution to the problem of reverse stress testing. Available via Athens: ScienceDirect http://www.openathens.net/
SECURITIES Canonical valuation of mortality-linked securities. Li, Johnny Siu-Hang; Ng, Andrew Cheuk-Yin - 32 pages. [RKN: 74875] Shelved at: Per: J.Risk Ins (Oxf) Shelved at: JOU Journal of Risk and Insurance (2011) 78 (4) : 853–884.
A fundamental question in the study of mortality-linked securities is how to place a value on them. This is still an open question, partly because there is a lack of liquidly traded longevity indexes or securities from which we can infer the market price of risk. This article develops a framework for pricing mortality-linked securities on the basis of canonical valuation. This framework is largely nonparametric, helping us avoid parameter and model risk, which may be significant in other pricing methods. The framework is then applied to a mortality-linked security, and the results are compared against those derived from other methods. Available via Athens: Wiley Online Library http://www.openathens.net
Securitization of longevity risk using percentile tranching (pages). Changki Kim and; Yangho Choi - 22 pages. [RKN: 74876] Shelved at: Per: J.Risk Ins (Oxf) Shelved at: JOU Journal of Risk and Insurance (2011) 78 (4) : 885–906.
Securitizations that transfer risk to the financial markets are a potential solution to longevity risk in the annuity business. The classical Lee–Carter model is applied to generate the future stochastic survival distribution. A method to design inverse survivor bonds using percentile tranches and to calculate the security prices is presented. The percentile tranche method is a simple and practical way for the issuer to design and price the security. This method can serve to identify the risk–yield relationship, which can provide investors with clear insight regarding the appropriate choice of tranches. Available via Athens: Wiley Online Library http://www.openathens.net
SECURITISATION Securitisation and tranching longevity and house price risk for reverse mortgage products. Yang, Sharon S Palgrave Macmillan, [RKN: 44908] Shelved at: Per: Geneva (Oxf) Geneva Papers on Risk and Insurance (2011) 36(4) : 648-674.
Reverse mortgage (RM) products are growing increasingly popular in many developed countries. This article designs a tranching security to deal with longevity and house price risks for RM products. The securitisation structure for RM products, the collateralised reverse mortgage obligation (CRMO), is similar to that for the collateralised debt obligation (CDO). However, unlike the CDO, the CRMO takes into account the dynamics of future mortality rates and house price returns instead of the default rate. To capture longevity risk for RM borrowers, this study employs the CBD model to project future mortality rates, as well as compares these results with those from the Lee-Carter model and static mortality table. The house price return dynamics is modelled using an ARMA-GARCH process. The calculation of fair spreads of CRMO in different tranches is illustrated under the risk-neutral valuation framework. On the basis of mortality experience and the programme of Home Equity Conversion Mortgage in the United States, this research demonstrates the problems of using static mortality tables and models risk for pricing fair spreads for CRMO numerically. Available via Athens: Palgrave MacMillan -- This article and others in Geneva Papers on Risk and Insurance: Issues and Practice 36(4) form part of special issue on Longevity http://www.openathens.net
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Securitisation of crossover risk in reverse mortgages. Huang, Hong-Chih; Wang, Chou-Wen; Miao, Yuan-Chi Palgrave Macmillan, [RKN: 44907] Shelved at: Per: Geneva (Oxf) Geneva Papers on Risk and Insurance (2011) 36(4) : 622-647.
When the outstanding balance exceeds the housing value before the loan is settled, the insurer suffers an exposure to crossover risk induced by three risk factors: interest rates, house prices and mortality rates. With consideration of housing price risk, interest rate risk and longevity risk, we provide a three-dimensional lattice method that simultaneously captures the evolution of housing prices and short-term interest rates to calculate the fair valuation of reverse mortgages numerically. For a reverse mortgage insurer, the premium structure of reverse mortgage insurance is determined by setting the present value of the total expected claim losses equal to the present value of the premium charges. However, when the actual loss is higher than the expected loss, the insurer will incur an unexpected loss. To offset the potential loss, we also design two types of crossover bonds to transfer the unexpected loss to bond investors. Therefore, through the crossover bonds, reverse mortgage insurers can partially transfer crossover risk onto bond holders. Available via Athens: Palgrave MacMillan -- This article and others in Geneva Papers on Risk and Insurance: Issues and Practice 36(4) form part of special issue on Longevity http://www.openathens.net
SHAREHOLDERS Governance and shareholder response to chief risk officer appointments. Gupta, Manu; Prakash, Puneet; Rangan, Nanda Palgrave Macmillan, [RKN: 45543] Shelved at: Per: Geneva (Oxf) Geneva Papers on Risk and Insurance (2012) 37(1) : 108-124.
This study examines the recent, significant growth in the appointments of Chief Risk Officers (CROs), the role of a CRO, and whether such appointments benefit shareholders. We find that the market is more likely to react positively to a CRO appointment for a firm with weak corporate governance. In particular, the lower the proportion of outside directors the greater is the likelihood of a positive market reaction to CRO appointments, suggesting that CRO appointments are associated with better future governance by firms‘ shareholders. Finally, firms with higher tax and product risk also experience increases in stock prices when they appoint CROs. Available via Athens: Palgrave MacMillan http://www.openathens.net
Reinsurance structure and shareholder value. Karim, James (2012). 2012. [RKN: 43558] General Insurance Convention (2012) : 361-383.
Paper presented at [39th] annual GIRO conference, or General Insurance Convention of the UK Actuarial Professon, at Square Conference Centre, Brussels, 18-21 September 2012 http://www.actuaries.org.uk/events/paper-presentation-archives/2012
SIMULATION Fast remote but not extreme quantiles with multiple factors: applications to Solvency II and Enterprise Risk Management. Chauvigny, Matthieu; Devineau, Laurent; Loisel, Stéphane; Maume-Deschamps, Véronique [RKN: 44809] Shelved at: online only European Actuarial Journal (2011) 1(1) July : 131-157.
For operational purposes, in Enterprise Risk Management or in insurance for example, it may be important to estimate remote (but not extreme) quantiles of some function f of some random vector. The call to f may be time- and resource-consuming so that one aims at reducing as much as possible the number of calls to f. In this paper, we propose some ways to address this problem of general interest. We then numerically analyze the performance of the method on insurance and Enterprise Risk Management real-world case studies. Available online via Athens http://www.openathens.net
SOCIAL SECURITY Valuing the longevity insurance acquired by delayed claiming of social security. Sun, Wei; Webb, Anthony - 24 pages. [RKN: 74877] Shelved at: Per: J.Risk Ins (Oxf) Shelved at: JOU Journal of Risk and Insurance (2011) 78 (4) : 907–930.
Individuals can claim Social Security at any age from 62 to 70, although most claim at 62. We show that expected present value calculations substantially understate both the optimal claim age and the losses resulting from early claiming because they ignore the value of the additional longevity insurance acquired because of delay. Using numerical optimization techniques, we illustrate that the optimal claim age is between 67 and 70. We calculate that the amount by which benefits payable at suboptimal ages must be increased so that a household is indifferent between claiming at those ages and the optimal combination of ages can be as high as 19.0 percent. Available via Athens: Wiley Online Library http://www.openathens.net
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SOLVENCY Equitable solvent controls in a multi-period game model of risk. Malinovskii, Vsevolod K [RKN: 44878] Shelved at: Online Only Shelved at: Online Only Insurance: Mathematics & Economics (2012) 51(3) : 599-616.
In insurance two major types of cycles are known: (a) regular many years long up- and down-swings referred to as underwriting cycles and (b) irregular short-range fluctuations. The key rationale of the underwriting cycles is migration of insureds triggered by the insurers‘ price competition while the short-range fluctuations are due to unpredictable fluctuations in economic surroundings. The competition-originated cycles were modeled in the framework of a Lundberg‘s-type multi-period model of risk in [Malinovskii, 2010] and [Malinovskii, submitted for publication]. Short-range fluctuations were modeled under diverse nature scenarios in the framework of (i) diffusion (see Malinovskii, 2007 [V.K. Malinovskii (2007), Zone-adaptive control strategy for a multiperiodic model of risk, Annals of Actuarial Science, 2 , 391-409] and Malinovskii, 2009 [V.K. Malinovskii (2009), Scenario analysis for a multi-period diffusion model of risk, ASTIN Bulletin, 39, 649-676]) and (ii) Lundberg‘s-type multi-period model (see Malinovskii, 2008a [V.K. Malinovskii (2008), Adaptive control strategies and dependence of finite time ruin on the premium loading, Insurance: Mathematics and Economics, 42, 81-94]). In this paper the results of Malinovskii (2009) are extended on the Lundberg‘s-type multi-period model. Available via Athens: ScienceDirect http://www.openathens.net/
Insurance protection funds in the European Union—Quo Vadis?. Monkiewicz, Marek - 18 pages. [RKN: 73822] Shelved at: JOU Risk Management and Insurance Review (2012) 15 (1) : 89-106.
Contrary to the development in other major insurance markets in the world only 13 out of 27 EU member states have introduced until now some type of insurance protection funds (IPF). As a result around a third of the market is without any collective protection. There is also a continuous debate since 2001 among the member states on the need for such a system at the community level. The experiences of the latest financial crisis have raised new arguments for reorganizing the existing system to avoid regulatory arbitrage and to strengthen consumer security. Even the prospective implementation of provisions strengthening supervisory bodies, and the new solvency directive (so-called Solvency II) are not fail-safe solutions. This article is an attempt to review the current situation as regards IPF in the EU and to discuss possible development scenarios. Available via Athens: Wiley Online Library http://www.openathens.net
Pricing for multiline insurer: Frictional costs, insolvency, and asset allocation. Zhang, Li; Nielson, Norma - 24 pages. [RKN: 70627] Shelved at: JOU Risk Management and Insurance Review (2012) 15 (2) : 129-152.
This article examines multiline insurance pricing based on the contingent claim approach in a limited liability and frictional costs environment. Capital allocation is based on the value of the default option, which satisfies the realistic assumption that each distinct line undertakes a pro rata share of deficit caused by insurer insolvency. Premium levels, available assets, and default risk interact with each other and reach equilibrium at the fair premium. The assets available to pay for liabilities are not predetermined or given; instead, the premium income and investment income jointly influence the available assets. The results show that equity allocation does not influence the overall fair premium. For a given expected loss, the premium-to-expected-loss ratio for firms offering multiple lines is higher than that for firms only offering a single line, due to the reduced risk achieved through diversification. Premium-to-expected-loss ratio and equity-to-expected-loss ratio vary across lines. Lines having a higher possibility or claim amount not being paid in full exhibit lower premium-to-expected-loss ratio and higher equity-to-expected-loss ratio. Positive correlation among lines of business results in lower premium-to-expected-loss ratio than when independent losses are assumed. Positive correlation between investment return and losses reduces the insolvency risk and leads to a higher premium-to-expected-loss ratio. Available online via Athens: Wiley Online Library http://onlinelibrary.wiley.com/doi/10.1111/j.1540-6296.2012.01214.x/abstract
Reversible jump Markov chain Monte Carlo method for parameter reduction in claims reserving. Verrall, Richard J; Wüthrich, Mario V Society of Actuaries, - 20 pages. [RKN: 70132] Shelved at: Per: NAAJ (Oxf) Per NAAJ (Lon) Shelved at: JOU North American Actuarial Journal (2012) 16 (2) : 240-259.
We present an application of the reversible jump Markov chain Monte Carlo (RJMCMC) method to the important problem of setting claims reserves in general insurance business for the outstanding loss liabilities. A measure of the uncertainty in these claims reserves estimates is also needed for solvency purposes. The RJMCMC method described in this paper represents an improvement over the manual processes often employed in practice. In particular, our RJMCMC method describes parameter reduction and tail factor estimation in the claims reserving process, and, moreover, it provides the full predictive distribution of the outstanding loss liabilities. http://www.soa.org/news-and-publications/publications/journals/naaj/naaj-detail.aspx
Risk management and the global banking crisis: lessons for insurance solvency regulation. Ashby, Simon Palgrave Macmillan, [RKN: 44913] Shelved at: Per: Geneva (Oxf) Geneva Papers on Risk and Insurance (2011) 36(3) : 330-347.
This paper investigates the causes of the banking crisis and the resulting lessons that need to be learned for insurance regulation. The paper argues that the banking crisis was predominantly caused by weaknesses in the management and regulation of banks, weaknesses that lead to problems such as flawed compensation schemes, poor risk management communication and an over-reliance on mathematical risk models. On the basis of these findings, doubts are expressed about the direction of certain insurance regulatory reforms—such as the focus on capital requirements and quantitative risk assessment (the so-called ―Pillar I‖ of most reforms). It is also recommended that a more balanced approach to insurance regulation should be implemented, which
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places much greater emphasis on enhancing risk management guidance and supervisory tools (Pillar II) and improving disclosure rules (Pillar III). Available via Athens: Palgrave MacMillan http://www.openathens.net
Risk processes with dependence and premium adjusted to solvency targets. Constantinescu, Corina; Maume-Deschamps, Véronique; Norberg, Ragnar [RKN: 44838] Shelved at: online only European Actuarial Journal (2012) 2(1) July : 1-20.
This paper considers risk processes with various forms of dependence between waiting times and claim amounts. The standing assumption is that the increments of the claims process possess exponential moments so that variations of the Lundberg upper bound for the probability of ruin are in reach. The traditional point of view in ruin theory is reversed: rather than studying the probability of ruin as a function of the initial reserve under fixed premium, the problem is to adjust the premium dynamically so as to obtain a given ruin probability (solvency requirement) for a fixed initial reserve (the financial capacity of the insurer). This programme is carried through in various models for the claims process, ranging from Cox processes with i.i.d. claim amounts, to conditional renewal (Sparre Andersen) processes. Available online via Athens -- Published online, July 2012 http://www.openathens.net
Solvency capital requirement for hybrid products. Kochanski, Michael; Karnaski, Bertel [RKN: 44832] Shelved at: online only European Actuarial Journal (2011) 1(2) November : 173-198.
In this paper, we propose a partial internal model to determine the solvency capital requirement (SCR) for static and dynamic hybrid products. We present qualitative and quantitative results from several simulation studies for new business portfolios as well as for existing portfolios based on actual and fictitious historical financial market data. Our findings show that hybrid products are mainly exposed to interest rate, equity and lapse risks. Furthermore, we show that the SCR for dynamic hybrid products strongly depends on past financial market fluctuations. Available online via Athens -- Published online, 22 December 2011 http://www.openathens.net
A traffic light approach to solvency measurement of Swiss occupational pension funds. Braun, Alexander; Rymaszewski, Przemyslaw; Schmeiser, Hato Palgrave Macmillan, [RKN: 45333] Shelved at: Per: Geneva (Oxf) Geneva Papers on Risk and Insurance (2011) 36(2) : 254-282.
In this paper, we combine a stochastic pension fund model with a traffic light approach to solvency measurement of occupational pension funds in Switzerland. Assuming normally distributed asset returns, a closed-form solution can be derived. Despite its simplicity, we believe the model comprises the essential risk sources needed in supervisory practice. Owing to its ease of calibration, it is well suited for a regulatory application in the fragmented Swiss market, keeping costs of solvency testing at a minimum. We calibrate and implement the model for a small sample of ten Swiss pension funds in order to illustrate its application and the derivation of traffic light signals. In addition, a sensitivity analysis is conducted to identify important drivers of the shortfall probabilities for the traffic light conditions. Although our analysis concentrates solely on Switzerland, the approach could also be applied to similar pension systems. Available via Athens: Palgrave MacMillan http://www.openathens.net
SOLVENCY II A comparative assessment of Basel II/III and Solvency II. Gatzert, Nadine; Wesker, Hannah [RKN: 43637] Shelved at: Per: Geneva Geneva Papers on Risk and Insurance (2012) 37(3) : 539-570.
In the course of creating a single European market for financial services and in the wake of two financial crises, regulatory frameworks in the financial services industry in the European Union have undergone significant change. One of the major reforms has been the transition from static rules-based systems towards principles-based regulation with the intent to better capture the risk situation of an undertaking. For insurance companies, the regulatory framework Solvency II is being finalised and is scheduled for implementation after 2013. At the same time, the regulatory regime for banking, Basel II, has been revised in response to the financial crisis; the new version is Basel III. The aim of this paper is to conduct a comprehensive and structured comparative assessment of Basel II/III and Solvency II in order to detect similarities and differences as well as the benefits and drawbacks of both regimes, which might be profitably addressed. The comparison is conducted against the background of the industries‘ characteristics and the objectives of regulation. Available via Athens: Palgrave MacMillan http://www.openathens.net
Fast remote but not extreme quantiles with multiple factors: applications to Solvency II and Enterprise Risk Management. Chauvigny, Matthieu; Devineau, Laurent; Loisel, Stéphane; Maume-Deschamps, Véronique [RKN: 44809] Shelved at: online only European Actuarial Journal (2011) 1(1) July : 131-157.
For operational purposes, in Enterprise Risk Management or in insurance for example, it may be important to estimate remote (but not extreme) quantiles of some function f of some random vector. The call to f may be time- and resource-consuming so that one aims at reducing as much as possible the number of calls to f. In this paper, we propose some ways to address this problem of general interest. We then numerically analyze the performance of the method on insurance and Enterprise Risk Management real-world case studies. Available online via Athens
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http://www.openathens.net
GIRO Conference and Exhibition 2012: Juggling uncertainty: the actuary's part to play : [39th annual General Insurance Convention papers] : SQUARE Conference Centre, Brussels, 18-21 September 2012. Institute and Faculty of Actuaries (2012). - London: Institute and Faculty of Actuaries, 2012. - 457 pages. [RKN: 43552] Shelved at: Strg box J33 gic (Oxf) BX (Lon) Shelved at: 368
Papers presented at [39th] annual GIRO conference, or General Insurance Convention of the UK Actuarial Professon, at Square Conference Centre, Brussels, 18-21 September 2012 http://www.actuaries.org.uk/events/residential/giro-conference-and-exhibition-2012
Insurance accounting : A new era. Foroughi, Kamran (2011). - London: Institute and Faculty of Actuaries, 2011. - 65 pages. [RKN: 73664] Shelved at: JOU
Insurance accounting has for many years proved a challenging topic for standard setters, perparers and users, often described as a "black box". Will recent developments, in particular the July 2010 Insurance Contracts Exposure Draft, herald a new era? This paper reviews these developments, settting out key issues and implications. It concentrates on issues relevant to life insurers, although much of the content is also relevant to non-life insurers. This paper compares certain IFRS and Solvency II developments, recognising that UK insurers face challenges in implementing new financial and regulatory reporting requirements in similar timeframes. The paper considers resulting external disclosure requirements and a possible future role for supplementary information. Presented to the Institute and Faculty of Actuaries on 11 April 2011 (London) and 11 May 2011 (Edinburgh). http://www.actuaries.org.uk/research-and-resources/documents/insurance-accounting-new-era
Insurance risk capital for the Sparre Andersen model with geometric Lévy stochastic returns. Hürlimann, Werner [RKN: 44834] Shelved at: online only European Actuarial Journal (2011) 1(2) November : 215-235.
Some multi-period insurance risk economic capital models that include the effects of heavy-tail claims and random returns are considered. They are based on the Sparre Andersen risk model with geometric Lévy stochastic returns. The random accumulated surplus over an arbitrary finite time horizon is decomposed into insurance risk, market risk and future profit components. A protection against the solvency risk of the policyholders is obtained by applying the VaR (CVaR) measure to the insurance risk component and defines a multi-period insurance risk VaR (CVaR) economic capital. A classical asymptotic result by Resnick and Willekens [Ref. 28: Resnick SI, Willekens E (1991) Moving averages with random coefficients and random coefficient autoregressive models. Comm. Statist. Stochastic Models 7(4):511–525] on the tail probability of moving averages with random coefficients is applied to the accumulated aggregate claims random variable for claim size distributions with regularly varying tail to derive asymptotic formulas for these multi-period insurance risk economic capitals. Numerical examples with a Pareto claim size distribution reveal interesting features and differences between these two solvency rules. Since the preceding results exclude the log-normal and the heavy-tailed Weibull claim size distributions, we consider also an extension to sub-exponential claim sizes for the compound Poisson model with constant force of interest, which is based on Hao and Tang [Ref. 12: Hao X, Tang Q (2008) A uniform asymptotic estimate for discounted aggregate claims with subexponential tails. Insurance Math. Econom. 43(1):116–120]. The obtained results are compared with the standard Solvency II specification of the non-life insurance risk. Available online via Athens -- Published online, 22 December 2011 http://www.openathens.net
Investigating risk disclosure practices in the European insurance industry. Höring, Dirk; Gründl, Helmut Palgrave Macmillan, [RKN: 44915] Shelved at: Per: Geneva (Oxf) Geneva Papers on Risk and Insurance (2011) 36(3) : 380-413.
In light of the upcoming Solvency II Pillar 3 disclosure regulation for the insurance industry, this paper explores the risk disclosure practices in annual reports of European primary insurers in the Dow Jones Stoxx 600 Insurance Index between 2005 and 2009. On the basis of a self-constructed risk disclosure index, the study examines the relation between the extent of risk disclosure and insurance companies‘ characteristics such as size, risk, profitability, ownership dispersion, cross-listing, home country and type of insurance sold, to draw inferences regarding motives for enhanced risk disclosure based on positive accounting theory. Available via Athens: Palgrave MacMillan http://www.openathens.net
Market-consistent valuation of insurance liabilities by cost of capital. Mohr, Christoph - 27 pages. [RKN: 74738] Shelved at: Per: Astin Bull (Oxf) Shelved at: JOU ASTIN Bulletin (2011) 41 (2) : 315-341.
This paper investigates market-consistent valuation of insurance liabilities in the context of Solvency II among others and to some extent IFRS 4. We propose an explicit and consistent framework for the valuation of insurance liabilities which incorporates the Solvency II approach as a special case. The proposed framework is based on replication over multiple (one-year) time periods by a periodically updated portfolio of assets with reliable market prices, allowing for 'limited liability' in the sense that the replication can in general not always be continued. The asset portfolio consists of two parts: (1) assets whose market price defines the value of the insurance liabilities, and (2) capital funds used to cover risk which cannot be replicated. The capital funds give rise to capital costs; the main exogenous input in the framework is the condition on when the investment of the capital funds is acceptable. We investigate existence of the value and show that the exact calculation of the value has to be done recursively backwards in time, starting at the end of the lifetime of the insurance liabilities. We derive upper bounds on the value and, for the special case of replication by risk-free one-year zero-coupon bonds, explicit recursive formulas for calculating the value. In the paper, we only partially consider the question of the uniqueness of the value. Valuation in Solvency II and IFRS 4 is based on representing the value as a sum of a 'best estimate' and a 'risk margin'. In our framework, it turns out that this split is not natural. Nonetheless, we show that a split can be constructed as a simplification, and that it provides an upper bound on the value under suitable conditions. We illustrate the general results by explicitly calculating the value for a simple example. online access via International Actuarial Association: http://www.actuaries.org/index.cfm?lang=EN&DSP=PUBLICATIONS&ACT=ASTIN BULLETIN http://www.actuaries.org/index.cfm?lang=EN&DSP=PUBLICATIONS&ACT=ASTIN BULLETIN
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Metodología para el cálculo de escenarios de caída de cartera en solvencia II en presencia de contagio entre cancelaciones. Ayuso, Mercedes; Guillén, Montserrat; Pérez-Marín, Ana M [RKN: 43378] Anales del Instituto de Actuarios Españoles (Epoca 3a) (2011) 17 : 13-30.
http://www.actuarios.org/espa/anales.htm
Multiperiod insurance supervision: top-down models. Eisele, Karl-Theodor; Artzner, Philippe [RKN: 44808] Shelved at: online only European Actuarial Journal (2011) 1(1) July : 107-130.
We describe a top-down procedure for the supervisory accounting of insurance companies with special emphasis on market impacts. The technical tools are a multiperiod risk assessment, a market consistent best estimate and an eligible asset. First, to avoid supervisory arbitrage by financial market instruments, the risk assessment is bounded by a market consistent best estimate. Applied to the risk bearing capital, i.e. asset value minus best estimate of obligations, the risk assessment immediately gives the free capital which has to be positive for acceptability. Next, optimal hedging of the obligation process by suitable asset portfolios yields the supervisory provision as the minimal initial value of a portfolio acceptable with respect to the given obligations. The problem to attain this minimal value leads to the definition of an optimal replicating portfolio. A further task of supervision is the determination of the ‗‗Fremd‘‘-capital in the supervisory balance sheet. This is formalized by the cost-of-capital method, i.e. a fictitious standardized transfer of the obligations to new investors on the market. The regulated price of such a transfer leads to the technical provision and the risk margin as ‗‗Fremd‘‘-capital items. Finally, the additional financial risks within the insurance‘s real asset portfolio are taken care of by the solvency capital requirement defined as the minimal acceptable ‗‗Eigen‘‘-capital for a given business plan. It measures the adequacy or inadequacy of the trading risks incorporated in the portfolio with respect to the obligation risks. An optimal replicating portfolio is characterized by a minimal solvency capital requirement. Solvency II and the Swiss Solvency Test (SST) are defined as bottom-up models. In the forthcoming paper Eisele and Artzner (2011), we shall show how bottom-up and top-down models can be made congruent. Available online via Athens http://www.openathens.net
Multivariate stress scenarios and solvency. McNeil, Alexander J; Smith, Andrew D [RKN: 45634] Shelved at: Online Only Shelved at: Online Only Insurance: Mathematics & Economics (2012) 50 (3) : 299-308.
We show how the probabilistic concepts of half-space trimming and depth may be used to define convex scenario sets Qa for stress testing the risk factors that affect the solvency of an insurance company over a prescribed time period. By choosing the scenario in Qa which minimizes net asset value at the end of the time period, we propose the idea of the least solvent likely event (LSLE) as a solution to the forward stress testing problem. By considering the support function of the convex scenario set Qa, we establish theoretical properties of the LSLE when financial risk factors can be assumed to have a linear effect on the net assets of an insurer. In particular, we show that the LSLE may be interpreted as a scenario causing a loss equivalent to the Value-at-Risk (VaR) at confidence level a, provided the a-quantile is a subadditive risk measure on linear combinations of the risk factors. In this case, we also show that the LSLE has an interpretation as a per-unit allocation of capital to the underlying risk factors when the overall capital is determined according to the VaR. These insights allow us to define alternative scenario sets that relate in similar ways to coherent measures, such as expected shortfall. We also introduce the most likely ruin event (MLRE) as a solution to the problem of reverse stress testing. Available via Athens: ScienceDirect http://www.openathens.net/
Practical issues in the Solvency II Internal Model Approval Process (IMAP) for general insurance actuaries. Anzar, Jahan; Armstrong, James; Austin, Roger; Bartliff, Adrian; Bird, Chris; Cairns, Martin; Chan, Cherry; Chavez-Lopez, Gabriela; Dee, Andrew; Dunkerley, Gavin; Latchman, Shane; Menezes, David; Robertson-Dunn, Stephen; Strudwick, Melinda; Trong, Buu (2012). 2012. [RKN: 43557] General Insurance Convention (2012) : 189-360.
Paper presented at [39th] annual GIRO conference, or General Insurance Convention of the UK Actuarial Professon, at Square Conference Centre, Brussels, 18-21 September 2012 http://www.actuaries.org.uk/events/paper-presentation-archives/2012
Risk management for insurers : Risk control, economic capital and Solvency II. Doff, René (2011). - 2nd ed. - London: Risk Books, 2011. - xi, 322 pages. [RKN: 45485] Shelved at: BX/BXP/BUG (Lon) Shelved at: 519.287
All over the globe insurers are facing the impact of the turmoil on the financial markets, making it more crucial than ever to fully understand how to implement risk management best practice. In this timely second edition, industry expert René Doff argues that Solvency II, which aims to improve standards of risk assessment, should be regarded as an opportunity. Solvency II will provide incentives for insurance companies to improve their risk management systems and will allow you to benefit from the risk management efforts in the context of supervision.
Risk margin estimation through the cost of capital approach: some conceptual issues. Floreani, Alberto Palgrave Macmillan, [RKN: 45332] Shelved at: Per: Geneva (Oxf) Geneva Papers on Risk and Insurance (2011) 36(2) : 226-253.
The Solvency II directive requires that insurance liabilities are valued using a best estimate plus a risk margin. The risk margin should be estimated using the cost of capital approach, that is the cost of the solvency capital requirement—which is computed through a value at risk measure—needed to support the insurance obligation until settlement. The unitary cost of capital applied to the future capital requirement should be fixed. This paper deals with conceptual issues relating to the risk margin estimate through the cost of capital approach. It shows that the Solvency II specification of the methodology is consistent with financial economics. However, the theoretical framework required (a frictionless and normally distributed world) is too far-fetched to be acceptable. Even if these conditions were satisfied, a variable unitary cost of capital must be used. Available via Athens: Palgrave MacMillan http://www.openathens.net
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Running it off. Czapiewski, Colin Staple Inn Actuarial Society, [RKN: 40081] Shelved at: Per: Actuary (Oxf) Per: Actuary (Lon) Shelved at: SIA/ACT The Actuary (2011) February : 26-27.
Colin Czapiewski believes Solvency II will have a significant impact on run-off insurers, affecting their capital requirements far more than insurers that continue to write new business. http://www.theactuary.com/archive
Solvency capital requirement for hybrid products. Kochanski, Michael; Karnaski, Bertel [RKN: 44832] Shelved at: online only European Actuarial Journal (2011) 1(2) November : 173-198.
In this paper, we propose a partial internal model to determine the solvency capital requirement (SCR) for static and dynamic hybrid products. We present qualitative and quantitative results from several simulation studies for new business portfolios as well as for existing portfolios based on actual and fictitious historical financial market data. Our findings show that hybrid products are mainly exposed to interest rate, equity and lapse risks. Furthermore, we show that the SCR for dynamic hybrid products strongly depends on past financial market fluctuations. Available online via Athens -- Published online, 22 December 2011 http://www.openathens.net
SOLVENCY TESTS Interest rate risk: dimension reduction in the Swiss Solvency Test. Ambrus, Marcel; Crugnola-Humbert, Jérôme; Schmid, Martin [RKN: 44831] Shelved at: online only European Actuarial Journal (2011) 1(2) November : 159-172.
Many risk models suffer from the incorporation of too many risk dimensions, which at best only increase computational costs. However, in many cases such models suffer in addition from a poor predictive power, as either the numerous underlying parameters are not understood fully and in order to remain computable the models may be over-simplistic and therefore neglect the more subtle interactions between the main risk drivers. In this paper, we analyze the interest rate risk module of the Swiss Solvency Test Standard Model, where interest rate risk is modeled with 13 risk-factors per currency. We apply the principal component analysis to reduce the dimension of this module. The economic interpretation of the remaining risk-factors becomes obvious, improving the understanding of the model. Further, we suggest to calculate the risk-factor sensitivities at the quantile corresponding to the expected shortfall of the corresponding normally distributed risk-factor. This way the inherent non-linearities are sufficiently allowed for and a complex second order Delta–Gamma approximation could be omitted. A sample calculation based on the SST 2011 for Basler Leben AG is provided to illustrate the validity of our approach with a real world case study. Available online via Athens -- Published online, 22 December 2011 http://www.openathens.net
SOUTH AFRICA High standards. Becker, Greg Staple Inn Actuarial Society, [RKN: 40068] Shelved at: Per: Actuary (Oxf) Per: Actuary (Lon) Shelved at: SIA/ACT The Actuary (2011) January : 28-29.
Greg Becker discusses the success of the South Africal Zimele insurance standard, and asks whether there is potential for other markets to adopt similar schemes. http://www.theactuary.com/archive
SPAIN Commitment and lapse behavior in long-term insurance: a case study. Pinquet, Jean; Guillén, Montserrat; Ayuso, Mercedes - 20 pages. [RKN: 74880] Shelved at: Per: J.Risk Ins (Oxf) Shelved at: JOU Journal of Risk and Insurance (2011) 78 (4) : 983–1002.
This article presents a case study of a portfolio of individual long-term insurance contracts sold by a Spanish mutual company. We describe the risk levels, the rating structure, and the implied cross-subsidies on a portfolio of policies providing health, life, and long-term care insurance. We show evidence of reclassification risk through the history of disability spells. We also analyze the lapse behavior and seek to provide a rationale for the portfolio‘s dynamics. We discuss the lack of commitment from the policyholders (lapses) and from the mutual company (which took a run-off decision). Finally, we draw conclusions regarding the design of such contracts. Available via Athens: Wiley Online Library http://www.openathens.net
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SPARRE ANDERSEN MODEL Insurance risk capital for the Sparre Andersen model with geometric Lévy stochastic returns. Hürlimann, Werner [RKN: 44834] Shelved at: online only European Actuarial Journal (2011) 1(2) November : 215-235.
Some multi-period insurance risk economic capital models that include the effects of heavy-tail claims and random returns are considered. They are based on the Sparre Andersen risk model with geometric Lévy stochastic returns. The random accumulated surplus over an arbitrary finite time horizon is decomposed into insurance risk, market risk and future profit components. A protection against the solvency risk of the policyholders is obtained by applying the VaR (CVaR) measure to the insurance risk component and defines a multi-period insurance risk VaR (CVaR) economic capital. A classical asymptotic result by Resnick and Willekens [Ref. 28: Resnick SI, Willekens E (1991) Moving averages with random coefficients and random coefficient autoregressive models. Comm. Statist. Stochastic Models 7(4):511–525] on the tail probability of moving averages with random coefficients is applied to the accumulated aggregate claims random variable for claim size distributions with regularly varying tail to derive asymptotic formulas for these multi-period insurance risk economic capitals. Numerical examples with a Pareto claim size distribution reveal interesting features and differences between these two solvency rules. Since the preceding results exclude the log-normal and the heavy-tailed Weibull claim size distributions, we consider also an extension to sub-exponential claim sizes for the compound Poisson model with constant force of interest, which is based on Hao and Tang [Ref. 12: Hao X, Tang Q (2008) A uniform asymptotic estimate for discounted aggregate claims with subexponential tails. Insurance Math. Econom. 43(1):116–120]. The obtained results are compared with the standard Solvency II specification of the non-life insurance risk. Available online via Athens -- Published online, 22 December 2011 http://www.openathens.net
STANDARDS AND SPECIFICATIONS High standards. Becker, Greg Staple Inn Actuarial Society, [RKN: 40068] Shelved at: Per: Actuary (Oxf) Per: Actuary (Lon) Shelved at: SIA/ACT The Actuary (2011) January : 28-29.
Greg Becker discusses the success of the South Africal Zimele insurance standard, and asks whether there is potential for other markets to adopt similar schemes. http://www.theactuary.com/archive
STATISTICS Statistical tools for finance and insurance. Cizek, Pavel; Hardle, Wolfgang Karl; Weron, Rafal (2011). - 2nd ed. - London: Springer, 2011. - 420 pages. [RKN: 73685] Shelved at: 519.5
Statistical Tools for Finance and Insurance presents ready-to-use solutions, theoretical developments and method construction for many practical problems in quantitative finance and insurance. Written by practitioners and leading academics in the field, this book offers a unique combination of topics from which every market analyst and risk manager will benefit. Features of the significantly enlarged and revised second edition: Offers insight into new methods and the applicability of the stochastic technologyProvides the tools, instruments and (online) algorithms for recent techniques in quantitative finance and modern treatments in insurance calculations. Covers topics such as - expected shortfall for heavy tailed and mixture distributions* - pricing of variance swaps* - volatility smile calibration in FX markets - pricing of catastrophe bonds and temperature derivatives* - building loss models and ruin probability approximation - insurance pricing with GLM* - equity linked retirement plans* (new topics in the second edition marked with*) Presents extensive examples
STOCHASTIC MODELS Prediction uncertainty in the Bornhuetter-Ferguson claims reserving method: revisited. Alai, D H; Merz, M; Wüthrich, Mario V Faculty of Actuaries and Institute of Actuaries; Cambridge University Press, [RKN: 39998] Shelved at: Per: AAS (Oxf) Per: AAS (Lon) Annals of Actuarial Science (2011) 5(1) : 7-17.
We revisit the stochastic model of Alai et al. (2009) for the Bornhuetter-Ferguson claims reserving method, Bornhuetter & Ferguson (1972). We derive an estimator of its conditional mean square error of prediction (MSEP) using an approach that is based on generalized linear models and maximum likelihood estimators for the model parameters. This approach leads to simple formulas, which can easily be implemented in a spreadsheet. http://www.actuaries.org.uk/research-and-resources/pages/access-journals
A statistical basis for claims experience monitoring. Taylor, Greg (2011). - Victoria: University of Melbourne, 2011. - 32 pages. [RKN: 74757]
By claims experience monitoring is meant the systematic comparison of the forecasts from a claims model with claims experience as it emerges subsequently. In the event that the stochastic properties of the forecasts are known, the comparison can be represented as a collection of probabilistic statements. This is stochastic monitoring. The paper defines this process rigorously in terms of statistical hypothesis testing. If the model is a regression model (which is the case for most stochastic claims models), then the natural form of hypothesis test is a number of likelihood ratio tests, one for each
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parameter in the valuation model. Such testing is shown to be very easily implemented by means of GLM software. This tests the formal structure of the claims model and is referred to as micro-testing. There may be other quantities (e.g. amount of claim payments in a defined interval) that require testing for practical reasons. This sort of testing is referred to as macro-testing, and its formulation is also discussed. No.1 (1993) onwards available online. Download as PDF. http://www.economics.unimelb.edu.au/ACT/papers.shtml
A statistical basis for claims experience monitoring. Taylor, Greg Society of Actuaries, - 18 pages. [RKN: 74921] Shelved at: Per: NAAJ (Oxf) Per NAAJ (Lon) Shelved at: JOU North American Actuarial Journal (2011) 15 (4) : 535-552.
By claims experience monitoring is meant the systematic comparison of the forecasts from a claims model with claims experience as it emerges subsequently. In the event that the stochastic properties of the forecasts are known, the comparison can be represented as a collection of probabilistic statements. This is stochastic monitoring. This paper defines this process rigorously in terms of statistical hypothesis testing. If the model is a regression model (which is the case for most stochastic claims models), then the natural form of hypothesis test is a number of likelihood ratio tests, one for each parameter in the valuation model. Such testing is shown to be very easily implemented by means of generalized linear modeling software. This tests the formal structure of the claims model and is referred to as microtesting. There may be other quantities (e.g., amount of claim payments in a defined interval) that require testing for practical reasons. This sort of testing is referred to as macrotesting, and its formulation is also discussed. http://www.soa.org/news-and-publications/publications/journals/naaj/naaj-detail.aspx
Statistical tools for finance and insurance. Cizek, Pavel; Hardle, Wolfgang Karl; Weron, Rafal (2011). - 2nd ed. - London: Springer, 2011. - 420 pages. [RKN: 73685] Shelved at: 519.5
Statistical Tools for Finance and Insurance presents ready-to-use solutions, theoretical developments and method construction for many practical problems in quantitative finance and insurance. Written by practitioners and leading academics in the field, this book offers a unique combination of topics from which every market analyst and risk manager will benefit. Features of the significantly enlarged and revised second edition: Offers insight into new methods and the applicability of the stochastic technologyProvides the tools, instruments and (online) algorithms for recent techniques in quantitative finance and modern treatments in insurance calculations. Covers topics such as - expected shortfall for heavy tailed and mixture distributions* - pricing of variance swaps* - volatility smile calibration in FX markets - pricing of catastrophe bonds and temperature derivatives* - building loss models and ruin probability approximation - insurance pricing with GLM* - equity linked retirement plans* (new topics in the second edition marked with*) Presents extensive examples
A unifying approach to the analysis of business with random gains. Cheung, Eric C K [RKN: 44883] Shelved at: Per: SAJ Shelved at: SCA/ACT Scandinavian Actuarial Journal (2012) 3 : 153-182.
In this paper, we consider a stochastic model in which a business enterprise is subject to constant rate of expenses over time and gains which are random in both time and amount. Inspired by Albrecher & Boxma (2004), it is assumed in general that the size of a given gain has an impact on the time until the next gain. Under such a model, we are interested in various quantities related to the survival of the business after default, which include: (i) the fair price of a perpetual insurance which pays the expenses whenever the available capital reaches zero; (ii) the probability of recovery by the first gain after default if money is borrowed at the time of default; and (iii) the Laplace transforms of the time of recovery and the first duration of negative capital. To this end, a function resembling the so-called Gerber–Shiu function (Gerber & Shiu (1998)) commonly used in insurance analysis is proposed. The function's general structure is studied via the use of defective renewal equations, and its applications to the evaluation of the above-mentioned quantities are illustrated. Exact solutions are derived in the independent case by assuming that either the inter-arrival times or the gains have an arbitrary distribution. A dependent example is also considered and numerical illustrations follow. Available via Athens: Taylor & Francis http://www.openathens.net/
STOCHASTIC PROCESSES Pricing in a competitive insurance market driven by fractional noise. Zimbidis, Alexandros A [RKN: 44925] Shelved at: Per: Variance Variance (2011) 5(1) : 55-67.
Motivated by the empirical evidence of the long-range dependency found within the Greek motor insurance market, we formulate a particular stochastic pricing model in a continuous framework. We assume the structure of a competitive insurance market where the business volume of each company is directly related to the existing relativity between the company‘s premium and the market‘s average premium. Using a simple demand function and modeling the movements of the market via a fractional Brownian motion, we derive the optimal premium control strategy. Finally, we support the importance of the specific approach by a short application. It is shown that the optimal premium strategy is considerably different under the absence or existence of the long-range dependency. http://www.variancejournal.org/issues
Properties of a risk measure derived from ruin theory. Truffin, Julien; Albrecher, Hansjoerg; Denuit, Michel M - 15 pages. [RKN: 74788] Shelved at: Per: Geneva (Oxf) Geneva Risk and Insurance Review (2011) 36 (2) : 174-188.
This paper studies a risk measure inherited from ruin theory and investigates some of its properties. Specifically, we consider a value-at-risk (VaR)-type risk measure defined as the smallest initial capital needed to ensure that the ultimate ruin probability is less than a given level. This VaR-type risk measure turns out to be equivalent to the VaR of the maximal deficit of the ruin process
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in infinite time. A related Tail-VaR-type risk measure is also discussed.
Seasonality modelling for catastrophe bond pricing. Hainaut, Donatien [RKN: 43469] Shelved at: online only Bulletin Français d'Actuariat (2012) 12 (no.23) : 129-150.
During the last decades, a new category of assets whose return is linked to insurance claims have appeared. Those assets, called catastrophe bonds, are primarily designed by insurers and reinsurers to transfer their risks to other categories of investors, looking for diversification. This paper proposes a method to price such bonds, when the claims arrival process is under the influence of a stochastic seasonal effect. The arrival process is modeled by a Poisson Process whose intensity is the sum of an Ornstein Uhlenbeck process and of one periodic function. The size of claims is assumed to be a positive random variable, independent of the intensity process. In this paper, we show that the expected number of claims can be inferred from the probability generating function and propose a pricing method of the fair coupon based on the Fourier Transform. To illustrate the tractability of our model, we price insurance bonds on claims resulting from tornadoes in the US. http://www.institutdesactuaires.com/bfa/
STOCK MARKET Insurance stock returns and economic growth. Zhou, Chunyang; Wu, Chongfeng; Li, Donghui; Chen, Zhian [RKN: 43631] Shelved at: Per: Geneva Geneva Papers on Risk and Insurance (2012) 37(3) : 405-428.
In this paper, we propose to use insurance stock returns as an indicator of insurance activities, and apply a dynamic panel technique to examine the link between the role of insurance and economic growth. Our empirical results show that after we control for the variations of market index returns, there is a significantly positive relationship between insurance stock returns and future economic growth. Furthermore, we also investigate how law environment and governance quality affect the link between the role of insurance and economic growth. The empirical results are consistent with our expectation that a well-defined law environment and governance quality facilitate the functioning of insurance companies, and strengthen the role of insurance in economic growth. We find generally that the effect of law and governance on the link between the role of insurance and economic growth is more significant in developed markets than in emerging markets. Available via Athens: Palgrave MacMillan http://www.openathens.net
STOCKS AND SHARES Catastrophes and Insurance Stocks – A Benchmarking Approach for Measuring Efficiency. West, Jason Faculty of Actuaries and Institute of Actuaries; Cambridge University Press, [RKN: 45563] Shelved at: Per: AAS (Oxf) Per: AAS (Lon) Annals of Actuarial Science (2012) 6(1) : 103-136.
This study uses the numeraire portfolio to benchmark insurance stock returns as a natural measure for detecting abnormal insurance stock returns from catastrophic events. The assumptions underlying the efficient markets hypothesis using a numeraire denominated returns approach hold for catastrophic insurance events whereas other more traditional methods such as the market model and Fama-French three factor model often fail, typically due to the accumulation of estimation errors. We construct a portfolio of Australian insurance firms and observe the market reaction to major insured catastrophic events. Using the numeraire denominated returns approach we observe no particular trend in the cumulative abnormal returns of insurance securities following a catastrophic event. Using both the traditional market model and the Fama-French three factor model however, we observe significantly positive cumulative abnormal returns following an insured catastrophic event. The errors inherent in the market model and three factor model for event studies are shown to be eliminated using the numeraire denominated returns approach. Available via Athens: Cambridge Journals http://www.actuaries.org.uk/research-and-resources/pages/access-journals
STOP LOSS Optimal reinsurance under VaR and CVaR risk measures. Chi, Yichun; Tan, Ken Seng - 23 pages. [RKN: 74744] Shelved at: Per: Astin Bull (Oxf) Shelved at: JOU ASTIN Bulletin (2011) 41 (2) : 487-509.
In this paper, we study two classes of optimal reinsurance models by minimizing the total risk exposure of an insurer under the criteria of value at risk (VaR) and conditional value at risk (CVaR). We assume that the reinsurance premium is calculated according to the expected value principle. Explicit solutions for the optimal reinsurance policies are derived over ceded loss functions with increasing degrees of generality. More precisely, we establish formally that under the VaR minimization model, (i) the stop-loss reinsurance is optimal among the class of increasing convex ceded loss functions; (ii) when the constraints on both ceded and retained loss functions are relaxed to increasing functions, the stop-loss reinsurance with an upper limit is shown to be optimal; (iii) and finally under the set of general increasing and left-continuous retained loss functions, the truncated stop-loss reinsurance is shown to be optimal. In contrast, under CVaR risk measure, the stop-loss reinsurance is shown to be always optimal. These results suggest that the VaR-based reinsurance models are sensitive with respect to the constraints imposed on both ceded and retained loss functions while the corresponding CVaR-based reinsurance models are quite robust. http://www.actuaries.org/index.cfm?lang=EN&DSP=PUBLICATIONS&ACT=ASTIN BULLETIN
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STORMS Risk and insurability of storm damages to residential buildings in Austria. Prettenthaler, Franz; Albrecher, Hansjorg; Koberla, Judith; Kortschak, Dominik Palgrave Macmillan, [RKN: 45663] Shelved at: Per: Geneva Geneva Papers on Risk and Insurance (2012) 37(2) : 340-364.
This paper develops a stochastic model to assess storm risk in Austria, which relates wind speed and actual losses. By virtue of a building-stock-value-weighted wind index, we use suitably normalised historical loss data of residential buildings over 12 years and corresponding wind speed data to calibrate the model. Subsequently, additional wind speed data is used to generate further scenarios and to obtain loss curves for storm risk that give rise to storm insurance loss quantiles and corresponding solvency capital requirements both on the aggregate and on the regional level. We also investigate the diversification effect across regions and use tools from extreme value theory to assess the insurability of storm risk in Austria in general. Available via Athens: Palgrave MacMillan http://www.openathens.net
STRESS TESTS Multivariate stress scenarios and solvency. McNeil, Alexander J; Smith, Andrew D [RKN: 45634] Shelved at: Online Only Shelved at: Online Only Insurance: Mathematics & Economics (2012) 50 (3) : 299-308.
We show how the probabilistic concepts of half-space trimming and depth may be used to define convex scenario sets Qa for stress testing the risk factors that affect the solvency of an insurance company over a prescribed time period. By choosing the scenario in Qa which minimizes net asset value at the end of the time period, we propose the idea of the least solvent likely event (LSLE) as a solution to the forward stress testing problem. By considering the support function of the convex scenario set Qa, we establish theoretical properties of the LSLE when financial risk factors can be assumed to have a linear effect on the net assets of an insurer. In particular, we show that the LSLE may be interpreted as a scenario causing a loss equivalent to the Value-at-Risk (VaR) at confidence level a, provided the a-quantile is a subadditive risk measure on linear combinations of the risk factors. In this case, we also show that the LSLE has an interpretation as a per-unit allocation of capital to the underlying risk factors when the overall capital is determined according to the VaR. These insights allow us to define alternative scenario sets that relate in similar ways to coherent measures, such as expected shortfall. We also introduce the most likely ruin event (MLRE) as a solution to the problem of reverse stress testing. Available via Athens: ScienceDirect http://www.openathens.net/
SUPERVISION Multiperiod insurance supervision: top-down models. Eisele, Karl-Theodor; Artzner, Philippe [RKN: 44808] Shelved at: online only European Actuarial Journal (2011) 1(1) July : 107-130.
We describe a top-down procedure for the supervisory accounting of insurance companies with special emphasis on market impacts. The technical tools are a multiperiod risk assessment, a market consistent best estimate and an eligible asset. First, to avoid supervisory arbitrage by financial market instruments, the risk assessment is bounded by a market consistent best estimate. Applied to the risk bearing capital, i.e. asset value minus best estimate of obligations, the risk assessment immediately gives the free capital which has to be positive for acceptability. Next, optimal hedging of the obligation process by suitable asset portfolios yields the supervisory provision as the minimal initial value of a portfolio acceptable with respect to the given obligations. The problem to attain this minimal value leads to the definition of an optimal replicating portfolio. A further task of supervision is the determination of the ‗‗Fremd‘‘-capital in the supervisory balance sheet. This is formalized by the cost-of-capital method, i.e. a fictitious standardized transfer of the obligations to new investors on the market. The regulated price of such a transfer leads to the technical provision and the risk margin as ‗‗Fremd‘‘-capital items. Finally, the additional financial risks within the insurance‘s real asset portfolio are taken care of by the solvency capital requirement defined as the minimal acceptable ‗‗Eigen‘‘-capital for a given business plan. It measures the adequacy or inadequacy of the trading risks incorporated in the portfolio with respect to the obligation risks. An optimal replicating portfolio is characterized by a minimal solvency capital requirement. Solvency II and the Swiss Solvency Test (SST) are defined as bottom-up models. In the forthcoming paper Eisele and Artzner (2011), we shall show how bottom-up and top-down models can be made congruent. Available online via Athens http://www.openathens.net
SURETY Surety bonds with fair and unfair pricing. Wambach, Achim; Engel, Andreas R. [RKN: 45274] Shelved at: Per: Geneva (Oxf) Geneva Risk and Insurance Review (2011) 36 (1) : 36-50.
Surety bonds are instruments used in public and private procurement to avoid the problem of contractor bankruptcy. A surety company issuing such a bond guarantees to either finish the project itself or pay the bond to the procurement agency in case of contractor's bankruptcy. This situation is analysed under the assumption that the bond is either priced fairly, or a risk loading that
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is proportional to the money at risk is imposed. If the surety is priced fairly, full insurance (or even overinsurance) is optimal. If the surety is priced unfairly, more solvent contractors are more likely to win, thus the problem of abnormally low tenders is alleviated.
SWITZERLAND Interest rate risk: dimension reduction in the Swiss Solvency Test. Ambrus, Marcel; Crugnola-Humbert, Jérôme; Schmid, Martin [RKN: 44831] Shelved at: online only European Actuarial Journal (2011) 1(2) November : 159-172.
Many risk models suffer from the incorporation of too many risk dimensions, which at best only increase computational costs. However, in many cases such models suffer in addition from a poor predictive power, as either the numerous underlying parameters are not understood fully and in order to remain computable the models may be over-simplistic and therefore neglect the more subtle interactions between the main risk drivers. In this paper, we analyze the interest rate risk module of the Swiss Solvency Test Standard Model, where interest rate risk is modeled with 13 risk-factors per currency. We apply the principal component analysis to reduce the dimension of this module. The economic interpretation of the remaining risk-factors becomes obvious, improving the understanding of the model. Further, we suggest to calculate the risk-factor sensitivities at the quantile corresponding to the expected shortfall of the corresponding normally distributed risk-factor. This way the inherent non-linearities are sufficiently allowed for and a complex second order Delta–Gamma approximation could be omitted. A sample calculation based on the SST 2011 for Basler Leben AG is provided to illustrate the validity of our approach with a real world case study. Available online via Athens -- Published online, 22 December 2011 http://www.openathens.net
TABULATED STATISTICS Key performance indicators of UK insurance companies : volume 1: 2009-2010. O'Brien, Christopher D; Orton, Tim R (2011). - Nottingham: Centre for Risk & Insurance Studies, 2011. - 108 pages. [RKN: 45508] Shelved at: BU/ELCB
We have compiled data from over 180 companies (including many subsidiaries), based on what firms regard as important: their key performance indicators (KPIs). Our report sets out the KPIs of those companies, where reported in their 2009 accounts and also for 2010, for 21 listed insurers and 5 major mutuals. The report includes an Excel spreadsheet that sets out those KPIs, and also the following data items for 2008 and 2009 where reported: · Premiums: earned and written, gross and net; · Claims paid (gross); claims incurred (net); · Administration expenses; net operating expenses; · Pre-tax profit; profit after tax; · Assets; shareholders‘ equity; fund for future appropriations; · Technical provisions; and outstanding claims (gross and net of reinsurance); · New life business annual premium, single premium, APE; capital resources for long-term business and regulatory requirement (life insurers). The spreadsheet also shows the following calculated ratios: · Expense ratio; combined ratio (general insurers); and rate of return on equity. There are tables indicating the top 10 insurers by assets, premiums, shareholders‘ equity, profits, rate of return on equity, and combined ratio. The report includes a paper presented to the 33rd UK Insurance Economists‘ conference that analyses the data. Among its findings was that while some firms did not disclose KPIs, firms which were less profitable were more likely than others to disclose KPIs. Includes 1 spreadsheet located as in network location. -- Replaces "Insurance Company Performance" RKN 39236
TAIL RISK MEASURES Fitting insurance claims to skewed distributions: are the skew-normal and skew-student good models?. Eling, Martin [RKN: 44782] Shelved at: Online Only Shelved at: Online Only Insurance: Mathematics & Economics (2012) 51(2) : 239-248.
This paper analyzes whether the skew-normal and skew-student distributions recently discussed in the finance literature are reasonable models for describing claims in property-liability insurance. We consider two well-known datasets from actuarial science and fit a number of parametric distributions to these data. Also the non-parametric transformation kernel approach is considered as a benchmark model. We find that the skew-normal and skew-student are reasonably competitive compared to other models in the literature when describing insurance data. In addition to goodness-of-fit tests, tail risk measures such as value at risk and tail value at risk are estimated for the datasets under consideration. Available via Athens: ScienceDirect http://www.openathens.net/
Tail comonotonicity: properties, constructions, and asymptotic additivity of risk measures. Hua, Lei; Joe, Harry [RKN: 44869] Shelved at: Online Only Shelved at: Online Only Insurance: Mathematics & Economics (2012) 51(2) : 472-479.
We investigate properties of a version of tail comonotonicity that can be applied to absolutely continuous distributions, and give
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several methods for constructions of multivariate distributions with tail comonotonicity or strongest tail dependence. Archimedean copulas as mixtures of powers, and scale mixtures of a non-negative random vector with the mixing distribution having slowly varying tails, lead to a tail comonotonic dependence structure. For random variables that are in the maximum domain of attraction of either Fréchet or Gumbel, we prove the asymptotic additivity property of Value at Risk and Conditional Tail Expectation. Available via Athens: ScienceDirect http://www.openathens.net/
TAIWAN An analysis of reinsurance and firm performance: evidence from the Taiwan property-liability insurance industry. Lee, Hsu-Hua; Lee, Chen-Ying [RKN: 43634] Shelved at: Per: Geneva Geneva Papers on Risk and Insurance (2012) 37(3) : 467-484.
This study investigates the relationship between reinsurance and firm performance by sourcing panel data from the 1999 to 2009 period of the property-liability insurance industry in Taiwan. The results of this investigation offer some insight that firm performance and reinsurance are interdependent. We find that insurers with higher return on assets (ROA) tend to purchase less reinsurance and insurers with higher reinsurance dependence tend to have a lower level of firm performance. Therefore, managers have to strike a balance between decreasing insolvency risk and reducing potential profitability. Other empirical results show that ROA, underwriting risks, liquidity ratio, business line concentration, return on investment (ROI) and financial holding dummy have a significant correlation with reinsurance. In addition, firm size, financial leverage, reinsurance, underwriting risks, liquidity ratio and ROI have a significant influence on firm performance. Our results have practical implications for the property-liability insurance industry and competent authorities in Taiwan. Available via Athens: Palgrave MacMillan http://www.openathens.net
A comparison of Bancassurance and traditional insurer sales channels. Chang, Pang-Ru; Peng, Jin-Lung; Fan, Chiang Ku Palgrave Macmillan, [RKN: 39977] Shelved at: Per: Geneva (Oxf) Geneva Papers on Risk and Insurance (2011) 36(1) : 76-93.
Although various sales channels exist for insurance products, no existing research compares their sales efficiency. This study offers a comparison of bancassurance and traditional sales channels in Taiwan. Using a data envelopment analysis approach, this study first computes the efficiencies of bancassurance and traditional sales channels separately. The efficiency score of the traditional sales channel is significantly higher than that of a comparable bancassurance channel. Furthermore, the efficiency relationship between the bancassurance and the traditional sales channels is independent. These findings have significant implications for the insurance industry and ongoing research in this field. Available via Athens: Palgrave MacMillan http://www.openathens.net
TAX Who responds to tax reforms? : evidence from the life insurance market. Hecht, Carolin; Hanewald, Katja Palgrave Macmillan, [RKN: 45539] Shelved at: Per: Geneva (Oxf) Geneva Papers on Risk and Insurance (2012) 37(1) : 5-26.
We exploit the natural experiment of the 2005 income tax reform in Germany to study the effects of tax incentives on consumer behaviour in life insurance markets. Our empirical analysis of sociodemographic, economic and psychological household characteristics elicited in the German SAVE study shows that two very different consumer groups buy (endowment) life insurance before and after the tax reform. We find that education plays a central role in reactions to the modified tax environment. Our stylised characterisation of ―arbitrageur‖ and ―straggler‖ buyers will assist both life insurance firms and regulatory authorities in designing effective policies. Available via Athens: Palgrave MacMillan http://www.openathens.net
TEMPERANCE Beyond risk aversion: Why, how and what's next? : EGRIE Keynote Address. Eeckhoudt, Louis - 15 pages. [RKN: 70260] Shelved at: Per: Geneva (Oxf) Geneva Risk and Insurance Review (2012) 37 (2) : 141-155.
Risk attitudes other than risk aversion (e.g. prudence and temperance) are becoming important both in theoretical and empirical work. While the literature has mainly focused its attention on the intensity of such risk attitudes (e.g. the concepts of absolute prudence and absolute temperance), I consider here an alternative approach related to the direction of these attitudes (i.e. the sign of the successive derivatives of the utility function).
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TERRORISM Calculating catastrophe. Woo, Gordon (2011). - London: Imperial College Press, 2011. - 355 pages. [RKN: 73989] Shelved at: 363.34
Calculating Catastrophe has been written to explain, to a general readership, the underlying philosophical ideas and scientific principles that govern catastrophic events, both natural and man-made. Knowledge of the broad range of catastrophes deepens understanding of individual modes of disaster. This book will be of interest to anyone aspiring to understand catastrophes better, but will be of particular value to those engaged in public and corporate policy, and the financial markets.
TERRORISM INSURANCE Corporate management of highly dynamic risks : Evidence from the demand for terrorism insurance in Germany. Thomann, Christian; Pascalau, Razvan; von der Schulenburg, J Mattias Graf - 26 pages. [RKN: 74942] Shelved at: Per: Geneva (Oxf) Geneva Risk and Insurance Review (2012) 37 (1) : 57-82.
This paper investigates a corporation's risk management response to highly dynamic risks. Using a unique data set on the German terrorist insurance market, the paper tests whether corporate risk managers have a clear understanding of the probability distribution of highly dynamic risks or if risk managers learn from severe losses and base their decisions upon day-to-day experience. The paper further investigates whether risk managers become more confident in their risk management decisions over time. For this purpose, we apply Viscusi's prospective reference theory to a corporate context. We find that firms learn from single events when making their risk management decisions, and that risk managers become more confident with their risk management decisions over time.
THIRD PARTY TARIFF Update from the Third Party Motor and the PPO Working Parties. Brown, David; MacDonnell, Sarah (2012). - London: Institute and Faculty of Actuaries, 2012. [RKN: 43526] Shelved at: Online
A key finding of the Institute and Faculty of Actuaries report is the increase in the proportion of third party accidents involving bodily injury where data shows a staggering 18% increase from 2010 to 2011. A rise in the proportion of reported accidents involving bodily injury has been a key trend for several years; however this year has seen the greatest increase ever. The Institute and Faculty of Actuaries believes that this rise is down to unprecedented activity by claims management companies. The increase in claims increased costs to insurers to the tune of approximately £400 million in 2011 The Institute and Faculty of Actuaries 3rd annual report looking at ‗third party motor and periodic payment orders (PPOs) UK claims data‘, a report which collates and analyses data from across the motor and PPO insurance industry for 2011. http://www.actuaries.org.uk/research-and-resources/documents/update-third-party-motor-and-ppo-working-parties
TRANSACTION COSTS Optimal dividend and equity issuance problem with proportional and fixed transaction costs. Peng, Xiaofan; Chen, Mi; Guo, Junyi [RKN: 44876] Shelved at: Online Only Shelved at: Online Only Insurance: Mathematics & Economics (2012) 51(3) : 576-585.
This paper investigates the optimal dividend problem of an insurance company, which controls risk exposure by reinsurance and by issuing new equity to protect from bankruptcy. Transaction costs are incurred by these business activities: reinsurance is non-cheap, dividend is taxed and fixed costs are generated by equity issuance. The goal of the company is to maximize the expected cumulative discounted dividend minus the expected discounted costs of equity issuance. This problem is formulated as a mixed regular-singular-impulse stochastic control problem. By solving the corresponding HJB [Hamilton-Jacobi-Bellman] equation, the authors obtain the analytical solutions of the optimal return function and the optimal strategy. Available via Athens: ScienceDirect http://www.openathens.net/
(S,s)-adjustment strategies and hedging under Markovian dynamics. Agliardi, Elettra; Andergassen, Rainer - 20 pages. [RKN: 74786] Shelved at: Per: Geneva (Oxf) Geneva Risk and Insurance Review (2011) 36 (2) : 112-131.
We study the destabilizing effect of hedging strategies under Markovian dynamics with transaction costs. Once transaction costs are taken into account, continuous portfolio rehedging is no longer an optimal strategy. Using a non-optimizing (local in time) strategy for portfolio rebalancing, explicit dynamics for the price of the underlying asset are derived, focusing in particular on excess volatility and feedback effects of these portfolio insurance strategies. Moreover, it is shown how these latter depend on the heterogeneity of the insured payoffs. Finally, conditions are derived under which it may be still reasonable, from a practical viewpoint, to implement Black–Scholes strategies.
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UNCERTAINTY Innovation and information acquisition under time inconsistency and uncertainty. Chemarin, Sophie; Orset, Caroline - 42 pages. [RKN: 74787] Shelved at: Per: Geneva (Oxf) Geneva Risk and Insurance Review (2011) 36 (2) : 132-173.
When an agent invests in new industrial activities, he has a limited initial knowledge of his project's returns. Acquiring information allows him both to reduce the uncertainty on the dangerousness of this project and to limit potential damages that it might cause on people's health and on the environment. In this paper, we study whether there exist situations in which the agent does not acquire information. We find that an agent with time-consistent preferences, as well as an agent with hyperbolic ones, will acquire information unless its cost exceeds the direct benefit they could get with this information. Nevertheless, a hyperbolic agent may remain strategically ignorant and, when he does acquire information, he will acquire less information than a time-consistent type. Moreover, a hyperbolic-discounting type who behaves as a time-consistent agent in the future is more inclined to stay ignorant. We then emphasize that this strategic ignorance depends on the degree of precision of the information. Finally, we analyse the role that existing liability rules could play as an incentive to acquire information under uncertainty and with regard to the form of the agent's preferences.
A Meta-study of the General Insurance Reserving Issues Taskforce and Reserving Oversight Committee Research in this area between 2004 and 2009. Gibson, E R; Barlow, C; Bruce, N A; Felisky, K M; Fisher, S; Hilary, N; Hilder, Ian M; Kam, Hanna; Matthews, Peter N; Winter, R [RKN: 45281] Shelved at: Per: BAJ (Oxf) Per: BAJ (Lon) Shelved at: BRI/ACT BAJ (2011) 16 (1) : 63-80.
http://www.actuaries.org.uk/research-and-resources/pages/members-access-journals
UNDERWRITING Equitable solvent controls in a multi-period game model of risk. Malinovskii, Vsevolod K [RKN: 44878] Shelved at: Online Only Shelved at: Online Only Insurance: Mathematics & Economics (2012) 51(3) : 599-616.
In insurance two major types of cycles are known: (a) regular many years long up- and down-swings referred to as underwriting cycles and (b) irregular short-range fluctuations. The key rationale of the underwriting cycles is migration of insureds triggered by the insurers‘ price competition while the short-range fluctuations are due to unpredictable fluctuations in economic surroundings. The competition-originated cycles were modeled in the framework of a Lundberg‘s-type multi-period model of risk in [Malinovskii, 2010] and [Malinovskii, submitted for publication]. Short-range fluctuations were modeled under diverse nature scenarios in the framework of (i) diffusion (see Malinovskii, 2007 [V.K. Malinovskii (2007), Zone-adaptive control strategy for a multiperiodic model of risk, Annals of Actuarial Science, 2 , 391-409] and Malinovskii, 2009 [V.K. Malinovskii (2009), Scenario analysis for a multi-period diffusion model of risk, ASTIN Bulletin, 39, 649-676]) and (ii) Lundberg‘s-type multi-period model (see Malinovskii, 2008a [V.K. Malinovskii (2008), Adaptive control strategies and dependence of finite time ruin on the premium loading, Insurance: Mathematics and Economics, 42, 81-94]). In this paper the results of Malinovskii (2009) are extended on the Lundberg‘s-type multi-period model. Available via Athens: ScienceDirect http://www.openathens.net/
A Meta-study of the General Insurance Reserving Issues Taskforce and Reserving Oversight Committee Research in this area between 2004 and 2009. Gibson, E R; Barlow, C; Bruce, N A; Felisky, K M; Fisher, S; Hilary, N; Hilder, Ian M; Kam, Hanna; Matthews, Peter N; Winter, R [RKN: 45281] Shelved at: Per: BAJ (Oxf) Per: BAJ (Lon) Shelved at: BRI/ACT BAJ (2011) 16 (1) : 63-80.
http://www.actuaries.org.uk/research-and-resources/pages/members-access-journals
A theory of the demand for underwriting. Browne, Mark J; Kamiya, Shinichi - 15 pages. [RKN: 70704] Shelved at: Per: J.Risk Ins (Oxf) Shelved at: JOU Journal of Risk and Insurance (2012) 79 (2) : 335-349.
We examine the demand for underwriting and its effect on equilibrium in an insurance market in which insureds know their risk type, but insurers do not. Our analysis indicates that a set of policies including one that requires buyers to take an underwriting test can constitute a full coverage Nash equilibrium when perfect classification is possible. We also find that underwriting equilibria, in which low risks obtain greater coverage than they would without underwriting, widely exist in a Wilsonian market with nonmyopic insurers. Our findings provide a potential explanation for why empirical evidence on adverse selection is mixed. Available via Athens: Wiley Online Library http://www.openathens.net
U.S. property-casualty: underwriting cycle modeling and risk benchmarks. Wang, Shaun S; Major, John A; Hucheng, Pan (Charles); Leong, Weng Kah [RKN: 43601] Shelved at: Per: Variance Variance (2011) 5(2) : 91-114.
The risk benchmarks and underwriting cycle models presented here can be used by insurers in their enterprise risk management models. We analyze the historical underwriting cycle and develop a regime-switching model for simulating future cycles, and show its superiority to an autoregressive approach. We compute benchmarks for pricing and reserving risks by line of business and by industry segments (large national, super regional, and small regional). We also compute the historical correlation of the loss ratio, as well as the correlation of changes in the reserve estimate between lines of business. http://www.variancejournal.org/issues
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Underwater underwriters. Parodi, Pietro Staple Inn Actuarial Society, [RKN: 45111] Shelved at: Per: Actuary (Oxf) Per: Actuary (Lon) Shelved at: SIA/ACT The Actuary (2011) March : 34-36.
Pietro Parodi considers how actuaries can use different techniques in modelling insurance claims. http://www.theactuary.com/archive
UNEMPLOYMENT The decline of substitute pathways into retirement : Empirical evidence from the Dutch health care sector. Euwals, Rob; van Vuren, Annemiek; van Vuuren, Daniel [RKN: 45803] Shelved at: Per: ISSR (Oxf) International Social Security Review (2012) 65 (3) : 101-122.
Early retirement schemes and disability insurance in the Netherlands have undergone several reforms in recent decades. The reforms have increased incentives for older workers to continue working and have decreased the roles of ―substitute pathways‖ into retirement. This article gives an overview of the reforms and, using administrative data for workers in the health care sector, tests a number of hypotheses about the labour market participation of older workers. The results offer two main findings: i) that the Dutch reforms have indeed been effective, as the labour force participation rate of older workers has increased; and ii) the concept of ―substitute pathways‖ has become less relevant as the use of disability insurance has been closed off as an exit route to early retirement. Nevertheless, caution is required before generalizing the implications of these Dutch findings to other OECD countries.
UNEMPLOYMENT INSURANCE State dependent unemployment benefits. Andersen, Torben M; Svarer, Michael - 20 pages. [RKN: 74856] Shelved at: Per: J.Risk Ins (Oxf) Shelved at: JOU Journal of Risk and Insurance (2011) 78 (2) : 325-344.
Optimal design of unemployment insurance is considered in a search setting where the state of nature (business cycle) affects the unemployment risk and thus the return to search. The incentive effects or distortions of individual job search arising due to the unemployment insurance scheme are crucial for optimal policies, so is the scope for risk diversification that depends critically on whether the balanced budget requirement applies to each state of nature or across states of nature. In the former case a basic budget effect tends to cause optimal benefits to be procyclical. If risk diversification across states of nature is possible, the fact that incentives are more distorted in good than bad states of nature tends to make both benefits and contribution rates countercyclical. It is shown that countercyclical benefits exacerbate employment fluctuations but increase average employment by aligning benefits more with states of nature where the incentive costs are small. Available via Athens: Wiley Online Library http://www.openathens.net
UNITED KINGDOM Key performance indicators of UK insurance companies : volume 1: 2009-2010. O'Brien, Christopher D; Orton, Tim R (2011). - Nottingham: Centre for Risk & Insurance Studies, 2011. - 108 pages. [RKN: 45508] Shelved at: BU/ELCB
We have compiled data from over 180 companies (including many subsidiaries), based on what firms regard as important: their key performance indicators (KPIs). Our report sets out the KPIs of those companies, where reported in their 2009 accounts and also for 2010, for 21 listed insurers and 5 major mutuals. The report includes an Excel spreadsheet that sets out those KPIs, and also the following data items for 2008 and 2009 where reported: · Premiums: earned and written, gross and net; · Claims paid (gross); claims incurred (net); · Administration expenses; net operating expenses; · Pre-tax profit; profit after tax; · Assets; shareholders‘ equity; fund for future appropriations; · Technical provisions; and outstanding claims (gross and net of reinsurance); · New life business annual premium, single premium, APE; capital resources for long-term business and regulatory requirement (life insurers). The spreadsheet also shows the following calculated ratios: · Expense ratio; combined ratio (general insurers); and rate of return on equity. There are tables indicating the top 10 insurers by assets, premiums, shareholders‘ equity, profits, rate of return on equity, and combined ratio. The report includes a paper presented to the 33rd UK Insurance Economists‘ conference that analyses the data. Among its findings was that while some firms did not disclose KPIs, firms which were less profitable were more likely than others to disclose KPIs. Includes 1 spreadsheet located as in network location. -- Replaces "Insurance Company Performance" RKN 39236
What motivates insurers to use derivatives: evidence from the United Kingdom life insurance industry. Yung-Ming, Shiu Palgrave Macmillan, [RKN: 45330] Shelved at: Per: Geneva (Oxf) Geneva Papers on Risk and Insurance (2011) 36(2) : 186-196.
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Using firm-specific variables that proxy for the motivations of life insurers‘ decision to participate in derivative transactions, we examine existing theories of corporate hedging behaviour. Our findings support the evidence of previous research that risk management and scale factors explain the use of derivatives. We observe a substitution effect that insurers use on-balance-sheet hedging through structuring their assets and liabilities to reduce price risks. Available via Athens: Palgrave MacMillan http://www.openathens.net
UNITED STATES Asymmetric information and countermeasures in early twentieth-century American short-term disability microinsurance. Murray, John E - 22 pages. [RKN: 74847] Shelved at: Per: J.Risk Ins (Oxf) Shelved at: JOU Journal of Risk and Insurance (2011) 78 (1) : 117-138.
American workers and employers a century ago formed microinsurance funds to provide sick pay to temporarily disabled workers. This article analyzes a 1908 survey of several hundred such microinsurers. Theoretically, a single cross-section may yield evidence of asymmetric information, but cannot enable the separation of moral hazard and adverse selection effects. However, microinsurance fund managers and outside observers believed they did see separate such effects and so microinsurers created separate countermeasures to mitigate these problems. This article finds prima facie evidence of asymmetric information and suggestive evidence of the separability of informational asymmetries and the effectiveness of such countermeasures. Available via Athens: Wiley Online Library http://www.openathens.net
Demutualisation, control and efficiency in the U.S. life insurance industry. Xie, Xiaoying; Lu, WeiLi; Reising, Joseph; Stohs, Mark Hoven Palgrave Macmillan, [RKN: 45331] Shelved at: Per: Geneva (Oxf) Geneva Papers on Risk and Insurance (2011) 36(2) : 197-225.
This paper examines the role of corporate governance in the demutualisation wave in the U.S. life insurance industry during the 1990s and 2000s. The efficiency hypothesis suggests a firm should experience improved performance after demutualisation and managers should only gain from superior performance. Alternately, the managerial welfare hypothesis proposes that executives gain independence of company performance. This research suggests that demutualisation is value-enhancing for firms converting through initial public offerings (IPOs), but value-neutral for firms that convert but stay private. Firms converting into public companies experience increased CEO turnover that leads to efficiency improvement. CEOs of these firms receive higher compensation after demutualisation, but most of the gain is due to a jump in incentive compensation. Firms converting but staying private do not have a similar significant increase in CEO compensation. Overall, our results provide evidence that value-enhancement, not private managerial welfare, motivates demutualisation. Available via Athens: Palgrave MacMillan http://www.openathens.net
Disability risk management and post-injury employment of workers with back pain. Johnson, William G; Butler, Richard J; Baldwin, Marjorie L; Côté, Pierre - 21 pages. [RKN: 73820] Shelved at: JOU Risk Management and Insurance Review (2012) 15 (1) : 35-55.
We analyze the outcomes of occupational back pain among four large employers that use one or more of the following disability management practices: aggressive return to work, claims management, medical management, or time-limited job accommodations. Outcomes measured at 6 and 12 months postonset include: duration of initial work absence and the probability of returning to stable employment. Employment outcomes are better in firms with more proactive return-to-work policies than in firms with more restrictive policies. We devise a statistical test for attrition bias and conclude that sample attrition does not significantly alter our results. Available via Athens: Wiley Online Library http://www.openathens.net
Disasters and decentralisation. Johnston, Jason Scott Palgrave Macmillan, [RKN: 45659] Shelved at: Per: Geneva Geneva Papers on Risk and Insurance (2012) 37(2) : 228-256.
Climate change may potentially increase the magnitude of losses from natural hazards, but the United States experience shows that the primary reason for escalating losses is policy failure. It is well known that centralised, taxpayer-funded ex post disaster relief has actually encouraged development in risky jurisdictions and also weakened incentives for ex ante precautions in such jurisdictions (moral or ―charity‖ hazard). Less well known and analysed is the role played by centralised ex ante development subsidies—often masquerading as protective investment—in distorting incentives. This paper develops a simple three jurisdiction model in which homogeneous jurisdictions decide by majority vote in a centralised legislature on the centralised (federal) share of ex post loss and centralised spending an ex ante development in a Beneficiary jurisdiction, taking into account how these decisions about centralised spending impact local Beneficiary jurisdiction incentives for precautions against ex post loss. The model shows that the marginal cost of ex ante federal development spending may be greater for a Beneficiary jurisdiction than for a Contractor jurisdiction. This somewhat technical result has an observable implication: evidence that a small fraction of ex post loss in a Beneficiary jurisdiction is centrally compensated (shared across jurisdictions) is evidence that ex ante development subsidies there may be truly precautionary on net; conversely, evidence that a Beneficiary jurisdiction has a large share of its ex post hazard loss compensated by centralised disaster relief suggests that the ex ante development subsidies received by that jurisdiction did more to encourage new development and increase the amount at risk than they did to protect existing development. The model is extended to consider how ex post loss sharing impacts the demand for federally subsidised disaster insurance and other related issues. Available via Athens: Palgrave MacMillan http://www.openathens.net
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Fuel risk management at American electric power. Buck, Douglas; Elliott, Dwayne; Niehaus, Greg; Rives, Bill; Thomas, Laura - 22 pages. [RKN: 73818] Shelved at: JOU Risk Management and Insurance Review (2012) 15 (1) : 1-22.
The senior management team and board of directors at American Electric Power (AEP) have emphasized the importance of an Enterprise Risk Management approach for dealing with the wide array of risk exposures that the firm faces. Senior management has put in place a risk governance structure that facilitates the identification of major risk exposures, assesses their impact on the firm's overall risk profile, and interacts the risk management process with the strategic planning process. Central to this structure is the firm's Risk Executive Committee, which includes the senior leadership of the firm and the Enterprise Risk Oversight staff. Members of the AEP Enterprise Risk Oversight group have just returned from a meeting of the Risk Executive Committee. The discussion at the meeting focused on an event that recently came to the firm's attention—an unexpected disruption in the firm's coal supply over the coming year due to necessary repairs in railroad facilities near the coal source. By the end of the week, the Enterprise Risk Oversight group needs to communicate with the relevant teams within the organization as part of its effort to identify the potential repercussions of the event for the enterprise. In addition, the Risk Executive Committee would like the groups to identify other possible adverse events that could occur and steps that should be taken now in preparation. Available via Athens: Wiley Online Library http://www.openathens.net
The impact of no-fault legislation on automobile insurance. Cole, Cassandra R; Eastman, Kevin L; Maroney, Patrick F; McCullough, Kathleen A; Macpherson, David Society of Actuaries, - 17 pages. [RKN: 70653] Shelved at: Per: NAAJ (Oxf) Per NAAJ (Lon) Shelved at: JOU North American Actuarial Journal (2012) 16 (3) : 306-322.
Since its inception, the effectiveness of no-fault legislation has been highly debated. Although some research suggests that no-fault laws are effective in reducing costs, other evidence suggests that the current no-fault systems may not meet the original objectives. This study provides a detailed assessment of the relation of no-fault laws and automobile insurance losses for the period 1994 to 2007. By examining total automobile insurance losses along with liability and personal injury protection losses, we are able to determine if and how specific provisions of the laws are related to claims costs. We find a negative relation between the presence of a no-fault law and total losses, which suggests that no-fault systems are associated with lower losses than the traditional tort system. In addition, an examination of no-fault–only states suggests that specific provisions of no-fault laws, such as thresholds and limitations on benefits, have some effect on losses. With the sunset of Colorado‘s no-fault legislation in 2003, the recent passage of Personal Injury Protection Reform in Florida, and proposed federal choice legislation, the overall impact of no-fault as well as the specific components of the laws are of heightened importance to consumers, insurers, and lawmakers. http://www.soa.org/news-and-publications/publications/journals/naaj/naaj-detail.aspx
The interplay between insurers’ financial and asset risks during the crisis of 2007-2009. Baranoff, Etti G; Sager, Thomas W Palgrave Macmillan, [RKN: 44914] Shelved at: Per: Geneva (Oxf) Geneva Papers on Risk and Insurance (2011) 36(3) : 348-379.
In this study we compare the interplay between capital and asset risks before and during the 2007–2009 financial crisis for the U.S. life and health insurance industries partitioned into segments by product specialisation, size and governance. The results show substantial intra-industry variation in the partial elasticity of capital with respect to asset risk, as well as significant impact of the crisis. Segment variation was driven by product focus. Most notable is the greater impact of the crisis on the U.S. insurers specialising in annuities (least risky product) than on specialists in health lines (riskiest product). During the crisis, the elasticity between asset risk and capital declined for all segments indicating that insurers‘ operation may have shifted from offsetting risk to seeking risk. Available via Athens: Palgrave MacMillan http://www.openathens.net
New Orleans business recovery in the aftermath of Hurricane Katrina. LeSage, James P; Pace, R Kelley; Campanella, Richard; Liu, Xingjian [RKN: 43374] Journal of the Royal Statistical Society, Series A (2011) 174(4) : 1000-1027.
Rainfall or rainmaking? Lawyers, courts, and the price of mold insurance in Texas. North, Charles M; Garven, James R; Gwin, Carl R - 23 pages. [RKN: 70432] Shelved at: Per: J.Risk Ins (Oxf) Shelved at: JOU Journal of Risk and Insurance (2012) 79 (3) : 817-839.
In well-functioning property--liability insurance markets, the price of coverage reflects the impact of the legal environment on the frequency and severity of claims. This article presents a case study of the Texas mold insurance crisis of 2001–2002. We provide a narrative of the controversy in Texas over insurance coverage for household mold and use county-level data from a single Texas insurer to assess the determinants of postcrisis prices for supplemental mold, slab, and extended water loss coverages. We find that more attorneys per capita and more heavily Democratic courts were both associated with higher prices for mold and slab coverage. Available via Athens: Wiley Online Library http://www.openathens.net
Reinsurance purchases, contingent commission payments and insurer reserve estimation. Browne, Mark J; Lu, Lan; Lei, Yu [RKN: 43633] Shelved at: Per: Geneva Geneva Papers on Risk and Insurance (2012) 37(3) : 452-466.
Prior studies on errors in reserve estimation suggest that insurers manage loss reserves to achieve corporate goals, including tax minimisation and income smoothing. Analysing U.S. property and casualty insurance industry data, we find a relationship between reserve errors and the purchase of reinsurance. A relationship is also found between reserve errors and the payment of contingent commissions. Since reserve errors may be costly in both instances, insurers who purchase reinsurance and those who pay contingent commissions may have a greater incentive to reserve accurately than other insurers. We find that in these cases insurers report smaller over-reserving errors. Available via Athens: Palgrave MacMillan
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Seasonality modelling for catastrophe bond pricing. Hainaut, Donatien [RKN: 43469] Shelved at: online only Bulletin Français d'Actuariat (2012) 12 (no.23) : 129-150.
During the last decades, a new category of assets whose return is linked to insurance claims have appeared. Those assets, called catastrophe bonds, are primarily designed by insurers and reinsurers to transfer their risks to other categories of investors, looking for diversification. This paper proposes a method to price such bonds, when the claims arrival process is under the influence of a stochastic seasonal effect. The arrival process is modeled by a Poisson Process whose intensity is the sum of an Ornstein Uhlenbeck process and of one periodic function. The size of claims is assumed to be a positive random variable, independent of the intensity process. In this paper, we show that the expected number of claims can be inferred from the probability generating function and propose a pricing method of the fair coupon based on the Fourier Transform. To illustrate the tractability of our model, we price insurance bonds on claims resulting from tornadoes in the US. http://www.institutdesactuaires.com/bfa/
A spatial econometric analysis of loss experience in the U.S. crop insurance program. Woodard, Joshua D; Schnitkey, Gary D; Sherrick, Bruce J; Lozano-Gracia, Nancy; Anselin, Luc - 26 pages. [RKN: 73854] Shelved at: Per: J.Risk Ins (Oxf) Shelved at: JOU Journal of Risk and Insurance (2012) 79 (1) : 261-286.
Patterns in loss-ratio experience in the U.S. corn insurance market are investigated with a spatial econometric model. The results demonstrate systematic geographically related misratings and provide estimates of the impacts of several observable factors on the magnitude of misrating in the program. The model is used to estimate actuarial cross-subsidizations across the primary corn-producing states and counties. The impacts of the primary factors are substantial, resulting in net premium transfers of approximately 26 percent of total premiums annually. The misratings likely have important insurance demand, welfare, and land-use implications. Available via Athens: Wiley Online Library http://www.openathens.net
Tabletop disaster exercise to enhance risk management education. Nielson, Norma L; Kitching, Brian - 12 pages. [RKN: 73819] Shelved at: JOU Risk Management and Insurance Review (2012) 15 (1) : 23-34.
This article describes a disaster planning exercise undertaken by a University class of risk management students Available via Athens: Wiley Online Library http://www.openathens.net
U.S. property-casualty: underwriting cycle modeling and risk benchmarks. Wang, Shaun S; Major, John A; Hucheng, Pan (Charles); Leong, Weng Kah [RKN: 43601] Shelved at: Per: Variance Variance (2011) 5(2) : 91-114.
The risk benchmarks and underwriting cycle models presented here can be used by insurers in their enterprise risk management models. We analyze the historical underwriting cycle and develop a regime-switching model for simulating future cycles, and show its superiority to an autoregressive approach. We compute benchmarks for pricing and reserving risks by line of business and by industry segments (large national, super regional, and small regional). We also compute the historical correlation of the loss ratio, as well as the correlation of changes in the reserve estimate between lines of business. http://www.variancejournal.org/issues
The value of contingent commissions in the property–casualty insurance industry : Evidence from stock market returns. Ghosh, Chinmoy; Hilliard, James I - 28 pages. [RKN: 73851] Shelved at: Per: J.Risk Ins (Oxf) Shelved at: JOU Journal of Risk and Insurance (2012) 79 (1) : 165-192.
Insurance producer compensation has incorporated contingent commissions for decades. In 2004, the New York State Attorney General sued insurers and brokers, alleging compensation abuses and calling for elimination of some forms of contingent commissions. Daily stock price return data reveal negative announcement-period portfolio returns for property–casualty carriers, suggesting expected negative cash flow effects. Firm-level losses were related to intensity of contingent commission use, suggesting that the effects of such regulatory changes would be felt most by firms that relied on contingent commissions. Investors believed contingent commissions were valuable not only for producers but also for carriers. Available via Athens: Wiley Online Library http://www.openathens.net
Valuing the longevity insurance acquired by delayed claiming of social security. Sun, Wei; Webb, Anthony - 24 pages. [RKN: 74877] Shelved at: Per: J.Risk Ins (Oxf) Shelved at: JOU Journal of Risk and Insurance (2011) 78 (4) : 907–930.
Individuals can claim Social Security at any age from 62 to 70, although most claim at 62. We show that expected present value calculations substantially understate both the optimal claim age and the losses resulting from early claiming because they ignore the value of the additional longevity insurance acquired because of delay. Using numerical optimization techniques, we illustrate that the optimal claim age is between 67 and 70. We calculate that the amount by which benefits payable at suboptimal ages must be increased so that a household is indifferent between claiming at those ages and the optimal combination of ages can be as high as 19.0 percent. Available via Athens: Wiley Online Library http://www.openathens.net
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VALUATION An academic view on the illiquidity premium and market-consistent valuation in insurance. Wüthrich, Mario V [RKN: 44807] Shelved at: online only European Actuarial Journal (2011) 1(1) July : 93-105.
The insurance industry currently discusses to which extent they can integrate an illiquidity premium into their best estimate considerations of insurance liabilities. The present position paper studies this question from an actuarial perspective that is based on market-consistent valuation. We conclude that mathematical theory does not allow for discounting insurance liabilities with an illiquidity spread. Available via Athens http://www.openathens.net
Valuation of catastrophe equity puts with markov-modulated poisson processes. Chang, Chia-Chien; Lin, Shih-Kuei; Yu, Min-Teh - 27 pages. [RKN: 74861] Shelved at: Per: J.Risk Ins (Oxf) Shelved at: JOU Journal of Risk and Insurance (2011) 78 (2) : 447-473.
We derive the pricing formula for catastrophe equity put options (CatEPuts) by assuming catastrophic events follow a Markov Modulated Poisson process (MMPP) whose intensity varies according to the change of the Atlantic Multidecadal Oscillation (AMO) signal. U.S. hurricanes events from 1960 to 2007 show that the CatEPuts pricing errors under the MMPP(2) are smaller than the PP by 30 percent to 66 percent. The scenario analysis indicates that the MMPP outperforms the exponential growth pattern (EG) if the hurricane intensity is the AMO signal, whereas the EG may outperform the MMPP if the future climate is warming rapidly. Available via Athens: Wiley Online Library http://www.openathens.net
VALUATIONS Cheap at half the price?. Maclaren, Andrew Staple Inn Actuarial Society, [RKN: 45162] Shelved at: Per: Actuary (Oxf) Per: Actuary (Lon) Shelved at: SIA/ACT The Actuary (2011) April : 29.
Andrew Maclaren looks at the float-based valuations of some insurance companies http://www.theactuary.com/archive
VALUE-AT-RISK (VAR) Analysis of the discounted sum of ascending ladder heights. Cossette, Hélène; Landriault, David; Marceau, Etienne; Moutanabbir, Khouzeima [RKN: 44798] Shelved at: Online Only Shelved at: Online Only Insurance: Mathematics & Economics (2012) 51(2) : 393-401.
Within the Sparre Andersen risk model, the ruin probability corresponds to the survival function of the maximal aggregate loss. It is well known that the maximum aggregate loss follows a compound geometric distribution, in which the summands consist of the ascending ladder heights. In the present paper, we propose to investigate the distribution of the discounted sum of ascending ladder heights over a finite or an infinite-time intervals. In particular, the moments of the discounted sum of ascending ladder heights over a finite and an infinite-time intervals are derived in both the classical compound Poisson risk model and the Sparre Andersen risk model with exponential claims. The application of a particular Gerber-Shiu functional is central to the derivation of these results, as is the mixed Erlang distributional assumption. Finally, we define VaR and TVaR risk measures in terms of the discounted sum of ascending ladder heights. We use a moment-matching method to approximate the distribution of the discounted sum of ascending ladder heights allowing the computation of the VaR and TVaR risk measures. We conclude this paper with a numerical example illustrating different topics discussed in the paper. Available via Athens: ScienceDirect http://www.openathens.net/
Enhancing insurer value using reinsurance and value-at-risk criterion. Tan, Ken Seng; Weng, Chengguo - 32 pages. [RKN: 74944] Shelved at: Per: Geneva (Oxf) Geneva Risk and Insurance Review (2012) 37 (1) : 109-140.
The quest for optimal reinsurance design has remained an interesting problem among insurers, reinsurers, and academicians. An appropriate use of reinsurance could reduce the underwriting risk of an insurer and thereby enhance its value. This paper complements the existing research on optimal reinsurance by proposing another model for the determination of the optimal reinsurance design. The problem is formulated as a constrained optimization problem with the objective of minimizing the value-at-risk of the net risk of the insurer while subjecting to a profitability constraint. The proposed optimal reinsurance model, therefore, has the advantage of exploiting the classical tradeoff between risk and reward. Under the additional assumptions that the reinsurance premium is determined by the expectation premium principle and the ceded loss function is confined to a class of increasing and convex functions, explicit solutions are derived. Depending on the risk measure's level of confidence, the safety loading for the reinsurance premium, and the expected profit guaranteed for the insurer, we establish conditions for the existence of reinsurance. When it is optimal to cede the insurer's risk, the optimal reinsurance design could be in the form of pure stop-loss reinsurance, quota-share reinsurance, or a combination of stop-loss and quota-share reinsurance.
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An executive's handbook for understanding and risk managing unit linked guarantees. Maher, J; Corrigan, J; Bentley, A; Diffey, W - 55 pages. [RKN: 73954] Shelved at: Per: BAJ (Oxf) Per: BAJ (Lon) Shelved at: REF BAJ (2012) 17 (1) : 71-125.
The focus of this paper is the identification, and more importantly, sustainable management, of risks embedded in guarantees attaching to unit linked savings and retirement contracts (as commonly referred to as GMxBs). In developing customer centric guarantees that are not readily transferrable to the capital markets, insurance undertakings require the skills and resources to hedge the guarantees within their own balance sheet (or with a temporary use of packaged solutions such as reinsurance). In taking on the guarantee manufacture task insurers are departing from areas of historic competence and need to develop a comprehensive understanding of all elements of market risk replication. These include both first order market exposures as well as the material second order risks associated with market micro structure. The paper seeks to integrate this comprehensive analysis within a practitioner focused framework and concludes with a senior executive summary of ―Seven key considerations in successful guarantee manufacture‖. http://www.actuaries.org.uk/research-and-resources/pages/members-access-journals
An executive's handbook for understanding and risk managing unit linked guarantees : Abstract of the Edinburgh discussion. Maher, James - 11 pages. [RKN: 73956] Shelved at: Per: BAJ (Oxf) Per: BAJ (Lon) Shelved at: REF BAJ (2012) 17 (1) : 142-152.
Institute and Faculty of Actuaries, 15 November 2010. http://www.actuaries.org.uk/research-and-resources/pages/members-access-journals
Insurance risk capital for the Sparre Andersen model with geometric Lévy stochastic returns. Hürlimann, Werner [RKN: 44834] Shelved at: online only European Actuarial Journal (2011) 1(2) November : 215-235.
Some multi-period insurance risk economic capital models that include the effects of heavy-tail claims and random returns are considered. They are based on the Sparre Andersen risk model with geometric Lévy stochastic returns. The random accumulated surplus over an arbitrary finite time horizon is decomposed into insurance risk, market risk and future profit components. A protection against the solvency risk of the policyholders is obtained by applying the VaR (CVaR) measure to the insurance risk component and defines a multi-period insurance risk VaR (CVaR) economic capital. A classical asymptotic result by Resnick and Willekens [Ref. 28: Resnick SI, Willekens E (1991) Moving averages with random coefficients and random coefficient autoregressive models. Comm. Statist. Stochastic Models 7(4):511–525] on the tail probability of moving averages with random coefficients is applied to the accumulated aggregate claims random variable for claim size distributions with regularly varying tail to derive asymptotic formulas for these multi-period insurance risk economic capitals. Numerical examples with a Pareto claim size distribution reveal interesting features and differences between these two solvency rules. Since the preceding results exclude the log-normal and the heavy-tailed Weibull claim size distributions, we consider also an extension to sub-exponential claim sizes for the compound Poisson model with constant force of interest, which is based on Hao and Tang [Ref. 12: Hao X, Tang Q (2008) A uniform asymptotic estimate for discounted aggregate claims with subexponential tails. Insurance Math. Econom. 43(1):116–120]. The obtained results are compared with the standard Solvency II specification of the non-life insurance risk. Available online via Athens -- Published online, 22 December 2011 http://www.openathens.net
Optimal reinsurance revisited point of view of cedent and reinsurer. Hürlimann, Werner - 28 pages. [RKN: 74746] Shelved at: Per: Astin Bull (Oxf) Shelved at: JOU ASTIN Bulletin (2011) 41 (2) : 547-474.
It is known that the partial stop-loss contract is an optimal reinsurance form under the VaR risk measure. Assuming that market premiums are set according to the expected value principle with varying loading factors, the optimal reinsurance parameters of this contract are obtained under three alternative single and joint party reinsurance criteria: (i) strong minimum of the total retained loss VaR measure; (ii) weak minimum of the total retained loss VaR measure and maximum of the reinsurer‘s expected profit; (iii) weak minimum of the total retained loss VaR measure and minimum of the total variance risk measure. New conditions for financing in the mean simultaneously the cedent's and the reinsurer's required VaR economic capital are revealed for situations of pure risk transfer (classical reinsurance) or risk and profit transfer (design of internal reinsurance or reinsurance captive owned by the captive of a corporate firm). http://www.actuaries.org/index.cfm?lang=EN&DSP=PUBLICATIONS&ACT=ASTIN BULLETIN
Optimal reinsurance under VaR and CVaR risk measures. Chi, Yichun; Tan, Ken Seng - 23 pages. [RKN: 74744] Shelved at: Per: Astin Bull (Oxf) Shelved at: JOU ASTIN Bulletin (2011) 41 (2) : 487-509.
In this paper, we study two classes of optimal reinsurance models by minimizing the total risk exposure of an insurer under the criteria of value at risk (VaR) and conditional value at risk (CVaR). We assume that the reinsurance premium is calculated according to the expected value principle. Explicit solutions for the optimal reinsurance policies are derived over ceded loss functions with increasing degrees of generality. More precisely, we establish formally that under the VaR minimization model, (i) the stop-loss reinsurance is optimal among the class of increasing convex ceded loss functions; (ii) when the constraints on both ceded and retained loss functions are relaxed to increasing functions, the stop-loss reinsurance with an upper limit is shown to be optimal; (iii) and finally under the set of general increasing and left-continuous retained loss functions, the truncated stop-loss reinsurance is shown to be optimal. In contrast, under CVaR risk measure, the stop-loss reinsurance is shown to be always optimal. These results suggest that the VaR-based reinsurance models are sensitive with respect to the constraints imposed on both ceded and retained loss functions while the corresponding CVaR-based reinsurance models are quite robust. http://www.actuaries.org/index.cfm?lang=EN&DSP=PUBLICATIONS&ACT=ASTIN BULLETIN
Optimal reinsurance under variance related premium principles. Chi, Yichun [RKN: 44790] Shelved at: Online Only Shelved at: Online Only Insurance: Mathematics & Economics (2012) 51(2) : 310-321.
In this paper, we investigate the optimal form of reinsurance when the insurer seeks to minimize the value at risk(VaR) or the conditional value at risk(CVaR) of his/her total risk exposure. In order to exclude the moral hazard from a reinsurance treaty, both the ceded and retained loss functions are constrained to be increasing. Under the additional assumption that the reinsurance
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premium is calculated by a variance related principle, we show that the layer reinsurance is always optimal over both the VaR and CVaR criteria. Finally, the variance and standard deviation premium principles are applied to illustrate how to derive the optimal deductible and the upper limit of layer reinsurance. Available via Athens: ScienceDirect http://www.openathens.net/
Properties of a risk measure derived from ruin theory. Truffin, Julien; Albrecher, Hansjoerg; Denuit, Michel M - 15 pages. [RKN: 74788] Shelved at: Per: Geneva (Oxf) Geneva Risk and Insurance Review (2011) 36 (2) : 174-188.
This paper studies a risk measure inherited from ruin theory and investigates some of its properties. Specifically, we consider a value-at-risk (VaR)-type risk measure defined as the smallest initial capital needed to ensure that the ultimate ruin probability is less than a given level. This VaR-type risk measure turns out to be equivalent to the VaR of the maximal deficit of the ruin process in infinite time. A related Tail-VaR-type risk measure is also discussed.
Skew mixture models for loss distributions: a Bayesian approach. Bernardi, Mauro; Maruotti, Antonello; Petrella, Lea [RKN: 44879] Shelved at: Online Only Shelved at: Online Only Insurance: Mathematics & Economics (2012) 51(3) : 617-623.
The derivation of loss distribution from insurance data is a very interesting research topic but at the same time not an easy task. To find an analytic solution to the loss distribution may be misleading although this approach is frequently adopted in the actuarial literature. Moreover, it is well recognized that the loss distribution is strongly skewed with heavy tails and presents small, medium and large size claims which hardly can be fitted by a single analytic and parametric distribution. Here we propose a finite mixture of Skew Normal distributions that provides a better characterization of insurance data. We adopt a Bayesian approach to estimate the model, providing the likelihood and the priors for the all unknown parameters; we implement an adaptive Markov Chain Monte Carlo algorithm to approximate the posterior distribution. We apply our approach to a well known Danish fire loss data and relevant risk measures, such as Value-at-Risk and Expected Shortfall probability, are evaluated as well. Available via Athens: ScienceDirect http://www.openathens.net/
Tail comonotonicity: properties, constructions, and asymptotic additivity of risk measures. Hua, Lei; Joe, Harry [RKN: 44869] Shelved at: Online Only Shelved at: Online Only Insurance: Mathematics & Economics (2012) 51(2) : 472-479.
We investigate properties of a version of tail comonotonicity that can be applied to absolutely continuous distributions, and give several methods for constructions of multivariate distributions with tail comonotonicity or strongest tail dependence. Archimedean copulas as mixtures of powers, and scale mixtures of a non-negative random vector with the mixing distribution having slowly varying tails, lead to a tail comonotonic dependence structure. For random variables that are in the maximum domain of attraction of either Fréchet or Gumbel, we prove the asymptotic additivity property of Value at Risk and Conditional Tail Expectation. Available via Athens: ScienceDirect http://www.openathens.net/
VARIABLE ANNUITIES An executive's handbook for understanding and risk managing unit linked guarantees. Maher, J; Corrigan, J; Bentley, A; Diffey, W - 55 pages. [RKN: 73954] Shelved at: Per: BAJ (Oxf) Per: BAJ (Lon) Shelved at: REF BAJ (2012) 17 (1) : 71-125.
The focus of this paper is the identification, and more importantly, sustainable management, of risks embedded in guarantees attaching to unit linked savings and retirement contracts (as commonly referred to as GMxBs). In developing customer centric guarantees that are not readily transferrable to the capital markets, insurance undertakings require the skills and resources to hedge the guarantees within their own balance sheet (or with a temporary use of packaged solutions such as reinsurance). In taking on the guarantee manufacture task insurers are departing from areas of historic competence and need to develop a comprehensive understanding of all elements of market risk replication. These include both first order market exposures as well as the material second order risks associated with market micro structure. The paper seeks to integrate this comprehensive analysis within a practitioner focused framework and concludes with a senior executive summary of ―Seven key considerations in successful guarantee manufacture‖. http://www.actuaries.org.uk/research-and-resources/pages/members-access-journals
An executive's handbook for understanding and risk managing unit linked guarantees : Abstract of the Edinburgh discussion. Maher, James - 11 pages. [RKN: 73956] Shelved at: Per: BAJ (Oxf) Per: BAJ (Lon) Shelved at: REF BAJ (2012) 17 (1) : 142-152.
Institute and Faculty of Actuaries, 15 November 2010. http://www.actuaries.org.uk/research-and-resources/pages/members-access-journals
Impacts of jumps and stochastic interest rates on the fair costs of guaranteed minimum death benefit contracts. Quittard-Pinon, François; Randrianarivony, Rivo [RKN: 45275] Shelved at: Per: Geneva (Oxf) Geneva Risk and Insurance Review (2011) 36 (1) : 51-73.
The authors offer a new perspective to the field of guaranteed minimum death benefit contracts, especially for simple return premium and rising floor guarantees. A particular feature of these contracts is a guaranteed capital upon the insured's death. A complete methodology based on the generalized Fourier transform is proposed to investigate the impacts of jumps and stochastic interest rates. This paper thus extends Milevsky and Posner (2001). If jumps alone are considered, similar results are obtained,
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but, when stochastic interest rates are introduced, the fair costs of the guarantee feature are found to be substantially higher in this more general economy.
VARIANCE ANALYSIS Optimal control of excess-of-loss reinsurance and investment for insurers under a CEV model. Gu, Ailing; Guo, Xianping; Li, Zhongfei; Zeng, Yan [RKN: 43685] Shelved at: Online Only Shelved at: Online Only Insurance: Mathematics & Economics (2012) 51(3) : 674-684.
The optimal excess-of-loss reinsurance and investment strategies under a constant elasticity of variance (CEV) model for an insurer are considered in this paper. Assume that the insurer‘s surplus process is approximated by a Brownian motion with drift, the insurer can purchase excess-of-loss reinsurance and invest his (or her) surplus in a financial market consisting of one risk-free asset and one risky asset whose price is modeled by a CEV model, and the objective of the insurer is to maximize the expected exponential utility from terminal wealth. Two problems are studied, one being a reinsurance-investment problem and the other being an investment-only problem. Explicit expressions for optimal strategies and optimal value functions of the two problems are derived by stochastic control approach and variable change technique. Moreover, several interesting results are found, and some sensitivity analysis and numerical simulations are provided to illustrate our results. Available via Athens: ScienceDirect http://www.openathens.net/
VOLATILITY (S,s)-adjustment strategies and hedging under Markovian dynamics. Agliardi, Elettra; Andergassen, Rainer - 20 pages. [RKN: 74786] Shelved at: Per: Geneva (Oxf) Geneva Risk and Insurance Review (2011) 36 (2) : 112-131.
We study the destabilizing effect of hedging strategies under Markovian dynamics with transaction costs. Once transaction costs are taken into account, continuous portfolio rehedging is no longer an optimal strategy. Using a non-optimizing (local in time) strategy for portfolio rebalancing, explicit dynamics for the price of the underlying asset are derived, focusing in particular on excess volatility and feedback effects of these portfolio insurance strategies. Moreover, it is shown how these latter depend on the heterogeneity of the insured payoffs. Finally, conditions are derived under which it may be still reasonable, from a practical viewpoint, to implement Black–Scholes strategies.
WEATHER Climate change, weather insurance design and hedging effectiveness. Kapphan, Ines; Calanca, Pierluigi; Holzkaemper, Annelie Palgrave Macmillan, [RKN: 45661] Shelved at: Per: Geneva Geneva Papers on Risk and Insurance (2012) 37(2) : 286-317.
Insurers have relied on historical data to design weather insurance contracts. In light of climate change, we examine the effects of this practice on the hedging effectiveness and profitability of insurance contracts. Using synthetic crop and weather data for today's and future climatic conditions we derive adjusted weather insurance contracts that account for shifts in the distribution of weather and yields. In our scenario, hedging benefits from adjusted contracts almost triple and expected profits increase by about 240 per cent. We further investigate the effect on risk reduction (for the insured) and profits (for the insurer) from hedging future weather risk with non-adjusted contracts based on historical data. In this case, insurers generate profits that are significantly smaller than for adjusted contracts, or even face substantial losses. Moreover, non-adjusted contracts that create higher profits than the adjusted counterparts cause negative hedging benefits for the insured. Available via Athens: Palgrave MacMillan http://www.openathens.net
The impact of climate change on precipitation-related insurance risk : A study of the effect of future scenarios on residential buildings in Norway. Scheel, Ida; Hinnerichsen, Mikkel Palgrave Macmillan, [RKN: 45664] Shelved at: Per: Geneva Geneva Papers on Risk and Insurance (2012) 37(2) : 365-376.
Climate change is likely to increase the future risk of weather-related damage to buildings worldwide. This challenge is faced by society in general, but the insurance industry is particularly important in the management of the anticipated increase in future risk. In addition to adjusting premiums appropriately and gradually, they can play an important role in prevention. It is crucial to know which areas are vulnerable and to what extent. In this paper, a spatial regression model for linking weather-related insurance losses for residential buildings to meteorological and hydrological covariates is coupled with three plausible scenarios for the future climate in order to project the future number of weather-related residential building insurance losses in Norway. The model is trained on observed daily insurance loss and weather data at the municipality level. Our results indicate a dramatic increase in the projected future weather-related insurance risk in many parts of Norway. The procedure can be extended and applied to other areas globally. Available via Athens: Palgrave MacMillan http://www.openathens.net
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Weather risk hedging in the European markets and international investment diversification. Yang, Charles C; Li, Linda Shihong; Wen, Min-Ming [RKN: 45276] Shelved at: Per: Geneva (Oxf) Geneva Risk and Insurance Review (2011) 36 (1) : 74-94.
This article analyses weather risk hedging efficiency in three European countries using weather derivatives traded at Chicago Mercantile Exchange (CME) and explores the potential of weather derivatives as a new investment asset to further diversify investors‘ portfolios. The results document that the CME European weather contracts are generally effective in hedging the temperature risk in the three European countries. However, for a specific country, weather risk hedging using other countries‘ weather indexes is generally not effective. Zero or little correlation among international weather indexes and stock market indexes indicates that weather derivatives should be an efficient investment diversifier. This research provides important insights to both weather risk hedgers and investors.
WORKERS' COMPENSATION INSURANCE Catastrophes and workers compensation ratemaking. Daley, Thomas V [RKN: 44928] Shelved at: Per: Variance Variance (2011) 5(1) : 13-31.
The National Council on Compensation Insurance (NCCI) changed its workers compensation ratemaking methodology to improve the treatment of large individual claims and catastrophic multiclaim events related to the perils of industrial accidents, earthquake, and terrorism. NCCI worked with a well known modeling firm to determine provisions for catastrophic events on a state basis. This paper describes the new methodology that NCCI has filed in many states. We discuss how certain traditional areas of aggregate ratemaking were modified: loss development including the tail factor, trend, capping losses, and application of excess provisions. The paper also documents for the first time in Casualty Actuarial Society literature how computer modeling was applied in workers compensation to determine loss costs by state. http://www.variancejournal.org/issues
Loss reduction through worker satisfaction : The case of worker's compensation. Butler, Richard J; Johnson, William G - 26 pages. [RKN: 74767] Shelved at: JOU Risk Management and Insurance Review (2011) 14 (1) : 1-26.
A prospective study of occupational low back pain (LBP) indicates loss reduction efforts in workers‘ compensation that improve workers satisfaction with the treatment of their claim significantly improves levels of recovery (reduces losses) and lowers workers‘ compensation insurance costs. The improved outcomes associated with greater worker satisfaction with the firm's treatment of their injury claim, as well as with the treatment from their health care provider, are robust to five alternative measures of back problems, including leg pain and back pain scales, measures of functional limitation, and quality of life scales. Satisfaction with effectiveness of the health care is more important in recovery than satisfaction with the provider's bedside manner. While satisfaction with health care provider significantly improves back pain and functionality at 6 months, satisfaction with the employer's treatment of the claim is equally important at 6 months and grows in quantitative importance at 1 year. Overall, higher satisfaction with claim treatment reduces the likelihood that an injury becomes an indemnity claim and results in almost a 30 percent reduction in claim costs. Available via Athens: Wiley Online Library http://www.openathens.net
