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Institute and Faculty of Actuaries September 2010
Actuarial Profession Libraries http://www.actuaries.org.uk/research-and-resources/pages/library-services
Risk Management Reading List September 2010
Institute and Faculty of Actuaries LIBRARY SERVICES The Norwich Library Napier House 4 Worcester Street OXFORD OX1 2AW
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********** THE NORWICH LIBRARY AND THE ROSS LIBRARY The libraries contain a comprehensive collection of books, papers and periodicals relating to the actuarial profession today, together with a selection of material on insurance (life and non-life), pensions, investment, economics, mathematics and statistical methods. A database of all publications in stock is available at all sites. The Libraries reserve the right to restrict the availability of any service to members of the Institute and Faculty of Actuaries only. ACCESS The Libraries are open to all members of the Faculty and Institute. Opening hours are 9.00am to 5.00pm Monday to Friday. Access for non-members is by arrangement with the appropriate library staff. Please telephone in advance of visiting. LENDING Most publications may be borrowed by members only. Books can be posted to members, and returned to any site. If a particular item is not in stock, it can usually be obtained from elsewhere. PHOTOCOPYING Subject to Copyright Regulations, the Libraries can provide single copies of periodical articles and extracts from books. The charge for this is currently 20p per A4 page. A fax service is also available. Pre-payment is required from non-members. A quotation can be provided if required. ENQUIRIES The library staff are always happy to handle enquiries, and if unable to help can usually refer you to someone who can. Customised lists of references can be prepared from the computer database, while you wait or by return of post. ONLINE CATALOGUE You can search the online catalogue at http://www.actuaries.org.uk/research-and-resources/pages/search-library-catalogue 2
Actuarial Profession Libraries http://www.actuaries.org.uk/research-and-resources/pages/library-services
Risk Management Reading List September 2010
READING LISTS Reading lists on individual subjects contain details of books and papers published within the last 3-5 years and available from the Libraries. They are also available for downloading from the profession's web site: www.actuaries.org.uk THE HISTORICAL COLLECTION The Institute's collection of historical material is housed at Staple Inn. This collection comprises all books published before 1870, those of historical interest published 1870 - 1959 and historical studies published subsequently. It also includes full sets of the Journal of the Institute of Actuaries, Journal of the Staple Inn Actuarial Society, Transactions of the Faculty of Actuaries, Transactions of the International Congress of Actuaries, the journals of many overseas actuarial bodies, copies of tuition material and a reference collection. Opening hours are 9.00am to 5.00pm. Prospective visitors are advised to telephone in advance.
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Risk Management Reading List September 2010
Institute and Faculty of Actuaries Library Services Reading list on Risk management All items are available for loan, or photocopies can be supplied at 20p per A4 page
Contents Actuarial education – syllabus / Course of reading ....................................................................................... 8 Actuarial management ...................................................................................................................................... 8 Actuarial profession .......................................................................................................................................... 8 Actuarial science ............................................................................................................................................... 9 Actuarial societies ........................................................................................................................................... 10 Advisers ............................................................................................................................................................ 10 Age .................................................................................................................................................................... 10 Annuities .......................................................................................................................................................... 11 Asset allocation ............................................................................................................................................... 13 Asset liability matching .................................................................................................................................. 14 Asset valuation ................................................................................................................................................ 14 Assets ............................................................................................................................................................... 14 Australia ........................................................................................................................................................... 14 Automobile industry ........................................................................................................................................ 16 Bank asset management ................................................................................................................................ 16 Banks and banking .......................................................................................................................................... 16 Bayesian analysis ............................................................................................................................................ 18 Behavioural sciences ...................................................................................................................................... 19 Bibliographies .................................................................................................................................................. 19 Bonds ................................................................................................................................................................ 20 Bootstrap .......................................................................................................................................................... 21 Brownian motion ............................................................................................................................................. 22 Business ........................................................................................................................................................... 22 Buy-outs ........................................................................................................................................................... 23 Capital adequacy ............................................................................................................................................. 23 Capital management ....................................................................................................................................... 23 Careers ............................................................................................................................................................. 24 Cash flow .......................................................................................................................................................... 24 Central banks ................................................................................................................................................... 25 Chain ladder methods ..................................................................................................................................... 25 Citation analysis .............................................................................................................................................. 26 Claim frequency ............................................................................................................................................... 26 Claims ............................................................................................................................................................... 26 Claims reserves ............................................................................................................................................... 28 Climate change ................................................................................................................................................ 28 Communication................................................................................................................................................ 28 Compound distributions ................................................................................................................................. 29 Computer science ........................................................................................................................................... 29 Consumer attitudes ......................................................................................................................................... 30 Consumer behaviour ....................................................................................................................................... 31 Control theory .................................................................................................................................................. 31 Copulas............................................................................................................................................................. 32 Corporate strategy .......................................................................................................................................... 33 Correlation........................................................................................................................................................ 33 Credit ................................................................................................................................................................ 33 4
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Risk Management Reading List September 2010
Crime ................................................................................................................................................................. 34 Data protection ................................................................................................................................................ 34 Decision making .............................................................................................................................................. 34 Defined benefit schemes ................................................................................................................................ 35 Derivatives ........................................................................................................................................................ 35 Diffusion processes ........................................................................................................................................ 36 Distribution theory........................................................................................................................................... 37 Diversification .................................................................................................................................................. 38 Dividends .......................................................................................................................................................... 39 Dynamic modelling .......................................................................................................................................... 40 Economic conditions ...................................................................................................................................... 40 Economic projections ..................................................................................................................................... 41 Endowments .................................................................................................................................................... 41 England ............................................................................................................................................................. 41 Enterprise risk management .......................................................................................................................... 42 Epidemiology ................................................................................................................................................... 48 Europe .............................................................................................................................................................. 49 Exposure to risk............................................................................................................................................... 49 Finance ............................................................................................................................................................. 50 Financial crises ................................................................................................................................................ 51 Financial economics ....................................................................................................................................... 52 Financial institutions ....................................................................................................................................... 52 Financial markets ............................................................................................................................................ 53 Financial risk analysis..................................................................................................................................... 54 Financial services ............................................................................................................................................ 55 Fire insurance .................................................................................................................................................. 56 Fraud ................................................................................................................................................................. 56 Gaming ............................................................................................................................................................. 57 General insurance ........................................................................................................................................... 57 Generalized entropic risk measures (GERMS) ............................................................................................. 61 Gerber-Shiu function ....................................................................................................................................... 61 Germany ........................................................................................................................................................... 65 Governance ...................................................................................................................................................... 65 Health costs ..................................................................................................................................................... 66 Health insurance .............................................................................................................................................. 67 Hedging ............................................................................................................................................................ 67 Indexes ............................................................................................................................................................. 68 Insurance .......................................................................................................................................................... 68 Insurance broking ........................................................................................................................................... 73 Insurance companies ...................................................................................................................................... 74 Insurance contracts ........................................................................................................................................ 76 Intellectual property ........................................................................................................................................ 77 International ..................................................................................................................................................... 77 International trade ........................................................................................................................................... 77 Investment ........................................................................................................................................................ 77 Investment attitudes ........................................................................................................................................ 79 Ireland ............................................................................................................................................................... 80 Islam .................................................................................................................................................................. 81 Japan ................................................................................................................................................................ 81 Law and legal systems of America ................................................................................................................ 82 Liabilities .......................................................................................................................................................... 82 Liability insurance ........................................................................................................................................... 82 Life assurance.................................................................................................................................................. 83 Life expectation ............................................................................................................................................... 83 Life insurance .................................................................................................................................................. 84 Longevity .......................................................................................................................................................... 85 Longevity risk .................................................................................................................................................. 85 Loss reserving ................................................................................................................................................. 90 Losses .............................................................................................................................................................. 90 Macroeconomics ............................................................................................................................................. 91 5
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Risk Management Reading List September 2010
Management ..................................................................................................................................................... 91 Markov processes ........................................................................................................................................... 92 Martingale methods ......................................................................................................................................... 93 Mathematics ..................................................................................................................................................... 93 Mathematics of finance ................................................................................................................................... 94 Matrix methods ................................................................................................................................................ 94 Modelling .......................................................................................................................................................... 94 Monopoly ........................................................................................................................................................ 103 Monte Carlo techniques ................................................................................................................................ 103 Mortality .......................................................................................................................................................... 104 Mortality rates ................................................................................................................................................ 105 Mortgages....................................................................................................................................................... 105 Multivariate analysis...................................................................................................................................... 106 Netherlands .................................................................................................................................................... 106 Norway ............................................................................................................................................................ 107 Occupational pensions ................................................................................................................................. 107 Operational risk ............................................................................................................................................. 107 Optimisation ................................................................................................................................................... 109 Option pricing ................................................................................................................................................ 109 Outliers ........................................................................................................................................................... 110 Outstanding claims ....................................................................................................................................... 110 Pareto distribution ......................................................................................................................................... 111 Pension fund administration ........................................................................................................................ 111 Pension schemes .......................................................................................................................................... 112 Pensions ......................................................................................................................................................... 112 Performance ................................................................................................................................................... 113 Performance measurement .......................................................................................................................... 113 Pharmaceutical industry ............................................................................................................................... 113 Planning .......................................................................................................................................................... 114 Poisson process ............................................................................................................................................ 114 Pooling ............................................................................................................................................................ 115 Portfolio insurance ........................................................................................................................................ 116 Portfolio investment ...................................................................................................................................... 116 Portfolio management ................................................................................................................................... 116 Portfolio performance ................................................................................................................................... 118 Premium calculation ..................................................................................................................................... 118 Premiums ....................................................................................................................................................... 119 Pricing ............................................................................................................................................................. 119 Probability ...................................................................................................................................................... 121 Professional conduct .................................................................................................................................... 122 Professional negligence ............................................................................................................................... 122 Professionalism ............................................................................................................................................. 123 Profit ............................................................................................................................................................... 123 Project management ..................................................................................................................................... 124 Prospect theory ............................................................................................................................................. 124 Public finance ................................................................................................................................................ 124 Quality systems ............................................................................................................................................. 125 Rating .............................................................................................................................................................. 125 Regulation ...................................................................................................................................................... 125 Reinsurance ................................................................................................................................................... 128 Reputation risk............................................................................................................................................... 130 Research......................................................................................................................................................... 131 Reserves ......................................................................................................................................................... 131 Risk ................................................................................................................................................................. 132 Risk analysis .................................................................................................................................................. 132 Risk assessment ........................................................................................................................................... 135 Risk aversion ................................................................................................................................................. 139 Risk-based capital ......................................................................................................................................... 141 Risk characteristics....................................................................................................................................... 142 Risk classification ......................................................................................................................................... 143 6
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Risk Management Reading List September 2010
Risk management .......................................................................................................................................... 144 Risk measurement ......................................................................................................................................... 163 Risk theory ..................................................................................................................................................... 164 Ruin probability ............................................................................................................................................. 166 Ruin theory ..................................................................................................................................................... 171 Securities........................................................................................................................................................ 171 Securitisation ................................................................................................................................................. 172 Shareholders .................................................................................................................................................. 173 Simulation ...................................................................................................................................................... 173 Social security benefits ................................................................................................................................ 174 Solvency ......................................................................................................................................................... 174 Solvency II ...................................................................................................................................................... 176 Sparre Andersen model ................................................................................................................................ 177 Standards and specifications....................................................................................................................... 178 Stochastic models ......................................................................................................................................... 179 Stochastic processes.................................................................................................................................... 179 Stock market .................................................................................................................................................. 179 Surrender values ........................................................................................................................................... 180 Swaps ............................................................................................................................................................. 180 Systemic risk.................................................................................................................................................. 180 Tail risk measures ......................................................................................................................................... 182 Tax ................................................................................................................................................................... 183 Telecommunications ..................................................................................................................................... 185 Transforms ..................................................................................................................................................... 185 Uncertainty ..................................................................................................................................................... 186 Underwriting .................................................................................................................................................. 187 United Kingdom ............................................................................................................................................. 187 United States .................................................................................................................................................. 188 Utility theory ................................................................................................................................................... 189 Valuation......................................................................................................................................................... 189 Valuations....................................................................................................................................................... 190 Value-at-risk (VAR) ........................................................................................................................................ 191 Volatility .......................................................................................................................................................... 194
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Risk Management Reading List September 2010
Actuarial education – syllabus / Course of reading Raising the profile of ERM : Student page. [RKN: 38973] Shelved at: Per: Actuary (Oxf); Per: Actuary (Lon) The Actuary (2009) March : 46. URL: http://www.the-actuary.org.uk Abstract: Jen and Jean invite Lindsay Smitherman to report on the new specialist technical subject - CT9 - first sitting in April 2010.
Actuarial management Bellis, Clare S (ed); Shepherd, John A (ed); Klugman, Stuart A; Lyon, Richard H S (ed). Understanding actuarial management: the actuarial control cycle. - 2nd ed. - Sydney: - Institute of Actuaries of Australia, 2010. - No. pages: 630. [RKN: 39617] Shelved at: EM (Oxf) [Faculty: 368.01 BEL] URL: http://www.soa.org/files/pdf/book-understanding-act.pdf Contents include: Risk management frameworks -- Being professional -- The need for financial products -- The context of actuarial work -- Applying risk management -- Regulation -- Product design -- Modelling -- Data and assumptions -- The need for capital -- Valuing liabilities -- Pricing -Assets -- Solvency -- Profit -- Monitoring experience -- Responding to experience -- Applying the actuarial control cycle Telford, P G; Browne, B A; Collinge, E J; Fulcher, P; Johnson, B E; Little, W; Lu, J L C; Nurse, J M; Smith, D W; Zhang, F. - Developments in the management of annuity business. - Faculty of Actuaries and Institute of Actuaries, 2010. - No. pages: 96. [RKN: 72306] [Faculty: JOU/INS] URL: http://www.actuaries.org.uk/research-and-resources/documents/developmentsmanagement-annuity-business Abstract: The focus of the paper is non-profit lifetime annuities in the UK. Annuity insurers have been faced with, or have initiated, an unprecedented amount of change during the last decade, and rapid change is still continuing. We draw out implications for the actuarial management of the business, arising from the evolution of: longevity risk assessment and management, investment strategy and operations, financial reporting, and enterprise risk management. We discuss Solvency II in some technical depth, analysing the proposed rules for technical provisions and solvency capital requirement. Keywords: Annuities; Retirement Income; Longevity; Mortality Improvement; Reinsurance; Underwriting; Collateral; Investment; Asset-Liability Management; Financial Reporting; IFRS; Pillar I; Individual Capital Assessment; Enterprise Risk Management; Solvency II; Illiquidity Premium; Economic Capital
Actuarial profession Bowie, Ronald. - Update from the Profession [copies of slides only] - Institute of Actuaries and Faculty of Actuaries, 2010. - (Risk and Investment Conference 2010 Caledonian Hotel, Edinburgh, 13-15 June 2010). [RKN: 73028] URL: http://www.actuaries.org.uk/research-and-resources/documents/update-actuarialprofession-slides
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Risk Management Reading List September 2010
Kay, Robert; Goldspink, Chris; Dyson, Sophie. - Do actuaries have a larger role to play in enterprise risk management? - Sydney: - Institute of Actuaries of Australia, 2009. - No. pages: 2. [RKN: 71961] [Faculty: JOU/ACT] Actuary Australia (2009) no.146 Dec : 4-5. URL: http://www.actuaries.asn.au/IAA/upload/public/AA_DEC09_web.pdf Abstract: This article addresses the question of how well actuaries are positioned to move into ERM, and the barriers facing the profession in doing so. Klumpes, Paul. - Opportunities in ERM. [RKN: 38962] Shelved at: Per: Actuary (Oxf); Per: Actuary (Lon) The Actuary (2009) March : 26-27. URL: http://www.the-actuary.org.uk Abstract: Paul Klumpes outlines areas in which the actuarial profession can capitalise on challenges presented by enterprise risk management. Smitherman, Lindsay. - Fancy working in ERM? - Staple Inn Actuarial Society, - No. pages: 1. [RKN: 72079] Shelved at: Per: Actuary (Oxf); Per: Actuary (Lon) [Faculty: SIA/ACT] The Actuary (2010) Jan / Feb : 30. URL: http://www.the-actuary.org.uk Abstract: Lindsay Smitherman thinks a CPA qualification may be a great place to start Society of Actuaries. - Companion Guide To The Global Risk Management Designation Recognition Treaty. - Society of Actuaries, 2009. - No. pages: 7. [RKN: 71930] URL: http://www.soa.org/files/pdf/cera-treaty-exec-summary.pdf Abstract: A summary of the Global Enterprise Risk Management Designation Recognition Treaty for the launch of the Chartered Enterprise Risk Analyst (CERA) credential as a global risk management designation.
Actuarial science Bellis, Clare S (ed); Shepherd, John A (ed); Klugman, Stuart A; Lyon, Richard H S (ed). Understanding actuarial management: the actuarial control cycle. - 2nd ed. - Sydney: - Institute of Actuaries of Australia, 2010. - No. pages: 630. [RKN: 39617] Shelved at: EM (Oxf) [Faculty: 368.01 BEL] URL: http://www.soa.org/files/pdf/book-understanding-act.pdf Contents include: Risk management frameworks -- Being professional -- The need for financial products -- The context of actuarial work -- Applying risk management -- Regulation -- Product design -- Modelling -- Data and assumptions -- The need for capital -- Valuing liabilities -- Pricing -Assets -- Solvency -- Profit -- Monitoring experience -- Responding to experience -- Applying the actuarial control cycle Colquitt, L Lee; Sommer, David W; Ferguson, William L. - A Citation Analysis of Risk, Insurance, and Actuarial Research: 2001 Through 2005. - No. pages: 21. [RKN: 71781] Shelved at: Per: J.Risk Ins (Oxf) [Faculty: JOU/RIS] Journal of Risk and Insurance (2009) 76 (4) : 933-953. Abstract: The bibliographies of 17 risk journals were evaluated to determine the relative influence of these risk journals on risk, insurance, and actuarial research published during the years 2001 through 2005. Tables are provided that show the frequency with which each of these journals cites itself and the other sample journals. The journals are ranked, within two groups (risk and insurance group and actuarial group), based on their total influence (total citations including and excluding self-citations) and their per article influence (per article citations including and excluding selfcitations). Finally, the most frequently cited articles from each risk journal are reported.
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Risk Management Reading List September 2010
Hunter-Yeats, Caroline; MacKenna, Ed. - Risky business. [RKN: 38970] Shelved at: Per: Actuary (Oxf); Per: Actuary (Lon) The Actuary (2009) March : 40-41. URL: http://www.the-actuary.org.uk Abstract: Article that looks at the potential impact of the FRC's new Actuarial Quality Framework on firms' risk management procedures.
Actuarial societies Society of Actuaries. - Companion Guide To The Global Risk Management Designation Recognition Treaty. - Society of Actuaries, 2009. - No. pages: 7. [RKN: 71930] URL: http://www.soa.org/files/pdf/cera-treaty-exec-summary.pdf Abstract: A summary of the Global Enterprise Risk Management Designation Recognition Treaty for the launch of the Chartered Enterprise Risk Analyst (CERA) credential as a global risk management designation.
Advisers Sonnenholzner, Michael; Friese, Sebastian; Graf von der Schulenburg, J.-Matthias. - Reinsurance brokers and advice quality : Is there a need for regulation? [RKN: 39292] Shelved at: Per: Geneva (Oxf) Geneva Risk and Insurance Review (2009) 34 (1) : 20-46. Abstract: Brokers play an increasing role in the distribution of reinsurance. In order to analyse reinsurance brokers' advice quality, we employ a model in which a monopoly broker advises cedents to buy a particular one out of similar reinsurance policies that cost the same but differ in details. The broker decides on how much to invest in his advice quality and on the price to charge for his service. We find that the broker's advice quality is generally lower and the price for his service higher than in the social optimum, even in the presence of a potential new entrant.
Age Wills, Samuel; Sherris, Michael. - Securitization, structuring and pricing of longevity risk. - No. pages: 13. [RKN: 72439] Shelved at: Per: IME (Oxf) Insurance: Mathematics & Economics (2010) 46 (1) : 173-185. Abstract: Pricing and risk management for longevity risk have increasingly become major challenges for life insurers and pension funds around the world. Risk transfer to financial markets, with their major capacity for efficient risk pooling, is an area of significant development for a successful longevity product market. The structuring and pricing of longevity risk using modern securitization methods, common in financial markets, have yet to be successfully implemented for longevity risk management. There are many issues that remain unresolved for ensuring the successful development of a longevity risk market. This paper considers the securitization of longevity risk focusing on the structuring and pricing of a longevity bond using techniques developed for the financial markets, particularly for mortgages and credit risk. A model based on Australian mortality data and calibrated to insurance risk linked market data is used to assess the structure and market consistent pricing of a longevity bond. Age dependence in the securitized risks is shown to be a critical factor in structuring and pricing longevity linked securitizations. Keywords: Longevity risk; Securitization
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Risk Management Reading List September 2010
Global Risk Network; World Economic Forum; Citigroup; Marsh & McLennan Companies; Swiss Re; Wharton School Risk Center; Zurich Financial Services. - Global Risks 2008 : A Global Risk Network Report. - Geneva: - World Economic Forum, 2008. - No. pages: 54. [RKN: 69132] Shelved at: online only [Faculty: online only] URL: http://www.weforum.org/pdf/globalrisk/report2008.pdf Contents: Introduction - 4 Focus on Emerging Issues in Global Risk - 6 Assessing Global Risks in 2008 - 20 Networked World, Networked Risks - 25 Financial Markets, Risk Transfer and Risk Mitigation - 30 Structuring Mitigation at the State and International Level: Taking the Country Risk Officer Forward Appendix 1: Taxonomy of Global Risk: Trends, Issues of Concern, Risks - 41 Appendix 2: Risk Assessments - 45
Annuities The annuity bulk buy-out market : Abstract of a discussion meeting held by the Faculty of Actuaries on 18 February 2008. [RKN: 39665] Shelved at: Per: BAJ (Oxf); Per: BAJ (Lon) [Faculty: BRI/ACT] BAJ (2008) 14 (2) : 237-256. URL: http://www.actuaries.org.uk/research-and-resources/pages/access-journals Abstract: Report of a Sessional Meeting which takes the form of a panel discussion, asking the question 'Managing defined benefit risk management: is buy-out the future?' Cox, Samuel H; Lin, Yijia; Pedersen, Hal. - Mortality risk modeling : Applications to insurance securitization. - No. pages: 12. [RKN: 72445] Shelved at: Per: IME (Oxf) Insurance: Mathematics & Economics (2010) 46 (1) : 242-253. Abstract: This paper proposes a stochastic mortality model featuring both permanent longevity jump and temporary mortality jump processes. A trend reduction component describes unexpected mortality improvement over an extended period of time. The model also captures the uneven effect of mortality events on different ages and the correlations among them. The model will be useful in analyzing future mortality dependent cash flows of life insurance portfolios, annuity portfolios, and portfolios of mortality derivatives. We show how to apply the model to analyze and price a longevity security. Gong, Guan; Webb, Anthony. - Evaluating the Advanced Life Deferred Annuity — An annuity people might actually buy. - No. pages: 12. [RKN: 72442] Shelved at: Per: IME (Oxf) Insurance: Mathematics & Economics (2010) 46 (1) : 210-221. Abstract: Although annuities provide longevity insurance that should be attractive to households facing an uncertain lifespan, rates of voluntary annuitization remain extremely low. We evaluate the Advanced Life Deferred Annuity, an annuity purchased at retirement, providing an income commencing in advanced old age. Using numerical optimization, we show that it would provide a substantial proportion of the longevity insurance provided by an immediate annuity, at much lower cost. At plausible levels of actuarial unfairness, households should prefer it to both immediate and postponed annuitization and an optimal decumulation of unannuitized wealth. Few households would suffer significant losses were it used as a 401(k) plan default. Keywords: Annuity; Longevity insurance; Advanced Life Deferred Annuity
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Risk Management Reading List September 2010
Horneff, Wolfram; Maurer, Raimond. - Mortality Contingent Claims: Impact of Capital Market, Income, and Interest Rate Risk. - Ann Arbour: - University of Michigan Retirement Research Center, 2009. - (Michigan Retirement Research Center WP 2009-222). - No. pages: 31. [RKN: 71706] URL: http://www.mrrc.isr.umich.edu/publications/papers/pdf/wp222.pdf Abstract: In this paper, we consider optimal insurance, portfolio allocation, and consumption rules for a stochastic wage earner with CRRA preferences whose lifetime is random. In a continuous time framework, the investor has to decide among short and long positions in mortality contingent claims a.k.a. life insurance, stocks, bonds, and money market investment when facing a risky stock market and interest rate risk. We find an analytical solution for the complete market case in which human capital is exactly priced. We also extend the analysis to the case where income is unspanned. An illustrative analysis shows when the wage earner’s demand for life insurance switches to the demand for annuities. Pang, Gaobo; Warshawsky, Mark. - Optimizing the equity-bond-annuity portfolio in retirement : The impact of uncertain health expenses. - No. pages: 12. [RKN: 72441] Shelved at: Per: IME (Oxf) Insurance: Mathematics & Economics (2010) 46 (1) : 198-209. Abstract: This paper derives optimal equity-bond-annuity portfolios for retired households who face stochastic capital market returns, differential exposures to mortality risk and uncertain uninsured health expenses, and differential Social Security and defined benefit pension coverage. The results show that the health spending risk drives household portfolios to shift from risky equities to safer assets and enhances the demand for annuities due to their increasing-with-age superiority over bonds in hedging against life-contingent health spending and longevity risks. Households with higher income have a greater incremental demand for life annuities. The annuities in turn provide greater leverage for equity investment in the remaining asset portfolios. Keywords: Annuity; Asset allocation; Health expense; Precautionary savings; Pension; Life cycle Stevens, Ralph; de Waegenaere, Anja; Melenberg, Bertrand. - Longevity risk in pension annuities with exchange options: The effect of product design. [RKN: 72443] Shelved at: Per: IME (Oxf) Insurance: Mathematics & Economics (2010) 46 (1) : 222-234. Abstract: We consider defined benefit pension plans that, at retirement age, allow the participant to choose between a single life annuity and a joint and survivor annuity. We compare two plans that differ in terms of how pension rights are accrued. In one plan, the participant accrues the right to receive a single life annuity, and can exchange that annuity for an actuarially equivalent joint and survivor annuity at retirement date. The opposite holds in the other plan. We show that both plans are affected by longevity risk in two ways. First, the participants’ choices at retirement age affect the ratio of survivor benefits over single life benefits, and, therefore, affect the natural hedge potential that arises from combining single life and survivor annuities. Second, uncertainty in the rate at which the participant will be allowed to exchange one type of annuity for the other at retirement date induces uncertainty in the level of the nominal rights for single life and survivor annuities, respectively. We compare the two plans, and show that longevity risk is substantially lower in case rights are accrued in the form of a joint and survivor annuity.
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Risk Management Reading List September 2010
Telford, P G; Browne, B A; Collinge, E J; Fulcher, P; Johnson, B E; Little, W; Lu, J L C; Nurse, J M; Smith, D W; Zhang, F. - Developments in the management of annuity business. - Faculty of Actuaries and Institute of Actuaries, 2010. - No. pages: 96. [RKN: 72306] [Faculty: JOU/INS] URL: http://www.actuaries.org.uk/research-and-resources/documents/developmentsmanagement-annuity-business Abstract: The focus of the paper is non-profit lifetime annuities in the UK. Annuity insurers have been faced with, or have initiated, an unprecedented amount of change during the last decade, and rapid change is still continuing. We draw out implications for the actuarial management of the business, arising from the evolution of: longevity risk assessment and management, investment strategy and operations, financial reporting, and enterprise risk management. We discuss Solvency II in some technical depth, analysing the proposed rules for technical provisions and solvency capital requirement. Keywords: Annuities; Retirement Income; Longevity; Mortality Improvement; Reinsurance; Underwriting; Collateral; Investment; Asset-Liability Management; Financial Reporting; IFRS; Pillar I; Individual Capital Assessment; Enterprise Risk Management; Solvency II; Illiquidity Premium; Economic Capital
Asset allocation Campbell, John Y. - The Changing Role of Nominal Government Bonds in Asset Allocation. - No. pages: 16. [RKN: 72016] Shelved at: Per: Geneva (Oxf) Geneva Risk and Insurance Review (2009) 34 (2) : 89-104. Abstract: The covariance between nominal bonds and stocks has varied considerably over recent decades and has even switched sign. It has been predominantly positive in periods such as the late 1970s and early 1980s when the economy has experienced supply shocks and the central bank has lacked credibility. It has been predominantly negative in periods such as the 2000s when investors have feared weak aggregate demand and deflation. Nominal bonds are attractive to short-term equity investors when these bonds are negatively correlated with stocks, as has been the case during the 2000s and especially during the downturn of 2007–2008. They are attractive to conservative long-term investors when long-term inflationary expectations are stable, for then these bonds are close substitutes for inflation-indexed bonds that are riskless in the long term. Keywords: Mean-variance analysis, long-term investing, time-varying risk Huang, Hong-Chih. - Optimal multiperiod asset allocation : Matching assets to liabilities in a discrete model. [RKN: 39630] Shelved at: Per: J.Risk Ins (Oxf) [Faculty: JOU/RIS] Journal of Risk and Insurance (2010) 77 (2) : 451-472. Abstract: Investment and risk control are becoming increasingly important for financial institutions. Asset allocation provides a fundamental investing principle to manage the risk and return trade-off in financial markets. This article proposes a general formulation of a first approximation of multiperiod asset allocation modelling for institutions that invest to meet the target payment structures of a long-term liability. By addressing the shortcomings of both single-period models and the single-point forecast of the mean variance approach, this article derives explicit formulae for optimal asset allocations, taking into account possible future realizations in a multiperiod discrete time model. Pang, Gaobo; Warshawsky, Mark. - Optimizing the equity-bond-annuity portfolio in retirement : The impact of uncertain health expenses. - No. pages: 12. [RKN: 72441] Shelved at: Per: IME (Oxf) Insurance: Mathematics & Economics (2010) 46 (1) : 198-209. Abstract: This paper derives optimal equity-bond-annuity portfolios for retired households who face stochastic capital market returns, differential exposures to mortality risk and uncertain uninsured health expenses, and differential Social Security and defined benefit pension coverage. The results show that the health spending risk drives household portfolios to shift from risky equities to 13
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Risk Management Reading List September 2010
safer assets and enhances the demand for annuities due to their increasing-with-age superiority over bonds in hedging against life-contingent health spending and longevity risks. Households with higher income have a greater incremental demand for life annuities. The annuities in turn provide greater leverage for equity investment in the remaining asset portfolios. Keywords: Annuity; Asset allocation; Health expense; Precautionary savings; Pension; Life cycle
Asset liability matching Kemp, Malcolm. - Market consistency. Model calibration in imperfect markets. - Chichester: Wiley, 2009. - No. pages: xxv,350. [RKN: 39382] Shelved at: CPFB (Oxf) Abstract: Achieving market consistency can be challenging, even for the most established finance practitioners. In "Market Consistency: Model Calibration in Imperfect Markets", leading expert Malcolm Kemp shows readers how they can best incorporate market consistency across all disciplines. Building on the author's experience as a practitioner, writer and speaker on the topic, the book explores how risk management and related disciplines might develop as fair valuation principles become more entrenched in finance and regulatory practice. This is the only text that clearly illustrates how to calibrate risk, pricing and portfolio construction models to a market consistent level, carefully explaining in a logical sequence when and how market consistency should be used, what it means for different financial disciplines and how it can be achieved for both liquid and illiquid positions. It explains why market consistency is intrinsically difficult to achieve with certainty in some types of activities, including computation of hedging parameters, and provides solutions to even the most complex problems. The book also shows how to best mark-to-market illiquid assets and liabilities and to incorporate these valuations into solvency and other types of financial analysis; it indicates how to define and identify risk-free interest rates, even when the creditworthiness of governments is no longer undoubted; and, it explores when practitioners should focus most on market consistency and when their clients or employers might have less desire for such an emphasis. Finally, the book analyses the intrinsic role of regulation and risk management within different parts of the financial services industry, identifying how and why market consistency is key to these topics, and highlights why ideal regulatory solvency approaches for long term investors like insurers and pension funds may not be the same as for other financial market participants such as banks and asset managers
Asset valuation Engle, Robert. - Anticipating correlations : A new paradigm for risk management. - Princeton University Press, 2009. - No. pages: 154. [RKN: 69777] [Faculty: 519.287 ENG]
Assets Chappell, Christopher; Jakhria, Parit; Marais, Johann; Smith, Andrew. - Understanding the risks in new asset classes. - Institute of Actuaries and Faculty of Actuaries, 2007. - (Finance, Investment and Risk Management Conference 2007 Seminar, 17-19 June 2007, Conrad Hilton Hotel, Dublin). [RKN: 72833] URL: http://www.actuaries.org.uk/research-and-resources/documents/understanding-risksnew-asset-classes Abstract: This paper reviews the mean-variance (M-V) framework and highlights some issues that investors should consider before adding the new, more exotic asset classes to their portfolios.
Australia Franklin, James; Sisson, Scott. - Assessment of Strategies for Evaluating Extreme Risks. 14
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Risk Management Reading List September 2010
Australian Centre of Excellence for Risk Analysis (ACERA), 2007. - (ACERA Project No 0602). No. pages: 61. [RKN: 72628] URL: http://www.acera.unimelb.edu.au/materials/endorsed/0602.pdf Abstract: It is in the nature of risk for extreme events that there is no or very little directly relevant data, so expert opinion must be relied on heavily. But expert opinion must be as fully informed as possible – by the data that is available, by other experts, by reasoned opinions of stakeholders, and by the use of commonsense reasoning applied to the diverse reasons put “on the table”. We survey a variety of case studies and a number of quantitative and non-quantitative methods that show promise for improving extreme risk analysis. We argue that an “advocacy model” similar to that used in the Basel II compliance regime for bank operational risks and Biosecurity Australia’s Import Risk Assessments is ideal for permitting the diversity of relevant evidence to be presented and soundly evaluated. We recommend that the process be enhanced in four ways – by better education of the risk evaluators in certain statistical methods (extreme value theory, Bayesian methods of combining expert opinion with data, and robustness methods such as InfoGap Theory); by better education of statisticians in non-numerical methods including legal-style advocacy and causal modelling; by education of all parties in the psychological findings on expert judgement; and by the use of independent facilitators such as consultants to mediate between the regulator / evaluator and the client / stakeholder. Neuhaus, Walther. - Risk equalisation by mixed schemes. 2008. - No. pages: 34. [RKN: 69395] Shelved at: Per: AAJ (Oxf) [Faculty: AUS/ACT] Australian Actuarial Journal (2008) 14 (2) : 193-226. URL: http://www.actuaries.asn.au/PublicationAndResearch/Library/AAJ?docType=Publication_A AJ&docTypeID=227&year=Select%20Year Abstract: This paper shows how a risk equalisation scheme using risk-based capitation (RBC) can be mollified by adding partial equalisation of health insurers' differential utilisation rates. A risk equalisation scheme that combines RBC with partial equalisation of the 'utilisation component' is called a 'mixed scheme'. Besides introducing the reader to mixed equalisation schemes, the aim of this paper is twofold. Firstly, to illustrate by a simple, made-up example how a mixed scheme responds to self-selection effects more efficiently than a RBC scheme. Secondly, to outline how a mixed scheme could be designed in practice, using only statistics that are available in the Australian private health insurance market. Keywords: health insurance, community rating, risk equalisation Sherris, Michael; Njenga, Carolyn. - Longevity Risk and the Econometric Analysis of Mortality Trends and Volatility. - UNSW Australian School of Business Research, 2009. - (UNSW Australian School of Business Research Paper No. 2009ACTL08). [RKN: 71634] URL: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1458084 Abstract: Longevity risk and the modelling of trends and volatility for mortality improvement has attracted increased attention driven by ageing populations around the world and the expected financial implications. The original Lee-Carter model that was used for longevity risk assessment included a single improvement factor with differential impacts by age. Financial models that allow for risk pricing and risk management have attracted increasing attention along with multiple factor models. This paper investigates trends, including common trends through co-integration, and the factors driving the volatility of mortality using principal components analysis for a number of developed countries including Australia, England, Japan, Norway and USA. The results demonstrate the need for multiple factors for modelling mortality rates across all these countries. The basic structure of the Lee-Carter model can not adequately model the random variation and the full risk structure of mortality changes. Trends by country are found to be stochastic. Common trends and co-integrating relationships are found across ages highlighting the benefits from modelling mortality rates as a system in a Vector-Autoregressive (VAR) model and capturing long run equilibrium relationships in a Vector Error-Correction Model (VECM) framework. Keywords: longevity risk, unit roots, VAR, VECM 15
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Risk Management Reading List September 2010
Wills, Samuel; Sherris, Michael. - Securitization, structuring and pricing of longevity risk. - No. pages: 13. [RKN: 72439] Shelved at: Per: IME (Oxf) Insurance: Mathematics & Economics (2010) 46 (1) : 173-185. Abstract: Pricing and risk management for longevity risk have increasingly become major challenges for life insurers and pension funds around the world. Risk transfer to financial markets, with their major capacity for efficient risk pooling, is an area of significant development for a successful longevity product market. The structuring and pricing of longevity risk using modern securitization methods, common in financial markets, have yet to be successfully implemented for longevity risk management. There are many issues that remain unresolved for ensuring the successful development of a longevity risk market. This paper considers the securitization of longevity risk focusing on the structuring and pricing of a longevity bond using techniques developed for the financial markets, particularly for mortgages and credit risk. A model based on Australian mortality data and calibrated to insurance risk linked market data is used to assess the structure and market consistent pricing of a longevity bond. Age dependence in the securitized risks is shown to be a critical factor in structuring and pricing longevity linked securitizations. Keywords: Longevity risk; Securitization
Automobile industry Tennyson, Sharon. - Incentive effects of community rating in insurance markets : evidence from Massachusetts automobile insurance. [RKN: 39618] Shelved at: Per: Geneva (Oxf) Geneva Risk and Insurance Review (2010) 35 (1) : 19-46. Abstract: Rate regulations in insurance markets often impose cross-subsidies in insurance premiums from low-risk consumers to high-risk consumers. This paper develops the hypothesis that premium cross-subsidies affect risk taking by insurance consumers, and tests this hypothesis by examining the marginal impact of premium subsidies and overcharges on future insurance costs. The empirical analysis uses 1990–2003 rating cell-level data from the Massachusetts automobile insurance market, in which regulation produced large cross-subsidies across cells. Consistent with the hypothesized effects, premium subsidies are found to be significantly related to higher future insurance costs, and the opposite effects are found for premium overcharges.
Bank asset management Aikman, David; Alessandri, Piegiorgio; Eklaund, Bruno; Gai, Prasanna; Kapadia, Sujit; Martin, Elizabeth; Mora, Nada; Sterne, Gabriel; Willison, Matthew. - Funding liquidity risk in a quantitative model of systemic stability. - Bank of England, 2009. - (Bank of England Working Paper no. 372). - No. pages: 39. [RKN: 69902] Shelved at: Online only [Faculty: Online only] URL: http://www.bankofengland.co.uk/publications/workingpapers/index.htm Abstract: We demonstrate how the introduction of liability-side feedbacks affects the properties of a quantitative model of systemic risk. The model is known as RAMSI and is still in its development phase. It is based on detailed balance sheets for UK banks and encompasses macro-credit risk, interest and non-interest income risk, network interactions, and feedback effects. Funding liquidity risk is introduced by allowing for rating downgrades and incorporating a simple framework in which concerns over solvency, funding profiles and confidence may trigger the outright closure of funding markets to particular institutions. In presenting results, we focus on aggregate distributions and analysis of a scenario in which large losses at some banks can be exacerbated by liability-side feedbacks, leading to system-wide instability.
Banks and banking Franklin, James; Sisson, Scott. - Assessment of Strategies for Evaluating Extreme Risks. 16
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Risk Management Reading List September 2010
Australian Centre of Excellence for Risk Analysis (ACERA), 2007. - (ACERA Project No 0602). No. pages: 61. [RKN: 72628] Abstract: It is in the nature of risk for extreme events that there is no or very little directly relevant data, so expert opinion must be relied on heavily. But expert opinion must be as fully informed as possible – by the data that is available, by other experts, by reasoned opinions of stakeholders, and by the use of commonsense reasoning applied to the diverse reasons put “on the table”. We survey a variety of case studies and a number of quantitative and non-quantitative methods that show promise for improving extreme risk analysis. We argue that an “advocacy model” similar to that used in the Basel II compliance regime for bank operational risks and Biosecurity Australia’s Import Risk Assessments is ideal for permitting the diversity of relevant evidence to be presented and soundly evaluated. We recommend that the process be enhanced in four ways – by better education of the risk evaluators in certain statistical methods (extreme value theory, Bayesian methods of combining expert opinion with data, and robustness methods such as InfoGap Theory); by better education of statisticians in non-numerical methods including legal-style advocacy and causal modelling; by education of all parties in the psychological findings on expert judgement; and by the use of independent facilitators such as consultants to mediate between the regulator / evaluator and the client / stakeholder. Nier, Erlend; Yang, Jing; Yorulmazer, Tanju; Alentorn, Amadeo. - Network models and financial stability. - Bank of England, 2008. - (Bank of England Working Paper no. 346). - No. pages: 29. [RKN: 69889] Shelved at: Online only [Faculty: Online only] URL: http://www.bankofengland.co.uk/publications/workingpapers/index.htm Abstract: Systemic risk is a key concern for central banks charged with safeguarding overall financial stability. In this paper we investigate how systemic risk is affected by the structure of the financial system. We construct banking systems that are composed of a number of banks that are connected by interbank linkages. We then vary the key parameters that define the structure of the financial system - including its level of capitalisation, the degree to which banks are connected, the size of interbank exposures and the degree of concentration of the system - and analyse the influence of these parameters on the likelihood of contagious (knock-on) defaults. First, we find that the better capitalised banks are, the more resilient is the banking system against contagious defaults and this effect is non-linear. Second, the effect of the degree of connectivity is nonmonotonic, that is, initially a small increase in connectivity increases the contagion effect; but after a certain threshold value, connectivity improves the ability of a banking system to absorb shocks. Third, the size of interbank liabilities tends to increase the risk of knock-on default, even if banks hold capital against such exposures. Fourth, more concentrated banking systems are shown to be prone to larger systemic risk, all else equal. In an extension to the main analysis we study how liquidity effects interact with banking structure to produce a greater chance of systemic breakdown. We finally consider how the risk of contagion might depend on the degree of asymmetry (tiering) inherent in the structure of the banking system. A number of our results have important implications for public policy, which this paper also draws out.
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Risk Management Reading List September 2010
Bayesian analysis Iezzi, Stefano. - Investors’ risk attitude and risky behavior : a Bayesian approach with imperfect information. - Roma: - Banca d'Italia, 2008. - (Working paper no. 692). - No. pages: 33. [RKN: 72182] URL: http://www.bancaditalia.it/pubblicazioni/econo/temidi/td08/td692_08/entd692_08/en_tema_6 92.pdf Abstract: In a choice model of risky assets the role of risk aversion is analyzed. The measure of risk preference comes from a direct subjective survey question and it is considered as an imperfect information about the true risk attitude of investors. Misclassification between the true and the observed risk aversion is explicitly taken into account in the empirical model. A Data Augmentation approach, a Bayesian procedure for incomplete-data problems, is applied on data from the 2006 Survey of Household Income and Wealth by the Bank of Italy. Results indicate that when misclassification of investors is taken into account model estimates show the good performance of the subjective question when used as a control in a portfolio choice models. Moreover risk aversion emerges as a strong predictor of the probability to hold risky assets. The analysis also shows that probability of misclassification decreases as latent risk aversion increases, that means that more risk tolerant investors tend to be classified erroneously more often than less risk tolerant investors. Keywords: portfolio choice, risk attitude, misclassification error, Bayesian analysis. Kogure, Atsuyuki; Kurachi, Yoshiyuki. - A Bayesian approach to pricing longevity risk based on risk-neutral predictive distributions. - No. pages: 11. [RKN: 72438] Shelved at: Per: IME (Oxf) Insurance: Mathematics & Economics (2010) 46 (1) : 162-172. Abstract: We present a Bayesian approach to pricing longevity risk under the framework of the Lee–Carter methodology. Specifically, we propose a Bayesian method for pricing the survivor bond and the related survivor swap designed by Denuit et al. (2007). Our method is based on the risk neutralization of the predictive distribution of future survival rates using the entropy maximization principle discussed by Stutzer (1996). The method is illustrated by applying it to Japanese mortality rates. Keywords: Bayesian approach; Pricing longevity risk; Maximum entropy principle; Risk-neutral predictive distribution; Japanese mortality rates Perez–Camarillo, Yessica. - Comparison of a Simple Bayesian Reserving Model with Traditional Methods [abstract only] 2008. [RKN: 38563] Shelved at: Online only [Faculty: Online only] Actuarial Research Clearing House (ARCH) (2008) 1 URL: http://www.soa.org/news-and-publications/publications/proceedings/arch/arch-2008iss1.aspx Abstract: There is a large literature on claims reserving. The available methods range from the simple deterministic ones to the very sophisticated stochastic. Stochastic or statistical models allow the actuary to estimate future claims along with some measure of their uncertainty, such as the variance. The more advanced methods will provide, in addition, the complete distribution or some quantiles. However most of the stochastic models are too complex and end up being a black box for practitioners. They also tend to be over parameterized, which has the effect that they tend to model historical observations very accurately, but they do not necessarily perform well when predicting future claims. In this paper we apply a Bayesian method that was developed for forecasting very short series with stable (seasonal) patterns. It is constructed on basic Bayesian concepts and leads to very simple prediction formulas. Then we compare it with several other methods as to their predictive effectiveness. In so doing, we depart from the traditional ‘triangleshaped’ framework for development data.
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Risk Management Reading List September 2010
Behavioural sciences Montier, James. - Applied behavioural finance : Insights into irrational minds and markets [copies of slides only] - Institute of Actuaries and Faculty of Actuaries, 2007. - (Finance, Investment and Risk Management Conference 2007 Seminar, 17-19 June 2007, Conrad Hilton Hotel, Dublin). [RKN: 72836] URL: http://www.actuaries.org.uk/research-and-resources/documents/applied-behaviouralfinance-insights-irrational-minds-and-markets-h Vlaev, Ivo; Stewart, Neil; Chater, Nick. - Risk preference discrepancy : a prospect relativity account of the discrepancy between risk preferences in laboratory gambles and real world investments. [RKN: 39305] Shelved at: UHG/LA pam (Oxf) Journal of Behavioral Finance (2008) 9 : 132-148. Abstract: In this article, we presented evidence that people are more risk averse when investing in financial products in the real world than when they make risky choices between gambles in laboratory experiments. To provide an account for this discrepancy, we conducted experiments which showed that the range of offered investment funds that vary in their risk-reward characteristics had a significant effect on the distribution of hypothetical funds to those products. We also showed that people are able to use the context provided by the choice set in order to make relative riskiness judgments for investment products. This context dependent relativistic nature of risk preferences is proposed as a plausible explanation of the risk preference discrepancy between laboratory experiments and real-world investments. We also discuss other possible theoretical interpretations of the discrepancy.
Bibliographies Orros, George. - ERM Literature review. 2007. - (Giro 2007 convention). - No. pages: 37. [RKN: 38275] Shelved at: online only [Faculty: online only] URL: http://www.actuaries.asn.au/NR/rdonlyres/1C5D0157-1B4E-4059-B75E32F751723D99/2811/ERM_LitRev_Main_180807.pdf Abstract: to provide an introduction to ERM and to suggest a reading list that might be appropriate for general insurance actuaries (and actuarial students) who would like to have a synopsis of introductory ERM publications and references. We have also prepared a list of 60 web sites that purport to be about ERM capabilities and where the reader can find, review and/or download further documents, information and web links in connection with ERM capabilities, skills and associated tools.
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Risk Management Reading List September 2010
Bonds Campbell, John Y. - The Changing Role of Nominal Government Bonds in Asset Allocation. - No. pages: 16. [RKN: 72016] Shelved at: Per: Geneva (Oxf) Geneva Risk and Insurance Review (2009) 34 (2) : 89-104. Abstract: The covariance between nominal bonds and stocks has varied considerably over recent decades and has even switched sign. It has been predominantly positive in periods such as the late 1970s and early 1980s when the economy has experienced supply shocks and the central bank has lacked credibility. It has been predominantly negative in periods such as the 2000s when investors have feared weak aggregate demand and deflation. Nominal bonds are attractive to short-term equity investors when these bonds are negatively correlated with stocks, as has been the case during the 2000s and especially during the downturn of 2007–2008. They are attractive to conservative long-term investors when long-term inflationary expectations are stable, for then these bonds are close substitutes for inflation-indexed bonds that are riskless in the long term. Keywords: Mean-variance analysis, long-term investing, time-varying risk Chen, Hua; Cummins, J David. - Longevity bond premiums : The extreme value approach and risk cubic pricing. - No. pages: 11. [RKN: 72437] Shelved at: Per: IME (Oxf) Insurance: Mathematics & Economics (2010) 46 (1) : 150-161. Abstract: The purpose of this study is to analyze the securitization of longevity risk with an emphasis on longevity risk modelling and longevity bond premium pricing. Various longevity derivatives have been proposed, and the capital market has experienced one unsuccessful attempt by the European Investment Bank (EIB) in 2004. After carefully analyzing the pros and cons of previous securitizations, we present our proposed longevity bonds, whose payoffs are structured as a series of put option spreads. We utilize a random walk model with drift to fit small variations of mortality improvements and employ extreme value theory to model rare longevity events. Our method is a new approach in longevity risk securitization, which has the advantage of both capturing mortality improvements within sample and extrapolating rare, out-of- sample longevity events. We demonstrate that the risk cubic model developed for pricing catastrophe bonds can be applied to mortality and longevity bond pricing and use the model to calculate risk premiums for longevity bonds. Keywords: Securitization; Longevity risk; Extreme value theory; Bond spreads Taboga, Marco. - The riskiness of corporate bonds. - Roma: - Banca d'Italia, 2009. - (Working paper no. 730). - No. pages: 45. [RKN: 72183] URL: http://www.bancaditalia.it/pubblicazioni/econo/temidi/td09/td730_09/en_td_730_09/en_tema _730.pdf Abstract: When the riskiness of an asset increases, then, arguably, some risk-averse agents that were previously willing to hold on to the asset are no longer willing to do so. Aumann and Serrano (2008) have recently proposed an index of riskiness that helps to make this intuition rigorous. We use their index to analyze the riskiness of corporate bonds and how this can change over time and across rating classes and how it compares to the riskiness of other financial instruments. We find statistically significant evidence that a number of financial and macroeconomic variables can predict time-variation in the riskiness of corporate bonds, including in ways one might not expect. For example, a higher yield-to-maturity lowers riskiness by reducing the frequency and the magnitude of negative holding-period returns. Keywords: riskiness, predictability, corporate bonds.
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Risk Management Reading List September 2010
Bootstrap Bjorkwall, Susanna; Hossjer, Ola; Ohlsson, Esbjorn. - Non-parametric and parametric bootstrap techniques for age-to-age development factor methods in stochastic claims reserving. - No. pages: 26. [RKN: 71758] Shelved at: Per: SAJ [Faculty: SCA/ACT] Scandinavian Actuarial Journal (2009) 4 : 306-331. Abstract: In the literature, one of the main objects of stochastic claims reserving is to find models underlying the chain-ladder method in order to analyze the variability of the outstanding claims, either analytically or by bootstrapping. In bootstrapping these models are used to find a full predictive distribution of the claims reserve, even though there is a long tradition of actuaries calculating the reserve estimate according to more complex algorithms than the chain-ladder, without explicit reference to an underlying model. In this paper we investigate existing bootstrap techniques and suggest two alternative bootstrap procedures, one non-parametric and one parametric, by which the predictive distribution of the claims reserve can be found for other age-toage development factor methods than the chain-ladder, using some rather mild model assumptions. For illustration, the procedures are applied to three different development triangles. Keywords: Bootstrap; Chain-ladder; Development factor method; Development triangle; Stochastic claims reserving Caslin, John; Fadden, Damian. - How risky is my investment? - Dublin: - Society of Actuaries in Ireland, 2007. - No. pages: 26. [RKN: 72211] URL: http://web.actuaries.ie/Events%20and%20Papers/Events%202007/How%20Risky%20is%20m y%20Investment%20-paper%20.pdf?q=Events%20and%20Papers/Events%202007/How%20Risky%20is%20my%20Inves tment%20-paper-%20.pdf Abstract: The aims of this paper are: (i) to illustrate one possible way in which risk might be illustrated so that consumers might gain a better understanding of the market risk of different investment funds. The approach results in a relatively simple illustration of the likely risk of a fund generated using a simple statistical technique; (ii) to remind investors of the need to adjust for risk when comparing the investment performance of different managers even where the managers have similar investment objectives; and (iii) recognising that investors' choices are not restricted to single asset classes, to quantify the benefits of diversification for investors when risk is lowered without lowering potential returns by combining assets that do not have their periods of positive and negative returns at the same time.
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Risk Management Reading List September 2010
Loisel, Stéphane; Mazza, Christian; Rullière, Didier. - Convergence and asymptotic variance of bootstrapped finite-time ruin probabilities with partly shifted risk processes. - No. pages: 8. [RKN: 72411] Shelved at: Per: IME (Oxf) Insurance: Mathematics & Economics (2009) 45 (3) : 374-381. Abstract: In the classical risk model, we prove the weak convergence of a sequence of empirical finite-time ruin probabilities. In an earlier paper (see Loisel et al., (2008)), we proved an equivalent result in the special case where the initial reserve is zero, and checked that numerically the general case seems to be true. In this paper, we prove the general case (with a nonnegative initial reserve), which is important for applications to estimation risk. So-called partly shifted risk processes are introduced, and used to derive an explicit expression of the asymptotic variance of the considered estimator. This provides a clear representation of the influence function associated with finite time ruin probabilities and gives a useful tool to quantify estimation risk according to new regulations. Keywords: Finite-time ruin probability; Robustness; Solvency II; Reliable ruin probability; Asymptotic normality; Influence function; Estimation Risk Solvency Margin (ERSM); Partly shifted risk process
Brownian motion Xin, Zhang; Siu, Tak Kuen. - Optimal investment and reinsurance of an insurer with model uncertainty. - No. pages: 8. [RKN: 72375] Shelved at: Per: IME (Oxf) Insurance: Mathematics & Economics (2009) 45 (1) : 81-88. Abstract: We introduce a novel approach to optimal investment–reinsurance problems of an insurance company facing model uncertainty via a game theoretic approach. The insurance company invests in a capital market index whose dynamics follow a geometric Brownian motion. The risk process of the company is governed by either a compound Poisson process or its diffusion approximation. The company can also transfer a certain proportion of the insurance risk to a reinsurance company by purchasing reinsurance. The optimal investment–reinsurance problems with model uncertainty are formulated as two-player, zero-sum, stochastic differential games between the insurance company and the market. We provide verification theorems for the Hamilton–Jacobi–Bellman–Isaacs (HJBI) solutions to the optimal investment–reinsurance problems and derive closed-form solutions to the problems. Keywords: Optimal investment; Proportional reinsurance; Model uncertainty; Stochastic differential game; Exponential utility; Penalty of ruin; HJBI equations
Business Swiss Reinsurance Company. - Commercial liability: A challenge for businesses and their insurers. - Zurich: - Swiss Reinsurance Company, - No. pages: 34. [RKN: 71956] [Faculty: SIG/SWI] Sigma (2009) 5 URL: http://www.swissre.com Contents include: -- Introduction: characteristics of liability insurance -- How much insurance do businesses buy and why? -- What are the key issues? -- What can insurers do to keep liability risk insurable?
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Risk Management Reading List September 2010
Buy-outs The annuity bulk buy-out market : Abstract of a discussion meeting held by the Faculty of Actuaries on 18 February 2008. [RKN: 39665] Shelved at: Per: BAJ (Oxf); Per: BAJ (Lon) [Faculty: BRI/ACT] BAJ (2008) 14 (2) : 237-256. URL: http://www.actuaries.org.uk/research-and-resources/pages/access-journals Abstract: Report of a Sessional Meeting which takes the form of a panel discussion, asking the question 'Managing defined benefit risk management: is buy-out the future?'
Capital adequacy Filipovic, Damir. - Multi-Level Risk Aggregation. - No. pages: 11. [RKN: 71969] Shelved at: Per: Astin Bull (Oxf) [Faculty: JOU/AST] ASTIN Bulletin (2009) 39 (2) : 565-575. Abstract: In this paper we compare the current Solvency II standard and a genuine bottom-up approach to risk aggregation. This is understood to be essential for developing a deeper insight into the possible differences between the diversification assumptions between the standard approach and internal models. Grané, Aurea; Veiga, Helena. - Outliers in GARCH models and the estimation of risk measures. Madrid: - Departamento de Estadística, Universidad Carlos III de Madrid, 2010. - (Working Paper 10-05). - No. pages: 21. [RKN: 72623] URL: http://e-archivo.uc3m.es/bitstream/10016/6699/1/ws100502.pdf Abstract: In this paper we focus on the impact of additive level outliers on the calculation of risk measures, such as minimum capital risk requirements, and compare four alternatives of reducing these measures' estimation biases. The first three proposals proceed by detecting and correcting outliers before estimating these risk measures with the GARCH(1,1) model, while the fourth procedure fits a Student’s t-distributed GARCH(1,1) model directly to the data. The former group includes the proposal of Grané and Veiga (2010), a detection procedure based on wavelets with hard- or soft-thresholding filtering, and the well known method of Franses and Ghijsels (1999). The first results, based on Monte Carlo experiments, reveal that the presence of outliers can bias severely the minimum capital risk requirement estimates calculated using the GARCH(1,1) model. The message driven from the second results, both empirical and simulations, is that outlier detection and filtering generate more accurate minimum capital risk requirements than the fourth alternative. Moreover, the detection procedure based on wavelets with hard-thresholding filtering gathers a very good performance in attenuating the effects of outliers and generating accurate minimum capital risk requirements out-of-sample, even in pretty volatile periods. Keywords: Minimum Capital Risk Requirements, Outliers, Wavelets
Capital management Bodoff, Neil M. - Capital Allocation by Percentile Layer. 2007. - (CAS ERM Symposium, 2007). [RKN: 38238] Shelved at: online only [Faculty: online only] URL: http://www.ermsymposium.org/2007/pdf/papers/Bodoff.pdf Abstract: Motivation. Capital allocation can have substantial ramifications upon measuring risk adjusted profitability as well as setting risk loads for pricing. Current allocation methods that emphasize the tail allocate too much capital to extreme events; “capital consumption” methods, which incorporate relative likelihood, tend to allocate insufficient capital to highly unlikely yet extremely severe losses. Method. In this paper I develop a new formulation of the meaning of holding capital equal to the Value at Risk. The new formulation views the total capital of the firm as the sum of many percentile layers of capital. Thus capital allocation varies continuously by layer and the capital allocated to 23
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Risk Management Reading List September 2010
any particular loss scenario is the sum of allocated capital across many percentile layers. Results. Capital Allocation by Percentile Layer produces capital allocations that differ significantly from other common methods such as VaR, TVaR, and coTVaR. Conclusions. Capital Allocation by Percentile Layer has important advantages over existing methods. It highlights a new formulation of Value at Risk and other capital standards, recognizes the capital usage of losses that do not extend into the tail, and captures the disproportionate capital usage of severe losses. Keywords. Capital Allocation; Percentile Layer of Capital; Value at Risk; Enterprise Risk Management; Risk Load; Risk Adjusted Profitability Degen, M; Lambrigger, D D; Segers, J. - Risk concentration and diversification : Second-order properties. - IAP Statistics Network, 2009. - (Technical report 09028). - No. pages: 19. [RKN: 72241] URL: http://www.stat.ucl.ac.be/ISpub/tr/2009/TR09028.pdf Abstract: The quantification of diversification benefits due to risk aggregation plays a prominent role in the (regulatory) capital management of large firms within the financial industry. However, the complexity of today’s risk landscape makes a quantifiable reduction of risk concentration a challenging task. In the present paper we discuss some of the issues that may arise. The theory of second-order regular variation and second-order subexponentiality provides the ideal methodological framework to derive second-order approximations for the risk concentration and the diversification benefit. Keywords: Diversification, second-order regular variation, second-order subexponentiality, subadditivity, Value-at-Risk
Careers Smitherman, Lindsay. - Fancy working in ERM? - Staple Inn Actuarial Society, - No. pages: 1. [RKN: 72079] Shelved at: Per: Actuary (Oxf); Per: Actuary (Lon) [Faculty: SIA/ACT] The Actuary (2010) Jan / Feb : 30. URL: http://www.the-actuary.org.uk Abstract: Lindsay Smitherman thinks a CPA qualification may be a great place to start
Cash flow Iyengar, Garud; Ma, Alfred Ka Chun. - Cash flow matching: A risk management approach. Society of Actuaries, 2009. - No. pages: 15. [RKN: 71630] Shelved at: Per: NAAJ (Oxf); Per NAAJ (Lon) [Faculty: NOR/AME] North American Actuarial Journal (2009) 13 (3) : 370-384. URL: http://www.soa.org/news-and-publications/publications/journals/naaj/naaj-detail.aspx Abstract: We propose a scenario-based optimization framework for solving the cash flow matching problem where the time horizon of the liabilities is longer than the maturities of available bonds and the interest rates are uncertain. Standard interest rate models can be used for scenario generation within this framework. The optimal portfolio is found by minimizing the cost at a specific level of shortfall risk measured by the conditional tail expectation (CTE), also known as conditional value-at-risk (CVaR) or Tail-VaR. The resulting optimization problem is still a linear program (LP) as in the classical cash flow matching approach. This framework can be employed in situations when the classical cash flow matching technique is not applicable.
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Risk Management Reading List September 2010
Central banks Nier, Erlend; Yang, Jing; Yorulmazer, Tanju; Alentorn, Amadeo. - Network models and financial stability. - Bank of England, 2008. - (Bank of England Working Paper no. 346). - No. pages: 29. [RKN: 69889] Shelved at: Online only [Faculty: Online only] URL: http://www.bankofengland.co.uk/publications/workingpapers/index.htm Abstract: Systemic risk is a key concern for central banks charged with safeguarding overall financial stability. In this paper we investigate how systemic risk is affected by the structure of the financial system. We construct banking systems that are composed of a number of banks that are connected by interbank linkages. We then vary the key parameters that define the structure of the financial system - including its level of capitalisation, the degree to which banks are connected, the size of interbank exposures and the degree of concentration of the system - and analyse the influence of these parameters on the likelihood of contagious (knock-on) defaults. First, we find that the better capitalised banks are, the more resilient is the banking system against contagious defaults and this effect is non-linear. Second, the effect of the degree of connectivity is nonmonotonic, that is, initially a small increase in connectivity increases the contagion effect; but after a certain threshold value, connectivity improves the ability of a banking system to absorb shocks. Third, the size of interbank liabilities tends to increase the risk of knock-on default, even if banks hold capital against such exposures. Fourth, more concentrated banking systems are shown to be prone to larger systemic risk, all else equal. In an extension to the main analysis we study how liquidity effects interact with banking structure to produce a greater chance of systemic breakdown. We finally consider how the risk of contagion might depend on the degree of asymmetry (tiering) inherent in the structure of the banking system. A number of our results have important implications for public policy, which this paper also draws out.
Chain ladder methods Bjorkwall, Susanna; Hossjer, Ola; Ohlsson, Esbjorn. - Non-parametric and parametric bootstrap techniques for age-to-age development factor methods in stochastic claims reserving. - No. pages: 26. [RKN: 71758] Shelved at: Per: SAJ [Faculty: SCA/ACT] Scandinavian Actuarial Journal (2009) 4 : 306-331. Abstract: In the literature, one of the main objects of stochastic claims reserving is to find models underlying the chain-ladder method in order to analyze the variability of the outstanding claims, either analytically or by bootstrapping. In bootstrapping these models are used to find a full predictive distribution of the claims reserve, even though there is a long tradition of actuaries calculating the reserve estimate according to more complex algorithms than the chain-ladder, without explicit reference to an underlying model. In this paper we investigate existing bootstrap techniques and suggest two alternative bootstrap procedures, one non-parametric and one parametric, by which the predictive distribution of the claims reserve can be found for other age-toage development factor methods than the chain-ladder, using some rather mild model assumptions. For illustration, the procedures are applied to three different development triangles. Keywords: Bootstrap; Chain-ladder; Development factor method; Development triangle; Stochastic claims reserving
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Risk Management Reading List September 2010
Citation analysis Colquitt, L Lee; Sommer, David W; Ferguson, William L. - A Citation Analysis of Risk, Insurance, and Actuarial Research: 2001 Through 2005. - No. pages: 21. [RKN: 71781] Shelved at: Per: J.Risk Ins (Oxf) [Faculty: JOU/RIS] Journal of Risk and Insurance (2009) 76 (4) : 933-953. Abstract: The bibliographies of 17 risk journals were evaluated to determine the relative influence of these risk journals on risk, insurance, and actuarial research published during the years 2001 through 2005. Tables are provided that show the frequency with which each of these journals cites itself and the other sample journals. The journals are ranked, within two groups (risk and insurance group and actuarial group), based on their total influence (total citations including and excluding self-citations) and their per article influence (per article citations including and excluding selfcitations). Finally, the most frequently cited articles from each risk journal are reported.
Claim frequency Ren, Jiandong. - The discounted joint distribution of the surplus prior to ruin and the deficit at ruin in a Sparre Andersen model. - No. pages: 10. [RKN: 68937] Shelved at: Per: NAAJ (Oxf); Per NAAJ (Lon) [Faculty: NOR/AME] North American Actuarial Journal (2007) 11 (3) : 128-137. URL: http://www.soa.org/news-and-publications/publications/journals/naaj/naaj-detail.aspx Abstract: In this article, we consider the risk model with phase-type interclaim times. We first derive a simple matrix-form expression for the discounted joint density of the surplus prior to ruin and the deficit at ruin when the initial surplus is zero. Then we express the discounted joint density in terms of certain expected discounted penalty functions when the initial surplus is greater than zero. This result generalizes that in Gerber and Shiu (1997).
Claims Cai, J; Zhou, M. - A Risk Model When Premium Rate Depends on Claim Size [abstract only] 2008. [RKN: 38560] Shelved at: Online only [Faculty: Online only] Actuarial Research Clearing House (ARCH) (2008) 1 URL: http://www.soa.org/news-and-publications/publications/proceedings/arch/arch-2008iss1.aspx Abstract: This paper considers a dependent classical risk model with diffusion, in which the premium rate is determined by the amount of the previous claim. It is assumed that different claim size will lead to different premium rate, such as a large claim size will lead to higher premium rate and small claim size will allow to be lower premium rate. At the same time, we can also assume that each premium rate has a different diffusion coefficient. Using the tool of Laplace transform, we give the closed Laplace transform form of the survival probability. Moreover, we also show that the survival probability can be obtained step by step by employing renewal equations. At last, some examples are presented to show the influence of parameters on the probability of ruin. Cheung, Eric C K; Landriault, David. - Analysis of a generalized penalty function in a semiMarkovian risk model. - Society of Actuaries, - No. pages: 17. [RKN: 72025] Shelved at: Per: NAAJ (Oxf); Per NAAJ (Lon) [Faculty: NOR/AME] North American Actuarial Journal (2009) 13 (4) : 497-513. URL: http://www.soa.org/news-and-publications/publications/journals/naaj/naaj-detail.aspx Abstract: In this paper an extension of the semi-Markovian risk model studied by Albrecher and Boxma (2005) is considered by allowing for general interclaim times. In such a model, we follow the ideas of Cheung et al. (2010b) and consider a generalization of the Gerber-Shiu function by incorporating two more random variables in the traditional penalty function, namely, the minimum surplus level before ruin and the surplus level immediately after the second last claim prior to ruin. 26
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Risk Management Reading List September 2010
It is shown that the generalized Gerber-Shiu function satisfies a matrix defective renewal equation. Detailed examples are also considered when either the interclaim times or the claim sizes are exponentially distributed. Finally, we also consider the case where the claim arrival process follows a Markovian arrival process. Probabilistic arguments are used to derive the discounted joint distribution of four random variables of interest in this risk model by capitalizing on an existing connection with a particular fluid flow process. Hao, X; Tang, Q. - Subexponential Tail of Discounted Aggregate Claims. 2008. [RKN: 38568] Shelved at: Online only [Faculty: Online only] Actuarial Research Clearing House (ARCH) (2008) 1 URL: http://www.soa.org/news-and-publications/publications/proceedings/arch/arch-2008iss1.aspx Abstract: In this paper we study the tail probability of discounted aggregate claims in a continuoustime renewal model. For the case that the common claim-size distribution is subexponential, we obtain an asymptotic formula, which holds uniformly for all time horizons within a finite interval. Then, with some additional mild assumptions on the distributions of the claim sizes and interarrival times, we further prove that this formula holds uniformly for all time horizons. In this way, we significantly extend a recent result of Tang (2007, J. Appl. Probab. 44, 285{294). Keywords: Asymptotics; Poisson process; renewal process; subexponential distribution; uniformity. Wu, Xueyuan; Li, Shuanming. - Matrix-form Recursions for a family of compound distributions. Victoria: - University of Melbourne, 2009. - (Centre for Actuarial Studies, University of Melbourne, Research Paper no. 186). - No. pages: 19. [RKN: 72115] URL: http://mercury.ecom.unimelb.edu.au/SITE/actwww/wps2009/186.pdf Abstract: In this paper, we aim to evaluate the distribution of the aggregate claims in the collective risk model. The number of claims is firstly assumed to belong to a generalised (a; b; 0) family. A matrix form recursive formula is then derived to evaluate the related compound distribution when individual claim amounts follow a discrete distribution on non-negative integers. The corresponding formula is also given for continuous individual claim amounts. Secondly, we pay particular attention to the recursive formula for compound phase-type distributions, since only certain types of discrete phase-type distributions belong to the generalised (a; b; 0) family. Similar recursive formulae are obtained for discrete and continuous individual claim amount distributions. Finally, numerical examples are presented for three counting distributions in this family. Keywords: Discrete phase-type distributions; Generalised (a, b, 0) family; Recursive formula; Compound distribution Zhang, Yingjie. - Why Should an Insurance Firm Charge for Frictional Costs? 2007. - (CAS ERM Symposium). [RKN: 38247] Shelved at: online only [Faculty: online only] URL: http://www.ermsymposium.org/2007/pdf/papers/Zhang.pdf Abstract: In this paper, we establish a premium principle that calculates the premium as the sum of present values of claim liability, normal business expense, income tax and frictional cost. The principle provides a fair premium in the sense that it generates a fair return on capital. In other words, it automatically produces the correct cost of equity capital without knowing its value. The frictional cost is defined as the sum of all expenses incurred by the firm that exceed the normal level or category. We discuss the sources of frictional costs and techniques for quantifying them. If a firm manages its market cap instead of book value, the frictional cost needs to be restated by incorporating its impact on the franchise value.
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Risk Management Reading List September 2010
Claims reserves Perez–Camarillo, Yessica. - Comparison of a Simple Bayesian Reserving Model with Traditional Methods [abstract only] 2008. [RKN: 38563] Shelved at: Online only [Faculty: Online only] Actuarial Research Clearing House (ARCH) (2008) 1 URL: http://www.soa.org/news-and-publications/publications/proceedings/arch/arch-2008iss1.aspx Abstract: There is a large literature on claims reserving. The available methods range from the simple deterministic ones to the very sophisticated stochastic. Stochastic or statistical models allow the actuary to estimate future claims along with some measure of their uncertainty, such as the variance. The more advanced methods will provide, in addition, the complete distribution or some quantiles. However most of the stochastic models are too complex and end up being a black box for practitioners. They also tend to be over parameterized, which has the effect that they tend to model historical observations very accurately, but they do not necessarily perform well when predicting future claims. In this paper we apply a Bayesian method that was developed for forecasting very short series with stable (seasonal) patterns. It is constructed on basic Bayesian concepts and leads to very simple prediction formulas. Then we compare it with several other methods as to their predictive effectiveness. In so doing, we depart from the traditional ‘triangleshaped’ framework for development data.
Climate change Maynard, Trevor. - Climate change - are you ready? : Soapbox. - Staple Inn Actuarial Society, No. pages: 1. [RKN: 71736] Shelved at: Per: Actuary (Oxf); Per: Actuary (Lon) [Faculty: SIA/ACT] The Actuary (2009) December : 8. URL: http://www.the-actuary.org.uk Abstract: Looks at the effects climate change will have on actuarial work, particularly on asset values, risk, health and mortality, and insurance.
Communication Carey, Janet M; Burgman, Mark A. - Linguistic Uncertainty in Qualitative Risk Analysis and How to Minimize It. - New York Academy of Sciences, - No. pages: 5. [RKN: 72627] Annals of the New York Academy of Sciences (2008) 1128 : 13-17. URL: http://www.acera.unimelb.edu.au/materials/endorsed/0611_Carey.pdf Abstract: Most risk assessments assume uncertainty may be decomposed into variability and incertitude. Language is often overlooked as a source of uncertainty, but linguistic uncertainty may be pervasive in workshops, committees, and other face-to-face language-based settings where it can result in misunderstanding and arbitrary disagreement. Here we present examples of linguistic uncertainty drawn from qualitative risk analysis undertaken in stakeholder workshops and describe how the uncertainties were treated. We used a process of iterative re-assessment of likelihoods and consequences, interspersed with facilitated discussion, to assist in the reduction of language-based uncertainty. The effects of this process were evident as changes in the level of agreement among groups of assessors in the ranking of hazards. Key words: risk analysis; linguistic uncertainty; ambiguity; vagueness; underspecificity; context dependence
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Risk Management Reading List September 2010
Compound distributions Siaw, Kok Keng; Wu, Xueyuan. - Matrix-form Recursive Evaluation of the Aggregate Claims Distribution Revisited. - Victoria: - University of Melbourne, 2010. - (Centre for Actuarial Studies, University of Melbourne, Research Paper no. 205). - No. pages: 23. [RKN: 72348] URL: http://econ.unimelb.edu.au/SITE/actwww/wps2010/205.pdf Abstract: This paper aims to evaluate the aggregate claims distribution under the collective risk model when the number of claims follows a so-called generalised (a; b; 1) family distribution. The definition of the generalised (a; b; 1) family of distributions is given first, followed by some detailed discussions on several members of the family. Of particular interest, it can be shown that all discrete phase-type (DPH) distributions belong to the generalised (a; b; 1) family. A simple matrixform recursion, which is a counterpart of the Panjer's recursion for the (a; b; 1) family, is then derived to calculate the aggregate claims distribution with non-negative individual claims, either discrete or continuous. Recursive formula for calculating the moments of aggregate claims is also obtained in this paper. At last, several numerical examples are presented to illustrate the recursive calculations using Mathematica. Keywords: Discrete phase-type distributions; Generalised (a; b; 1) family; Recursive formula; Compound distribution Wu, Xueyuan; Li, Shuanming. - Matrix-form Recursions for a family of compound distributions. Victoria: - University of Melbourne, 2009. - (Centre for Actuarial Studies, University of Melbourne, Research Paper no. 186). - No. pages: 19. [RKN: 72115] URL: http://mercury.ecom.unimelb.edu.au/SITE/actwww/wps2009/186.pdf Abstract: In this paper, we aim to evaluate the distribution of the aggregate claims in the collective risk model. The number of claims is firstly assumed to belong to a generalised (a; b; 0) family. A matrix form recursive formula is then derived to evaluate the related compound distribution when individual claim amounts follow a discrete distribution on non-negative integers. The corresponding formula is also given for continuous individual claim amounts. Secondly, we pay particular attention to the recursive formula for compound phase-type distributions, since only certain types of discrete phase-type distributions belong to the generalised (a; b; 0) family. Similar recursive formulae are obtained for discrete and continuous individual claim amount distributions. Finally, numerical examples are presented for three counting distributions in this family. Keywords: Discrete phase-type distributions; Generalised (a, b, 0) family; Recursive formula; Compound distribution
Computer science Parodi, Pietro. - Computational intelligence techniques for general insurance. 2009. - (Specialist Applications Dissertation). - No. pages: 161. [RKN: 39457] Shelved at: BX/EEQ (Oxf) [Faculty: 519.287 PAR] Abstract: This paper is an attempt to answer the question "What is the proper framework for understanding risk?" in the context of general insurance. It argues that although actuaries and other risk professionals tend to deal with risk in the context of classical statistics and by resorting to subjective judgment to compensate the inadequacies of this framework, understanding risk is actually an 'ecological' problem and it is more fruitful to look at risk in the context of computational intelligence.
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Risk Management Reading List September 2010
Consumer attitudes Iezzi, Stefano. - Investors’ risk attitude and risky behavior : a Bayesian approach with imperfect information. - Roma: - Banca d'Italia, 2008. - (Working paper no. 692). - No. pages: 33. [RKN: 72182] URL: http://www.bancaditalia.it/pubblicazioni/econo/temidi/td08/td692_08/entd692_08/en_tema_6 92.pdf Abstract: In a choice model of risky assets the role of risk aversion is analyzed. The measure of risk preference comes from a direct subjective survey question and it is considered as an imperfect information about the true risk attitude of investors. Misclassification between the true and the observed risk aversion is explicitly taken into account in the empirical model. A Data Augmentation approach, a Bayesian procedure for incomplete-data problems, is applied on data from the 2006 Survey of Household Income and Wealth by the Bank of Italy. Results indicate that when misclassification of investors is taken into account model estimates show the good performance of the subjective question when used as a control in a portfolio choice models. Moreover risk aversion emerges as a strong predictor of the probability to hold risky assets. The analysis also shows that probability of misclassification decreases as latent risk aversion increases, that means that more risk tolerant investors tend to be classified erroneously more often than less risk tolerant investors. Keywords: portfolio choice, risk attitude, misclassification error, Bayesian analysis. Montier, James. - Applied behavioural finance : Insights into irrational minds and markets [copies of slides only] - Institute of Actuaries and Faculty of Actuaries, 2007. - (Finance, Investment and Risk Management Conference 2007 Seminar, 17-19 June 2007, Conrad Hilton Hotel, Dublin). [RKN: 72836] URL: http://www.actuaries.org.uk/research-and-resources/documents/applied-behaviouralfinance-insights-irrational-minds-and-markets-h Qiu, Jianying; Steiger, Eva-Maria. - Understanding Risk Attitudes in two Dimensions : An Experimental Analysis. - Innsbruck: - University of Innsbruck, 2009. - (Working Papers in Economics and Statistics 2009-11). - No. pages: 31. [RKN: 72189] URL: http://www.uibk.ac.at/fakultaeten/volkswirtschaft_und_statistik/forschung/wopec/repec/inn/ wpaper/2009-11.pdf Abstract: Despite extensive studies, the nature of risk attitudes remains as one of the most vigorously discussed questions in economics and psychology. In the framework of expected utility theory, attitude towards risk originates in changes in marginal utility (the curvature of the utility function). Cumulative prospect theory (CPT) adds an additional dimension: the weighting of probabilities. By examining both dimensions, we strive to gain more insights on the nature of risk attitudes: what is the relation between the curvature of utility and probability weighting? How are these related to cognitive limitations? We ran a controlled laboratory experiment to answer these questions. Our findings suggest that the two dimensions capture different characteristics of individual risk attitudes. Though, most individuals are risk averse in both dimensions, the two dimensions show no significant correlation. In addition, only probability weighting is correlated with educational background and decision time. This suggests a relation between the convexity of probability weighting and cognitive limitations. Keywords: risk attitudes, cumulative prospect theory, experimental study
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Risk Management Reading List September 2010
Consumer behaviour Friedman, Joseph; Phillips, Herbert E. - The Downside Risk of Postponing Social Security Benefits. - Philadelphia, PA: - Department of Economics, Temple University, 2010. - (DETU Working Paper 10-08). - No. pages: 27. [RKN: 72620] URL: http://www.temple.edu/cla/economics/research/documents/detu_10_08.pdf Abstract: The point that only live participants may initiate or receive Social Security benefits is typically overlooked. Thus a postponement of benefits at any eligible retirement age may be likened to participation in a game of chance in which the participant is subject to a variant form of gambler’s ruin at death. The typical assumption, therefore, that a participant should automatically opt for a postponement if the present value of the resulting benefits, discounted to breakeven age, higher than the present value of the opportunity costs, carries with it the implication of risk neutrality in relation to the consequence of dying before reaching breakeven death age. While this implication of risk neutrality is sometimes correct, it is more likely not. In marked contrast to conclusions reached in previous studies, this paper shows that a single Social Security participant, who is risk averse as regards the chances - and contingent consequences - of dying before reaching breakeven death age, would be well advised to initiate benefits at the earliest age at which he or she would not be subject to earned income tax penalties.
Control theory Malinovskii, Vsevolod K. - Scenario Analysis for a Multi-Period Diffusion Model of Risk. - No. pages: 28. [RKN: 71973] Shelved at: Per: Astin Bull (Oxf) [Faculty: JOU/AST] ASTIN Bulletin (2009) 39 (2) : 649-676. Abstract: This paper extends and develops the results of a previous paper Malinovskii (2007). Dealing with a simplistic diffusion multi-year model of insurance operations, this paper illustrates the adaptive control approach when the object of control is the balance of solvency and equity. Compared to the previous paper, a new element is the “scenario of nature”, or the incomplete knowledge of future risk, which is quite often the case in insurance. It introduces a new and inevitable randomness in the model and leads to a qualitative difference in its behaviour. Keywords: Multi-period insurance process; diffusion annual mechanisms; volatile scenario; solvency; equity; adaptive control strategies
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Risk Management Reading List September 2010
Copulas Dorey, Martyn; Papastamati, Konstantina. - Variable Dependency ‘D’ Distributions : A General Framework to Generate Skew Elliptical Multivariate Copulas with Polytonal Dependency. Institute of Actuaries and Faculty of Actuaries, 2007. - (Finance, Investment and Risk Management Conference 2007 Seminar, 17-19 June 2007, Conrad Hilton Hotel, Dublin). - No. pages: 32. [RKN: 72832] Abstract: A simple procedure generating a multivariate density function that satisfies high asymmetry and polytonal dependency is defined and studied. Traditional approaches to multivariate distributions develop functions that first establish joint density, with dependency inferred, and often poorly understood, as an adjunct at the end. The result is that separate copula designs, such as the Clayton or skew-T, are sought to capture particular dependency structures. The alternative approach presented here generates a joint density function after the dependency is explicitly predefined. This approach, which we have termed the D distribution, has produced a variety of satisfactory results relating to different univariate and multivariate distributions through the choice of an appropriate dependency transfer function. Here we show a new application of the transfer function to construct the flexible and hence highly applicable D distribution and D copula. This concept is connected to copulas, neural networks, skew normal distributions and conditioning on hidden variables. Key Words: Transfer functions, neural networks, polytonal dependency, local dependence function, copulas, multivariate copulas, skew multivariate distributions, skew-normal, skewCauchy, skew-T. Dunn, Gary. - A Multiple Period Gaussian Jump to Default Risk Model. - London: - Financial Services Authority, 2008. - (FSA Occasional paper 29). - No. pages: 37. [RKN: 72497] URL: http://www.fsa.gov.uk/Pages/Library/research/economic/Occasional/index.shtml Abstract: The single-factor Gaussian copula method is a common approach for default risk modelling. However, the model deals with the distribution of default losses over a single period. Proposals currently under consideration for calculating a ‘jump to default’ risk capital charge for the trading book incorporate the concept of a liquidity horizon, which will be typically shorter than the capital horizon over which the jump to default risk charge has to be calculated. The liquidity horizon specifies a period over which a portfolio can be rebalanced. Depending on the rebalancing “rules” adopted (such as the “constant level of risk” assumption), an actively managed portfolio can exhibit a more benign default loss distribution relative to that of a constant portfolio over a given investment (or capital) horizon. This paper develops a general multi-period Gaussian copula model that incorporates the dynamics of default risk over time. Huang, Jen-Tsung; Lee, Kuo-Jung; Liang, Hueimei; Lin, Wei-Fu. - Estimating value at risk of portfolio by conditional copula-GARCH method. - No. pages: 10. [RKN: 72404] Shelved at: Per: IME (Oxf) Insurance: Mathematics & Economics (2009) 45 (3) : 315-324. Abstract: Copula functions represent a methodology that describes the dependence structure of a multi-dimension random variable and has become one of the most significant new tools to handle risk factors in finance, such as Value-at Risk (VaR), which is probably the most widely used risk measure in financial institutions. Combining copula and the forecast function of the GARCH model, this paper proposes a new method, called conditional copula-GARCH, to compute the VaR of portfolios. This work presents an application of the copula-GARCH model in the estimation of a portfolio’s VaR, composed of NASDAQ and TAIEX. The empirical results show that, compared with traditional methods, the copula model captures the VaR more successfully. In addition, the Student-t copula describes the dependence structure of the portfolio return series quite well. Keywords: Copula; GARCH; VaR
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Risk Management Reading List September 2010
Corporate strategy Harvard Business Review on managing external risk. - Boston: - Harvard Business Press, 2009. No. pages: 218. [RKN: 63329] [Faculty: 658.155 22 HAR] Abstract: "Businesses today are operating amid unprecedented uncertainty. The greater the uncertainty, the more ominous and numerous are the threats to your company. To manage external risk, you'll need to select the right analytical tools and incorporate risk into your strategic decision making. This collection shows you how, providing powerful frameworks, tools, and examples for mastering this crucial competency."
Correlation Engle, Robert. - Anticipating correlations : A new paradigm for risk management. - Princeton University Press, 2009. - No. pages: 154. [RKN: 69777] [Faculty: 519.287 ENG]
Credit Bluhm, Christian; Overbeck, Ludger; Wagner, Christop. - Introduction to credit risk modeling. 2nd ed ed. - London: - CRC Press, 2010. - (CRC Financial Mathematics Series). - No. pages: 384. [RKN: 72888] [Faculty: 658.8 BLU] Abstract: "The financial crisis illustrated the importance of effectively communicating model outcomes and ensuring that the variation in results is clearly understood by decision makers. The crisis also showed that more modelling and more analysis are superior to only one model. This accessible, self-contained book recommends using a variety of models to shed light on different aspects of the true nature of a credit risk problem, thereby allowing the problem to be viewed from different angles." (Publisher's blurb) Derivatives Working Party of the Faculty & Institute of Actuaries. - The credit spread "puzzle". Extract from “Credit Derivatives”, Prepared by the Derivatives Working Party of the Faculty & Institute of Actuaries and presented to the Faculty of Actuaries, January 2007. - Institute of Actuaries and Faculty of Actuaries, 2007. - (Finance, Investment and Risk Management Conference 2007 Seminar, 17-19 June 2007, Conrad Hilton Hotel, Dublin). [RKN: 72830] URL: http://www.actuaries.org.uk/research-and-resources/documents/extract-creditderivatives-prepared-derivatives-working-party-facul Fulcher, Paul. - The credit spread "puzzle" [copies of slides only] - Institute of Actuaries and Faculty of Actuaries, 2007. - (Finance, Investment and Risk Management Conference 2007 Seminar, 17-19 June 2007, Conrad Hilton Hotel, Dublin). [RKN: 72831] URL: http://www.actuaries.org.uk/research-and-resources/documents/credit-spread-puzzleliquidity-premium-and-implications-annuity-bus Wagner, Niklas. - Credit risk: models, derivatives and management. - United States: - Chapman & Hall/CRC, 2008. - No. pages: 574. [RKN: 69517] [Faculty: 519.287 CRE]
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Risk Management Reading List September 2010
Crime Global Risk Network; World Economic Forum; Citigroup; Marsh & McLennan Companies; Swiss Re; Wharton School Risk Center; Zurich Financial Services. - Global Risks 2008 : A Global Risk Network Report. - Geneva: - World Economic Forum, 2008. - No. pages: 54. [RKN: 69132] Shelved at: online only [Faculty: online only] URL: http://www.weforum.org/pdf/globalrisk/report2008.pdf Contents: Introduction - 4 Focus on Emerging Issues in Global Risk - 6 Assessing Global Risks in 2008 - 20 Networked World, Networked Risks - 25 Financial Markets, Risk Transfer and Risk Mitigation - 30 Structuring Mitigation at the State and International Level: Taking the Country Risk Officer Forward Appendix 1: Taxonomy of Global Risk: Trends, Issues of Concern, Risks - 41 Appendix 2: Risk Assessments - 45
Data protection Gatzlaff, Kevin M; McCullough, Kathleen A. - The Effect of Data Breaches on Shareholder Wealth. - No. pages: 12. [RKN: 72289] [Faculty: RIS/MAN] Risk Management and Insurance Review (2010) 13 (1) : 61-83. Abstract: Many companies face the risk of a data breach exposing stored personal information of customers and employees. The frequency of such incidents has been increasing over time and can result in significant costs for the affected firm. This article examines the stock market's assessment of the cost of data breaches at publicly traded companies in which personal information such as customer and/or employee data are exposed. Using event study methodology on a sample of 77 events between the beginning of 2004 and the end of 2006, we find that the overall effect of a data breach on shareholder wealth is negative and statistically significant. Based on a cross-sectional analysis of the cumulative abnormal returns, we find a negative association between market reaction and firms that are less forthcoming about the details of the breach. We also find that firms with higher market-to-book ratios experience greater negative abnormal returns associated with a data breach. Further, we find that firm size and subsidiary status mitigate the negative effect of a data breach on the firm's stock price and that the negative market reaction to a data breach is more significant in the most recent time periods of the sample.
Decision making Rebonato, Riccardo. - The plight of the fortune tellers: why we need to manage financial risk differently. - Woodstock: - Princeton University Press, 2007. - No. pages: 272. [RKN: 38839] Shelved at: EE/JNH (Oxf) Abstract: Today's top financial-risk professionals have come to rely on ever-more sophisticated mathematics in their attempts to come to grips with financial risk. But this excessive reliance on quantitative precision is misleading - and it puts us all at risk. This is the case that Riccardo Rebonato makes in Plight of the Fortune Tellers - and coming from someone who is both an experienced market professional and an academic, this heresy is worth listening to. Rebonato forcefully argues that we must restore genuine decision making to our financial planning, and he shows us how to do it using probability, experimental psychology, and decision theory. This is the only way to effectively manage financial risk in a manner congruent with how human beings actually react to chance. Rebonato challenges us to rethink the standard wisdom about probability in financial-risk management. Risk managers have become obsessed with measuring risk and believe that these quantitative results by themselves can guide sound financial choices - but they can't. In this book, Rebonato offers a radical yet surprisingly commonsense solution, one that 34
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Risk Management Reading List September 2010
seeks to remind us that managing risk comes down to real people making decisions under uncertainty. Plight of the Fortune Tellers is not only a book for the decision makers of Wall Street, it's a must-read for anyone concerned about how today's financial markets are run. The stakes have never been higher - can you risk it?
Defined benefit schemes Sweeting, P J. - Longevity Indices and Pension Fund Risk. - London: - The Pensions Institute, 2010. - (Discussion Paper PI-1004). - No. pages: 19. [RKN: 72236] URL: http://www.pensions-institute.org/workingpapers/WP1004.pdf Abstract: Pension fund longevity risk is becoming increasingly important. Longevity indices would allow the creation of liquid derivatives that could be used to hedge this risk. However, there are a number of criteria that such indices would need to fulfil to provide an optimal solution, as well as a number of forms that the derivatives could take. These features are discussed, together with the characteristics of some existing longevity indices. Whelan, S F. - Defining and measuring investment risk in defined benefit pension funds. [RKN: 38310] Shelved at: Per: AAS (Oxf); Per: AAS (Lon) [Faculty: JOU/AAS] Annals of Actuarial Science (2007) 2(1) : 51-66. URL: http://www.actuaries.org.uk/research-and-resources/pages/access-journals Abstract: A formal definition of investment risk in actuarial investigations is given. Case studies estimating the investment risk associated with different investment strategies for defined benefit pension funds using historic market data are presented. It is shown that a few decades ago, when bond markets only extended in depth to 20-year maturities, the investment risk of investing in equities was of the same order of magnitude as the investment risk introduced by the duration mismatch from investing in bonds for immature schemes. It is shown that now, with the extension of the term of bond markets and introduction of strippable bonds, the least risk portfolio for the same pension liability is a bond portfolio of suitable duration. It is argued that investment risk voluntarily undertaken in defined benefit pension plans has grown markedly in recent decades, at a time when the ability to bear the investment risk has diminished. Investment risk in pension funds is quite different to investment risk for other investors, which leads to the possibility that current portfolios are not optimised — that is, there exist portfolios which increase the expected surplus without increasing risk. The formalising of our intuitive concept of investment risk in actuarial applications is a first step in the identification of more efficient portfolios. Keywords: Investment Risk; Defined Benefit Pension Funds; Investment Strategies; Risk in Actuarial Applications
Derivatives Bauer, Daniel; Börger, Matthias; Ruß, Jochen. - On the pricing of longevity-linked securities. - No. pages: 11. [RKN: 72436] Shelved at: Per: IME (Oxf) Insurance: Mathematics & Economics (2010) 46 (1) : 139-149. Abstract: For annuity providers, longevity risk, i.e. the risk that future mortality trends differ from those anticipated, constitutes an important risk factor. In order to manage this risk, new financial products, so-called longevity derivatives, may be needed, even though a first attempt to issue a longevity bond in 2004 was not successful. While different methods of how to price such securities have been proposed in recent literature, no consensus has been reached. This paper reviews, compares and comments on these different approaches. In particular, we use data from the United Kingdom to derive prices for the proposed first longevity bond and an alternative security design based on the different methods. Keywords: Longevity risk; Stochastic mortality; Longevity derivatives Bluhm, Christian; Overbeck, Ludger; Wagner, Christop. - Introduction to credit risk modeling. 35
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Risk Management Reading List September 2010
2nd ed ed. - London: - CRC Press, 2010. - (CRC Financial Mathematics Series). - No. pages: 384. [RKN: 72888] [Faculty: 658.8 BLU] Abstract: "The financial crisis illustrated the importance of effectively communicating model outcomes and ensuring that the variation in results is clearly understood by decision makers. The crisis also showed that more modelling and more analysis are superior to only one model. This accessible, self-contained book recommends using a variety of models to shed light on different aspects of the true nature of a credit risk problem, thereby allowing the problem to be viewed from different angles." (Publisher's blurb) Cox, Samuel H; Lin, Yijia; Pedersen, Hal. - Mortality risk modeling : Applications to insurance securitization. - No. pages: 12. [RKN: 72445] Shelved at: Per: IME (Oxf) Insurance: Mathematics & Economics (2010) 46 (1) : 242-253. Abstract: This paper proposes a stochastic mortality model featuring both permanent longevity jump and temporary mortality jump processes. A trend reduction component describes unexpected mortality improvement over an extended period of time. The model also captures the uneven effect of mortality events on different ages and the correlations among them. The model will be useful in analyzing future mortality dependent cash flows of life insurance portfolios, annuity portfolios, and portfolios of mortality derivatives. We show how to apply the model to analyze and price a longevity security. Derivatives Working Party of the Faculty & Institute of Actuaries. - The credit spread "puzzle". Extract from “Credit Derivatives”, Prepared by the Derivatives Working Party of the Faculty & Institute of Actuaries and presented to the Faculty of Actuaries, January 2007. - Institute of Actuaries and Faculty of Actuaries, 2007. - (Finance, Investment and Risk Management Conference 2007 Seminar, 17-19 June 2007, Conrad Hilton Hotel, Dublin). [RKN: 72830] URL: http://www.actuaries.org.uk/research-and-resources/documents/extract-creditderivatives-prepared-derivatives-working-party-facul
Diffusion processes Xin, Zhang; Siu, Tak Kuen. - Optimal investment and reinsurance of an insurer with model uncertainty. - No. pages: 8. [RKN: 72375] Shelved at: Per: IME (Oxf) Insurance: Mathematics & Economics (2009) 45 (1) : 81-88. Abstract: We introduce a novel approach to optimal investment–reinsurance problems of an insurance company facing model uncertainty via a game theoretic approach. The insurance company invests in a capital market index whose dynamics follow a geometric Brownian motion. The risk process of the company is governed by either a compound Poisson process or its diffusion approximation. The company can also transfer a certain proportion of the insurance risk to a reinsurance company by purchasing reinsurance. The optimal investment–reinsurance problems with model uncertainty are formulated as two-player, zero-sum, stochastic differential games between the insurance company and the market. We provide verification theorems for the Hamilton–Jacobi–Bellman–Isaacs (HJBI) solutions to the optimal investment–reinsurance problems and derive closed-form solutions to the problems. Keywords: Optimal investment; Proportional reinsurance; Model uncertainty; Stochastic differential game; Exponential utility; Penalty of ruin; HJBI equations
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Risk Management Reading List September 2010
Distribution theory Cox, S; Lin, Y; Tian, R; Zuluaga, L. - Bounds for Ruin Probabilities and Value at Risk. 2008. [RKN: 38562] Shelved at: Online only [Faculty: Online only] Actuarial Research Clearing House (ARCH) (2008) 1 URL: http://www.soa.org/news-and-publications/publications/proceedings/arch/arch-2008iss1.aspx Abstract: In many situations, complete information about a rare event is not available, meaning the underlying probability distribution is not completely specified. This paper finds the best one can do when the incomplete information consists of estimates of the first two moments of the distribution. These are called semiparametric lower and upper bounds. We consider value-at-risk (VaR) in the sense that we find bounds on probability of portfolio return less than some small value, given only the first two moments of the portfolio components. We also apply semiparametric bounds to a rare event hitting an insurer for which losses are extraordinary high and investment income is low. We refer to this as “ruin” although the company may survive; it is just a convenient way to describe a rare event that would threaten a company’s solvency. In addition, we calculate bounds on insurance stoploss payments. The payoff of a call or put option can be considered as a special case or a transform of the stop-loss payment. In order to numerically solve the semiparametric bounds considered here, we reformulate the corresponding semiparametric bound problem as a sum of squares (SOS) program. A SOS program is an optimization problem where the variables are coefficients of polynomials, the objective is a linear combination of the variable coefficients, and the constraints are given the polynomials being SOS. This form of reformulation allows us to use one of several readily available SOS programming solvers to solve the moment problem. For the stop-loss bound problem, Cox (1991)’s method is also investigated to confirm our SOS program solutions. Our numerical examples have shown that our technique works reasonably well. Furman, Edward; Landsman, Zinoviy. - Multivariate Tweedie distributions and some related capital-at-risk analyses. - No. pages: 11. [RKN: 72456] Shelved at: Per: IME (Oxf) Insurance: Mathematics & Economics (2010) 46 (2) : 351-361. Abstract: We study a multivariate extension of the univariate exponential dispersion Tweedie family of distributions. The class, referred to as the multivariate Tweedie family (MTwF), on the one hand includes multivariate Poisson, gamma, inverse Gaussian, stable and compound Poisson distributions and on the other hand introduces a high variety of new dependent probabilistic models unstudied so far. We investigate various properties of MTwF and discuss its possible applications to financial risk management. Keywords: Exponential dispersion models; Multivariate Tweedie family; Cauchy’s functional equations; Risk capital allocations; The tail conditional expectation risk measure Hao, X; Tang, Q. - Subexponential Tail of Discounted Aggregate Claims. 2008. [RKN: 38568] Shelved at: Online only [Faculty: Online only] Actuarial Research Clearing House (ARCH) (2008) 1 URL: http://www.soa.org/news-and-publications/publications/proceedings/arch/arch-2008iss1.aspx Abstract: In this paper we study the tail probability of discounted aggregate claims in a continuoustime renewal model. For the case that the common claim-size distribution is subexponential, we obtain an asymptotic formula, which holds uniformly for all time horizons within a finite interval. Then, with some additional mild assumptions on the distributions of the claim sizes and interarrival times, we further prove that this formula holds uniformly for all time horizons. In this way, we significantly extend a recent result of Tang (2007, J. Appl. Probab. 44, 285{294). Keywords: Asymptotics; Poisson process; renewal process; subexponential distribution; uniformity.
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Risk Management Reading List September 2010
Mera, A. - Analysis of a Threshold Strategy in the Discrete–time Sparre Andersen Model. 2008. [RKN: 38561] Shelved at: Online only [Faculty: Online only] Actuarial Research Clearing House (ARCH) (2008) 1 URL: http://www.soa.org/news-and-publications/publications/proceedings/arch/arch-2008iss1.aspx Abstract: In this thesis, it is shown that the application of a threshold on the surplus level of a particular discrete-time delayed Sparre Andersen insurance risk model results in a process that can be analyzed as a doubly infinite Markov chain with finite blocks. Two fundamental cases, encompassing all possible values of the surplus level at the time of the first claim, are explored in detail. Matrix analytic methods are employed to establish a computational algorithm for each case. The resulting procedures are then used to calculate the probability distributions associated with fundamental ruin-related quantities of interest, such as the time of ruin, the surplus immediately prior to ruin, and the deficit at ruin. The ordinary Sparre Andersen model, an important special case of the general model, with varying threshold levels is considered in a numerical illustration. Powers, Michael R. - Using aumann-shapley values to allocate insurance risk: the case of inhomogeneous losses. - No. pages: 15. [RKN: 68936] Shelved at: Per: NAAJ (Oxf); Per NAAJ (Lon) [Faculty: NOR/AME] North American Actuarial Journal (2007) 11 (3) : 113-127. URL: http://www.soa.org/news-and-publications/publications/journals/naaj/naaj-detail.aspx Abstract: The problem of allocating responsibility for risk among members of a portfolio arises in a variety of financial and risk-management contexts. Examples are particularly prominent in the insurance sector, where actuaries have long sought methods for distributing capital (net worth) across a number of distinct exposure units or accounts according to their relative contributions to the total ‘‘risk’’ of an insurer’s portfolio. Although substantial work has been done on this problem, no satisfactory solution has yet been presented for the case of inhomogeneous loss distributions— that is, losses X (x) FX such that FXt(x) FtX(x) for some t 0. The purpose of this article is to show that the value-assignment method of nonatomic cooperative games proposed in 1974 by Aumann and Shapley may be used to solve risk-allocation problems involving losses of this type. This technique is illustrated by providing analytical solutions for a useful class of multivariatenormal loss distributions.
Diversification Degen, Matthias; Lambrigger, Dominik D; Segers, Johan. - Risk concentration and diversification : Second-order properties. - No. pages: 6. [RKN: 72522] Shelved at: Per: IME (Oxf) Insurance: Mathematics & Economics (2010) 46 (3) : 541-546. Abstract: The quantification of diversification benefits due to risk aggregation plays a prominent role in the (regulatory) capital management of large firms within the financial industry. However, the complexity of today's risk landscape makes a quantifiable reduction of risk concentration a challenging task. In the present paper we discuss some of the issues that may arise. The theory of second-order regular variation and second-order subexponentiality provides the ideal methodological framework to derive second-order approximations for the risk concentration and the diversification benefit. Keywords: Diversification ; Second-order regular variation ; Second-order subexponentiality ; Subadditivity ; Value-at-Risk Zhou, Chen. - Dependence structure of risk factors and diversification effects. - No. pages: 10. [RKN: 72521] Shelved at: Per: IME (Oxf) Insurance: Mathematics & Economics (2010) 46 (3) : 531-540. Abstract: In this paper, we study the aggregated risk from dependent risk factors under the multivariate Extreme Value Theory (EVT) framework. We consider the heavy-tailedness of the risk factors as well as the non-parametric tail dependence structure. This allows a large range of 38
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Risk Management Reading List September 2010
models on the dependence. We assess the Value-at-Risk of a diversified portfolio constructed from dependent risk factors. Moreover, we examine the diversification effects under this setup. Keywords: Aggregated risk ; Diversification effect ; Multivariate extreme value theory
Dividends Avanzi, Benjamin. - Strategies for dividend distribution: a review. - No. pages: 35. [RKN: 69806] Shelved at: Per: NAAJ (Oxf); Per NAAJ (Lon) [Faculty: NOR/AME] North American Actuarial Journal (2009) 13 (2) : 217-251. URL: http://www.soa.org/news-and-publications/publications/journals/naaj/naaj-detail.aspx Abstract: In today's world of financial uncertainty, one major public concern is to assess (and possibly improve) the stability of companies that take on risks. Actuaries have been aware of that issue for a very long time and have a great experience in modelling the activity of a risk business. During the first part of the twentieth century, they focused on the probability of ruin to assess the stability of their company. In his seminal paper of 1957 Bruni de Finetti criticized this approach and laid the foundations of what would become an increasingly popular topic: the study of dividend strategies. The contributions made by actuaries in that field constitute a substantial body of knowledge, whose interest is relevant not only to insurance but also to a much broader range of areas of practice. In this paper we aim at a taxonomical synthesis of the 50 years of actuarial research that followed de Finetti's original paper. Frostig, Esther. - Asymptotic analysis of a risk process with high dividend barrier. [RKN: 39544] Shelved at: Per: IME (Oxf) Insurance: Mathematics & Economics (2010) 47 (1) : 21-26. Abstract: In this paper we study a risk model with constant high dividend barrier. We apply Keilson’s (1966) results to the asymptotic distribution of the time until occurrence of a rare event in a regenerative process, and then results of the cycle maxima for random walk to obtain the asymptotic distribution of the time to ruin and the amount of dividends paid until ruin. Gerber, Hans U; Shiu, Elias S W; Yang, Hailiang. - An elementary approach to discrete models of dividend strategies. - No. pages: 8. [RKN: 72432] Shelved at: Per: IME (Oxf) Insurance: Mathematics & Economics (2010) 46 (1) : 109-116. Abstract: The paper studies a discrete counterpart of Gerber et al. (2006). The surplus of an insurance company (before dividends) is modelled as a time-homogeneous Markov chain with possible changes of size +1,0,-1,-2,-3,…. If a barrier strategy is applied for paying dividends, it is shown that the dividends-penalty identity holds. The identity expresses the expected present value of a penalty at ruin in terms of the expected discounted dividends until ruin and the expected present value of the penalty at ruin if no dividends are paid. For the problem of maximizing the difference between the expected discounted dividends until ruin and the expected present value of the penalty at ruin, barrier strategies play a prominent role. In some cases an optimal dividend barrier exists. The paper discusses in detail the special case where the distribution of the change in surplus does not depend on the current surplus (so that in the absence of dividends the surplus process has independent increments). A closed-form result for zero initial surplus is given, and it is shown how the relevant quantities can be calculated recursively. Finally, it is shown how optimal dividend strategies can be determined; typically, they are band strategies. Keywords: Optimal dividends; Penalty at ruin; Dividends-penalty identity; Band strategy; Lundberg equation
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Risk Management Reading List September 2010
Loeffen, Ronnie L; Renaud, Jean-François. - De Finetti’s optimal dividends problem with an affine penalty function at ruin. - No. pages: 11. [RKN: 72431] Shelved at: Per: IME (Oxf) Insurance: Mathematics & Economics (2010) 46 (1) : 98-108. Abstract: In a Lévy insurance risk model, under the assumption that the tail of the Lévy measure is log-convex, we show that either a horizontal barrier strategy or the take-the-money-and-run strategy maximizes, among all admissible strategies, the dividend payments subject to an affine penalty function at ruin. As a key step for the proof, we prove that, under the aforementioned condition on the jump measure, the scale function of the spectrally negative Lévy process has a log-convex derivative. Keywords: Insurance risk theory; Optimal dividends; Deficit at ruin; Gerber–Shiu functions; Lévy processes; Stochastic control; Log-convexity Ren, Jiandong; Li, Shuanming. - The analysis of perturbed risk processes with Markovian arrivals. - Victoria: - University of Melbourne, 2009. - (Centre for Actuarial Studies, University of Melbourne, Research Paper no. 187). - No. pages: 18. [RKN: 72116] URL: http://mercury.ecom.unimelb.edu.au/SITE/actwww/wps2009/187.pdf Abstract: In this paper, we study the perturbed risk processes with Markovian arrivals. We present explicit formulas for the Laplace transform of the time to cross a certain level before ruin, the Laplace transform of the time of recovery and the distribution of the maximum severity of ruin, as well as the expected discounted dividends and the distribution of the total dividends prior to ruin for the risk model in the presence of a constant dividend barrier. Keywords: Perturbed risk processes; Markovian arrival processes; First passage times; Time of recovery; Maximum severity of ruin; Dividend barrier
Dynamic modelling Mundt, André. - Dynamic risk measures under model uncertainty. [RKN: 43363] Shelved at: Per: Blätter (Lon); online only Blätter der Deutsche Gesellschaft für Versicherungs- und Finanzmathematik (2008) 29 (heft 2) : 267-293. URL: http://www.springerlink.com/content/1864-0303/
Economic conditions Dix, Roger. - Opening new doors. [RKN: 38659] Shelved at: Per: Actuary (Oxf); Per: Actuary (Lon) The Actuary (2008) October : 37. URL: http://www.the-actuary.org.uk Abstract: Article that examines the opportunities available to actuaries within enterprise risk management in light of the changing economic climate. Nier, Erlend; Yang, Jing; Yorulmazer, Tanju; Alentorn, Amadeo. - Network models and financial stability. - Bank of England, 2008. - (Bank of England Working Paper no. 346). - No. pages: 29. [RKN: 69889] Shelved at: Online only [Faculty: Online only] URL: http://www.bankofengland.co.uk/publications/workingpapers/index.htm Abstract: Systemic risk is a key concern for central banks charged with safeguarding overall financial stability. In this paper we investigate how systemic risk is affected by the structure of the financial system. We construct banking systems that are composed of a number of banks that are connected by interbank linkages. We then vary the key parameters that define the structure of the financial system - including its level of capitalisation, the degree to which banks are connected, the size of interbank exposures and the degree of concentration of the system - and analyse the influence of these parameters on the likelihood of contagious (knock-on) defaults. First, we find that the better capitalised banks are, the more resilient is the banking system against contagious defaults and this effect is non-linear. Second, the effect of the degree of connectivity is non40
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Risk Management Reading List September 2010
monotonic, that is, initially a small increase in connectivity increases the contagion effect; but after a certain threshold value, connectivity improves the ability of a banking system to absorb shocks. Third, the size of interbank liabilities tends to increase the risk of knock-on default, even if banks hold capital against such exposures. Fourth, more concentrated banking systems are shown to be prone to larger systemic risk, all else equal. In an extension to the main analysis we study how liquidity effects interact with banking structure to produce a greater chance of systemic breakdown. We finally consider how the risk of contagion might depend on the degree of asymmetry (tiering) inherent in the structure of the banking system. A number of our results have important implications for public policy, which this paper also draws out.
Economic projections Global Risk Network; World Economic Forum; Citigroup; Marsh & McLennan Companies; Swiss Re; Wharton School Risk Center; Zurich Financial Services. - Global Risks 2008 : A Global Risk Network Report. - Geneva: - World Economic Forum, 2008. - No. pages: 54. [RKN: 69132] Shelved at: online only [Faculty: online only] URL: http://www.weforum.org/pdf/globalrisk/report2008.pdf Contents: Introduction - 4 Focus on Emerging Issues in Global Risk - 6 Assessing Global Risks in 2008 - 20 Networked World, Networked Risks - 25 Financial Markets, Risk Transfer and Risk Mitigation - 30 Structuring Mitigation at the State and International Level: Taking the Country Risk Officer Forward Appendix 1: Taxonomy of Global Risk: Trends, Issues of Concern, Risks - 41 Appendix 2: Risk Assessments - 45
Endowments Pepper, Anthony. - Mortgage endowments: a FOS risk? - Staple Inn Actuarial Society, [RKN: 71757] Shelved at: Online only [Faculty: Online only] The Actuary (2009) December URL: http://www.the-actuary.org.uk/871265 Abstract: Anthony Pepper questions the appropriateness of the Financial Ombudsman Service risk assessment
England Sherris, Michael; Njenga, Carolyn. - Longevity Risk and the Econometric Analysis of Mortality Trends and Volatility. - UNSW Australian School of Business Research, 2009. - (UNSW Australian School of Business Research Paper No. 2009ACTL08). [RKN: 71634] URL: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1458084 Abstract: Longevity risk and the modelling of trends and volatility for mortality improvement has attracted increased attention driven by ageing populations around the world and the expected financial implications. The original Lee-Carter model that was used for longevity risk assessment included a single improvement factor with differential impacts by age. Financial models that allow for risk pricing and risk management have attracted increasing attention along with multiple factor models. This paper investigates trends, including common trends through co-integration, and the factors driving the volatility of mortality using principal components analysis for a number of developed countries including Australia, England, Japan, Norway and USA. The results demonstrate the need for multiple factors for modelling mortality rates across all these countries. The basic structure of the Lee-Carter model can not adequately model the random variation and the full risk structure of mortality changes. Trends by country are found to be stochastic. Common trends and co-integrating relationships are found across ages highlighting the benefits from 41
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Risk Management Reading List September 2010
modelling mortality rates as a system in a Vector-Autoregressive (VAR) model and capturing long run equilibrium relationships in a Vector Error-Correction Model (VECM) framework. Keywords: longevity risk, unit roots, VAR, VECM
Enterprise risk management Enterprise risk management. Seminar, 3 July 2006. 2007. [RKN: 37908] Shelved at: Online only [Faculty: Online only] Contents: A US perspective on Enterprise Risk Management, by Godfrey Perrott and Marc Slutzky -- Enterprise risk management, by Rob Jones -- Risk geographies. Understanding risk in ndimensions, by Richard Baddon and Paul Coulthard -- ERM - doing it for real, by Colin Forrest -RAMP - Analysis and Management for Projects, by Chris Lewin -- Making strategic risk management work, by Neil Allan and Neil Cantle -- Tying it all together, by Stuart Robinson Raising the profile of ERM : Student page. [RKN: 38973] Shelved at: Per: Actuary (Oxf); Per: Actuary (Lon) The Actuary (2009) March : 46. URL: http://www.the-actuary.org.uk Abstract: Jen and Jean invite Lindsay Smitherman to report on the new specialist technical subject - CT9 - first sitting in April 2010. Acharyya, Madhusudan. - The fundamentals of designing an integrated model of financial risk and operational risk within an Enterprise Risk Management framework : findings of an empirical study. - CAS, 2007. - (CAS ERM Symposium 2007). [RKN: 38236] Shelved at: online only [Faculty: online only] URL: http://www.ermsymposium.org/2007/pdf/papers/Acharyya.pdf Abstract: The objective of this article is to identify and explore the fundamental issues necessary to design an integrated model of financial risk (hereinafter referred as “FR”) and OR (hereinafter referred as OR”) within the framework of Enterprise Risk Management (hereinafter referred as “ERM”) for the insurance industry. The objective was achieved by conducting an exploratory study on four major European insurers in connection with their ERM practice. The result suggests that quantification of OR is itself complex and the aim to integrate OR with FR for diversification purpose is theoretically problematic given their nature in the insurance business. However, a balance between the quantitative and qualitative approaches towards the management OR could best serve the purpose. Keywords: Enterprise Risk Management, Strategic Risk Management; Operational Risk Management; Financial Risk Management; Risk Culture; Regulations; Interdisciplinary. Beasley, Mark; Pagach, Don; Warr, Richard. - Information Conveyed in Hiring Announcements of Senior Executives Overseeing Enterprise-Wide Risk Management Processes. - CAS, 2007. (CAS ERM symposium, 2007). [RKN: 38237] Shelved at: online only [Faculty: online only] URL: http://www.ermsymposium.org/2007/pdf/papers/Pagach.pdf Abstract: Enterprise risk management (ERM) is the process of analyzing the portfolio of risks facing the enterprise to ensure that the combined effect of such risks is within an acceptable tolerance. While ERM adoption is on the rise, little academic research exists about the costs and benefits of ERM. Proponents of ERM claim that ERM is designed to enhance shareholder value; however, portfolio theory suggests that costly ERM implementation would be unwelcome by shareholders who can use less costly diversification to eliminate idiosyncratic risk. This study examines equity market reactions to announcements of appointments of senior executive officers overseeing the enterprise’s risk management processes. Based on a sample of 120 announcements from 1992-2003, we find that the univariate average two-day market response is not significant, suggesting that a broad definitive statement about the benefit or cost of implementing ERM is not possible. However, our multivariate analysis reveals that market responses to such appointments are significantly positively associated with a firm’s size and prior earnings volatility, and negatively associated with the amount of cash on hand relative to liabilities 42
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Risk Management Reading List September 2010
and leverage on the balance sheet. These results are confined to non-financial firms, possibly be due to the regulatory requirements for enterprise risk management that already exist for financial firms. We conclude that the costs and benefits of ERM are firm-specific. Subject Areas: Enterprise risk management, chief risk officers (CROs), value creation Bodoff, Neil M. - Capital Allocation by Percentile Layer. 2007. - (CAS ERM Symposium, 2007). [RKN: 38238] Shelved at: online only [Faculty: online only] URL: http://www.ermsymposium.org/2007/pdf/papers/Bodoff.pdf Abstract: Motivation. Capital allocation can have substantial ramifications upon measuring risk adjusted profitability as well as setting risk loads for pricing. Current allocation methods that emphasize the tail allocate too much capital to extreme events; “capital consumption” methods, which incorporate relative likelihood, tend to allocate insufficient capital to highly unlikely yet extremely severe losses. Method. In this paper I develop a new formulation of the meaning of holding capital equal to the Value at Risk. The new formulation views the total capital of the firm as the sum of many percentile layers of capital. Thus capital allocation varies continuously by layer and the capital allocated to any particular loss scenario is the sum of allocated capital across many percentile layers. Results. Capital Allocation by Percentile Layer produces capital allocations that differ significantly from other common methods such as VaR, TVaR, and coTVaR. Conclusions. Capital Allocation by Percentile Layer has important advantages over existing methods. It highlights a new formulation of Value at Risk and other capital standards, recognizes the capital usage of losses that do not extend into the tail, and captures the disproportionate capital usage of severe losses. Keywords. Capital Allocation; Percentile Layer of Capital; Value at Risk; Enterprise Risk Management; Risk Load; Risk Adjusted Profitability Bowser, Marcus; Tuley, James. - Useful tool or expensive toy? [RKN: 38963] Shelved at: Per: Actuary (Oxf); Per: Actuary (Lon) The Actuary (2009) March : 28-29. URL: http://www.the-actuary.org.uk Abstract: Marcus Bowser and James Tuley discuss the usefulness of replicating portfolios in risk management. Centre for the Study of Financial Innovation; PricewaterhouseCoopers. - Insurance Banana Skins 2009 : The CSFI survey of the risks facing insurers. - Centre for the Study of Financial Innovation (CSFI), 2009. [RKN: 71821] URL: http://www.pwc.com/en_GX/gx/insurance/assets/insurance_banana_skins_2009.pdf Abstract: Surveys the risks facing the insurance industry at a time of great stress in the financial sector, and identifies those that are seen as most pressing by insurance practitioners and close observers of the insurance scene. In keeping with the current volatile financial environment, investment performance, equity markets and capital availability now head the list of insurance Banana Skins. Macro-economic trends are ranked fourth. Concerns over counterparty exposures, reinsurance security and broader systemic and solvency risks have also come to the fore. Chaplin, Mark; Leung, Vanessa. - Does your ERM sing and dance? [RKN: 39197] Shelved at: online only [Faculty: online only] The Actuary (2009) June : 28. URL: http://www.the-actuary.org.uk Abstract: Article highlighting the moves that will make your Enterprise Risk Management (ERM) framework more dynamic. Chew, Donald H. - Corporate risk management: theory and practice. - New York: - Columbia University Press, 2007. - No. pages: 480. [RKN: 69356] Shelved at: UHG/AZM (Oxf) [Faculty: 368.01 CHE LOST] Abstract: More than 30 leading scholars and finance practitioners discuss the theory and practice 43
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Risk Management Reading List September 2010
of using enterprise-risk management (ERM) to increase corporate values. ERM is the corporatewide effort to manage the right-hand side of the balance sheet - a firm's total liability structure - in ways that enable management to make the most of the firm's assets. While typically working to stabilize cash flows, the primary aim of a well-designed risk management program is not to smooth corporate earnings, but to limit the possibility that surprise outcomes can threaten a company's ability to fund its major investments and carry out its strategic plan. Contributors summarize the development and use of risk management products and their practical applications. Case studies involve Merck, British Petroleum, the American airline industry, and United Grain Growers, and the conclusion addresses a variety of topics that include the pricing and use of certain derivative securities, hybrid debt, and catastrophe bonds. All the articles that comprise this book were first published in the "Journal of Applied Corporate Finance". Morgan Stanley's ownership of the journal is a reflection of its commitment to identifying outstanding academic research and promoting its application in the practicing corporate and investment communities. Deighton, S P; Dix, Roger C; Graham, J R; Skinner, J M E. - Governance and risk management in United Kingdom insurance companies. - London: - The Actuarial Profession. Institute of Actuaries and Faculty of Actuaries, 2009. - No. pages: 54. [RKN: 38980] Shelved at: ifp 03/09; BXP/511 pam (Oxf) [Faculty: JOU/INS] URL: http://www.actuaries.org.uk/research-and-resources/documents/governance-and-riskmanagement-uk-insurance-companies Abstract: For some while there has been a growing awareness from both internal and external stakeholders that the governance and risk management in United Kingdom insurance companies needed to be enhanced. The proposed European Union Solvency II Directive makes this very explicit and the current economic turmoil has put a much stronger emphasis on the whole process: it is being seen as the right thing to do, rather than simply a regulatory requirement. In this paper, the authors set out the background to and recent history of governance for UK insurance companies, and consider how enterprise risk management can bring together the various control frameworks needed to support that governance. Whilst no two companies are the same, and hence the solutions to these issues will vary, there are several common themes linked to successful implementation. Similarly, various barriers to success are identified, together with solutions to resolve them. Dix, Roger. - Opening new doors. [RKN: 38659] Shelved at: Per: Actuary (Oxf); Per: Actuary (Lon) The Actuary (2008) October : 37. URL: http://www.the-actuary.org.uk Abstract: Article that examines the opportunities available to actuaries within enterprise risk management in light of the changing economic climate. Godhole, Deepak. - From silo based to integrated risk management - enterprise risk management. [RKN: 39307] Shelved at: Per: Bimaquest (Oxf) Bimaquest (2009) 9 (2) : 1-20. Abstract: ERM is essentially a process effected by an entity's board of directors, top management and applied in strategy setting across the enterprise, designed to identify potential events that may affect the entity, manage those risk which are within its risk appetite, transfer the rest and provide reasonable assurance regarding achievement of the overall corporate objectives. The successful implementation or ERP in an organization depends on culture, intellectual capital, skills/talent, data availability, IT processes and top management involvement, support and commitment. Implementation of ERM has made a great deal of progress and shareholders have benefited. Gorvett, Rick; Nambiar, Vijendra. - Setting Up the Enterprise Risk Management Office : CAS ERM Symposium. 2007. - (CAS ERM Symposium). - No. pages: 11. [RKN: 38242] Shelved at: online only [Faculty: online only] URL: http://www.ermsymposium.org/2006/pdf/papers/Gorvett%20and%20Nambiar%20paper.pdf 44
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Risk Management Reading List September 2010
Abstract: In this paper, the concept of an Enterprise Risk Management Office (ERMO) is examined. The ERMO concept is investigated relative to another recent enterprise-wide entity that has evolved in many corporations and public institutions: the Project Management Office (PMO). The PMO is analyzed for any guidance it can provide regarding the implementation and benefits of a potential enterprise-wide and holistic approach to risk management. Guidelines and best practices for an ERMO are suggested. Hitchcox, A N; Klumpes, P J M; McGaughey, K W; Smith, A D; Taverner, N H. - ERM for insurance companies - Adding the investor's point of view. - London: - Institute of Actuaries, 2010. - No. pages: 48. [RKN: 72028] Shelved at: ifp 01/10 (Oxf); ifp 01/10 (Lon) [Faculty: JOU/INS] URL: http://www.actuaries.org.uk/research-and-resources/documents/erm-insurancecompanies-adding-investors-point-view Abstract: A major outcome of ERM activities in insurance companies has been the bringing together of all of the key risks in the company, to be managed together in a holistic fashion. The authors of this paper believe that an ERM framework also needs to look beyond the company, and have regard to the risk management needs of investors, from the point of view of the contribution of the insurance company to the overall risk and reward of their total investment portfolios. To meet these needs, the ERM framework needs to provide sufficient information on topics such as systematic risk, potential correlations of earnings from future new business with macroeconomic trends, other risks to franchise value, and sources of model risk within the company. The paper does not provide solutions for the issues described above; but limits itself to describing and discussing the direction for some important new initiatives in ERM activities. Keywords: Risk Management; Enterprise Risk Management (ERM); Systematic Risk; Franchise Value; Buffer Capital; Cost of Capital; Replicating Portfolio; Parameter Risk; Model Risk; Agency Risk; Risk Governance; Risk Disclosure. Hoyt, Robert E; Powell, Lawrence S; Sommer, David W. - Computing value at risk: a simulation assignment to illustrate the value of enterprise risk management. [RKN: 69057] [Faculty: RIS/MAN] Risk Management and Insurance Review (2007) 10 (2) : 299-307. Hunter-Yeats, Caroline; MacKenna, Ed. - Risky business. [RKN: 38970] Shelved at: Per: Actuary (Oxf); Per: Actuary (Lon) The Actuary (2009) March : 40-41. URL: http://www.the-actuary.org.uk Abstract: Article that looks at the potential impact of the FRC's new Actuarial Quality Framework on firms' risk management procedures. Kay, Robert; Goldspink, Chris; Dyson, Sophie. - Do actuaries have a larger role to play in enterprise risk management? - Sydney: - Institute of Actuaries of Australia, 2009. - No. pages: 2. [RKN: 71961] [Faculty: JOU/ACT] Actuary Australia (2009) no.146 Dec : 4-5. URL: http://www.actuaries.asn.au/IAA/upload/public/AA_DEC09_web.pdf Abstract: This article addresses the question of how well actuaries are positioned to move into ERM, and the barriers facing the profession in doing so.
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Risk Management Reading List September 2010
Klumpes, Paul. - Opportunities in ERM. [RKN: 38962] Shelved at: Per: Actuary (Oxf); Per: Actuary (Lon) The Actuary (2009) March : 26-27. URL: http://www.the-actuary.org.uk Abstract: Paul Klumpes outlines areas in which the actuarial profession can capitalise on challenges presented by enterprise risk management. Ledlie, Colin. - ERM one year on. [RKN: 38961] Shelved at: Per: Actuary (Oxf); Per: Actuary (Lon) The Actuary (2009) March : 8. URL: http://www.the-actuary.org.uk Abstract: Colin Ledlie describes the contribution that actuaries can make in the realm of enterprise risk management. Lewin, Chris. - To uncertainty ... and beyond. - Staple Inn Actuarial Society, - No. pages: 1. [RKN: 71738] Shelved at: Per: Actuary (Oxf); Per: Actuary (Lon) [Faculty: SIA/ACT] The Actuary (2009) December : 24. URL: http://www.the-actuary.org.uk Abstract: Chris Lewin charts the development of a ground-breaking enterprise risk management (ERM) guide based on the management of wider uncertainty beyond the variability of foreseeable events Melnick, Edward; Everitt, Brian. - Encyclopaedia of Quantitative Risk Analysis and Assessment. Chicester: - John Wiley & Sons, 2008. - No. pages: 1954. - 4 vols. [RKN: 38534] Shelved at: EEQ (Oxf) Abstract: Leading the way in this field, the Encyclopedia of Quantitative Risk Analysis and Assessment will be the first publication to offer a modern, comprehensive and in-depth resource to the huge variety of disciplines involved. A truly international work, its coverage ranges across risk issues pertinent to life scientists, engineers, policy makers, healthcare professionals, the finance industry, the military and practising statisticians. Drawing on the expertise of world-renowned authors and editors in this field this title will provide up-to-date material on drug safety, investment theory, public policy applications, transportation safety, public perception of risk, epidemiological risk, national defence and security, critical infrastructure, and program management. Ngwenya, Marjorie; Singh, Raj. - Time to rewind. - Staple Inn Actuarial Society, - No. pages: 2. [RKN: 71740] Shelved at: Per: Actuary (Oxf); Per: Actuary (Lon) [Faculty: SIA/ACT] The Actuary (2009) December : 28-29. URL: http://www.the-actuary.org.uk Abstract: Marjorie Ngwenya talks to Raj Singh, chief risk officer of Swiss Re, about his life, his work and the challenges of enterprise risk management Orros, George. - ERM Literature review. 2007. - (Giro 2007 convention). - No. pages: 37. [RKN: 38275] Shelved at: online only [Faculty: online only] URL: http://www.actuaries.asn.au/NR/rdonlyres/1C5D0157-1B4E-4059-B75E32F751723D99/2811/ERM_LitRev_Main_180807.pdf Abstract: to provide an introduction to ERM and to suggest a reading list that might be appropriate for general insurance actuaries (and actuarial students) who would like to have a synopsis of introductory ERM publications and references. We have also prepared a list of 60 web sites that purport to be about ERM capabilities and where the reader can find, review and/or download further documents, information and web links in connection with ERM capabilities, skills and associated tools.
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Risk Management Reading List September 2010
Orros, George; Smith, John. - Health at risk. - Staple Inn Actuarial Society, - No. pages: 3. [RKN: 71739] Shelved at: Per: Actuary (Oxf); Per: Actuary (Lon) [Faculty: SIA/ACT] The Actuary (2009) December : 25-27. URL: http://www.the-actuary.org.uk Abstract: George Orros and John Smith consider a practical enterprise risk management (ERM) framework for health and care insurance companies. Keywords: Early warning indicators, key performance indicators, risk heat maps Orros, George C; Cantle, Neil J; Puchy, Rudolf Y; Wang, Haijing. - ERM for Strategic and Emerging Risks. - Institute of Actuaries and Faculty of Actuaries, 2010. - (Risk and Investment Conference 2010 Caledonian Hotel, Edinburgh, 13-15 June 2010). [RKN: 73011] Abstract: This paper is focussed on ERM and strategic business management for insurance companies in our world of “unknown unknowns” and the emergence of unexpected risks over time. It illustrates how Chief Risk Officers can focus, with an ERM framework on “risk and opportunity management”, balancing risks against opportunities, whilst being resilient against “unknown unknowns” and their emergence over time as “known unknowns” and “known knowns”. The findings were based on 14 real case studies and review the “lessons learned” and the “early warning indicators” that could (and perhaps should) have been used in order to detect the emerging risks in a timely manner and influenced the CRO function to have taken appropriate remedial action. Keywords: Enterprise Risk Management; Strategic Risks; Risk and Uncertainty; Governance; Risk Appetite Robbin, Ira; Ostaszewski, Krystztof; Kneuer, Paul; Horowitz, Bertram; Chatzivasiloglou, Ioanis; Fytos, Charalampos; Conlin, Paul. - Risk Management: The current financial crisis, lessons learned and future implications. - Society of Actuaries. Casualty Actuarial Society. Canadian Institute of Actuaries, 2008. [RKN: 38797] Shelved at: online only URL: http://www.soa.org/library/essays/rm-essay-2008.pdf Abstract: Series of essays on Risk Management: The Current Financial Crisis, Lessons Learned and Future Implications. Smitherman, Lindsay. - Fancy working in ERM? - Staple Inn Actuarial Society, - No. pages: 1. [RKN: 72079] Shelved at: Per: Actuary (Oxf); Per: Actuary (Lon) [Faculty: SIA/ACT] The Actuary (2010) Jan / Feb : 30. URL: http://www.the-actuary.org.uk Abstract: Lindsay Smitherman thinks a CPA qualification may be a great place to start Tripp, Michael H; Chan, C; Haria, Sejal; Hilary, Neil; Morgan, Kathryn A; Orros, George C; Perry, Geoff; Tahir-Thomson, Kartina. - Enterprise risk management from the general insurance actuarial perspective. - Institute of Actuaries and Faculty of Actuaries, 2008. - No. pages: 93. [RKN: 69341] Shelved at: ifp 04/08 (Oxf); UHG/AA/BX pam (Oxf) [Faculty: JOU/INS] URL: http://www.actuaries.org.uk/research-and-resources/documents/enterprise-riskmanagement-general-insurance-actuarial-perspective Abstract: The authors have reviewed over 60 texts on the subject of Enterprise Risk Management (ERM). In this paper they set out a summary of ERM based on three of those sources, selected for their relevance and breadth of view. The paper observes that the approaches described vary widely in nature. A separate `on-line' source is provided which summarises key reading from the 60 texts. Combining findings from these texts with the authors' own experiences, the paper suggests some best practice checklists, designed to enable organisations to take stock of their current ERM framework. It discusses other aspects of ERM for practitioners, including extreme events, opportunity management and the link with corporate strategy. The paper looks at immediate and longer-term implications for actuaries in the United Kingdom, and then poses questions about future professional development and education. It suggests an emerging role for 47
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Risk Management Reading List September 2010
the `ERM Actuary', and finally it suggests future work to progress the development of ERM and the actuaries' role. Zhang, Yingjie. - Why Should an Insurance Firm Charge for Frictional Costs? 2007. - (CAS ERM Symposium). [RKN: 38247] Shelved at: online only [Faculty: online only] URL: http://www.ermsymposium.org/2007/pdf/papers/Zhang.pdf Abstract: In this paper, we establish a premium principle that calculates the premium as the sum of present values of claim liability, normal business expense, income tax and frictional cost. The principle provides a fair premium in the sense that it generates a fair return on capital. In other words, it automatically produces the correct cost of equity capital without knowing its value. The frictional cost is defined as the sum of all expenses incurred by the firm that exceed the normal level or category. We discuss the sources of frictional costs and techniques for quantifying them. If a firm manages its market cap instead of book value, the frictional cost needs to be restated by incorporating its impact on the franchise value.
Epidemiology Chen, H; Cox, S. - An Option–based Operational Risk Management on Pandemics. 2008. [RKN: 38541] Shelved at: Online only [Faculty: Online only] Actuarial Research Clearing House (ARCH) (2008) 1 URL: http://www.soa.org/news-and-publications/publications/proceedings/arch/arch-2008iss1.aspx Abstract: In this paper, we employ the theory of real option pricing to address problems in the area of operational risk management. Particularly, we develop a two-stage model to help firms determine the optimal triggers in the event of an influenza pandemic. In the first stage, we propose a regime-dependent epidemic model to simulate the spread of the virus, depending on whether the firm is active or inactive. In the second stage, we view the reactivation decision as a call option and the suspension decision as a put option, and use dynamic programming method to determine the optimal switching thresholds. Our numerical experiments suggest that given the parameter values in our paper, it is optimal for the firm to suspend the business (or parts of its business) when the fraction of infected employees is higher than 18%, and to reactivate the operation anytime the fraction drops to 3%. When considering the uncertainty in the future, firms are more conservative about the decisions of suspension and reactivation. If the firm incurs switching costs, the suspension threshold increases with costs, while the reactivation threshold decreases with costs. By implementing policies to control the disease, firms can meet their social obligations and in the meantime, increase their values in both regimes. Key Words: Real Option Valuation, Epidemic Risk, Operational Risk Management, RegimeSwitching Model, Dynamic Programming Chen, Hua; Cox, Samuel H. - An option-based operational risk management model for pandemics. 2009. - No. pages: 23. [RKN: 69511] Shelved at: Per: NAAJ (Oxf); Per NAAJ (Lon) [Faculty: NOR/AME] North American Actuarial Journal (2009) 13 (1) : 54-76. URL: http://www.soa.org/library/journals/north-american-actuarial-journal/2009/no-01/naaj2009-vol13-no1-chen.pdf Abstract: In this paper we employ the theory of real option pricing to address problems in the area of operational risk management. We develop a two-stage model to help firms determine the optimal suspension-reactivation triggers in the events of pandemics. In the first stage, we propose a regime-dependent epidemic model to simulate the spread of the virus, depending on whether the firm is active or inactive. In the second stage, we view the reactivation decision as a call option and the suspension decision as a put option, and use dynamic programming methods to obtain the optimal switching thresholds. Our method can be regarded as a quantitative implementation of the CDC’s instructions for pandemic preparation. We find that when they take the uncertainty of disease transmission into consideration, firms are more conservative about the decisions of 48
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Risk Management Reading List September 2010
suspension and reactivation. We also find that when firms incur switching costs, the suspension threshold increases with costs, whereas the reactivation threshold decreases with costs. By adopting disease control policies, firms can increase their values in both regimes. Hirsch, Rachel; Pun, Kenny; Reuttner, Isabella. - Rethinking Risk Management in Financial Services : Practices from other domains. - New York, NY: - World Economic Forum. Boston Consulting Group, 2010. - No. pages: 68. [RKN: 72465] URL: http://www.weforum.org/pdf/FinancialInstitutions/RethinkingRiskManagement.pdf Abstract: While other efforts have largely focused on improving risk management in financial services “from the inside out,” this report looks at it “from the outside in” – trying to learn from practices and patterns in domains such as aviation, fisheries, wildfire fighting, immunology / epidemiology, telecommunication and pharmaceuticals. While not all of these practices are directly transferable to finance, many are and most of them provide much needed fresh perspective and thinking.
Europe Koster, Ferry. - Risk management in a globalizing world : An empirical analysis of individual preferences in 26 European countries. [RKN: 39262] Shelved at: Per: ISSR (Oxf) International Social Security Review (2009) 62 (3) : 79-98. Abstract: The risks that individuals face in everyday life, such as illness and unemployment, can be covered using market, government, or community mechanisms. The market can function with a lower level of solidarity compared to the other two mechanisms; the government mechanism requires the highest level of compulsory solidarity and communities are associated with voluntary solidarity. Social context affects individual preferences with regard to any one of these mechanisms. This article investigates to what extent these preferences are influenced by globalization: the economic, social and political openness of countries. The dataset used in this study combines data from the European Values Study 1999-2000 (EVS), the International Monetary Fund (IMF), and the KOF Index of Globalization, and contains information about 31,554 people living in 26 European countries. The results derived from logistic multilevel analysis show that preferences towards the organization of solidarity are related to the different dimensions of globalization. Schoenmaker, Dirk; Oosterloo, Sander; Winkels, Otto. - The emergence of cross-border insurance groups within Europe with centralised risk management. [RKN: 39043] Shelved at: Per: Geneva (Oxf) Geneva Papers on Risk and Insurance (2008) 33 (3) : 530-546. Abstract: This paper analyses the degree of internationalisation of insurance business. Using a novel data set of 25 large EU insurance groups, we find that the insurance industry has a strong international orientation. About 55 percent of the business of these large insurance groups is conducted abroad. The cross-border activities are predominantly within Europe (30–35 percent) and less so in the rest of the world (20–25 percent). Next, this paper examines the impact of internationalisation on the organisational structure. We find a clear trend towards centralising risk and capital management activities within large insurance groups, though insurance remains at the same time a local business. Applying the hub and spoke model, we identify which functions are executed at the centre (hub) and which functions are performed at the level of the local business units (spokes).
Exposure to risk Centre for the Study of Financial Innovation; PricewaterhouseCoopers. - Insurance Banana Skins 2009 : The CSFI survey of the risks facing insurers. - Centre for the Study of Financial Innovation (CSFI), 2009. [RKN: 71821] URL: http://www.pwc.com/en_GX/gx/insurance/assets/insurance_banana_skins_2009.pdf 49
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Risk Management Reading List September 2010
Abstract: Surveys the risks facing the insurance industry at a time of great stress in the financial sector, and identifies those that are seen as most pressing by insurance practitioners and close observers of the insurance scene. In keeping with the current volatile financial environment, investment performance, equity markets and capital availability now head the list of insurance Banana Skins. Macro-economic trends are ranked fourth. Concerns over counterparty exposures, reinsurance security and broader systemic and solvency risks have also come to the fore. Hammitt, James K; Haninger, Kevin; Treich, Nicolas. - Effects of Health and Longevity on Financial Risk Tolerance. - No. pages: 23. [RKN: 72018] Shelved at: Per: Geneva (Oxf) Geneva Risk and Insurance Review (2009) 34 (2) : 117-139. Abstract: We investigate the effects of health and life expectancy on tolerance of financial risk. Using a standard life-cycle model, we find that the effects of health and life expectancy on preferences over lifetime-income risk are theoretically ambiguous. However, risk tolerance is independent of health and life expectancy when utility takes one of the standard (harmonic absolute risk aversion) functional forms or when optimal consumption is constant over time. Our empirical results, using data from a stated-preference survey (n=2,795), suggest that financial risk tolerance is positively associated with both health and life expectancy; hence utility is not consistent with standard functional forms. Keywords: risk tolerance, health, longevity, life-cycle model, consumption, stated preference
Finance CRMPG III; Corrigan, E Gerald. - Containing systematic risk : the road to reform : The report of the CRMPG III. 2008. - No. pages: 138. [RKN: 38533] Shelved at: online only URL: http://www.crmpolicygroup.org/docs/CRMPG-III.pdf Abstract: The scope of the CRMPG III initiative was designed to focus its primary attention on the steps that must be taken by the private sector to reduce the frequency and/or severity of future financial shocks while recognizing that such future shocks are inevitable, in part because it is literally impossible to anticipate the specific timing and triggers of such events. The CRMPG III effort has focused its attention on four closely related and forward-looking aspects of financial reform and rehabilitation, including: (1) a reconsideration of the standards for consolidation under US GAAP that contemplates a significant shift of currently off-balance sheet entities to on-balance sheet status; (2) measures to better understand and manage complex financial instruments with particular emphasis on their distribution and how their risk sensitivities are disclosed; (3) risk monitoring and risk management with particular emphasis on the role of sound corporate governance and the relationship between liquidity, leverage and capital adequacy; and (4) a series of sweeping measures to enhance the resiliency of credit markets in particular and financial markets more generally with particular attention to strengthening the safeguards associated with the OTC derivatives markets with emphasis on credit default swaps (CDS). Among other things, this section of the Report urges swift industry action to create a clearinghouse for OTC derivatives, starting with CDS. Melnick, Edward; Everitt, Brian. - Encyclopaedia of Quantitative Risk Analysis and Assessment. Chicester: - John Wiley & Sons, 2008. - No. pages: 1954. - 4 vols. [RKN: 38534] Shelved at: EEQ (Oxf) Abstract: Leading the way in this field, the Encyclopedia of Quantitative Risk Analysis and Assessment will be the first publication to offer a modern, comprehensive and in-depth resource to the huge variety of disciplines involved. A truly international work, its coverage ranges across risk issues pertinent to life scientists, engineers, policy makers, healthcare professionals, the finance industry, the military and practising statisticians. Drawing on the expertise of world-renowned authors and editors in this field this title will provide up-to-date material on drug safety, investment theory, public policy applications, transportation safety, public perception of risk, epidemiological risk, national defence and security, critical infrastructure, and program management. 50
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Risk Management Reading List September 2010
Financial crises Besar, D; Booth, Philip M; Chan, K K; Milne, Alistair; Pickles, J. - Systemic risk in financial services : A discussion paper. - London: - Faculty of Actuaries. Institute of Actuaries, 2009. - No. pages: 127. [RKN: 71955] Shelved at: ifp 12/09 (Oxf); ifp 12/09 (Lon) [Faculty: JOU/INS] URL: http://www.actuaries.org.uk/research-and-resources/documents/systemic-riskfinancial-services Abstract: The current banking crisis has reminded us of how risks materialising in one part of the financial system can have a widespread impact, affecting other financial markets and institutions and the broader economy. This paper, prepared on behalf of the Actuarial Profession, examines how such events have an impact on the entire financial system and explores whether such disturbances may arise within the insurance and pensions sectors as well as within banking. The paper seeks to provide an overview of a number of banking and other financial crises which have occurred in the past, illustrated by four cases studies. It discusses what constitutes a systemic event and what distinguishes it from a large aggregate system wide shock. Finally, it discusses how policy makers can respond to the risk of such systemic financial failures. Keywords: Banking Crisis; Financial Crisis; Global Financial Crisis; Financial Deregulation; Credit Cycle; Governance; Control Mechanisms; Systemic Risk; Financial Infrastructure; Payment Systems; Short Term Funding Markets; Collateral Exposure; Securities; Derivatives; Counterparty Risk; Recession; Pension System Centre for the Study of Financial Innovation; PricewaterhouseCoopers. - Insurance Banana Skins 2009 : The CSFI survey of the risks facing insurers. - Centre for the Study of Financial Innovation (CSFI), 2009. [RKN: 71821] URL: http://www.pwc.com/en_GX/gx/insurance/assets/insurance_banana_skins_2009.pdf Abstract: Surveys the risks facing the insurance industry at a time of great stress in the financial sector, and identifies those that are seen as most pressing by insurance practitioners and close observers of the insurance scene. In keeping with the current volatile financial environment, investment performance, equity markets and capital availability now head the list of insurance Banana Skins. Macro-economic trends are ranked fourth. Concerns over counterparty exposures, reinsurance security and broader systemic and solvency risks have also come to the fore. Harrington, Scott E. - The financial crisis, systemic risk, and the future of insurance regulation. No. pages: 35. [RKN: 71775] Shelved at: Per: J.Risk Ins (Oxf) [Faculty: JOU/RIS] Journal of Risk and Insurance (2009) 76 (4) : 785-819. Abstract: This article considers the role of American International Group (AIG) and the insurance sector in the 2007–2009 financial crisis and the implications for insurance regulation. Following an overview of the causes of the crisis, I explore the events and policies that contributed to federal government intervention to prevent bankruptcy of AIG and the scope of federal assistance to AIG. I discuss the extent to which insurance in general poses systemic risk and whether a systemic risk regulator is desirable for insurers or other nonbank financial institutions. The last two sections of the article address the financial crisis's implications for proposed optional and/or mandatory federal chartering and regulation of insurers and for insurance regulation in general. Kemp, Malcolm; Varnell, Elliot. - Regulatory frameworks: lessons learned and potential implications of the Credit Crisis [copies of slides only] - Institute of Actuaries and Faculty of Actuaries, 2010. - (Risk and Investment Conference 2010 Caledonian Hotel, Edinburgh, 13-15 June 2010). [RKN: 73026] URL: http://www.actuaries.org.uk/research-and-resources/documents/regulatoryframeworks-lessons-learned-crisis-and-potential-implicat Mandelbrot, Benoit B; Hudson, Richard L. - The (mis)behaviour of markets : A fractal view of risk, ruin, and reward. - Profile Books, 2008. - No. pages: 326. [RKN: 71051] 51
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Risk Management Reading List September 2010
[Faculty: 519.287 MAN] Abstract: Re-evaluation of the standard tools and models of modern financial theory. Milne, Alistair. - A measured response. - Staple Inn Actuarial Society, - No. pages: 2. [RKN: 72081] Shelved at: Per: Actuary (Oxf); Per: Actuary (Lon) [Faculty: SIA/ACT] The Actuary (2010) Jan / Feb : 32-33. URL: http://www.the-actuary.org.uk Abstract: Alistair Milne reports on the findings of his research into systemic risk in response to the recent financial crisis OpRisk Advisory; Towers Perrin. - A New Approach for Managing Operational Risk : Addressing the Issues Underlying the 2008 Global Financial Crisis. - Society of Actuaries. Canadian Institute of Actuaries. Casualty Actuarial Society, 2009. - No. pages: 90. [RKN: 71819] URL: http://www.soa.org/files/pdf/research-new-approach.pdf Abstract: Examines approaches to operational risk management (ORM) and considerations for establishing formal operational risk programmes.
Financial economics Nier, Erlend; Yang, Jing; Yorulmazer, Tanju; Alentorn, Amadeo. - Network models and financial stability. - Bank of England, 2008. - (Bank of England Working Paper no. 346). - No. pages: 29. [RKN: 69889] Shelved at: Online only [Faculty: Online only] URL: http://www.bankofengland.co.uk/publications/workingpapers/index.htm Abstract: Systemic risk is a key concern for central banks charged with safeguarding overall financial stability. In this paper we investigate how systemic risk is affected by the structure of the financial system. We construct banking systems that are composed of a number of banks that are connected by interbank linkages. We then vary the key parameters that define the structure of the financial system - including its level of capitalisation, the degree to which banks are connected, the size of interbank exposures and the degree of concentration of the system - and analyse the influence of these parameters on the likelihood of contagious (knock-on) defaults. First, we find that the better capitalised banks are, the more resilient is the banking system against contagious defaults and this effect is non-linear. Second, the effect of the degree of connectivity is nonmonotonic, that is, initially a small increase in connectivity increases the contagion effect; but after a certain threshold value, connectivity improves the ability of a banking system to absorb shocks. Third, the size of interbank liabilities tends to increase the risk of knock-on default, even if banks hold capital against such exposures. Fourth, more concentrated banking systems are shown to be prone to larger systemic risk, all else equal. In an extension to the main analysis we study how liquidity effects interact with banking structure to produce a greater chance of systemic breakdown. We finally consider how the risk of contagion might depend on the degree of asymmetry (tiering) inherent in the structure of the banking system. A number of our results have important implications for public policy, which this paper also draws out.
Financial institutions Sweeting, Paul J. - Modelling and managing risk. [RKN: 39349] Shelved at: Per: BAJ (Oxf); Per: BAJ (Lon) [Faculty: BRI/ACT] BAJ (2007) 13 (3) : 579-636. URL: http://www.actuaries.org.uk/research-and-resources/pages/access-journals Abstract: This paper looks at the risks faced by financial institutions, and how they can be modelled and managed. I compare the way in which each of the risks affects different types of financial institution and look for similarities (and differences) across industries. Finally, I consider what makes a good risk management system. Sweeting, Paul J. - Modelling and managing risk : Abstract of the discussion held by the Faculty of 52
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Risk Management Reading List September 2010
Actuaries. [RKN: 39433] Shelved at: Per: BAJ (Oxf); Per: BAJ (Lon) [Faculty: BRI/ACT] BAJ (2008) 14 (1) : 111-125. URL: http://www.actuaries.org.uk/research-and-resources/pages/access-journals Abstract: Discussion about Paul Sweeting’s paper. This paper looks at the risks faced by financial institutions, and how they can be modelled and managed. It compares the way in which each of the risks affects different types of financial institution and look for similarities (and differences) across industries. Finally, it consider what makes a good risk management system.
Financial markets Financial Services Authority. - Financial Risk Outlook 2010. - London: - Financial Services Authority, 2010. - No. pages: 88. [RKN: 72242] Shelved at: 002128 URL: http://www.fsa.gov.uk/pubs/plan/financial_risk_outlook_2010.pdf Abstract: The report is divided into four sections: Macroeconomic background and outlook looks at how fiscal and monetary policy support has limited the scale and duration of the global recession, and the future impact of its removal; Financial Stability and Prudential Risks and Issues highlights the importance of effectively managing prudential and financial stability risks for all stakeholders in the financial system. The chapter explores the new regulatory frameworks being developed to strengthen firms’ capital and liquidity management under stressed conditions and the FSA’s updated stress test; Market Risks and Issues explores risks derived directly from the crisis and other ongoing risks to which regulators and market participants need to respond; Retail Conduct Risks and Issues identifies retail conduct of business risks, some of which have resulted from today’s specific economic circumstances but many of which are rooted in enduring features of retail financial services markets: such as business models that cross subsidise lossmaking core products and very high margin products. Goltz, Felix. - Constructing efficient stock market indices [copies of slides only] - Institute of Actuaries and Faculty of Actuaries, 2010. - (Risk and Investment Conference 2010 Caledonian Hotel, Edinburgh, 13-15 June 2010). [RKN: 73007] URL: http://www.actuaries.org.uk/research-and-resources/documents/constructionefficient-stock-market-indicies Mandelbrot, Benoit B; Hudson, Richard L. - The (mis)behaviour of markets : A fractal view of risk, ruin, and reward. - Profile Books, 2008. - No. pages: 326. [RKN: 71051] [Faculty: 519.287 MAN] Abstract: Re-evaluation of the standard tools and models of modern financial theory.
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Risk Management Reading List September 2010
Financial risk analysis Global Risk Network; World Economic Forum; Citigroup; Marsh & McLennan Companies; Swiss Re; Wharton School Risk Center; Zurich Financial Services. - Global Risks 2008 : A Global Risk Network Report. - Geneva: - World Economic Forum, 2008. - No. pages: 54. [RKN: 69132] Shelved at: online only [Faculty: online only] URL: http://www.weforum.org/pdf/globalrisk/report2008.pdf Contents: Introduction - 4 Focus on Emerging Issues in Global Risk - 6 Assessing Global Risks in 2008 - 20 Networked World, Networked Risks - 25 Financial Markets, Risk Transfer and Risk Mitigation - 30 Structuring Mitigation at the State and International Level: Taking the Country Risk Officer Forward Appendix 1: Taxonomy of Global Risk: Trends, Issues of Concern, Risks - 41 Appendix 2: Risk Assessments - 45 Guillen, Montserrat; Høgh, Nils; Nielson, Jens Perch; Perez-Marin, Ana M. - Froot and Stein revisited once again. [RKN: 39269] Shelved at: Per: AAS (Oxf); Per: AAS (Lon) [Faculty: JOU/AAS] Annals of Actuarial Science (2008) 3 (1+2) : 121-126. URL: http://www.actuaries.org.uk/research-and-resources/pages/access-journals Abstract: Høgh, Linton and Nielsen (2006) showed that the famous result in the award winning paper of Froot and Stein (1998) is not correct in the sense that their result does not follow from their assumptions. In this paper we show that the economic intuition behind the paper of Froot and Stein (1998) is correct and that their result can be obtained when the market is reformulated in a continuous time setting and modern market theory is employed. Keywords: Financial Risk; CAPM Transaction Costs Murphy, David. - Understanding risk: the theory and practice of financial risk management. - USA: - Chapman & Hall/CRC, 2008. - No. pages: 452. [RKN: 69516] [Faculty: 519.287 MUR] Abstract: Blending a quantitative approach with a more informal style, this book explains how to understand financial risk and how the severity and frequency losses can be controlled. The book begins by introducing the basics of risk management and the behaviour of financial instruments. The next section focuses on regulatory capital standards and models, addressing value-at-risk (VaR) models, portfolio credit risk, tranching, operational risk and the Basel accords. The author then deals with asset/liability management (ALM) and liquidity management. The last part explores structured finance and a variety of new trading instruments, including inflation-linked products, sophisticated equity basket options and convertible bonds. Nieto, María Rosa; Ruiz, Esther. - Measuring financial risk : comparison of alternative procedures to estimate VaR and ES. - Madrid: - Departamento de Estadística, Universidad Carlos III de Madrid, 2008. - (Working paper 08-73). - No. pages: 45. [RKN: 72633] URL: http://e-archivo.uc3m.es/bitstream/10016/3384/1/ws087326.pdf Abstract: We review several procedures for estimating and backtesting two of the most important measures of risk, the Value at Risk (VaR) and the Expected Shortfall (ES). The alternative estimators differ in the way the specify and estimate the conditional mean and variance and the conditional distribution of returns. The results are illustrated by estimating the VaR and ES of daily S&P500 returns. Keywords: Backtesting, extreme value, GARCH models, leverage effect
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Risk Management Reading List September 2010
Rebonato, Riccardo. - The plight of the fortune tellers: why we need to manage financial risk differently. - Woodstock: - Princeton University Press, 2007. - No. pages: 272. [RKN: 38839] Shelved at: EE/JNH (Oxf) Abstract: Today's top financial-risk professionals have come to rely on ever-more sophisticated mathematics in their attempts to come to grips with financial risk. But this excessive reliance on quantitative precision is misleading - and it puts us all at risk. This is the case that Riccardo Rebonato makes in Plight of the Fortune Tellers - and coming from someone who is both an experienced market professional and an academic, this heresy is worth listening to. Rebonato forcefully argues that we must restore genuine decision making to our financial planning, and he shows us how to do it using probability, experimental psychology, and decision theory. This is the only way to effectively manage financial risk in a manner congruent with how human beings actually react to chance. Rebonato challenges us to rethink the standard wisdom about probability in financial-risk management. Risk managers have become obsessed with measuring risk and believe that these quantitative results by themselves can guide sound financial choices - but they can't. In this book, Rebonato offers a radical yet surprisingly commonsense solution, one that seeks to remind us that managing risk comes down to real people making decisions under uncertainty. Plight of the Fortune Tellers is not only a book for the decision makers of Wall Street, it's a must-read for anyone concerned about how today's financial markets are run. The stakes have never been higher - can you risk it? Sweeting, Paul J. - Modelling and managing risk. - Faculty and Institute of Actuaries, 2007. - No. pages: 43. [RKN: 37580] Shelved at: ifp 4/07 (Oxf) [Faculty: TRA/FAC] URL: http://www.actuaries.org.uk/research-and-resources/documents/modelling-andmanaging-risk Abstract: This paper looks at the risks faced by financial institutions, and how they can be modelled and managed. I compare the way in which each of the risks affects different types of financial institution and look for similarities (and differences) across industries. Finally, I consider what makes a good risk management system. Keywords: Financial Risk; Operational Risk; Modelling; Pension Fund; Insurance Company; Bank
Financial services Besar, D; Booth, Philip M; Chan, K K; Milne, Alistair; Pickles, J. - Systemic risk in financial services : A discussion paper. - London: - Faculty of Actuaries. Institute of Actuaries, 2009. - No. pages: 127. [RKN: 71955] Shelved at: ifp 12/09 (Oxf); ifp 12/09 (Lon) [Faculty: JOU/INS] URL: http://www.actuaries.org.uk/research-and-resources/documents/systemic-riskfinancial-services Abstract: The current banking crisis has reminded us of how risks materialising in one part of the financial system can have a widespread impact, affecting other financial markets and institutions and the broader economy. This paper, prepared on behalf of the Actuarial Profession, examines how such events have an impact on the entire financial system and explores whether such disturbances may arise within the insurance and pensions sectors as well as within banking. The paper seeks to provide an overview of a number of banking and other financial crises which have occurred in the past, illustrated by four cases studies. It discusses what constitutes a systemic event and what distinguishes it from a large aggregate system wide shock. Finally, it discusses how policy makers can respond to the risk of such systemic financial failures. Keywords: Banking Crisis; Financial Crisis; Global Financial Crisis; Financial Deregulation; Credit Cycle; Governance; Control Mechanisms; Systemic Risk; Financial Infrastructure; Payment Systems; Short Term Funding Markets; Collateral Exposure; Securities; Derivatives; Counterparty Risk; Recession; Pension System
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Risk Management Reading List September 2010
Hirsch, Rachel; Pun, Kenny; Reuttner, Isabella. - Rethinking Risk Management in Financial Services : Practices from other domains. - New York, NY: - World Economic Forum. Boston Consulting Group, 2010. - No. pages: 68. [RKN: 72465] URL: http://www.weforum.org/pdf/FinancialInstitutions/RethinkingRiskManagement.pdf Abstract: While other efforts have largely focused on improving risk management in financial services “from the inside out,” this report looks at it “from the outside in” – trying to learn from practices and patterns in domains such as aviation, fisheries, wildfire fighting, immunology / epidemiology, telecommunication and pharmaceuticals. While not all of these practices are directly transferable to finance, many are and most of them provide much needed fresh perspective and thinking.
Fire insurance Wang, Kili C; Huang, Rachel J; Tzeng, Larry Y. - Empirical evidence for advantageous selection in the commercial fire insurance market. [RKN: 39291] Shelved at: Per: Geneva (Oxf) Geneva Risk and Insurance Review (2009) 34(1) : 1-19. Abstract: De Meza and Webb (2001) indicated that individuals with a higher degree of risk aversion would demand more insurance and invest in self-protection to reduce risk probability when both the preference type and investment in self-protection are hidden from insurers. They referred to the negative correlation between market insurance and risk type as advantageous selection. However, the relationship between risk type and the degree of risk aversion is debatable in both theoretical and empirical research. This paper therefore proposes that advantageous selection could be supported from another angle by directly examining the relationships that exist among market insurance, self-protection, and risk probability. By focusing on the commercial fire insurance market, information on the purchase of market insurance, investment in self-protection, and fire accident records is hand-collected by means of a unique survey. It is found that firms purchasing market insurance have a greater tendency to channel efforts into self-protection. It is also found that firms expending effort on self-protection are less likely to suffer a fire accident. Furthermore, it is found that firms with commercial fire insurance have less chance of suffering a fire accident than those without such insurance. Each of the above three findings jointly supports the view that advantageous selection could play a critical role in the commercial fire insurance market.
Fraud Krawczyk, Michal. - The role of repetition and observability in deterring insurance fraud. [RKN: 39294] Shelved at: Per: Geneva (Oxf) Geneva Risk and Insurance Review (2009) 34 (1) : 74-87. Abstract: In this paper, I analyze an inspection game between an insurer and an infinite sequence of policyholders, who can try to misrepresent relevant information in order to obtain coverage or lower insurance premium. Because claim-auditing is costly for the insurer, ex-post moral hazard problem arises. I find that the repeated game effect serves as a commitment device, allowing the insurer to deter fraud completely (for sufficiently high discount rate) but only when the policyholders observe past auditing strategies. Under weaker observability conditions, only partial efficiency gains are generally possible. I conclude that the insurers should spend resources on signalling their anti-fraud attempts to the potential policyholders. Similar conclusions can be drawn with respect to conceptually similar problems, such as tax evasion.
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Risk Management Reading List September 2010
Gaming Barberis, Nicholas. - A Model of Casino Gambling. - New Haven, CT: - Yale School of Management, 2010. - No. pages: 41. [RKN: 72557] URL: http://badger.som.yale.edu/faculty/ncb25/gb20d.pdf Abstract: Casino gambling is a hugely popular activity around the world, but there are still very few models of why people go to casinos or of how they behave when they get there. In this paper, we show that prospect theory can offer a surprisingly rich theory of gambling, one that captures many features of actual gambling behaviour. First, we demonstrate that, for a wide range of parameter values, a prospect theory agent would be willing to gamble in a casino, even if the casino only offers bets with zero or negative expected value. Second, we show that prospect theory predicts a plausible time inconsistency: at the moment he enters a casino, a prospect theory agent plans to follow one particular gambling strategy; but after he enters, he wants to switch to a different strategy. The model therefore predicts heterogeneity in gambling behaviour : how a gambler behaves depends on whether he is aware of the time-inconsistency; and, if he is aware of it, on whether he is able to commit, in advance, to his initial plan of action. Keywords: gambling, prospect theory, time inconsistency, probability weighting
General insurance Bernard, Carole; Tian, Weidong. - Insurance market effects of risk management metrics. [RKN: 39619] Shelved at: Per: Geneva (Oxf) Geneva Risk and Insurance Review (2010) 35 (1) : 47-80. Abstract: We extend the classical analysis on optimal insurance design to the case when the insurer implements regulatory requirements (Value-at-Risk). Presumably, regulators impose some risk management requirement such as VaR to reduce the insurers’ insolvency risk, as well as to improve the insurance market stability. We show that VaR requirements may better protect the insured and improve economic efficiency, but have stringent negative effects on the insurance market. Our analysis reveals that the insured are better protected in the event of greater loss irrespective of the optimal design from either the insured or the insurer perspective. However, in the presence of the VaR requirement on the insurer, the insurer's insolvency risk might be increased and there are moral hazard issues in the insurance market because the optimal contract is discontinuous. Bowser, Marcus; MacDonald, Jon. - The alchemy of risk. [RKN: 38386] Shelved at: Per: Actuary (Oxf); Per: Actuary (Lon) The Actuary (2008) July : 30-31. URL: http://www.the-actuary.org.uk Abstract: Article on how insurers can manage risk effectively and use it to generate profit Doff, René. - Risk management for insurers : Risk control, economic capital and Solvency II. Risk Books, 2007. - No. pages: 204. [RKN: 39273] [Faculty: 519.287 DOF] Abstract: This book will help the reader to quickly get to grips with risk management terms and techniques and how they relate specifically to the insurance industry. It also demonstrates how Solvency II is already shaping the regulatory agenda and its likely impact on the insurance industry. Risk Management for Insurers is an accessible reference for the whole insurance industry, identifying and discussing how to measure and manage seven major risk types such as: Market risk, including interest rate and equity risk; Credit risk; Liquidity risk; Non-life risk; Life risk; Operational risk; and Business risk. The main benefit of Risk Management for Insurers is that it emphasizes the practical risk management concepts, rather than technical calculations and detailed theory, making it easier for a layman to understand. All concepts and terms are applied to clear illustrative examples and the regulation and supervision developments are simple to follow. It 57
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Risk Management Reading List September 2010
is recommended for risk managers, actuaries, controllers, accountants, auditors, corporate finance managers, underwriting and reinsurance managers, investment managers, equity analysts and financial consultants. Haslip, Gareth. - Risk assessment. [RKN: 38758] Shelved at: Per: Actuary (Oxf); Per: Actuary (Lon) The Actuary (2008) December : 28-30. URL: http://www.the-actuary.org.uk Abstract: Description of the calculation methodologies for Solvency II risk margin requirements for non-life insurers. Haste, Andy. - Risky Business: Insurance and Society. - London: - Chartered Insurance Institute. CII, 2009. - No. pages: 4. [RKN: 39353] Shelved at: online only [Faculty: online only] URL: http://www.cii.co.uk/downloaddata/TP23_HasteRSA_Managing_Risk_18Aug2009.pdf Abstract: This article, the first of a series of four on risk and insurance, explores the basic elements of risk management, the value it can add to peoples’ freedom and choices and the future challenges that insurers face in taking on and assessing levels of risk. Insurance provides an important and often forgotten social value to consumers and businesses. Its benefits range from providing security in the face of potentially catastrophic losses at home or abroad to providing freedom from liability allowing firms to explore new and dynamic fields. While the basic principle of providing peace of mind has stayed the same for over 300 years, the processes for doing this have become increasingly sophisticated. New techniques such as accurate flood mapping and telematics technology have resulted in more competitive propositions in both commercial and personal lines. Insurance has also had the effect of influencing behaviour, such as incentivising safer or more climate-friendly consumers or more sustainable business practices. Looking ahead, insurers and government will need to develop mutual working and understanding. In the area of climate change, underwriters must contend with the need to develop realistic risk modelling for related scenarios despite not being aware of their full impact or likelihood. Meanwhile, policymakers must consider the unintended consequences that otherwise well-intentioned legislation could hold for insurers. Krawczyk, Michal. - The role of repetition and observability in deterring insurance fraud. [RKN: 39294] Shelved at: Per: Geneva (Oxf) Geneva Risk and Insurance Review (2009) 34 (1) : 74-87. Abstract: In this paper, I analyze an inspection game between an insurer and an infinite sequence of policyholders, who can try to misrepresent relevant information in order to obtain coverage or lower insurance premium. Because claim-auditing is costly for the insurer, ex-post moral hazard problem arises. I find that the repeated game effect serves as a commitment device, allowing the insurer to deter fraud completely (for sufficiently high discount rate) but only when the policyholders observe past auditing strategies. Under weaker observability conditions, only partial efficiency gains are generally possible. I conclude that the insurers should spend resources on signaling their anti-fraud attempts to the potential policyholders. Similar conclusions can be drawn with respect to conceptually similar problems, such as tax evasion. Ohlsson, Esbjörn; Lauzeningks, Jan. - The one-year non-life insurance risk. - No. pages: 6. [RKN: 72391] Shelved at: Per: IME (Oxf) Insurance: Mathematics & Economics (2009) 45 (2) : 203-208. Abstract: A major part of the literature on non-life insurance reserve risk has been devoted to the ultimo risk, the risk in the full run-off of the liabilities. This is in contrast to the short time horizon in internal risk models at insurance companies, and the one-year risk perspective taken in the Solvency II project of the European Community. This paper aims at clarifying the one-year risk concept and describing simulation approaches, in particular for the one-year reserve risk. We also discuss the one-year premium risk and its relation to the premium reserve. Finally, we initiate a discussion on the role of risk margins and discounting for the reserve and premium risk, with focus 58
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Risk Management Reading List September 2010
on the Cost-of-Capital method. We show that risk margins do not affect the reserve risk and show how reserve duration can be used for easy calculation of risk margins Parodi, Pietro. - Computational intelligence techniques for general insurance. 2009. - (Specialist Applications Dissertation). - No. pages: 161. [RKN: 39457] Shelved at: BX/EEQ (Oxf) [Faculty: 519.287 PAR] Abstract: This paper is an attempt to answer the question "What is the proper framework for understanding risk?" in the context of general insurance. It argues that although actuaries and other risk professionals tend to deal with risk in the context of classical statistics and by resorting to subjective judgment to compensate the inadequacies of this framework, understanding risk is actually an 'ecological' problem and it is more fruitful to look at risk in the context of computational intelligence. Quiggin, John; Chambers, Robert G. - Bargaining power and efficiency in insurance contracts. [RKN: 39293] Shelved at: Per: Geneva (Oxf) Geneva Risk and Insurance Review (2009) 34 (1) : 47-73. Abstract: Insurance contracts are frequently modelled as principal–agent relationships. The purpose of this paper is to examine the interaction between differential bargaining power and the efficiency of insurance contracts. The analysis is undertaken in a framework of state-contingent production, which allows us to consider, as separate choices, the level of effort committed by the client and the riskiness of the equilibrium state-contingent production vector. Our central result is that, in the presence of hold-up problems, the exercise of monopoly power by insurers leads clients to undertake socially costly self-protection, leading to suboptimal levels of insurance. Clients can exploit information asymmetries to offset the bargaining power of the insurer, but this process is also socially costly. Hence, competitive markets for insurance will yield a Paretosuperior outcome to the constrained Pareto-optimum reached in markets where insurers have monopoly power. More generally, in a bargaining situation, an increase in the bargaining power of clients will increase social welfare. Schoenmaker, Dirk; Oosterloo, Sander; Winkels, Otto. - The emergence of cross-border insurance groups within Europe with centralised risk management. [RKN: 39043] Shelved at: Per: Geneva (Oxf) Geneva Papers on Risk and Insurance (2008) 33 (3) : 530-546. Abstract: This paper analyses the degree of internationalisation of insurance business. Using a novel data set of 25 large EU insurance groups, we find that the insurance industry has a strong international orientation. About 55 percent of the business of these large insurance groups is conducted abroad. The cross-border activities are predominantly within Europe (30–35 percent) and less so in the rest of the world (20–25 percent). Next, this paper examines the impact of internationalisation on the organisational structure. We find a clear trend towards centralising risk and capital management activities within large insurance groups, though insurance remains at the same time a local business. Applying the hub and spoke model, we identify which functions are executed at the centre (hub) and which functions are performed at the level of the local business units (spokes). Tripp, Michael H; Chan, C; Haria, Sejal; Hilary, Neil; Morgan, Kathryn A; Orros, George C; Perry, Geoff; Tahir-Thomson, Kartina. - Enterprise risk management from the general insurance actuarial perspective. - Institute of Actuaries and Faculty of Actuaries, 2008. - No. pages: 93. [RKN: 69341] Shelved at: ifp 04/08 (Oxf); UHG/AA/BX pam (Oxf) [Faculty: JOU/INS] URL: http://www.actuaries.org.uk/research-and-resources/documents/enterprise-riskmanagement-general-insurance-actuarial-perspective Abstract: The authors have reviewed over 60 texts on the subject of Enterprise Risk Management (ERM). In this paper they set out a summary of ERM based on three of those sources, selected for their relevance and breadth of view. The paper observes that the approaches described vary widely in nature. A separate `on-line' source is provided which summarises key reading from the 60 texts. Combining findings from these texts with the authors' own experiences, the paper 59
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Risk Management Reading List September 2010
suggests some best practice checklists, designed to enable organisations to take stock of their current ERM framework. It discusses other aspects of ERM for practitioners, including extreme events, opportunity management and the link with corporate strategy. The paper looks at immediate and longer-term implications for actuaries in the United Kingdom, and then poses questions about future professional development and education. It suggests an emerging role for the `ERM Actuary', and finally it suggests future work to progress the development of ERM and the actuaries' role. van Lelyveld, Iman; Liedorp, Franka; Kampman, Manuel. - An Empirical assessment of reinsurance risk. - Amsterdam: - De Nederlandsche Bank, 2009. - (DNB Working Paper No. 201 February 2009). - No. pages: 31. [RKN: 71936] URL: http://www.dnb.nl/en/binaries/Working%20paper%20201_tcm47-212957.pdf Abstract: We analyse the effect of failing reinsurance cover on the stability of Dutch insurers. As insurers often reinsure themselves with other (re)insurers, losses could spread contagiously through the sector. Using a unique and confidential data set on reinsurance exposures, we perform a scenario analysis to measure contagion risks. Based on current exposures, we find no evidence of systemic risk in the Netherlands, even if multiple reinsurance companies fail simultaneously. Next, we analyse to what extent the financial position of individual primary insurers is affected following a particular shock, considering solvency, capital and profit levels. The life insurance industry is hardly affected by reinsurance failures. The non-life industry, however, is vulnerable to a crisis in the European reinsurance market. We also find that members of smaller insurance groups are particularly exposed. Keywords : reinsurance, contagion, simulation Wang, Kili C; Huang, Rachel J; Tzeng, Larry Y. - Empirical evidence for advantageous selection in the commercial fire insurance market. [RKN: 39291] Shelved at: Per: Geneva (Oxf) Geneva Risk and Insurance Review (2009) 34(1) : 1-19. Abstract: De Meza and Webb (2001) indicated that individuals with a higher degree of risk aversion would demand more insurance and invest in self-protection to reduce risk probability when both the preference type and investment in self-protection are hidden from insurers. They referred to the negative correlation between market insurance and risk type as advantageous selection. However, the relationship between risk type and the degree of risk aversion is debatable in both theoretical and empirical research. This paper therefore proposes that advantageous selection could be supported from another angle by directly examining the relationships that exist among market insurance, self-protection, and risk probability. By focusing on the commercial fire insurance market, information on the purchase of market insurance, investment in self-protection, and fire accident records is hand-collected by means of a unique survey. It is found that firms purchasing market insurance have a greater tendency to channel efforts into self-protection. It is also found that firms expending effort on self-protection are less likely to suffer a fire accident. Furthermore, it is found that firms with commercial fire insurance have less chance of suffering a fire accident than those without such insurance. Each of the above three findings jointly supports the view that advantageous selection could play a critical role in the commercial fire insurance market.
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Generalized entropic risk measures (GERMS) Peng, Li; Lim, Andrew E B; Shanthikumar, J George. - Optimal risk transfer for agents with germs. [RKN: 39542] Shelved at: Per: IME (Oxf) Insurance: Mathematics & Economics (2010) 47 (1) : 1-12. Abstract: We introduce a new class of risk measures called generalized entropic risk measures (GERMS) that allow economic agents to have different attitudes towards different sources of risk. We formulate the problem of optimal risk transfer in terms of these risk measures and characterize the optimal transfer contract. The optimal contract involves what we call intertemporal sourcedependent quotient sharing, where agents linearly share changes in the aggregate risk reserve that occur in response to shocks to the system over time, with scaling coefficients that depend on the attitudes of each agent towards the source of risk causing the shock. Generalized entropic risk measures are not dilations of a common base risk measure, so our results extend the class of risk measures for which explicit characterizations of the optimal transfer contract can be found. Keywords: Convex risk measure; Optimal risk transfer; Risk sharing; Generalized entropic risk measure; Generalized exponential premium; Intertemporal source-dependent quotient sharing; Risk management
Gerber-Shiu function Albrecherl, Hansjörg; Constantinescu, Corina; Pirsic, Gottlieb; Regensburger, Georg; Rosenkranz, Markus. - An algebraic operator approach to the analysis of Gerber–Shiu functions. - No. pages: 10. [RKN: 72426] Shelved at: Per: IME (Oxf) Insurance: Mathematics & Economics (2010) 46 (1) : 42-51. Abstract: We introduce an algebraic operator framework to study discounted penalty functions in renewal risk models. For inter-arrival and claim size distributions with rational Laplace transform, the usual integral equation is transformed into a boundary value problem, which is solved by symbolic techniques. The factorization of the differential operator can be lifted to the level of boundary value problems, amounting to iteratively solving first-order problems. This leads to an explicit expression for the Gerber–Shiu function in terms of the penalty function. Biffis, Enrico; Kyprianou, Andreas E. - A note on scale functions and the time value of ruin for Lévy insurance risk processes. - No. pages: 7. [RKN: 72429] Shelved at: Per: IME (Oxf) Insurance: Mathematics & Economics (2010) 46 (1) : 85-91. Abstract: We examine discounted penalties at ruin for surplus dynamics driven by a general spectrally negative Lévy process; the natural class of stochastic processes which contains many examples of risk processes which have already been considered in the existing literature. Following from the important contributions of [Zhou, X., 2005. On a classical risk model with a constant dividend barrier. North Am. Act. J. 95–108] we provide an explicit characterization of a generalized version of the Gerber–Shiu function in terms of scale functions, streamlining and extending results available in the literature. Keywords: Scale functions; Ruin; Spectrally negative Lévy processes; Gerber–Shiu function; Laplace transform Biffis, Enrico; Morales, Manuel. - On a generalization of the Gerber–Shiu function to pathdependent penalties. - No. pages: 6. [RKN: 72430] Shelved at: Per: IME (Oxf) Insurance: Mathematics & Economics (2010) 46 (1) : 92-97. Abstract: The Expected Discounted Penalty Function (EDPF) was introduced in a series of now classical papers ([9], [11] and [12]). Motivated by applications in option pricing and risk management, and inspired by recent developments in fluctuation theory for Lévy processes, we 61
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study an extended definition of the expected discounted penalty function that takes into account a new ruin-related random variable. In addition to the surplus before ruin and deficit at ruin, we extend the EDPF to include the surplus at the last minimum before ruin. We provide an expression for the generalized EDPF in terms of convolutions in a setting involving a subordinator and a spectrally negative Lévy process. Some expressions for the classical EDPF are recovered as special cases of the generalized EDPF. Cheung, Eric C K; Landriault, David. - Analysis of a generalized penalty function in a semiMarkovian risk model. - Society of Actuaries, - No. pages: 17. [RKN: 72025] Shelved at: Per: NAAJ (Oxf); Per NAAJ (Lon) [Faculty: NOR/AME] North American Actuarial Journal (2009) 13 (4) : 497-513. URL: http://www.soa.org/news-and-publications/publications/journals/naaj/naaj-detail.aspx Abstract: In this paper an extension of the semi-Markovian risk model studied by Albrecher and Boxma (2005) is considered by allowing for general interclaim times. In such a model, we follow the ideas of Cheung et al. (2010b) and consider a generalization of the Gerber-Shiu function by incorporating two more random variables in the traditional penalty function, namely, the minimum surplus level before ruin and the surplus level immediately after the second last claim prior to ruin. It is shown that the generalized Gerber-Shiu function satisfies a matrix defective renewal equation. Detailed examples are also considered when either the interclaim times or the claim sizes are exponentially distributed. Finally, we also consider the case where the claim arrival process follows a Markovian arrival process. Probabilistic arguments are used to derive the discounted joint distribution of four random variables of interest in this risk model by capitalizing on an existing connection with a particular fluid flow process. Cheung, Eric C K; Landriault, David; Willmot, Gordon E; Woo, Jae-Kyung. - Structural properties of Gerber–Shiu functions in dependent Sparre Andersen models. - No. pages: 10. [RKN: 72433] Shelved at: Per: IME (Oxf) Insurance: Mathematics & Economics (2010) 46 (1) : 117-126. Abstract: The structure of various Gerber–Shiu functions in Sparre Andersen models allowing for possible dependence between claim sizes and interclaim times is examined. The penalty function is assumed to depend on some or all of the surplus immediately prior to ruin, the deficit at ruin, the minimum surplus before ruin, and the surplus immediately after the second last claim before ruin. Defective joint and marginal distributions involving these quantities are derived. Many of the properties in the Sparre Andersen model without dependence are seen to hold in the present model as well. A discussion of Lundberg’s fundamental equation and the generalized adjustment coefficient is given, and the connection to a defective renewal equation is considered. The usual Sparre Andersen model without dependence is also discussed, and in particular the case with exponential claim sizes is considered. Keywords: Defective renewal equation; Compound geometric distribution; Ladder height; Lundberg’s fundamental equation; Generalized adjustment coefficient; Cramer’s asymptotic ruin formula; Esscher transform; Last interclaim time; NWU; NBU Cheung, Eric C K; Landriault, David. - A generalized penalty function with the maximum surplus prior to ruin in a MAP risk model. - No. pages: 8. [RKN: 72434] Shelved at: Per: IME (Oxf) Insurance: Mathematics & Economics (2010) 46 (1) : 127-134. Abstract: In this paper, a risk model where claims arrive according to a Markovian arrival process (MAP) is considered. A generalization of the well-known Gerber–Shiu function is proposed by incorporating the maximum surplus level before ruin into the penalty function. For this wider class of penalty functions, we show that the generalized Gerber–Shiu function can be expressed in terms of the original Gerber–Shiu function (see e.g. [Gerber, Hans U., Shiu, Elias, S.W., 1998. On the time value of ruin. North American Actuarial Journal 2(1), 48–72]) and the Laplace transform of a first passage time which are both readily available. The generalized Gerber–Shiu function is also shown to be closely related to the original Gerber–Shiu function in the same MAP risk model subject to a dividend barrier strategy. The simplest case of a MAP risk model, namely the classical compound Poisson risk model, will be studied in more detail. In particular, the discounted joint 62
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Risk Management Reading List September 2010
density of the surplus prior to ruin, the deficit at ruin and the maximum surplus before ruin is obtained through analytic Laplace transform inversion of a specific generalized Gerber–Shiu function. Numerical illustrations are then examined. Keywords: Gerber–Shiu function; Generalized penalty function; Maximum surplus level before ruin; Markovian arrival process; Discounted joint distribution Cheung, Eric C K; Landriault, David. - On a risk model with surplus-dependent premium and tax rates. - Waterloo: - University of Waterloo, 2010. - (Waterloo Research Institute in Insurance, Securities and Quantitative Finance (WatRISQ) Working paper series 2010-05). - No. pages: 20. [RKN: 72577] URL: http://www.watrisq.uwaterloo.ca/Research/2010Reports/2010-05.pdf Abstract: In this paper, the compound Poisson risk model with surplus-dependent premium rate is analyzed in the taxation system proposed by Albrecher and Hipp (2007). In the compound Poisson risk model, Albrecher and Hipp (2007) showed that a simple relationship between the ruin probabilities in the risk model with and without tax exists. This so-called tax identity was later generalized to a surplus-dependent tax rate by Albrecher et al. (2009). This paper further generalizes these results to the Gerber-Shiu function with a generalized penalty function involving the maximum surplus prior to ruin. We show that this generalized Gerber-Shiu function in the risk model with tax is closely related to the 'original' Gerber-Shiu function in the risk model without tax defined in a dividend barrier framework. The moments of the discounted tax payments before ruin and the optimal threshold level for the tax authority to start collecting tax payments are also examined. Keywords: Gerber-Shiu function, tax identity, maximum surplus level, surplus-dependent premium, discounted tax payments. Chi, Yichun; Jaimungal, Sebastian; Lin, X Sheldon. - An insurance risk model with stochastic volatility. - No. pages: 17. [RKN: 72427] Shelved at: Per: IME (Oxf) Insurance: Mathematics & Economics (2010) 46 (1) : 52-66. Abstract: In this paper, we extend the Cramér–Lundberg insurance risk model perturbed by diffusion to incorporate stochastic volatility and study the resulting Gerber–Shiu expected discounted penalty (EDP) function. Under the assumption that volatility is driven by an underlying Ornstein–Uhlenbeck (OU) process, we derive the integro-differential equation which the EDP function satisfies. Not surprisingly, no closed-form solution exists; however, assuming the driving OU process is fast mean-reverting, we apply the singular perturbation theory to obtain an asymptotic expansion of the solution. Two integro-differential equations for the first two terms in this expansion are obtained and explicitly solved. When the claim size distribution is of phase-type, the asymptotic results simplify even further and we succeed in estimating the error of the approximation. Hyper-exponential and mixed-Erlang distributed claims are considered in some detail. Keywords: Gerber–Shiu expected discounted penalty function; Integro-differential equation; Singular perturbation theory; Stochastic volatility; Perturbed compound Poisson risk process; Phase-type distribution; Ornstein–Uhlenbeck process Feng, R. - Generalized Gerber–Shiu Function in Piecewise–deterministic Markov Processes [abstract only] 2008. [RKN: 38565] Shelved at: Online only [Faculty: Online only] Actuarial Research Clearing House (ARCH) (2008) 1 URL: http://www.soa.org/news-and-publications/publications/proceedings/arch/arch-2008iss1.aspx Abstract: Introduced by Gerber and Shiu (1998) in NAAJ, the Gerber-Shiu expected discounted penalty function has ever since become the standard technical tool in the actuarial literature to analyze a variety of ruin-related quantities such as the probability of ultimate ruin, the joint distribution of the surplus prior to ruin and the deficit at ruin. As ruin theory progresses, great efforts have been made in the literature to study the dividends paid to shareholders up to ruin, which is not a special case of the Gerber-Shiu function. It has been brought to our attention that 63
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most techniques applied to the dividends problem are basically parallel to those employed in the analysis of the Gerber-Shiu function. The similarity between the solution methods led us to propose a more general function that contains both the Gerber-Shiu expected discounted penalty function and dividends paid up to ruin, as well as many others that have not been taken into consideration in the same systematic way, such as the insurer’s accumulative utility, expected total discounted claim expenses, etc. Not only does the generalized Gerber-Shiu function accommodate more quantities, it is also applicable with a more general class of underlying risk processes called the piecewise deterministic Markov processes, which includes most well-studied non-diffusion processes such as the compound Poisson, Sparre Andersen with phase-type interclaim times and Markov-modulated risk processes. Our major result provides an unifying approach to obtain integro-differential equations for all ruin-related quantities that fall in the category of the generalized Gerber-Shiu function. In the end, we shall demonstrate the application of generalized Gerber-Shiu function by recovering many well-known results in the literature as well as producing solutions to other aforementioned new quantities of interests. Loeffen, Ronnie L; Renaud, Jean-François. - De Finetti’s optimal dividends problem with an affine penalty function at ruin. - No. pages: 11. [RKN: 72431] Shelved at: Per: IME (Oxf) Insurance: Mathematics & Economics (2010) 46 (1) : 98-108. Abstract: In a Lévy insurance risk model, under the assumption that the tail of the Lévy measure is log-convex, we show that either a horizontal barrier strategy or the take-the-money-and-run strategy maximizes, among all admissible strategies, the dividend payments subject to an affine penalty function at ruin. As a key step for the proof, we prove that, under the aforementioned condition on the jump measure, the scale function of the spectrally negative Lévy process has a log-convex derivative. Keywords: Insurance risk theory; Optimal dividends; Deficit at ruin; Gerber–Shiu functions; Lévy processes; Stochastic control; Log-convexity Schmidli, Hanspeter. - On the Gerber–Shiu function and change of measure. - No. pages: 8. [RKN: 72422] Shelved at: Per: IME (Oxf) Insurance: Mathematics & Economics (2010) 46 (1) : 3-11. Abstract: We consider several models for the surplus of an insurance company mainly under some light-tail assumptions. We are interested in the expected discounted penalty at ruin. By a change of measure we remove the discounting, which simplifies the expression. This leads to (defective) renewal equations as they had been found by different methods in the literature. If we use the change of measure such that ruin becomes certain, the renewal equations simplify to ordinary renewal equations. This helps to discuss the asymptotics as the initial capital goes to infinity. For phase-type claim sizes, explicit formulae can be derived. Keywords: Expected discounted penalty function; Change of measure; Laplace transform; Sparre– Andersen risk model; Markov-modulated risk model; Björk–Grandell risk model; Perturbed risk model; Lump sum premia
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Tang, Qihe; Li, Wei. - Asymptotic aspects of the Gerber–Shiu function in the renewal risk model using Wiener–Hopf factorization and convolution equivalence. - No. pages: 13. [RKN: 72424] Shelved at: Per: IME (Oxf) Insurance: Mathematics & Economics (2010) 46 (1) : 19-31. Abstract: We study the asymptotic behaviour of the Gerber–Shiu expected discounted penalty function in the renewal risk model. Under the assumption that the claim-size distribution has a convolution-equivalent density function, which allows both heavy-tailed and light-tailed cases, we establish some asymptotic formulas for the Gerber–Shiu function with a fairly general penalty function. These formulas become completely transparent in the compound Poisson risk model or for certain choices of the penalty function in the renewal risk model. A by-product of this work is an extension of the Wiener–Hopf factorization to include the times of ascending and descending ladders in the continuous-time renewal risk model. Keywords: Asymptotics; Convolution equivalence; Duality principle; Gerber–Shiu function; Renewal risk model; Wiener–Hopf factorization Willmot, Gordon E; Woo, Jae-Kyung. - Surplus analysis for a class of Coxian interclaim time distributions with applications to mixed Erlang claim amounts. - No. pages: 10. [RKN: 72425] Shelved at: Per: IME (Oxf) Insurance: Mathematics & Economics (2010) 46 (1) : 32-41. Abstract: Gerber–Shiu analysis with the generalized penalty function proposed by Cheung et al. (in press-a) is considered in the Sparre Andersen risk model with a Kn family distribution for the interclaim time. A defective renewal equation and its solution for the present Gerber–Shiu function are derived, and their forms are natural for analysis which jointly involves the time of ruin and the surplus immediately prior to ruin. The results are then used to find explicit expressions for various defective joint and marginal densities, including those involving the claim causing ruin and the last interclaim time before ruin. The case with mixed Erlang claim amounts is considered in some detail. Keywords: Sparre Andersen risk process; Kn family of distributions; Combination of Erlangs; Mixtures of Erlangs; Defective renewal equation; Compound geometric distribution; Ladder height; Generalized Lundberg’s fundamental equation; Lagrange polynomials
Germany Devlin, Peter L; Cahill, Stephen. - Risk and Compensation : German and UK [copies of slides only] - Institute of Actuaries and Faculty of Actuaries, 2010. - (Risk and Investment Conference 2010 Caledonian Hotel, Edinburgh, 13-15 June 2010). [RKN: 73017] URL: http://www.actuaries.org.uk/research-and-resources/documents/risk-andcompensation
Governance Bridgeland, Sally. - Pension fund governance : a CEO’s view [copies of slides only] - Institute of Actuaries and Faculty of Actuaries, 2010. - (Risk and Investment Conference 2010 Caledonian Hotel, Edinburgh, 13-15 June 2010). [RKN: 73024] URL: http://www.actuaries.org.uk/research-and-resources/documents/pension-fundgovernance-ceos-view-slides
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Deighton, S P; Dix, Roger C; Graham, J R; Skinner, J M E. - Governance and risk management in United Kingdom insurance companies. - London: - The Actuarial Profession. Institute of Actuaries and Faculty of Actuaries, 2009. - No. pages: 54. [RKN: 38980] Shelved at: ifp 03/09; BXP/511 pam (Oxf) [Faculty: JOU/INS] URL: http://www.actuaries.org.uk/research-and-resources/documents/governance-and-riskmanagement-uk-insurance-companies Abstract: For some while there has been a growing awareness from both internal and external stakeholders that the governance and risk management in United Kingdom insurance companies needed to be enhanced. The proposed European Union Solvency II Directive makes this very explicit and the current economic turmoil has put a much stronger emphasis on the whole process: it is being seen as the right thing to do, rather than simply a regulatory requirement. In this paper, the authors set out the background to and recent history of governance for UK insurance companies, and consider how enterprise risk management can bring together the various control frameworks needed to support that governance. Whilst no two companies are the same, and hence the solutions to these issues will vary, there are several common themes linked to successful implementation. Similarly, various barriers to success are identified, together with solutions to resolve them. Honey, Garry. - A short guide to reputation risk. - Gower, 2009. - No. pages: 119. [Faculty: 519.287 HON] Abstract: This guide will show you how to: - Identify the value of your reputation and mitigate risk of damage to this value. - Measure your reputation as an intangible asset and part of intellectual capital. - Manage the drivers of reputation effectively within your organization. - Report reputation risk management to inspire confidence among stakeholders.
[RKN: 71960]
Orros, George C; Cantle, Neil J; Puchy, Rudolf Y; Wang, Haijing. - ERM for Strategic and Emerging Risks. - Institute of Actuaries and Faculty of Actuaries, 2010. - (Risk and Investment Conference 2010 Caledonian Hotel, Edinburgh, 13-15 June 2010). [RKN: 73011] Abstract: This paper is focussed on ERM and strategic business management for insurance companies in our world of “unknown unknowns” and the emergence of unexpected risks over time. It illustrates how Chief Risk Officers can focus, with an ERM framework on “risk and opportunity management”, balancing risks against opportunities, whilst being resilient against “unknown unknowns” and their emergence over time as “known unknowns” and “known knowns”. The findings were based on 14 real case studies and review the “lessons learned” and the “early warning indicators” that could (and perhaps should) have been used in order to detect the emerging risks in a timely manner and influenced the CRO function to have taken appropriate remedial action. Keywords: Enterprise Risk Management; Strategic Risks; Risk and Uncertainty; Governance; Risk Appetite Stewart, Fiona. - Pension Funds’ Risk-Management Framework : Regulation and supervisory oversight. - Paris: - OECD, 2010. - (OECD Working Papers on Insurance and Private Pensions No. 40). - No. pages: 56. [RKN: 72297] URL: http://www.oecd.org/dataoecd/35/43/44633539.pdf Abstract: Drawing on the experience of the pensions and other financial sectors, this paper examines what sort of risk-management framework pension funds should have in place. Such frameworks are broken down into four main categories: management oversight and culture; strategy and risk assessment; control systems; and information and reporting. Ways in which supervisory authorities can check that such systems are operating are also considered, with a check list provided to assist pension supervisory authorities with their oversight of this important area. Key words: Pensions, Risk-management, Risk Assessment, Internal Controls
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Risk Management Reading List September 2010
Pang, Gaobo; Warshawsky, Mark. - Optimizing the equity-bond-annuity portfolio in retirement : The impact of uncertain health expenses. - No. pages: 12. [RKN: 72441] Shelved at: Per: IME (Oxf) Insurance: Mathematics & Economics (2010) 46 (1) : 198-209. Abstract: This paper derives optimal equity-bond-annuity portfolios for retired households who face stochastic capital market returns, differential exposures to mortality risk and uncertain uninsured health expenses, and differential Social Security and defined benefit pension coverage. The results show that the health spending risk drives household portfolios to shift from risky equities to safer assets and enhances the demand for annuities due to their increasing-with-age superiority over bonds in hedging against life-contingent health spending and longevity risks. Households with higher income have a greater incremental demand for life annuities. The annuities in turn provide greater leverage for equity investment in the remaining asset portfolios. Keywords: Annuity; Asset allocation; Health expense; Precautionary savings; Pension; Life cycle
Health insurance Neuhaus, Walther. - Risk equalisation by mixed schemes. 2008. - No. pages: 34. [RKN: 69395] Shelved at: Per: AAJ (Oxf) [Faculty: AUS/ACT] Australian Actuarial Journal (2008) 14 (2) : 193-226. URL: http://www.actuaries.asn.au/PublicationAndResearch/Library/AAJ?docType=Publication_A AJ&docTypeID=227&year=Select%20Year Abstract: This paper shows how a risk equalisation scheme using risk-based capitation (RBC) can be mollified by adding partial equalisation of health insurers' differential utilisation rates. A risk equalisation scheme that combines RBC with partial equalisation of the 'utilisation component' is called a 'mixed scheme'. Besides introducing the reader to mixed equalisation schemes, the aim of this paper is twofold. Firstly, to illustrate by a simple, made-up example how a mixed scheme responds to self-selection effects more efficiently than a RBC scheme. Secondly, to outline how a mixed scheme could be designed in practice, using only statistics that are available in the Australian private health insurance market. Keywords: health insurance, community rating, risk equalisation Orros, George; Smith, John. - Health at risk. - Staple Inn Actuarial Society, - No. pages: 3. [RKN: 71739] Shelved at: Per: Actuary (Oxf); Per: Actuary (Lon) [Faculty: SIA/ACT] The Actuary (2009) December : 25-27. URL: http://www.the-actuary.org.uk Abstract: George Orros and John Smith consider a practical enterprise risk management (ERM) framework for health and care insurance companies. Keywords: Early warning indicators, key performance indicators, risk heat maps
Hedging Hull, John. - Risk management and financial institutions. - Pearson Education, 2007. - No. pages: 500. [RKN: 69114] [Faculty: 332.1 HUL]
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Indexes Goltz, Felix. - Constructing efficient stock market indices [copies of slides only] - Institute of Actuaries and Faculty of Actuaries, 2010. - (Risk and Investment Conference 2010 Caledonian Hotel, Edinburgh, 13-15 June 2010). [RKN: 73007] URL: http://www.actuaries.org.uk/research-and-resources/documents/constructionefficient-stock-market-indicies Sweeting, P J. - Longevity Indices and Pension Fund Risk. - London: - The Pensions Institute, 2010. - (Discussion Paper PI-1004). - No. pages: 19. [RKN: 72236] URL: http://www.pensions-institute.org/workingpapers/WP1004.pdf Abstract: Pension fund longevity risk is becoming increasingly important. Longevity indices would allow the creation of liquid derivatives that could be used to hedge this risk. However, there are a number of criteria that such indices would need to fulfil to provide an optimal solution, as well as a number of forms that the derivatives could take. These features are discussed, together with the characteristics of some existing longevity indices.
Insurance Anderson, Dan R; Anderson, Kenneth E. - Sustainability Risk Management. 2009. - No. pages: 14. [RKN: 69452] [Faculty: RIS/MAN] Risk Management and Insurance Review (2009) 12 (1) : 25-38. Abstract: This article features a panel discussion on sustainability risk management organized by Dan R. Anderson for the American Risk and Insurance Association 2007 annual meeting. The moderator, Mr. Dan Anderson, is the Leslie P. Schulz Professor of Risk Management and Insurance at the University of Wisconsin-Madison School of Business and author of Corporate Survival: The Critical Importance of Sustainability Risk Management. Anderson is a past president of the American Risk and Insurance Association (ARIA) and the 2007 winner of the Geneva Association/International Insurance Society Research Award, including a $10,000 stipend, for his paper, "Sustainability Risk Management as a Critical Component of Enterprise Risk Management (ERM): Global Warming—Climate Change Risks." He also was recently presented with the Risk Innovator Award by Risk and Insurance magazine for his work in sustainability risk management. The next panelist is Kenneth E. Anderson, Director of Aon's Environmental Services Group. Mr. Kenn Anderson is a graduate of the University of Wisconsin's Risk and Insurance Management program and has spent the last 20 years advising organizations about their exposure to environmental risk and designing, negotiating and implementing appropriate environmental insurance programs to meet specific client needs. He will emphasize business opportunities associated with sustainability risk management and the availability of insurance coverage for sustainability risks. Baltensperger, E; Buomberger, P; Iuppa, A A; Keller, B; Wicki, A. - Regulation and intervention in the insurance industry : Fundamental issues. - Geneva Association, 2008. - (Geneva Report No. 01). - No. pages: 63. [RKN: 71581] Shelved at: online only [Faculty: online only] URL: http://www.genevaassociation.org/Home/Results.aspx?mode=free&keyword=geneva%20re port Abstract: Financial markets belong to the strongly supervised and regulated sectors of most modern economies. This applies to both banking and insurance. Traditional motives and justifications for regulation in these two industries overlap to some extent, but differ also in many ways. Financial markets have undergone extraordinary growth and structural change in recent decades, due to a variety of developments (worldwide integration of capital markets, revolution in information 68
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Risk Management Reading List September 2010
technology, shifting attitudes towards competition and protection in the financial services area). Along with this, existing approaches to regulation have been increasingly questioned and regulatory frameworks modified in a multitude of ways, a process very much still going on. While a very substantial body of literature concerned with the regulation of banking has developed over recent years, dealing with both its fundamental motivation and specific forms and applications of such regulation, a similar intellectual effort concerned with insurance regulation is lacking to a considerable extent. It is the aim of this paper to work towards closing this gap. Chan, Kam C; Liano, Kartono. - Influential articles, journals and institutions in risk management and insurance. 2009. - No. pages: 15. [RKN: 69456] [Faculty: RIS/MAN] Risk Management and Insurance Review (2009) 12 (1) : 125-139. Abstract: We use a threshold citation approach to measure the influence of articles, journals, and institutions in risk management and insurance research. The three frequently cited articles in risk management and insurance research are "Increasing Risk: I. A Definition" by Rothschild and Stiglitz (1970), "Precautionary Saving in the Small and in the Large" by Kimball (1990), and "Equilibrium in Competitive Insurance Markets: An Essay on the Economics of Imperfect Information" by Rothschild and Stiglitz (1990). Journal of Risk and Insurance, Econometrica, and Journal of Political Economy are the three influential journals in risk management and insurance research. Furthermore, the five influential institutions in risk management and insurance research are the University of Pennsylvania, Harvard University, the University of Rochester, the University of Michigan, and Massachusetts Institute of Technology. Chi, Yichun; Jaimungal, Sebastian; Lin, X Sheldon. - An insurance risk model with stochastic volatility. - No. pages: 17. [RKN: 72427] Shelved at: Per: IME (Oxf) Insurance: Mathematics & Economics (2010) 46 (1) : 52-66. Abstract: In this paper, we extend the Cramér–Lundberg insurance risk model perturbed by diffusion to incorporate stochastic volatility and study the resulting Gerber–Shiu expected discounted penalty (EDP) function. Under the assumption that volatility is driven by an underlying Ornstein–Uhlenbeck (OU) process, we derive the integro-differential equation which the EDP function satisfies. Not surprisingly, no closed-form solution exists; however, assuming the driving OU process is fast mean-reverting, we apply the singular perturbation theory to obtain an asymptotic expansion of the solution. Two integro-differential equations for the first two terms in this expansion are obtained and explicitly solved. When the claim size distribution is of phase-type, the asymptotic results simplify even further and we succeed in estimating the error of the approximation. Hyper-exponential and mixed-Erlang distributed claims are considered in some detail. Keywords: Gerber–Shiu expected discounted penalty function; Integro-differential equation; Singular perturbation theory; Stochastic volatility; Perturbed compound Poisson risk process; Phase-type distribution; Ornstein–Uhlenbeck process Christiansen, Marcus C; Helwich, Marko. - Some further ideas concerning the interaction between insurance and investment risks. [RKN: 43362] Shelved at: Per: Blätter (Lon); online only Blätter der Deutsche Gesellschaft für Versicherungs- und Finanzmathematik (2008) 29 (heft 2) : 253-266. URL: http://www.springerlink.com/content/1864-0303/
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Crocker, Keith J; Snow, Arthur. - Background risk and the performance of insurance markets under adverse selection . [RKN: 38801] Shelved at: Per: Geneva (Oxf) Geneva Risk and Insurance Review (2008) 33 (2) : 137-160. Abstract: Background risk can influence the performance of insurance markets that must deal with adverse selection when applicants are risk vulnerable, since they are more averse to bearing the insurable risk as a result of their exposures to background risk. We show that background risk always results in a lower deductible for the incentive constrained contract, and that a broader range of markets attains the stable sequential equilibrium cross-subsidized pair of separating contracts. We conclude that background risk always improves the performance of markets for coverage against (insurable) foreground risks that must deal with adverse selection. We also find, however, that these improvements are never sufficient to offset the cost to insureds of bearing the background risk. De Alba, Enrique; Zuniga, Jesus; Corzo, Marco A. Ramírez. - Measurement and transfer of catastrophic risks : A simulation analysis. - Ontario: - University of Waterloo, 2008. - (Institute of Insurance and Pension Research Research Report 08-03). - No. pages: 22. [RKN: 69977] Shelved at: Online only [Faculty: Online only] URL: http://www.stats.uwaterloo.ca/stats_navigation/IIPR/IIPR-Reports.shtml Abstract: When analyzing catastrophic risk, traditional measures for evaluating risk, such as the probable maximum loss (PML), value at risk (VaR), tail-VaR , and others, can become practically impossible to obtain analytically in certain types of insurance, such as earthquake, and certain types of reinsurance arrangements, specially nonproportional with reinstatements. Given the available information, it can be very difficult for an insurer to measure its risk exposure. The transfer of risk in this type of insurance is usually done through reinsurance schemes combining diverse types of contracts that can greatly reduce the extreme tail of the cedant’s loss distribution. This effect can be assessed mathematically. The PML is defined in terms of a very extreme quantile. Also, under standard operating conditions, insurers use several “layers” of non proportional reinsurance that may or may not be combined with some type of proportional reinsurance. The resulting reinsurance structures will then be very complicated to analyze and to evaluate their mitigation or transfer effects analytically, so it may be necessary to use alternative approaches, such as Monte Carlo simulation methods. This is what we do in this paper in order to measure the effect of a complex reinsurance treaty on the risk profile of an insurance company. We compute the pure risk premium, PML as well as a host of results: impact on the insured portfolio, risk transfer effect of reinsurance programs, proportion of times reinsurance is exhausted, percentage of years it was necessary to use the contractual reinstatements, etc. Since the estimators of quantiles are known to be biased, we explore the alternative of using an Extreme Value approach to complement the analysis. Keywords: Quantile, Extreme Value, Monte Carlo Methods, PML, VAR, Reinsurance. Dowd, Kevin; Bartlett, David L; Chaplin, Mark; Kelliher, Patrick O J; O'Brien, Chris D. - Risk management in the UK insurance industry: the changing state of practice. [RKN: 38029] Shelved at: BXP pam (Oxf) International Journal of Financial Services Management (2008) 3 : 5-23. Abstract: This paper reviews a number of recent surveys relevant to risk management by UK insurers. These include the results of four surveys specifically on UK insurers. Our findings suggest that the risk management practices of UK insurers are variable, generally behind best practices in adjacent sectors, and in some cases are a cause of concern. However, we also find that they have been improving significantly.
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Risk Management Reading List September 2010
Haste, Andy. - Risky Business: Insurance and Society. - London: - Chartered Insurance Institute. CII, 2009. - No. pages: 4. [RKN: 39353] Shelved at: online only [Faculty: online only] URL: http://www.cii.co.uk/downloaddata/TP23_HasteRSA_Managing_Risk_18Aug2009.pdf Abstract: This article, the first of a series of four on risk and insurance, explores the basic elements of risk management, the value it can add to peoples’ freedom and choices and the future challenges that insurers face in taking on and assessing levels of risk. Insurance provides an important and often forgotten social value to consumers and businesses. Its benefits range from providing security in the face of potentially catastrophic losses at home or abroad to providing freedom from liability allowing firms to explore new and dynamic fields. While the basic principle of providing peace of mind has stayed the same for over 300 years, the processes for doing this have become increasingly sophisticated. New techniques such as accurate flood mapping and telematics technology have resulted in more competitive propositions in both commercial and personal lines. Insurance has also had the effect of influencing behaviour, such as incentivising safer or more climate-friendly consumers or more sustainable business practices. Looking ahead, insurers and government will need to develop mutual working and understanding. In the area of climate change, underwriters must contend with the need to develop realistic risk modelling for related scenarios despite not being aware of their full impact or likelihood. Meanwhile, policymakers must consider the unintended consequences that otherwise well-intentioned legislation could hold for insurers. Kim, Joseph H T. - Conditional tail moments of the exponential family and its transformed distributions. - Ontario: - University of Waterloo, 2008. - (Institute of Insurance and Pension Research Research Report 08-05). - No. pages: 28. [RKN: 69979] Shelved at: Online only [Faculty: Online only] URL: http://www.stats.uwaterloo.ca/stats_navigation/IIPR/IIPR-Reports.shtml Abstract: Tail risk measures have been extensively used in the finance and actuarial literature for setting premium and risk capital. Among others the conditional tail expectation (CTE) is a popular measure in insurance applications. This paper derives the formulas of the CTE and higher moments for the exponential family class, which extends the natural exponential family, using the canonical representation. The conditional tail moments for the distributions transformed from the exponential family are also derived using the variable transformation. With the formulas developed in this paper we know the conditional tail moments for a wide range of distributions used for actuarial modeling. Keywords: conditional tail moments; exponential family; tail risk measure Maynard, Trevor. - Climate change - are you ready? : Soapbox. - Staple Inn Actuarial Society, No. pages: 1. [RKN: 71736] Shelved at: Per: Actuary (Oxf); Per: Actuary (Lon) [Faculty: SIA/ACT] The Actuary (2009) December : 8. URL: http://www.the-actuary.org.uk Abstract: Looks at the effects climate change will have on actuarial work, particularly on asset values, risk, health and mortality, and insurance. Powers, Michael R. - Using Aumann-Shapley values to allocate insurance risk: the case of inhomogeneous losses. - No. pages: 15. [RKN: 68936] Shelved at: Per: NAAJ (Oxf); Per NAAJ (Lon) [Faculty: NOR/AME] North American Actuarial Journal (2007) 11 (3) : 113-127. URL: http://www.soa.org/news-and-publications/publications/journals/naaj/naaj-detail.aspx Abstract: The problem of allocating responsibility for risk among members of a portfolio arises in a variety of financial and risk-management contexts. Examples are particularly prominent in the insurance sector, where actuaries have long sought methods for distributing capital (net worth) across a number of distinct exposure units or accounts according to their relative contributions to the total ‘‘risk’’ of an insurer’s portfolio. Although substantial work has been done on this problem, no satisfactory solution has yet been presented for the case of inhomogeneous loss distributions— that is, losses X (x) FX such that FXt(x) FtX(x) for some t 0. The purpose of this article is to show 71
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Risk Management Reading List September 2010
that the value-assignment method of nonatomic cooperative games proposed in 1974 by Aumann and Shapley may be used to solve risk-allocation problems involving losses of this type. This technique is illustrated by providing analytical solutions for a useful class of multivariatenormal loss distributions. Renaud, Jean-François. - The distribution of tax payments in a Lévy insurance risk model with a surplus-dependent taxation structure. - No. pages: 5. [RKN: 72396] Shelved at: Per: IME (Oxf) Insurance: Mathematics & Economics (2009) 45 (2) : 242-246. Abstract: We study the distribution of tax payments in the model of Kyprianou and Zhou [Kyprianou, A.E., Zhou, X., 2009. General tax structures and the Lévy insurance risk model. J. Appl. Probab. (in press)], that is a Lévy insurance risk model with a surplus-dependent tax rate. More precisely, after a short discussion on the so-called tax identity, we derive a recursive formula for arbitrary moments of the discounted tax payments until ruin and we identify the distribution of the tax payments when there is no force of interest. Keywords: Insurance risk theory; General taxation structure; Tax payments; Lévy processes Rusalovskiy, Artem. - Challenges of Solvency II implementation : Preparing for IT implementation of Solvency II regulations in insurance companies. - Germany: - VDM Verlag Dr Müller Aktiengesellschaft & Co. KG, 2008. - No. pages: 123. [RKN: 69771] [Faculty: 368 RUS] Tennyson, Sharon. - Incentive effects of community rating in insurance markets : evidence from Massachusetts automobile insurance. [RKN: 39618] Shelved at: Per: Geneva (Oxf) Geneva Risk and Insurance Review (2010) 35 (1) : 19-46. Abstract: Rate regulations in insurance markets often impose cross-subsidies in insurance premiums from low-risk consumers to high-risk consumers. This paper develops the hypothesis that premium cross-subsidies affect risk taking by insurance consumers, and tests this hypothesis by examining the marginal impact of premium subsidies and overcharges on future insurance costs. The empirical analysis uses 1990–2003 rating cell-level data from the Massachusetts automobile insurance market, in which regulation produced large cross-subsidies across cells. Consistent with the hypothesized effects, premium subsidies are found to be significantly related to higher future insurance costs, and the opposite effects are found for premium overcharges.
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Wang, Liang; Valdez, Emiliano A; Piggott, John. - Securitization of longevity risk in reverse mortgages. 2008. - No. pages: 27. [RKN: 69496] Shelved at: Per: NAAJ (Oxf); Per NAAJ (Lon) [Faculty: NOR/AME] North American Actuarial Journal (2008) 12 (4) : 345-371. URL: http://www.soa.org/news-and-publications/publications/journals/naaj/naaj-detail.aspx Abstract: The reverse mortgage market has been expanding rapidly in developed economies in recent years. The onset of demographic transition places a rapidly rising number of households in an age window in which reverse mortgages have potential appeal. Increasing prices for residential real estate over the last decade have further stimulated interest. Reverse mortgages involve various risks from the provider's perspective that may hinder the further development of these financial products. This paper addresses one method of transferring and financing the risks associated with these products through the form of secularization. Securitization is becoming a popular and attractive alternative form of risk transfer of insurance liabilities. Here we demonstrate how to construct a secularization structure for reverse mortgages similar to the one applied in traditional insurance products. Specifically, we investigate the merits of developing survivor bonds and survivor swaps for reverse mortgage products. In the case of survivor bonds, for example, we are able to compute premiums, both analytically and numerically through simulations, and to examine how the longevity risk may be transferred to the financial investors. Our numerical calculations provide an indication of the economic benefits derived from developing survivor bonds to securitize the 'longevity risk component' of reverse mortgage products. Moreover, some sensitivity analysis of these economic benefits indicates that these survivor bonds provide for a promising tool for investment diversification.
Insurance broking De Alba, Enrique; Zuniga, Jesus; Corzo, Marco A. Ramírez. - Measurement and transfer of catastrophic risks : A simulation analysis. - Ontario: - University of Waterloo, 2008. - (Institute of Insurance and Pension Research Research Report 08-03). - No. pages: 22. [RKN: 69977] Shelved at: Online only [Faculty: Online only] URL: http://www.stats.uwaterloo.ca/stats_navigation/IIPR/IIPR-Reports.shtml Abstract: When analyzing catastrophic risk, traditional measures for evaluating risk, such as the probable maximum loss (PML), value at risk (VaR), tail-VaR , and others, can become practically impossible to obtain analytically in certain types of insurance, such as earthquake, and certain types of reinsurance arrangements, specially nonproportional with reinstatements. Given the available information, it can be very difficult for an insurer to measure its risk exposure. The transfer of risk in this type of insurance is usually done through reinsurance schemes combining diverse types of contracts that can greatly reduce the extreme tail of the cedant’s loss distribution. This effect can be assessed mathematically. The PML is defined in terms of a very extreme quantile. Also, under standard operating conditions, insurers use several “layers” of non proportional reinsurance that may or may not be combined with some type of proportional reinsurance. The resulting reinsurance structures will then be very complicated to analyze and to evaluate their mitigation or transfer effects analytically, so it may be necessary to use alternative approaches, such as Monte Carlo simulation methods. This is what we do in this paper in order to measure the effect of a complex reinsurance treaty on the risk profile of an insurance company. We compute the pure risk premium, PML as well as a host of results: impact on the insured portfolio, risk transfer effect of reinsurance programs, proportion of times reinsurance is exhausted, percentage of years it was necessary to use the contractual reinstatements, etc. Since the estimators of quantiles are known to be biased, we explore the alternative of using an Extreme Value approach to complement the analysis. Keywords: Quantile, Extreme Value, Monte Carlo Methods, PML, VAR, Reinsurance.
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Insurance companies Bernard, C; Chen, A. - On the Regulator–Insurer Interaction in a Structural Model. 2008. [RKN: 38567] Shelved at: Online only [Faculty: Online only] Actuarial Research Clearing House (ARCH) (2008) 1 URL: http://www.soa.org/news-and-publications/publications/proceedings/arch/arch-2008iss1.aspx Abstract: In this paper, we provide a new insight to the previous work of Briys and de Varenne [1994], Grosen and Jørgensen [2002] and Chen and Suchanecki [2007]. We show that if the insurance company follows a risk management strategy, it can significantly change the risk exposure of the company, and that it should thus be taken into account by the regulators. We first study how the regulator establishes regulation intervention levels in order to control for instance the default probability of the insurance company (under the real world probability measure). This part of the analysis is based on a constant volatility and there exists a one-to-one relation between the optimal regulation level and the volatility. Given that the insurance company is informed of the regulatory rules, we study how results can be significantly different when the insurance company follows a risk management strategy with non-constant volatilities. We thus highlight the limits of prior literature and believe that the value of the risk management of the company should be included in the risk exposure estimation and the market value of liabilities as well. Bernard, Carole; Chen, An. - On the regulator-insurer-interaction in a structural model. - Ontario: University of Waterloo, 2008. - (Institute of Insurance and Pension Research Research Report 0801). - No. pages: 24. [RKN: 69975] Shelved at: Online only [Faculty: Online only] URL: http://www.stats.uwaterloo.ca/stats_navigation/IIPR/IIPR-Reports.shtml Abstract: In this paper, we provide a new insight to the previous work of Briys and de Varenne [1994], Grosen and Jørgensen [2002] and Chen and Suchanecki [2007]. We show that if the insurance company follows a risk management strategy, it can significantly change the risk exposure of the company, and that it should thus be taken into account by regulators. We first study how the regulator establishes regulation intervention levels in order to control for instance the default probability of the insurance company. This part of the analysis is based on a constant volatility and there exists a one-to-one relation between the optimal regulation level and the volatility. Given that the insurance company is informed of regulatory rules, we study how results can be significantly different when the insurance company follows a risk management strategy with non-constant volatilities. We thus highlight some limits of prior literature and believe that the value of the company’s risk management should be included in the risk exposure estimation and the market value of liabilities as well. Keywords: Life insurance policies, Default risk, Regulatory rule. De Alba, Enrique; Zuniga, Jesus; Corzo, Marco A. Ramírez. - Measurement and transfer of catastrophic risks : A simulation analysis. - Ontario: - University of Waterloo, 2008. - (Institute of Insurance and Pension Research Research Report 08-03). - No. pages: 22. [RKN: 69977] Shelved at: Online only [Faculty: Online only] URL: http://www.stats.uwaterloo.ca/stats_navigation/IIPR/IIPR-Reports.shtml Abstract: When analyzing catastrophic risk, traditional measures for evaluating risk, such as the probable maximum loss (PML), value at risk (VaR), tail-VaR , and others, can become practically impossible to obtain analytically in certain types of insurance, such as earthquake, and certain types of reinsurance arrangements, specially nonproportional with reinstatements. Given the available information, it can be very difficult for an insurer to measure its risk exposure. The transfer of risk in this type of insurance is usually done through reinsurance schemes combining diverse types of contracts that can greatly reduce the extreme tail of the cedant’s loss distribution. This effect can be assessed mathematically. The PML is defined in terms of a very extreme quantile. Also, under standard operating conditions, insurers use several “layers” of non proportional reinsurance that may or may not be combined with some type of proportional 74
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Risk Management Reading List September 2010
reinsurance. The resulting reinsurance structures will then be very complicated to analyze and to evaluate their mitigation or transfer effects analytically, so it may be necessary to use alternative approaches, such as Monte Carlo simulation methods. This is what we do in this paper in order to measure the effect of a complex reinsurance treaty on the risk profile of an insurance company. We compute the pure risk premium, PML as well as a host of results: impact on the insured portfolio, risk transfer effect of reinsurance programs, proportion of times reinsurance is exhausted, percentage of years it was necessary to use the contractual reinstatements, etc. Since the estimators of quantiles are known to be biased, we explore the alternative of using an Extreme Value approach to complement the analysis. Keywords: Quantile, Extreme Value, Monte Carlo Methods, PML, VAR, Reinsurance. Deighton, S P; Dix, Roger C; Graham, J R; Skinner, J M E. - Governance and risk management in United Kingdom insurance companies. - London: - The Actuarial Profession. Institute of Actuaries and Faculty of Actuaries, 2009. - No. pages: 54. [RKN: 38980] Shelved at: ifp 03/09; BXP/511 pam (Oxf) [Faculty: JOU/INS] URL: http://www.actuaries.org.uk/research-and-resources/documents/governance-and-riskmanagement-uk-insurance-companies Abstract: For some while there has been a growing awareness from both internal and external stakeholders that the governance and risk management in United Kingdom insurance companies needed to be enhanced. The proposed European Union Solvency II Directive makes this very explicit and the current economic turmoil has put a much stronger emphasis on the whole process: it is being seen as the right thing to do, rather than simply a regulatory requirement. In this paper, the authors set out the background to and recent history of governance for UK insurance companies, and consider how enterprise risk management can bring together the various control frameworks needed to support that governance. Whilst no two companies are the same, and hence the solutions to these issues will vary, there are several common themes linked to successful implementation. Similarly, various barriers to success are identified, together with solutions to resolve them. Gatzert, Nadine; Hoermann, Gudrun; Schmeiser, Hato. - The impact of the secondary market of life insurers' surrender profits. - No. pages: 22. [RKN: 71779] Shelved at: Per: J.Risk Ins (Oxf) [Faculty: JOU/RIS] Journal of Risk and Insurance (2009) 76 (4) : 887-908. Abstract: Life insurers often claim that the life settlement industry reduces their surrender profits and leads to an adverse shift in their portfolio of insured risks; that is, high risks remain in the portfolio instead of surrendering. In this article, we aim to quantify the effect of altered surrender behavior––subject to the health status of an insured––in a portfolio of life insurance contracts on the surrender profits of primary insurers. Our model includes mortality heterogeneity by applying a stochastic frailty factor to a mortality table. We additionally analyze the impact of the premium payment method by comparing results for annual and single premium payments. Hitchcox, A N; Klumpes, P J M; McGaughey, K W; Smith, A D; Taverner, N H. - ERM for insurance companies - Adding the investor's point of view. - London: - Institute of Actuaries, 2010. - No. pages: 48. [RKN: 72028] Shelved at: ifp 01/10 (Oxf); ifp 01/10 (Lon) [Faculty: JOU/INS] URL: http://www.actuaries.org.uk/research-and-resources/documents/erm-insurancecompanies-adding-investors-point-view Abstract: A major outcome of ERM activities in insurance companies has been the bringing together of all of the key risks in the company, to be managed together in a holistic fashion. The authors of this paper believe that an ERM framework also needs to look beyond the company, and have regard to the risk management needs of investors, from the point of view of the contribution of the insurance company to the overall risk and reward of their total investment portfolios. To meet these needs, the ERM framework needs to provide sufficient information on topics such as systematic risk, potential correlations of earnings from future new business with macroeconomic trends, other risks to franchise value, and sources of model risk within the company. The paper does not provide solutions for the issues described above; but limits itself to describing and 75
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discussing the direction for some important new initiatives in ERM activities. Keywords: Risk Management; Enterprise Risk Management (ERM); Systematic Risk; Franchise Value; Buffer Capital; Cost of Capital; Replicating Portfolio; Parameter Risk; Model Risk; Agency Risk; Risk Governance; Risk Disclosure. Orros, George; Smith, John. - Health at risk. - Staple Inn Actuarial Society, - No. pages: 3. [RKN: 71739] Shelved at: Per: Actuary (Oxf); Per: Actuary (Lon) [Faculty: SIA/ACT] The Actuary (2009) December : 25-27. URL: http://www.the-actuary.org.uk Abstract: George Orros and John Smith consider a practical enterprise risk management (ERM) framework for health and care insurance companies. Keywords: Early warning indicators, key performance indicators, risk heat maps Schoenmaker, Dirk; Oosterloo, Sander; Winkels, Otto. - The emergence of cross-border insurance groups within Europe with centralised risk management. [RKN: 39043] Shelved at: Per: Geneva (Oxf) Geneva Papers on Risk and Insurance (2008) 33 (3) : 530-546. Abstract: This paper analyses the degree of internationalisation of insurance business. Using a novel data set of 25 large EU insurance groups, we find that the insurance industry has a strong international orientation. About 55 percent of the business of these large insurance groups is conducted abroad. The cross-border activities are predominantly within Europe (30–35 percent) and less so in the rest of the world (20–25 percent). Next, this paper examines the impact of internationalisation on the organisational structure. We find a clear trend towards centralising risk and capital management activities within large insurance groups, though insurance remains at the same time a local business. Applying the hub and spoke model, we identify which functions are executed at the centre (hub) and which functions are performed at the level of the local business units (spokes).
Insurance contracts Quiggin, John; Chambers, Robert G. - Bargaining power and efficiency in insurance contracts. [RKN: 39293] Shelved at: Per: Geneva (Oxf) Geneva Risk and Insurance Review (2009) 34 (1) : 47-73. Abstract: Insurance contracts are frequently modelled as principal–agent relationships. The purpose of this paper is to examine the interaction between differential bargaining power and the efficiency of insurance contracts. The analysis is undertaken in a framework of state-contingent production, which allows us to consider, as separate choices, the level of effort committed by the client and the riskiness of the equilibrium state-contingent production vector. Our central result is that, in the presence of hold-up problems, the exercise of monopoly power by insurers leads clients to undertake socially costly self-protection, leading to suboptimal levels of insurance. Clients can exploit information asymmetries to offset the bargaining power of the insurer, but this process is also socially costly. Hence, competitive markets for insurance will yield a Paretosuperior outcome to the constrained Pareto-optimum reached in markets where insurers have monopoly power. More generally, in a bargaining situation, an increase in the bargaining power of clients will increase social welfare.
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Risk Management Reading List September 2010
Intellectual property Honey, Garry. - A short guide to reputation risk. - Gower, 2009. - No. pages: 119. [Faculty: 519.287 HON] Abstract: This guide will show you how to: - Identify the value of your reputation and mitigate risk of damage to this value. - Measure your reputation as an intangible asset and part of intellectual capital. - Manage the drivers of reputation effectively within your organization. - Report reputation risk management to inspire confidence among stakeholders.
[RKN: 71960]
International Schoenmaker, Dirk; Oosterloo, Sander; Winkels, Otto. - The emergence of cross-border insurance groups within Europe with centralised risk management. [RKN: 39043] Shelved at: Per: Geneva (Oxf) Geneva Papers on Risk and Insurance (2008) 33 (3) : 530-546. Abstract: This paper analyses the degree of internationalisation of insurance business. Using a novel data set of 25 large EU insurance groups, we find that the insurance industry has a strong international orientation. About 55 percent of the business of these large insurance groups is conducted abroad. The cross-border activities are predominantly within Europe (30–35 percent) and less so in the rest of the world (20–25 percent). Next, this paper examines the impact of internationalisation on the organisational structure. We find a clear trend towards centralising risk and capital management activities within large insurance groups, though insurance remains at the same time a local business. Applying the hub and spoke model, we identify which functions are executed at the centre (hub) and which functions are performed at the level of the local business units (spokes).
International trade Global Risk Network; World Economic Forum; Citigroup; Marsh & McLennan Companies; Swiss Re; Wharton School Risk Center; Zurich Financial Services. - Global Risks 2008 : A Global Risk Network Report. - Geneva: - World Economic Forum, 2008. - No. pages: 54. [RKN: 69132] Shelved at: online only [Faculty: online only] URL: http://www.weforum.org/pdf/globalrisk/report2008.pdf Contents: Introduction - 4 Focus on Emerging Issues in Global Risk - 6 Assessing Global Risks in 2008 - 20 Networked World, Networked Risks - 25 Financial Markets, Risk Transfer and Risk Mitigation - 30 Structuring Mitigation at the State and International Level: Taking the Country Risk Officer Forward Appendix 1: Taxonomy of Global Risk: Trends, Issues of Concern, Risks - 41 Appendix 2: Risk Assessments - 45
Investment Christiansen, Marcus C; Helwich, Marko. - Some further ideas concerning the interaction between insurance and investment risks. [RKN: 43362] Shelved at: Per: Blätter (Lon); online only Blätter der Deutsche Gesellschaft für Versicherungs- und Finanzmathematik (2008) 29 (heft 2) : 253-266. URL: http://www.springerlink.com/content/1864-0303/ Fulcher, Paul; Catchpole, Steven. - Practical implementation of Liability Driven Investment [copies 77
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Risk Management Reading List September 2010
of slides only] - Institute of Actuaries and Faculty of Actuaries, 2007. - (Finance, Investment and Risk Management Conference 2007 Seminar, 17-19 June 2007, Conrad Hilton Hotel, Dublin). [RKN: 72838] URL: http://www.actuaries.org.uk/research-and-resources/documents/presentationpractical-implementation-liability-driven-investment-w Krutov, Alex. - Investing in Insurance Risk : Insurance-Linked Securities - A Practitioner's Perspective. - London: - Risk Books, 2010. - No. pages: 480. [RKN: 72674] [Faculty: 332.6 KRU] Abstract: Insurance-linked securities and certain reinsurance instruments provide the ability to invest in insurance directly, as opposed to investing in equities or debt issued by insurance and reinsurance companies. The “pure” insurance risk component of these investments can range from that of property catastrophe to longevity, all of which provide limited correlation with the investment performance of traditional asset types. Securitisation of insurance risk has also become an important tool for risk and capital management that can be utilised by insurance companies alongside the more traditional approaches. It offers insurance and reinsurance companies additional flexibility at a time when the landscape keeps changing and the ability to respond to changes quickly is a critical source of competitive advantage. Investing in Insurance Risk by Alex Krutov looks at all of the issues involved in investing in insurance risk and insurance securitisation. It examines the various types of insurance-linked securities now available to investors, along with techniques for their analysis. In addition, the book explains the considerations insurance companies face in transferring insurance risk to the capital markets. The book is somewhat provocatively titled Investing in Insurance Risk to emphasize that investing always involves the potential of both return and risk. This is particularly clear in a field such as insurance-linked securities, where risk transfer—rather than simply raising capital—is often the primary driver for issuing these securities. The ability to analyze the risk-return profile of these investments is essential for both issuing and investing in them. The book is designed to serve as a valuable resource to those active in the insurance-linked securities marketplace, while also aiding basic understanding of the topics for those new to the field. The author offers a clear practitioner’s perspective as opposed to an academic one; this hands-on approach is particularly important in a market that is new and still evolving. (Publisher's blurb) Vlaev, Ivo; Stewart, Neil; Chater, Nick. - Risk preference discrepancy : a prospect relativity account of the discrepancy between risk preferences in laboratory gambles and real world investments. [RKN: 39305] Shelved at: UHG/LA pam (Oxf) Journal of Behavioral Finance (2008) 9 : 132-148. Abstract: In this article, we presented evidence that people are more risk averse when investing in financial products in the real world than when they make risky choices between gambles in laboratory experiments. To provide an account for this discrepancy, we conducted experiments which showed that the range of offered investment funds that vary in their risk-reward characteristics had a significant effect on the distribution of hypothetical funds to those products. We also showed that people are able to use the context provided by the choice set in order to make relative riskiness judgments for investment products. This context dependent relativistic nature of risk preferences is proposed as a plausible explanation of the risk preference discrepancy between laboratory experiments and real-world investments. We also discuss other possible theoretical interpretations of the discrepancy.
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Risk Management Reading List September 2010
Whelan, S F. - Defining and measuring investment risk in defined benefit pension funds. [RKN: 38310] Shelved at: Per: AAS (Oxf); Per: AAS (Lon) [Faculty: JOU/AAS] Annals of Actuarial Science (2007) 2(1) : 51-66. URL: http://www.actuaries.org.uk/research-and-resources/pages/access-journals Abstract: A formal definition of investment risk in actuarial investigations is given. Case studies estimating the investment risk associated with different investment strategies for defined benefit pension funds using historic market data are presented. It is shown that a few decades ago, when bond markets only extended in depth to 20-year maturities, the investment risk of investing in equities was of the same order of magnitude as the investment risk introduced by the duration mismatch from investing in bonds for immature schemes. It is shown that now, with the extension of the term of bond markets and introduction of strippable bonds, the least risk portfolio for the same pension liability is a bond portfolio of suitable duration. It is argued that investment risk voluntarily undertaken in defined benefit pension plans has grown markedly in recent decades, at a time when the ability to bear the investment risk has diminished. Investment risk in pension funds is quite different to investment risk for other investors, which leads to the possibility that current portfolios are not optimised — that is, there exist portfolios which increase the expected surplus without increasing risk. The formalising of our intuitive concept of investment risk in actuarial applications is a first step in the identification of more efficient portfolios. Keywords: Investment Risk; Defined Benefit Pension Funds; Investment Strategies; Risk in Actuarial Applications Xin, Zhang; Siu, Tak Kuen. - Optimal investment and reinsurance of an insurer with model uncertainty. - No. pages: 8. [RKN: 72375] Shelved at: Per: IME (Oxf) Insurance: Mathematics & Economics (2009) 45 (1) : 81-88. Abstract: We introduce a novel approach to optimal investment–reinsurance problems of an insurance company facing model uncertainty via a game theoretic approach. The insurance company invests in a capital market index whose dynamics follow a geometric Brownian motion. The risk process of the company is governed by either a compound Poisson process or its diffusion approximation. The company can also transfer a certain proportion of the insurance risk to a reinsurance company by purchasing reinsurance. The optimal investment–reinsurance problems with model uncertainty are formulated as two-player, zero-sum, stochastic differential games between the insurance company and the market. We provide verification theorems for the Hamilton–Jacobi–Bellman–Isaacs (HJBI) solutions to the optimal investment–reinsurance problems and derive closed-form solutions to the problems. Keywords: Optimal investment; Proportional reinsurance; Model uncertainty; Stochastic differential game; Exponential utility; Penalty of ruin; HJBI equations
Investment attitudes Caslin, John; Fadden, Damian. - How risky is my investment? - Dublin: - Society of Actuaries in Ireland, 2007. - No. pages: 26. [RKN: 72211] URL: http://web.actuaries.ie/Events%20and%20Papers/Events%202007/How%20Risky%20is%20m y%20Investment%20-paper%20.pdf?q=Events%20and%20Papers/Events%202007/How%20Risky%20is%20my%20Inves tment%20-paper-%20.pdf Abstract: The aims of this paper are: (i) to illustrate one possible way in which risk might be illustrated so that consumers might gain a better understanding of the market risk of different investment funds. The approach results in a relatively simple illustration of the likely risk of a fund generated using a simple statistical technique; (ii) to remind investors of the need to adjust for risk when comparing the investment performance of different managers even where the managers have similar investment objectives; and 79
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Risk Management Reading List September 2010
(iii) recognising that investors' choices are not restricted to single asset classes, to quantify the benefits of diversification for investors when risk is lowered without lowering potential returns by combining assets that do not have their periods of positive and negative returns at the same time. Horneff, Wolfram; Maurer, Raimond. - Mortality Contingent Claims: Impact of Capital Market, Income, and Interest Rate Risk. - Ann Arbour: - University of Michigan Retirement Research Center, 2009. - (Michigan Retirement Research Center WP 2009-222). - No. pages: 31. [RKN: 71706] URL: http://www.mrrc.isr.umich.edu/publications/papers/pdf/wp222.pdf Abstract: In this paper, we consider optimal insurance, portfolio allocation, and consumption rules for a stochastic wage earner with CRRA preferences whose lifetime is random. In a continuous time framework, the investor has to decide among short and long positions in mortality contingent claims a.k.a. life insurance, stocks, bonds, and money market investment when facing a risky stock market and interest rate risk. We find an analytical solution for the complete market case in which human capital is exactly priced. We also extend the analysis to the case where income is unspanned. An illustrative analysis shows when the wage earner’s demand for life insurance switches to the demand for annuities.
Ireland Caslin, John; Fadden, Damian. - How risky is my investment? - Dublin: - Society of Actuaries in Ireland, 2007. - No. pages: 26. [RKN: 72211] URL: http://web.actuaries.ie/Events%20and%20Papers/Events%202007/How%20Risky%20is%20m y%20Investment%20-paper%20.pdf?q=Events%20and%20Papers/Events%202007/How%20Risky%20is%20my%20Inves tment%20-paper-%20.pdf Abstract: The aims of this paper are: (i) to illustrate one possible way in which risk might be illustrated so that consumers might gain a better understanding of the market risk of different investment funds. The approach results in a relatively simple illustration of the likely risk of a fund generated using a simple statistical technique; (ii) to remind investors of the need to adjust for risk when comparing the investment performance of different managers even where the managers have similar investment objectives; and (iii) recognising that investors' choices are not restricted to single asset classes, to quantify the benefits of diversification for investors when risk is lowered without lowering potential returns by combining assets that do not have their periods of positive and negative returns at the same time. Sykes, Ian. - Regulations and investor behaviour. - Institute of Actuaries and Faculty of Actuaries, 2007. - (Finance, Investment and Risk Management Conference 2007 Seminar, 17-19 June 2007, Conrad Hilton Hotel, Dublin). [RKN: 72834] Abstract: This session is about how regulation affects the investment behaviour of Irish occupational pension schemes. This is a very specific situation to look at, but a topical one given the location of the conference this year and an interesting one because the regulations and other factors were similar, but not identical to the UK until the Pensions Act 2004 changes. Since then they have diverged.
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Risk Management Reading List September 2010
Whelan, Shane. - The mis-selling of investment risk in mandatory pension savings [copies of slides only] - Institute of Actuaries and Faculty of Actuaries, 2007. - (Finance, Investment and Risk Management Conference 2007 Seminar, 17-19 June 2007, Conrad Hilton Hotel, Dublin). [RKN: 72835] URL: http://www.actuaries.org.uk/research-and-resources/documents/mis-sellinginvestment-risk-mandatory-pension-savings-handouts
Islam Global Risk Network; World Economic Forum; Citigroup; Marsh & McLennan Companies; Swiss Re; Wharton School Risk Center; Zurich Financial Services. - Global Risks 2008 : A Global Risk Network Report. - Geneva: - World Economic Forum, 2008. - No. pages: 54. [RKN: 69132] Shelved at: online only [Faculty: online only] URL: http://www.weforum.org/pdf/globalrisk/report2008.pdf Contents: Introduction - 4 Focus on Emerging Issues in Global Risk - 6 Assessing Global Risks in 2008 - 20 Networked World, Networked Risks - 25 Financial Markets, Risk Transfer and Risk Mitigation - 30 Structuring Mitigation at the State and International Level: Taking the Country Risk Officer Forward Appendix 1: Taxonomy of Global Risk: Trends, Issues of Concern, Risks - 41 Appendix 2: Risk Assessments - 45
Japan Kogure, Atsuyuki; Kurachi, Yoshiyuki. - A Bayesian approach to pricing longevity risk based on risk-neutral predictive distributions. - No. pages: 11. [RKN: 72438] Shelved at: Per: IME (Oxf) Insurance: Mathematics & Economics (2010) 46 (1) : 162-172. Abstract: We present a Bayesian approach to pricing longevity risk under the framework of the Lee–Carter methodology. Specifically, we propose a Bayesian method for pricing the survivor bond and the related survivor swap designed by Denuit et al. (2007). Our method is based on the risk neutralization of the predictive distribution of future survival rates using the entropy maximization principle discussed by Stutzer (1996). The method is illustrated by applying it to Japanese mortality rates. Keywords: Bayesian approach; Pricing longevity risk; Maximum entropy principle; Risk-neutral predictive distribution; Japanese mortality rates Sherris, Michael; Njenga, Carolyn. - Longevity Risk and the Econometric Analysis of Mortality Trends and Volatility. - UNSW Australian School of Business Research, 2009. - (UNSW Australian School of Business Research Paper No. 2009ACTL08). [RKN: 71634] URL: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1458084 Abstract: Longevity risk and the modelling of trends and volatility for mortality improvement has attracted increased attention driven by ageing populations around the world and the expected financial implications. The original Lee-Carter model that was used for longevity risk assessment included a single improvement factor with differential impacts by age. Financial models that allow for risk pricing and risk management have attracted increasing attention along with multiple factor models. This paper investigates trends, including common trends through co-integration, and the factors driving the volatility of mortality using principal components analysis for a number of developed countries including Australia, England, Japan, Norway and USA. The results demonstrate the need for multiple factors for modelling mortality rates across all these countries. The basic structure of the Lee-Carter model can not adequately model the random variation and the full risk structure of mortality changes. Trends by country are found to be stochastic. Common trends and co-integrating relationships are found across ages highlighting the benefits from modelling mortality rates as a system in a Vector-Autoregressive (VAR) model and capturing long 81
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Risk Management Reading List September 2010
run equilibrium relationships in a Vector Error-Correction Model (VECM) framework. Keywords: longevity risk, unit roots, VAR, VECM
Law and legal systems of America Harrington, Scott E. - The financial crisis, systemic risk, and the future of insurance regulation. No. pages: 35. [RKN: 71775] Shelved at: Per: J.Risk Ins (Oxf) [Faculty: JOU/RIS] Journal of Risk and Insurance (2009) 76 (4) : 785-819. Abstract: This article considers the role of American International Group (AIG) and the insurance sector in the 2007–2009 financial crisis and the implications for insurance regulation. Following an overview of the causes of the crisis, I explore the events and policies that contributed to federal government intervention to prevent bankruptcy of AIG and the scope of federal assistance to AIG. I discuss the extent to which insurance in general poses systemic risk and whether a systemic risk regulator is desirable for insurers or other nonbank financial institutions. The last two sections of the article address the financial crisis's implications for proposed optional and/or mandatory federal chartering and regulation of insurers and for insurance regulation in general.
Liabilities Bernard, Carole; Chen, An. - On the regulator-insurer-interaction in a structural model. - Ontario: University of Waterloo, 2008. - (Institute of Insurance and Pension Research Research Report 0801). - No. pages: 24. [RKN: 69975] Shelved at: Online only [Faculty: Online only] URL: http://www.stats.uwaterloo.ca/stats_navigation/IIPR/IIPR-Reports.shtml Abstract: In this paper, we provide a new insight to the previous work of Briys and de Varenne [1994], Grosen and Jørgensen [2002] and Chen and Suchanecki [2007]. We show that if the insurance company follows a risk management strategy, it can significantly change the risk exposure of the company, and that it should thus be taken into account by regulators. We first study how the regulator establishes regulation intervention levels in order to control for instance the default probability of the insurance company. This part of the analysis is based on a constant volatility and there exists a one-to-one relation between the optimal regulation level and the volatility. Given that the insurance company is informed of regulatory rules, we study how results can be significantly different when the insurance company follows a risk management strategy with non-constant volatilities. We thus highlight some limits of prior literature and believe that the value of the company’s risk management should be included in the risk exposure estimation and the market value of liabilities as well. Keywords: Life insurance policies, Default risk, Regulatory rule.
Liability insurance Bajtelsmit, Vickie; Thistle, Paul. - Negligence, Ignorance and the Demand for Liability Insurance. No. pages: 12. [RKN: 72017] Shelved at: Per: Geneva (Oxf) Geneva Risk and Insurance Review (2009) 34 (2) : 105-116. Abstract: This paper considers whether lack of information regarding risk exposures can lead to a demand for negligence liability insurance. We find that, under the uniform negligence rule, such as the "reasonable person" standard used to determine negligence in the U.S. and other countries, the value of information is positive and any demand for liability insurance must come from informed individuals. The necessary and sufficient condition is that good risks find it less costly to be negligent and purchase insurance. Keywords: information, tort, moral hazard, screening Swiss Reinsurance Company. - Commercial liability: A challenge for businesses and their insurers. - Zurich: - Swiss Reinsurance Company, - No. pages: 34. [RKN: 71956] 82
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Risk Management Reading List September 2010
[Faculty: SIG/SWI] Sigma (2009) 5 URL: http://www.swissre.com Contents: Contents include: -- Introduction: characteristics of liability insurance -- How much insurance do businesses buy and why? -- What are the key issues? -- What can insurers do to keep liability risk insurable?
Life assurance Transitioning from ICA to ERM - 10 October 2008. 2008. [RKN: 39024] Contents: What's the use of ICA? / Asad Malik -- The ICA process in risk management / Jonathan Pears -- ICA in a global ERM framework / Jim Webber -- Beyond the limitations of ICA / David Chalkley Dexter, N C; Ford, Chris L; Jakhria, P C; Kelliher, P O J; McCall, D; Mills, Cameron K; Probyn, A C; Raddall, Phill A; Ryan, J. - Quantifying operational risk in life insurance companies. [RKN: 38936] Shelved at: Per: BAJ (Oxf); Per: BAJ (Lon) [Faculty: BRI/ACT] BAJ (2007) 13 (2) : 257-357. URL: http://www.actuaries.org.uk/research-and-resources/pages/access-journals Abstract: This paper overviews a practical approach to the assessment of operational risk in life insurance companies. It considers how actuaries, working in conjunction with risk management professionals and senior management, can develop a framework to assess the capital requirements relating to operational risk, taking into account the capital requirements of other risks and their interaction. This paper recognises that we do not live in an ideal world, and that a lot of the data which one might want for operational risk assessment are not available. Consequently, the approach outlined in this paper takes into account the fact that management and assessment of operational risk is at an early stage of development in the life industry. In addition, it outlines some of the areas where development is necessary or desirable in the coming years. There is a section on the operational risks against which it is appropriate to hold capital. A brief review of techniques for reporting the results of the assessment is provided. The paper concludes with some thoughts on how operational risk management can be embedded more in the business, and then considers what future work will help develop the framework.
Life expectation Hammitt, James K; Haninger, Kevin; Treich, Nicolas. - Effects of Health and Longevity on Financial Risk Tolerance. - No. pages: 23. [RKN: 72018] Shelved at: Per: Geneva (Oxf) Geneva Risk and Insurance Review (2009) 34 (2) : 117-139. Abstract: We investigate the effects of health and life expectancy on tolerance of financial risk. Using a standard life-cycle model, we find that the effects of health and life expectancy on preferences over lifetime-income risk are theoretically ambiguous. However, risk tolerance is independent of health and life expectancy when utility takes one of the standard (harmonic absolute risk aversion) functional forms or when optimal consumption is constant over time. Our empirical results, using data from a stated-preference survey (n=2,795), suggest that financial risk tolerance is positively associated with both health and life expectancy; hence utility is not consistent with standard functional forms. Keywords: risk tolerance, health, longevity, life-cycle model, consumption, stated preference
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Risk Management Reading List September 2010
Life insurance Cox, Samuel H; Lin, Yijia; Pedersen, Hal. - Mortality risk modeling : Applications to insurance securitization. - No. pages: 12. [RKN: 72445] Shelved at: Per: IME (Oxf) Insurance: Mathematics & Economics (2010) 46 (1) : 242-253. Abstract: This paper proposes a stochastic mortality model featuring both permanent longevity jump and temporary mortality jump processes. A trend reduction component describes unexpected mortality improvement over an extended period of time. The model also captures the uneven effect of mortality events on different ages and the correlations among them. The model will be useful in analyzing future mortality dependent cash flows of life insurance portfolios, annuity portfolios, and portfolios of mortality derivatives. We show how to apply the model to analyze and price a longevity security. Dexter, N C; Ford, Chris L; Jakhria, P C; Kelliher, P O J; McCall, D; Mills, Cameron K; Probyn, A C; Raddall, Phill A; Ryan, J. - Quantifying operational risk in life insurance companies. [RKN: 38936] Shelved at: Per: BAJ (Oxf); Per: BAJ (Lon) [Faculty: BRI/ACT] BAJ (2007) 13 (2) : 257-357. URL: http://www.actuaries.org.uk/research-and-resources/pages/access-journals Abstract: This paper overviews a practical approach to the assessment of operational risk in life insurance companies. It considers how actuaries, working in conjunction with risk management professionals and senior management, can develop a framework to assess the capital requirements relating to operational risk, taking into account the capital requirements of other risks and their interaction. This paper recognises that we do not live in an ideal world, and that a lot of the data which one might want for operational risk assessment are not available. Consequently, the approach outlined in this paper takes into account the fact that management and assessment of operational risk is at an early stage of development in the life industry. In addition, it outlines some of the areas where development is necessary or desirable in the coming years. There is a section on the operational risks against which it is appropriate to hold capital. A brief review of techniques for reporting the results of the assessment is provided. The paper concludes with some thoughts on how operational risk management can be embedded more in the business, and then considers what future work will help develop the framework. Gatzert, Nadine; Hoermann, Gudrun; Schmeiser, Hato. - The impact of the secondary market of life insurers' surrender profits. - No. pages: 22. [RKN: 71779] Shelved at: Per: J.Risk Ins (Oxf) [Faculty: JOU/RIS] Journal of Risk and Insurance (2009) 76 (4) : 887-908. Abstract: Life insurers often claim that the life settlement industry reduces their surrender profits and leads to an adverse shift in their portfolio of insured risks; that is, high risks remain in the portfolio instead of surrendering. In this article, we aim to quantify the effect of altered surrender behaviour––subject to the health status of an insured––in a portfolio of life insurance contracts on the surrender profits of primary insurers. Our model includes mortality heterogeneity by applying a stochastic frailty factor to a mortality table. We additionally analyze the impact of the premium payment method by comparing results for annual and single premium payments. Horneff, Wolfram; Maurer, Raimond. - Mortality Contingent Claims: Impact of Capital Market, Income, and Interest Rate Risk. - Ann Arbour: - University of Michigan Retirement Research Center, 2009. - (Michigan Retirement Research Center WP 2009-222). - No. pages: 31. [RKN: 71706] URL: http://www.mrrc.isr.umich.edu/publications/papers/pdf/wp222.pdf Abstract: In this paper, we consider optimal insurance, portfolio allocation, and consumption rules for a stochastic wage earner with CRRA preferences whose lifetime is random. In a continuous time framework, the investor has to decide among short and long positions in mortality contingent claims a.k.a. life insurance, stocks, bonds, and money market investment when facing a risky 84
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Risk Management Reading List September 2010
stock market and interest rate risk. We find an analytical solution for the complete market case in which human capital is exactly priced. We also extend the analysis to the case where income is unspanned. An illustrative analysis shows when the wage earner’s demand for life insurance switches to the demand for annuities.
Longevity Sherris, Michael; Njenga, Carolyn. - Longevity Risk and the Econometric Analysis of Mortality Trends and Volatility. - UNSW Australian School of Business Research, 2009. - (UNSW Australian School of Business Research Paper No. 2009ACTL08). [RKN: 71634] URL: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1458084 Abstract: Longevity risk and the modelling of trends and volatility for mortality improvement has attracted increased attention driven by ageing populations around the world and the expected financial implications. The original Lee-Carter model that was used for longevity risk assessment included a single improvement factor with differential impacts by age. Financial models that allow for risk pricing and risk management have attracted increasing attention along with multiple factor models. This paper investigates trends, including common trends through co-integration, and the factors driving the volatility of mortality using principal components analysis for a number of developed countries including Australia, England, Japan, Norway and USA. The results demonstrate the need for multiple factors for modelling mortality rates across all these countries. The basic structure of the Lee-Carter model can not adequately model the random variation and the full risk structure of mortality changes. Trends by country are found to be stochastic. Common trends and co-integrating relationships are found across ages highlighting the benefits from modelling mortality rates as a system in a Vector-Autoregressive (VAR) model and capturing long run equilibrium relationships in a Vector Error-Correction Model (VECM) framework. Keywords: longevity risk, unit roots, VAR, VECM Sweeting, P J. - Longevity Indices and Pension Fund Risk. - London: - The Pensions Institute, 2010. - (Discussion Paper PI-1004). - No. pages: 19. [RKN: 72236] URL: http://www.pensions-institute.org/workingpapers/WP1004.pdf Abstract: Pension fund longevity risk is becoming increasingly important. Longevity indices would allow the creation of liquid derivatives that could be used to hedge this risk. However, there are a number of criteria that such indices would need to fulfil to provide an optimal solution, as well as a number of forms that the derivatives could take. These features are discussed, together with the characteristics of some existing longevity indices.
Longevity risk Bauer, Daniel; Börger, Matthias; Ruß, Jochen. - On the pricing of longevity-linked securities. - No. pages: 11. [RKN: 72436] Shelved at: Per: IME (Oxf) Insurance: Mathematics & Economics (2010) 46 (1) : 139-149. Abstract: For annuity providers, longevity risk, i.e. the risk that future mortality trends differ from those anticipated, constitutes an important risk factor. In order to manage this risk, new financial products, so-called longevity derivatives, may be needed, even though a first attempt to issue a longevity bond in 2004 was not successful. While different methods of how to price such securities have been proposed in recent literature, no consensus has been reached. This paper reviews, compares and comments on these different approaches. In particular, we use data from the United Kingdom to derive prices for the proposed first longevity bond and an alternative security design based on the different methods. Keywords: Longevity risk; Stochastic mortality; Longevity derivatives
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Biffis, Enrico; Blake, David. - Securitizing and tranching longevity exposures. - No. pages: 12. [RKN: 72440] Shelved at: Per: IME (Oxf) Insurance: Mathematics & Economics (2010) 46 (1) : 186-197. Abstract: We consider the problem of optimally designing longevity risk transfers under asymmetric information. We focus on holders of longevity exposures that have superior knowledge of the underlying demographic risks, but are willing to take them off their balance sheets because of capital requirements. In equilibrium, they transfer longevity risk to uninformed agents at a cost, where the cost is represented by retention of part of the exposure and/or by a risk premium. We use a signalling model to quantify the effects of asymmetric information and emphasize how they compound with parameter uncertainty. We show how the cost of private information can be minimized by suitably tranching securitized cashflows, or, equivalently, by securitizing the exposure in exchange for an option on mortality rates. We also investigate the benefits of pooling several longevity exposures and the impact on tranching levels. Keywords: Longevity risk; Asymmetric information; Security design; Pooling; Tranching Blake, David; de Waegenaere, Anja; MacMinn, Richard; Nijman, Theo. - Longevity risk and capital markets: The 2008–2009 update. - No. pages: 4. [RKN: 72435] Shelved at: Per: IME (Oxf) Insurance: Mathematics & Economics (2010) 46 (1) : 135-138. Abstract: This issue of Insurance: Mathematics and Economics contains 11 contributions to the academic literature all dealing with longevity risk and capital markets. Draft versions of the papers were presented at Longevity Four: The Fourth International Longevity Risk and Capital Markets Solutions Conference that was held in Amsterdam on 25–26 September 2008. It was hosted by Netspar and the Pensions Institute (at Cass Business School), and organized by PensionSummit. Longevity risk and related capital market solutions have grown increasingly important in recent years, both in academic research and in the real world life markets. Mortality improvements around the world are putting more and more pressure on governments, pension funds, life insurance companies as well as individuals, to deal with the longevity risk they face. At the same time, capital markets can, in principle, provide vehicles to hedge longevity risk effectively. Many new investment products have been created both by the insurance/reinsurance industry and by the capital markets. Mortality catastrophe bonds are an example of a successful insurance-linked security. Some new innovative capital market solutions for transferring longevity risk include longevity (or survivor) bonds, longevity (or survivor) swaps and mortality (or q-) forward contracts. The aim of the International Longevity Risk and Capital Markets Solutions Conferences is to bring together academics and practitioners from all over the world to discuss and analyze these exciting new developments. Chen, Hua; Cummins, J David. - Longevity bond premiums : The extreme value approach and risk cubic pricing. - No. pages: 11. [RKN: 72437] Shelved at: Per: IME (Oxf) Insurance: Mathematics & Economics (2010) 46 (1) : 150-161. Abstract: The purpose of this study is to analyze the securitization of longevity risk with an emphasis on longevity risk modeling and longevity bond premium pricing. Various longevity derivatives have been proposed, and the capital market has experienced one unsuccessful attempt by the European Investment Bank (EIB) in 2004. After carefully analyzing the pros and cons of previous securitizations, we present our proposed longevity bonds, whose payoffs are structured as a series of put option spreads. We utilize a random walk model with drift to fit small variations of mortality improvements and employ extreme value theory to model rare longevity events. Our method is a new approach in longevity risk securitization, which has the advantage of both capturing mortality improvements within sample and extrapolating rare, out-of- sample longevity events. We demonstrate that the risk cubic model developed for pricing catastrophe bonds can be applied to mortality and longevity bond pricing and use the model to calculate risk premiums for longevity bonds. Keywords: Securitization; Longevity risk; Extreme value theory; Bond spreads 86
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Risk Management Reading List September 2010
Cox, Samuel H; Lin, Yijia; Pedersen, Hal. - Mortality risk modeling : Applications to insurance securitization. - No. pages: 12. [RKN: 72445] Shelved at: Per: IME (Oxf) Insurance: Mathematics & Economics (2010) 46 (1) : 242-253. Abstract: This paper proposes a stochastic mortality model featuring both permanent longevity jump and temporary mortality jump processes. A trend reduction component describes unexpected mortality improvement over an extended period of time. The model also captures the uneven effect of mortality events on different ages and the correlations among them. The model will be useful in analyzing future mortality dependent cash flows of life insurance portfolios, annuity portfolios, and portfolios of mortality derivatives. We show how to apply the model to analyze and price a longevity security. Gong, Guan; Webb, Anthony. - Evaluating the Advanced Life Deferred Annuity — An annuity people might actually buy. - No. pages: 12. [RKN: 72442] Shelved at: Per: IME (Oxf) Insurance: Mathematics & Economics (2010) 46 (1) : 210-221. Abstract: Although annuities provide longevity insurance that should be attractive to households facing an uncertain lifespan, rates of voluntary annuitization remain extremely low. We evaluate the Advanced Life Deferred Annuity, an annuity purchased at retirement, providing an income commencing in advanced old age. Using numerical optimization, we show that it would provide a substantial proportion of the longevity insurance provided by an immediate annuity, at much lower cost. At plausible levels of actuarial unfairness, households should prefer it to both immediate and postponed annuitization and an optimal decumulation of unannuitized wealth. Few households would suffer significant losses were it used as a 401(k) plan default. Keywords: Annuity; Longevity insurance; Advanced Life Deferred Annuity Kogure, Atsuyuki; Kurachi, Yoshiyuki. - A Bayesian approach to pricing longevity risk based on risk-neutral predictive distributions. - No. pages: 11. [RKN: 72438] Shelved at: Per: IME (Oxf) Insurance: Mathematics & Economics (2010) 46 (1) : 162-172. Abstract: We present a Bayesian approach to pricing longevity risk under the framework of the Lee–Carter methodology. Specifically, we propose a Bayesian method for pricing the survivor bond and the related survivor swap designed by Denuit et al. (2007). Our method is based on the risk neutralization of the predictive distribution of future survival rates using the entropy maximization principle discussed by Stutzer (1996). The method is illustrated by applying it to Japanese mortality rates. Keywords: Bayesian approach; Pricing longevity risk; Maximum entropy principle; Risk-neutral predictive distribution; Japanese mortality rates Pang, Gaobo; Warshawsky, Mark. - Optimizing the equity-bond-annuity portfolio in retirement : The impact of uncertain health expenses. - No. pages: 12. [RKN: 72441] Shelved at: Per: IME (Oxf) Insurance: Mathematics & Economics (2010) 46 (1) : 198-209. Abstract: This paper derives optimal equity-bond-annuity portfolios for retired households who face stochastic capital market returns, differential exposures to mortality risk and uncertain uninsured health expenses, and differential Social Security and defined benefit pension coverage. The results show that the health spending risk drives household portfolios to shift from risky equities to safer assets and enhances the demand for annuities due to their increasing-with-age superiority over bonds in hedging against life-contingent health spending and longevity risks. Households with higher income have a greater incremental demand for life annuities. The annuities in turn provide greater leverage for equity investment in the remaining asset portfolios. Keywords: Annuity; Asset allocation; Health expense; Precautionary savings; Pension; Life cycle
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Stevens, Ralph; de Waegenaere, Anja; Melenberg, Bertrand. - Longevity risk in pension annuities with exchange options: The effect of product design. [RKN: 72443] Shelved at: Per: IME (Oxf) Insurance: Mathematics & Economics (2010) 46 (1) : 222-234. Abstract: We consider defined benefit pension plans that, at retirement age, allow the participant to choose between a single life annuity and a joint and survivor annuity. We compare two plans that differ in terms of how pension rights are accrued. In one plan, the participant accrues the right to receive a single life annuity, and can exchange that annuity for an actuarially equivalent joint and survivor annuity at retirement date. The opposite holds in the other plan. We show that both plans are affected by longevity risk in two ways. First, the participants’ choices at retirement age affect the ratio of survivor benefits over single life benefits, and, therefore, affect the natural hedge potential that arises from combining single life and survivor annuities. Second, uncertainty in the rate at which the participant will be allowed to exchange one type of annuity for the other at retirement date induces uncertainty in the level of the nominal rights for single life and survivor annuities, respectively. We compare the two plans, and show that longevity risk is substantially lower in case rights are accrued in the form of a joint and survivor annuity. Telford, P G; Browne, B A; Collinge, E J; Fulcher, P; Johnson, B E; Little, W; Lu, J L C; Nurse, J M; Smith, D W; Zhang, F. - Developments in the management of annuity business. - Faculty of Actuaries and Institute of Actuaries, 2010. - No. pages: 96. [RKN: 72306] [Faculty: JOU/INS] URL: http://www.actuaries.org.uk/research-and-resources/documents/developmentsmanagement-annuity-business Abstract: The focus of the paper is non-profit lifetime annuities in the UK. Annuity insurers have been faced with, or have initiated, an unprecedented amount of change during the last decade, and rapid change is still continuing. We draw out implications for the actuarial management of the business, arising from the evolution of: longevity risk assessment and management, investment strategy and operations, financial reporting, and enterprise risk management. We discuss Solvency II in some technical depth, analysing the proposed rules for technical provisions and solvency capital requirement. Keywords: Annuities; Retirement Income; Longevity; Mortality Improvement; Reinsurance; Underwriting; Collateral; Investment; Asset-Liability Management; Financial Reporting; IFRS; Pillar I; Individual Capital Assessment; Enterprise Risk Management; Solvency II; Illiquidity Premium; Economic Capital Tsai, Jeffrey T; Wang, Jennifer L; Tzeng, Larry Y. - On the optimal product mix in life insurance companies using conditional value at risk. - No. pages: 7. [RKN: 72444] Shelved at: Per: IME (Oxf) Insurance: Mathematics & Economics (2010) 46 (1) : 235-241. Abstract: This paper proposes a Conditional Value-at-Risk Minimization (CVaRM) approach to optimize an insurer’s product mix. By incorporating the natural hedging strategy of Cox and Lin (2007) and the two-factor stochastic mortality model of Cairns et al. (2006b), we calculate an optimize product mix for insurance companies to hedge against the systematic mortality risk under parameter uncertainty. To reflect the importance of required profit, we further integrate the premium loading of systematic risk. We compare the hedging results to those using the duration match method of Wang et al. (forthcoming), and show that the proposed CVaRM approach has a narrower quantile of loss distribution after hedging—thereby effectively reducing systematic mortality risk for life insurance companies. Keywords: Systematic mortality risk; Product mix; Natural hedging; Parameter risk; Conditional VaR
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Wang, Liang; Valdez, Emiliano A; Piggott, John. - Securitization of longevity risk in reverse mortgages. 2008. - No. pages: 27. [RKN: 69496] Shelved at: Per: NAAJ (Oxf); Per NAAJ (Lon) [Faculty: NOR/AME] North American Actuarial Journal (2008) 12 (4) : 345-371. URL: http://www.soa.org/news-and-publications/publications/journals/naaj/naaj-detail.aspx Abstract: The reverse mortgage market has been expanding rapidly in developed economies in recent years. The onset of demographic transition places a rapidly rising number of households in an age window in which reverse mortgages have potential appeal. Increasing prices for residential real estate over the last decade have further stimulated interest. Reverse mortgages involve various risks from the provider's perspective that may hinder the further development of these financial products. This paper addresses one method of transferring and financing the risks associated with these products through the form of secularization. Securitization is becoming a popular and attractive alternative form of risk transfer of insurance liabilities. Here we demonstrate how to construct a secularization structure for reverse mortgages similar to the one applied in traditional insurance products. Specifically, we investigate the merits of developing survivor bonds and survivor swaps for reverse mortgage products. In the case of survivor bonds, for example, we are able to compute premiums, both analytically and numerically through simulations, and to examine how the longevity risk may be transferred to the financial investors. Our numerical calculations provide an indication of the economic benefits derived from developing survivor bonds to securitize the 'longevity risk component' of reverse mortgage products. Moreover, some sensitivity analysis of these economic benefits indicates that these survivor bonds provide for a promising tool for investment diversification. Wills, Samuel; Sherris, Michael. - Securitization, structuring and pricing of longevity risk. - No. pages: 13. [RKN: 72439] Shelved at: Per: IME (Oxf) Insurance: Mathematics & Economics (2010) 46 (1) : 173-185. Abstract: Pricing and risk management for longevity risk have increasingly become major challenges for life insurers and pension funds around the world. Risk transfer to financial markets, with their major capacity for efficient risk pooling, is an area of significant development for a successful longevity product market. The structuring and pricing of longevity risk using modern securitization methods, common in financial markets, have yet to be successfully implemented for longevity risk management. There are many issues that remain unresolved for ensuring the successful development of a longevity risk market. This paper considers the securitization of longevity risk focusing on the structuring and pricing of a longevity bond using techniques developed for the financial markets, particularly for mortgages and credit risk. A model based on Australian mortality data and calibrated to insurance risk linked market data is used to assess the structure and market consistent pricing of a longevity bond. Age dependence in the securitized risks is shown to be a critical factor in structuring and pricing longevity linked securitizations. Keywords: Longevity risk; Securitization Yang, Sharon S; Yue, Jack C; Huang, Hong-Chih. - Modeling longevity risks using a principal component approach : A comparison with existing stochastic mortality models. - No. pages: 17. [RKN: 72446] Shelved at: Per: IME (Oxf) Insurance: Mathematics & Economics (2010) 46 (1) : 254-270. Abstract: This research proposes a mortality model with an age shift to project future mortality using principal component analysis (PCA). Comparisons of the proposed PCA model with the wellknown models—the Lee–Carter model, the age–period–cohort model (Renshaw and Haberman, 2006), and the Cairns, Blake, and Dowd model—employ empirical studies of mortality data from six countries, two each from Asia, Europe, and North America. The mortality data come from the human mortality database and span the period 1970–2005. The proposed PCA model produces smaller prediction errors for almost all illustrated countries in its mean absolute percentage error. To demonstrate longevity risk in annuity pricing, we use the proposed PCA model to project future mortality rates and analyze the underestimated ratio of annuity price for whole life annuity and 89
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Risk Management Reading List September 2010
deferred whole life annuity product respectively. The effect of model risk on annuity pricing is also investigated by comparing the results from the proposed PCA model with those from the LC model. The findings can benefit actuaries in their efforts to deal with longevity risk in pricing and valuation. Keywords: Longevity risk; Age–period–cohort model; Lee–Carter models; Principal component analysis
Loss reserving Choo, Weihao; de Jong, Piet. - Loss reserving using loss aversion functions. - No. pages: 7. [RKN: 72399] Shelved at: Per: IME (Oxf) Insurance: Mathematics & Economics (2009) 45 (2) : 271-277. Abstract: This article discusses the determination of risk capital based on “aversion” functions. Aversion functions weigh different outcomes according to perceived severity. Many practical and popular risk measures are usefully viewed in terms of aversion functions including those arising from distortion operators and risk margin loadings. The approach of this paper builds on, unifies, and extends existing disparate approaches discussed in the literature. Analytical and computer generated illustrations are given as well as suggestions for the practical determination of aversion functions. Keywords: Distortion operators; Loss aversion; Risk measure; Percentile rank aversion; Standard deviation principle; Premium loading; Expected Maximum Loss
Losses Selvaggi, Mariano. - Analysing operational losses in insurance : Evidence on the need for scaling from the ORIC database. - Association of British Insurers, 2009. - (ABI Research Paper 16). No. pages: 54. [RKN: 69772] URL: http://www.abioric.com/media/2032/abi-oric%20research%20paper%2016.pdf Abstract: This research studies robust methodologies for scaling the size and number of external losses to make them equivalent to a firm’s internal loss events. Adjusting for potential scaling biases is important when external and internal losses are merged for operational risk management and economic capital calculations. We use operational loss event in the ORIC database to provide real-world applications of the methodologies discussed. It is the first time we have used our data in this way. We set this against data on the size of the insurer where the loss occurred and additional scaling factors controlling for business lines and loss event types. The purpose of our research is not to provide final answers, but to illustrate our empirical approach and uncover early trends in operational loss data from insurance business.
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van Lelyveld, Iman; Liedorp, Franka; Kampman, Manuel. - An Empirical assessment of reinsurance risk. - Amsterdam: - De Nederlandsche Bank, 2009. - (DNB Working Paper No. 201 February 2009). - No. pages: 31. [RKN: 71936] URL: http://www.dnb.nl/en/binaries/Working%20paper%20201_tcm47-212957.pdf Abstract: We analyse the effect of failing reinsurance cover on the stability of Dutch insurers. As insurers often reinsure themselves with other (re)insurers, losses could spread contagiously through the sector. Using a unique and confidential data set on reinsurance exposures, we perform a scenario analysis to measure contagion risks. Based on current exposures, we find no evidence of systemic risk in the Netherlands, even if multiple reinsurance companies fail simultaneously. Next, we analyse to what extent the financial position of individual primary insurers is affected following a particular shock, considering solvency, capital and profit levels. The life insurance industry is hardly affected by reinsurance failures. The non-life industry, however, is vulnerable to a crisis in the European reinsurance market. We also find that members of smaller insurance groups are particularly exposed. Keywords : reinsurance, contagion, simulation
Macroeconomics Financial Services Authority. - Financial Risk Outlook 2010. - London: - Financial Services Authority, 2010. - No. pages: 88. [RKN: 72242] Shelved at: 002128 URL: http://www.fsa.gov.uk/pubs/plan/financial_risk_outlook_2010.pdf Abstract: The report is divided into four sections: Macroeconomic background and outlook looks at how fiscal and monetary policy support has limited the scale and duration of the global recession, and the future impact of its removal; Financial Stability and Prudential Risks and Issues highlights the importance of effectively managing prudential and financial stability risks for all stakeholders in the financial system. The chapter explores the new regulatory frameworks being developed to strengthen firms’ capital and liquidity management under stressed conditions and the FSA’s updated stress test; Market Risks and Issues explores risks derived directly from the crisis and other ongoing risks to which regulators and market participants need to respond; Retail Conduct Risks and Issues identifies retail conduct of business risks, some of which have resulted from today’s specific economic circumstances but many of which are rooted in enduring features of retail financial services markets: such as business models that cross subsidise lossmaking core products and very high margin products. Steehouwer, Hens; Slater, Andrew. - Macroeconomic Scenarios : A Frequency Domain Approach [copies of slides only] - Institute of Actuaries and Faculty of Actuaries, 2010. - (Risk and Investment Conference 2010 Caledonian Hotel, Edinburgh, 13-15 June 2010). [RKN: 73015] URL: http://www.actuaries.org.uk/research-and-resources/documents/macroeconomicscenarios-frequency-domain-approach-slides
Management Harvard Business Review on managing external risk. - Boston: - Harvard Business Press, 2009. No. pages: 218. [RKN: 63329] [Faculty: 658.155 22 HAR] Abstract: "Businesses today are operating amid unprecedented uncertainty. The greater the uncertainty, the more ominous and numerous are the threats to your company. To manage external risk, you'll need to select the right analytical tools and incorporate risk into your strategic decision making. This collection shows you how, providing powerful frameworks, tools, and examples for mastering this crucial competency."
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Markov processes Cheung, Eric C K; Landriault, David. - Analysis of a generalized penalty function in a semiMarkovian risk model. - Society of Actuaries, - No. pages: 17. [RKN: 72025] Shelved at: Per: NAAJ (Oxf); Per NAAJ (Lon) [Faculty: NOR/AME] North American Actuarial Journal (2009) 13 (4) : 497-513. URL: http://www.soa.org/news-and-publications/publications/journals/naaj/naaj-detail.aspx Abstract: In this paper an extension of the semi-Markovian risk model studied by Albrecher and Boxma (2005) is considered by allowing for general interclaim times. In such a model, we follow the ideas of Cheung et al. (2010b) and consider a generalization of the Gerber-Shiu function by incorporating two more random variables in the traditional penalty function, namely, the minimum surplus level before ruin and the surplus level immediately after the second last claim prior to ruin. It is shown that the generalized Gerber-Shiu function satisfies a matrix defective renewal equation. Detailed examples are also considered when either the interclaim times or the claim sizes are exponentially distributed. Finally, we also consider the case where the claim arrival process follows a Markovian arrival process. Probabilistic arguments are used to derive the discounted joint distribution of four random variables of interest in this risk model by capitalizing on an existing connection with a particular fluid flow process. Cheung, Eric C K; Landriault, David. - A generalized penalty function with the maximum surplus prior to ruin in a MAP risk model. - No. pages: 8. [RKN: 72434] Shelved at: Per: IME (Oxf) Insurance: Mathematics & Economics (2010) 46 (1) : 127-134. Abstract: In this paper, a risk model where claims arrive according to a Markovian arrival process (MAP) is considered. A generalization of the well-known Gerber–Shiu function is proposed by incorporating the maximum surplus level before ruin into the penalty function. For this wider class of penalty functions, we show that the generalized Gerber–Shiu function can be expressed in terms of the original Gerber–Shiu function (see e.g. [Gerber, Hans U., Shiu, Elias, S.W., 1998. On the time value of ruin. North American Actuarial Journal 2(1), 48–72]) and the Laplace transform of a first passage time which are both readily available. The generalized Gerber–Shiu function is also shown to be closely related to the original Gerber–Shiu function in the same MAP risk model subject to a dividend barrier strategy. The simplest case of a MAP risk model, namely the classical compound Poisson risk model, will be studied in more detail. In particular, the discounted joint density of the surplus prior to ruin, the deficit at ruin and the maximum surplus before ruin is obtained through analytic Laplace transform inversion of a specific generalized Gerber–Shiu function. Numerical illustrations are then examined. Keywords: Gerber–Shiu function; Generalized penalty function; Maximum surplus level before ruin; Markovian arrival process; Discounted joint distribution Feng, R. - Generalized Gerber–Shiu Function in Piecewise–deterministic Markov Processes [abstract only] 2008. [RKN: 38565] Shelved at: Online only [Faculty: Online only] Actuarial Research Clearing House (ARCH) (2008) 1 URL: http://www.soa.org/news-and-publications/publications/proceedings/arch/arch-2008iss1.aspx Abstract: Introduced by Gerber and Shiu (1998) in NAAJ, the Gerber-Shiu expected discounted penalty function has ever since become the standard technical tool in the actuarial literature to analyze a variety of ruin-related quantities such as the probability of ultimate ruin, the joint distribution of the surplus prior to ruin and the deficit at ruin. As ruin theory progresses, great efforts have been made in the literature to study the dividends paid to shareholders up to ruin, which is not a special case of the Gerber-Shiu function. It has been brought to our attention that most techniques applied to the dividends problem are basically parallel to those employed in the analysis of the Gerber-Shiu function. The similarity between the solution methods led us to propose a more general function that contains both the Gerber-Shiu expected discounted penalty function and dividends paid up to ruin, as well as many others that have not been taken into 92
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consideration in the same systematic way, such as the insurer’s accumulative utility, expected total discounted claim expenses, etc. Not only does the generalized Gerber-Shiu function accommodate more quantities, it is also applicable with a more general class of underlying risk processes called the piecewise deterministic Markov processes, which includes most well-studied non-diffusion processes such as the compound Poisson, Sparre Andersen with phase-type interclaim times and Markov-modulated risk processes. Our major result provides an unifying approach to obtain integro-differential equations for all ruin-related quantities that fall in the category of the generalized Gerber-Shiu function. In the end, we shall demonstrate the application of generalized Gerber-Shiu function by recovering many well-known results in the literature as well as producing solutions to other aforementioned new quantities of interests. Mera, A. - Analysis of a Threshold Strategy in the Discrete–time Sparre Andersen Model. 2008. [RKN: 38561] Shelved at: Online only [Faculty: Online only] Actuarial Research Clearing House (ARCH) (2008) 1 URL: http://www.soa.org/news-and-publications/publications/proceedings/arch/arch-2008iss1.aspx Abstract: In this thesis, it is shown that the application of a threshold on the surplus level of a particular discrete-time delayed Sparre Andersen insurance risk model results in a process that can be analyzed as a doubly infinite Markov chain with finite blocks. Two fundamental cases, encompassing all possible values of the surplus level at the time of the first claim, are explored in detail. Matrix analytic methods are employed to establish a computational algorithm for each case. The resulting procedures are then used to calculate the probability distributions associated with fundamental ruin-related quantities of interest, such as the time of ruin, the surplus immediately prior to ruin, and the deficit at ruin. The ordinary Sparre Andersen model, an important special case of the general model, with varying threshold levels is considered in a numerical illustration.
Martingale methods Badescu, Andrei; Breuer, Lothar. - The use of vector-valued martingales in risk theory. [RKN: 43359] Shelved at: Per: Blätter (Lon); online only Blätter der Deutsche Gesellschaft für Versicherungs- und Finanzmathematik (2008) 29 (heft 1) : 1-12. URL: http://www.springerlink.com/content/1864-0303/
Mathematics Herzog, T. - Metrics for Matches, Mismatches and Non–Matches [abstract only] 2008. [RKN: 38566] Shelved at: Online only [Faculty: Online only] Actuarial Research Clearing House (ARCH) (2008) 1 URL: http://www.soa.org/news-and-publications/publications/proceedings/arch/arch-2008iss1.aspx Abstract: When performing record linkages it is important to know the extent to which one has identified (1) correct matches and (2) erroneous matches, or failed to match records that should be matched. In this talk, we review a number of metrics that have been proposed to measure such situations. We also describe the strengths and weaknesses of such metrics and discuss possible research problems in this area.
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Mathematics of finance Mandelbrot, Benoit B; Hudson, Richard L. - The (mis)behaviour of markets : A fractal view of risk, ruin, and reward. - Profile Books, 2008. - No. pages: 326. [RKN: 71051] [Faculty: 519.287 MAN] Abstract: Re-evaluation of the standard tools and models of modern financial theory.
Matrix methods Wu, Xueyuan; Li, Shuanming. - Matrix-form Recursions for a family of compound distributions. Victoria: - University of Melbourne, 2009. - (Centre for Actuarial Studies, University of Melbourne, Research Paper no. 186). - No. pages: 19. [RKN: 72115] URL: http://mercury.ecom.unimelb.edu.au/SITE/actwww/wps2009/186.pdf Abstract: In this paper, we aim to evaluate the distribution of the aggregate claims in the collective risk model. The number of claims is firstly assumed to belong to a generalised (a; b; 0) family. A matrix form recursive formula is then derived to evaluate the related compound distribution when individual claim amounts follow a discrete distribution on non-negative integers. The corresponding formula is also given for continuous individual claim amounts. Secondly, we pay particular attention to the recursive formula for compound phase-type distributions, since only certain types of discrete phase-type distributions belong to the generalised (a; b; 0) family. Similar recursive formulae are obtained for discrete and continuous individual claim amount distributions. Finally, numerical examples are presented for three counting distributions in this family. Keywords: Discrete phase-type distributions; Generalised (a, b, 0) family; Recursive formula; Compound distribution
Modelling Asimit, Alexandru V; Badescu, Andrei L. - Extremes on the discounted aggregate claims in a time dependent risk model. - No. pages: 12. [RKN: 72591] Shelved at: Per: SAJ [Faculty: SCA/ACT] Scandinavian Actuarial Journal (2010) 2 : 93-104. Abstract: This paper presents an extension of the classical compound Poisson risk model for which the inter-claim time and the forthcoming claim amount are no longer independent random variables (rv's). Asymptotic tail probabilities for the discounted aggregate claims are presented when the force of interest is constant and the claim amounts are heavy tail distributed rv's. Furthermore, we derive asymptotic finite time ruin probabilities, as well as asymptotic approximations for some common risk measures associated with the discounted aggregate claims. A simulation study is performed in order to validate the results obtained in the free interest risk model. Keywords: Compound Poisson risk model; Dependence; Discounted aggregate loss; Subexponential distribution; Value-at-risk Barberis, Nicholas. - A Model of Casino Gambling. - New Haven, CT: - Yale School of Management, 2010. - No. pages: 41. [RKN: 72557] URL: http://badger.som.yale.edu/faculty/ncb25/gb20d.pdf Abstract: Casino gambling is a hugely popular activity around the world, but there are still very few models of why people go to casinos or of how they behave when they get there. In this paper, we show that prospect theory can offer a surprisingly rich theory of gambling, one that captures many features of actual gambling behaviour. First, we demonstrate that, for a wide range of parameter values, a prospect theory agent would be willing to gamble in a casino, even if the casino only offers bets with zero or negative expected value. Second, we show that prospect theory predicts a plausible time inconsistency: at the moment he enters a casino, a prospect theory agent plans to follow one particular gambling strategy; but after he enters, he wants to switch to a different strategy. The model therefore predicts heterogeneity in gambling behaviour : how a gambler 94
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behaves depends on whether he is aware of the time-inconsistency; and, if he is aware of it, on whether he is able to commit, in advance, to his initial plan of action. Keywords: gambling, prospect theory, time inconsistency, probability weighting Barth, Michael M; Eckles, David L. - An Empirical Investigation of the Effect of Growth on ShortTerm Changes in Loss Ratios. - No. pages: 19. [RKN: 71778] Shelved at: Per: J.Risk Ins (Oxf) [Faculty: JOU/RIS] Journal of Risk and Insurance (2009) 76 (4) : 867-885. Abstract: Given the use of premium growth as a risk measure in regulatory and private risk assessment models, the impact of growth on underwriting profitability is an important question. Our results show a negative relationship between premium growth and changes in loss ratios, suggesting that premium growth alone does not necessarily result in higher underwriting risk. Further, there is a positive relationship between claim count growth and changes in loss ratios, suggesting that claim count growth may be a preferred measure of underwriting risk. Bellis, Clare S (ed); Shepherd, John A (ed); Klugman, Stuart A; Lyon, Richard H S (ed). Understanding actuarial management: the actuarial control cycle. - 2nd ed. - Sydney: - Institute of Actuaries of Australia, 2010. - No. pages: 630. [RKN: 39617] Shelved at: EM (Oxf) [Faculty: 368.01 BEL] URL: http://www.soa.org/files/pdf/book-understanding-act.pdf Contents include: -- Risk management frameworks -- Being professional -- The need for financial products -- The context of actuarial work -- Applying risk management -- Regulation -- Product design -- Modelling -- Data and assumptions -- The need for capital -- Valuing liabilities -- Pricing -Assets -- Solvency -- Profit -- Monitoring experience -- Responding to experience -- Applying the actuarial control cycle Benouaret, Zina; Aïssani, Djamil. - Strong stability in a two-dimensional classical risk model with independent claims. - No. pages: 10. [RKN: 72590] Shelved at: Per: SAJ [Faculty: SCA/ACT] Scandinavian Actuarial Journal (2010) 2 : 83-92. Abstract: In this paper, we study the strong stability of ruin probabilities in risk models. The question of stability naturally arises in risk theory since the governing parameters in these models can only be estimated with uncertainty. Moreover, in most cases there are not explicit expressions known for the ruin probabilities. Our objective is to present the applicability of the strong stability method to the bivariate classical risk model with independent claims. After clarifying the conditions to approximate the two-dimensional risk model with disturbance parameters by the twodimensional classical risk model, we obtain the stability inequalities with an exact computation of the constants. Keywords: Risk models; Ruin probabilities; Markov chain; Strong stability; Reversed process; Continuity estimates Bernard, C; Chen, A. - On the Regulator–Insurer Interaction in a Structural Model. 2008. [RKN: 38567] Shelved at: Online only [Faculty: Online only] Actuarial Research Clearing House (ARCH) (2008) 1 URL: http://www.soa.org/news-and-publications/publications/proceedings/arch/arch-2008iss1.aspx Abstract: In this paper, we provide a new insight to the previous work of Briys and de Varenne [1994], Grosen and Jørgensen [2002] and Chen and Suchanecki [2007]. We show that if the insurance company follows a risk management strategy, it can significantly change the risk exposure of the company, and that it should thus be taken into account by the regulators. We first study how the regulator establishes regulation intervention levels in order to control for instance the default probability of the insurance company (under the real world probability measure). This part of the analysis is based on a constant volatility and there exists a one-to-one relation between the optimal regulation level and the volatility. Given that the insurance company is informed of the regulatory rules, we study how results can be significantly different when the insurance company follows a risk management strategy with non-constant volatilities. We thus highlight the limits of 95
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Risk Management Reading List September 2010
prior literature and believe that the value of the risk management of the company should be included in the risk exposure estimation and the market value of liabilities as well. Bjorkwall, Susanna; Hossjer, Ola; Ohlsson, Esbjorn. - Non-parametric and parametric bootstrap techniques for age-to-age development factor methods in stochastic claims reserving. - No. pages: 26. [RKN: 71758] Shelved at: Per: SAJ [Faculty: SCA/ACT] Scandinavian Actuarial Journal (2009) 4 : 306-331. Abstract: In the literature, one of the main objects of stochastic claims reserving is to find models underlying the chain-ladder method in order to analyze the variability of the outstanding claims, either analytically or by bootstrapping. In bootstrapping these models are used to find a full predictive distribution of the claims reserve, even though there is a long tradition of actuaries calculating the reserve estimate according to more complex algorithms than the chain-ladder, without explicit reference to an underlying model. In this paper we investigate existing bootstrap techniques and suggest two alternative bootstrap procedures, one non-parametric and one parametric, by which the predictive distribution of the claims reserve can be found for other age-toage development factor methods than the chain-ladder, using some rather mild model assumptions. For illustration, the procedures are applied to three different development triangles. Keywords: Bootstrap; Chain-ladder; Development factor method; Development triangle; Stochastic claims reserving Bluhm, Christian; Overbeck, Ludger; Wagner, Christop. - Introduction to credit risk modeling. 2nd ed ed. - London: - CRC Press, 2010. - (CRC Financial Mathematics Series). - No. pages: 384. [RKN: 72888] [Faculty: 658.8 BLU] Abstract: "The financial crisis illustrated the importance of effectively communicating model outcomes and ensuring that the variation in results is clearly understood by decision makers. The crisis also showed that more modelling and more analysis are superior to only one model. This accessible, self-contained book recommends using a variety of models to shed light on different aspects of the true nature of a credit risk problem, thereby allowing the problem to be viewed from different angles." (Publisher's blurb) Campana, Antonella. - On Tail Value-at-Risk for sums of non-independent random variables with a generalized Pareto distribution. [RKN: 37742] Shelved at: Per: Geneva (Oxf) Geneva Risk and Insurance Review (2007) 32 (2) : 169-180. Abstract: Recently in actuarial literature several authors have derived lower and upper bounds in the sense of convex order for sums of random variables with given marginal distributions and unknown dependency structure. In this paper, we derive convex bounds for sums of nonindependent and identically distributed random variables when marginal distributions are mixture models. In particular, we examine some well-known risk measures and we find approximations for Tail Value-at-Risk of the sums considered when marginal distributions are generalized Pareto distributions. By numerical examples we illustrate the goodness of the presented approximations. Chen, Hua; Cox, Samuel H. - An option-based operational risk management model for pandemics. 2009. - No. pages: 23. [RKN: 69511] Shelved at: Per: NAAJ (Oxf); Per NAAJ (Lon) [Faculty: NOR/AME] North American Actuarial Journal (2009) 13 (1) : 54-76. URL: http://www.soa.org/library/journals/north-american-actuarial-journal/2009/no-01/naaj2009-vol13-no1-chen.pdf Abstract: In this paper we employ the theory of real option pricing to address problems in the area of operational risk management. We develop a two-stage model to help firms determine the optimal suspension-reactivation triggers in the events of pandemics. In the first stage, we propose a regime-dependent epidemic model to simulate the spread of the virus, depending on whether the firm is active or inactive. In the second stage, we view the reactivation decision as a call option and the suspension decision as a put option, and use dynamic programming methods to obtain the optimal switching thresholds. Our method can be regarded as a quantitative implementation of the 96
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CDC’s instructions for pandemic preparation. We find that when they take the uncertainty of disease transmission into consideration, firms are more conservative about the decisions of suspension and reactivation. We also find that when firms incur switching costs, the suspension threshold increases with costs, whereas the reactivation threshold decreases with costs. By adopting disease control policies, firms can increase their values in both regimes. Cheung, Eric C K; Landriault, David. - A generalized penalty function with the maximum surplus prior to ruin in a MAP risk model. - No. pages: 8. [RKN: 72434] Shelved at: Per: IME (Oxf) Insurance: Mathematics & Economics (2010) 46 (1) : 127-134. Abstract: In this paper, a risk model where claims arrive according to a Markovian arrival process (MAP) is considered. A generalization of the well-known Gerber–Shiu function is proposed by incorporating the maximum surplus level before ruin into the penalty function. For this wider class of penalty functions, we show that the generalized Gerber–Shiu function can be expressed in terms of the original Gerber–Shiu function (see e.g. [Gerber, Hans U., Shiu, Elias, S.W., 1998. On the time value of ruin. North American Actuarial Journal 2(1), 48–72]) and the Laplace transform of a first passage time which are both readily available. The generalized Gerber–Shiu function is also shown to be closely related to the original Gerber–Shiu function in the same MAP risk model subject to a dividend barrier strategy. The simplest case of a MAP risk model, namely the classical compound Poisson risk model, will be studied in more detail. In particular, the discounted joint density of the surplus prior to ruin, the deficit at ruin and the maximum surplus before ruin is obtained through analytic Laplace transform inversion of a specific generalized Gerber–Shiu function. Numerical illustrations are then examined. Keywords: Gerber–Shiu function; Generalized penalty function; Maximum surplus level before ruin; Markovian arrival process; Discounted joint distribution Cheung, Eric C K; Landriault, David. - On a risk model with surplus-dependent premium and tax rates. - Waterloo: - University of Waterloo, 2010. - (Waterloo Research Institute in Insurance, Securities and Quantitative Finance (WatRISQ) Working paper series 2010-05). - No. pages: 20. [RKN: 72577] URL: http://www.watrisq.uwaterloo.ca/Research/2010Reports/2010-05.pdf Abstract: In this paper, the compound Poisson risk model with surplus-dependent premium rate is analyzed in the taxation system proposed by Albrecher and Hipp (2007). In the compound Poisson risk model, Albrecher and Hipp (2007) showed that a simple relationship between the ruin probabilities in the risk model with and without tax exists. This so-called tax identity was later generalized to a surplus-dependent tax rate by Albrecher et al. (2009). This paper further generalizes these results to the Gerber-Shiu function with a generalized penalty function involving the maximum surplus prior to ruin. We show that this generalized Gerber-Shiu function in the risk model with tax is closely related to the 'original' Gerber-Shiu function in the risk model without tax defined in a dividend barrier framework. The moments of the discounted tax payments before ruin and the optimal threshold level for the tax authority to start collecting tax payments are also examined. Keywords: Gerber-Shiu function, tax identity, maximum surplus level, surplus-dependent premium, discounted tax payments. Chi, Yichun; Jaimungal, Sebastian; Lin, X Sheldon. - An insurance risk model with stochastic volatility. - No. pages: 17. [RKN: 72427] Shelved at: Per: IME (Oxf) Insurance: Mathematics & Economics (2010) 46 (1) : 52-66. Abstract: In this paper, we extend the Cramér–Lundberg insurance risk model perturbed by diffusion to incorporate stochastic volatility and study the resulting Gerber–Shiu expected discounted penalty (EDP) function. Under the assumption that volatility is driven by an underlying Ornstein–Uhlenbeck (OU) process, we derive the integro-differential equation which the EDP function satisfies. Not surprisingly, no closed-form solution exists; however, assuming the driving OU process is fast mean-reverting, we apply the singular perturbation theory to obtain an asymptotic expansion of the solution. Two integro-differential equations for the first two terms in 97
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this expansion are obtained and explicitly solved. When the claim size distribution is of phase-type, the asymptotic results simplify even further and we succeed in estimating the error of the approximation. Hyper-exponential and mixed-Erlang distributed claims are considered in some detail. Keywords: Gerber–Shiu expected discounted penalty function; Integro-differential equation; Singular perturbation theory; Stochastic volatility; Perturbed compound Poisson risk process; Phase-type distribution; Ornstein–Uhlenbeck process Christodoulakis, George (ed); Satchell, Stephen E (ed). - The analytics of risk model validation. Elsevier, 2008. - No. pages: 201. [RKN: 69115] [Faculty: 519.2 CHR] Contents: 1. Determinants of small business default - 1 -- 2. Validation of stress testing models 13 -- 3. The validity of credit risk model validation models - 27 -- 4. A moments-based procedure for evaluating risk forecasting models - 45 -- 5. Measuring concentration risk in credit portfolios 59 -- 6. A simple method for regulators to cross-check operational risk loss models for banks - 79 - 7. Of the credibility of mapping and benchmarking credit risk estimates for internal rating systems - 91 -- 8. Analytic models of the ROC curve: applications to credit rating model validation - 113 -- 9. The validation of the equity portfolio risk models - 135 -- 10. Dynamic risk analysis and risk model evaluation - 149 -- 11. Validation of internal rating systems and PD estimates - 169 Dickson, David C M; Li, Shuanming. - Erlang risk models and finite time ruin problems. - Victoria: - University of Melbourne, 2010. - (Centre for Actuarial Studies, University of Melbourne, Research Paper no. 202). - No. pages: 24. [RKN: 72345] URL: http://econ.unimelb.edu.au/SITE/actwww/wps2010/202.pdf Abstract: We consider the joint density of the time of ruin and deficit at ruin in the Erlang(n) risk model. We give a general formula for this joint density and illustrate how the components of this formula can be found in the special case when n = 2. We then show how the formula can be implemented numerically for a general value of n. We also discuss how the ideas extend to the generalised Erlang(n) risk model. Dickson, David C M; Li, Shuanming. - Finite time ruin problems for the Erlang(2) risk model. - No. pages: 7. [RKN: 72423] Shelved at: Per: IME (Oxf) Insurance: Mathematics & Economics (2010) 46 (1) : 12-18. Abstract: We consider the Erlang(2) risk model and derive expressions for the density of the time to ruin and the joint density of the time to ruin and the deficit at ruin when the individual claim amount distribution is (i) an exponential distribution and (ii) an Erlang(2) distribution. We also consider the special case when the initial surplus is zero. Dunn, Gary. - A Multiple Period Gaussian Jump to Default Risk Model. - London: - Financial Services Authority, 2008. - (FSA Occasional paper 29). - No. pages: 37. [RKN: 72497] URL: http://www.fsa.gov.uk/Pages/Library/research/economic/Occasional/index.shtml Abstract: The single-factor Gaussian copula method is a common approach for default risk modelling. However, the model deals with the distribution of default losses over a single period. Proposals currently under consideration for calculating a ‘jump to default’ risk capital charge for the trading book incorporate the concept of a liquidity horizon, which will be typically shorter than the capital horizon over which the jump to default risk charge has to be calculated. The liquidity horizon specifies a period over which a portfolio can be rebalanced. Depending on the rebalancing “rules” adopted (such as the “constant level of risk” assumption), an actively managed portfolio can exhibit a more benign default loss distribution relative to that of a constant portfolio over a given investment (or capital) horizon. This paper develops a general multi-period Gaussian copula model that incorporates the dynamics of default risk over time. Grané, Aurea; Veiga, Helena. - Outliers in GARCH models and the estimation of risk measures. Madrid: - Departamento de Estadística, Universidad Carlos III de Madrid, 2010. - (Working Paper 10-05). - No. pages: 21. [RKN: 72623] URL: http://e-archivo.uc3m.es/bitstream/10016/6699/1/ws100502.pdf 98
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Abstract: In this paper we focus on the impact of additive level outliers on the calculation of risk measures, such as minimum capital risk requirements, and compare four alternatives of reducing these measures' estimation biases. The first three proposals proceed by detecting and correcting outliers before estimating these risk measures with the GARCH(1,1) model, while the fourth procedure fits a Student’s t-distributed GARCH(1,1) model directly to the data. The former group includes the proposal of Grané and Veiga (2010), a detection procedure based on wavelets with hard- or soft-thresholding filtering, and the well known method of Franses and Ghijsels (1999). The first results, based on Monte Carlo experiments, reveal that the presence of outliers can bias severely the minimum capital risk requirement estimates calculated using the GARCH(1,1) model. The message driven from the second results, both empirical and simulations, is that outlier detection and filtering generate more accurate minimum capital risk requirements than the fourth alternative. Moreover, the detection procedure based on wavelets with hard-thresholding filtering gathers a very good performance in attenuating the effects of outliers and generating accurate minimum capital risk requirements out-of-sample, even in pretty volatile periods. Keywords: Minimum Capital Risk Requirements, Outliers, Wavelets Guszcza, James. - Black swans and red herrings. [RKN: 39325] Shelved at: Per: Actuary (Oxf); Per: Actuary (Lon) The Actuary (2009) August : 24-26. URL: http://www.the-actuary.org.uk Abstract: James Guszcza explores model risk in the context of outlier events and Knightian uncertainty. He discusses the three faces of risk (process risk, parameter risk, and model risk). Huang, Hong-Chih. - Optimal multiperiod asset allocation : Matching assets to liabilities in a discrete model. [RKN: 39630] Shelved at: Per: J.Risk Ins (Oxf) [Faculty: JOU/RIS] Journal of Risk and Insurance (2010) 77 (2) : 451-472. Abstract: Investment and risk control are becoming increasingly important for financial institutions. Asset allocation provides a fundamental investing principle to manage the risk and return trade-off in financial markets. This article proposes a general formulation of a first approximation of multiperiod asset allocation modelling for institutions that invest to meet the target payment structures of a long-term liability. By addressing the shortcomings of both single-period models and the single-point forecast of the mean variance approach, this article derives explicit formulae for optimal asset allocations, taking into account possible future realizations in a multiperiod discrete time model. Iyengar, Garud; Ma, Alfred Ka Chun. - Cash flow matching: A risk management approach. Society of Actuaries, 2009. - No. pages: 15. [RKN: 71630] Shelved at: Per: NAAJ (Oxf); Per NAAJ (Lon) [Faculty: NOR/AME] North American Actuarial Journal (2009) 13 (3) : 370-384. URL: http://www.soa.org/news-and-publications/publications/journals/naaj/naaj-detail.aspx Abstract: We propose a scenario-based optimization framework for solving the cash flow matching problem where the time horizon of the liabilities is longer than the maturities of available bonds and the interest rates are uncertain. Standard interest rate models can be used for scenario generation within this framework. The optimal portfolio is found by minimizing the cost at a specific level of shortfall risk measured by the conditional tail expectation (CTE), also known as conditional value-at-risk (CVaR) or Tail-VaR. The resulting optimization problem is still a linear program (LP) as in the classical cash flow matching approach. This framework can be employed in situations when the classical cash flow matching technique is not applicable.
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Loeffen, Ronnie L; Renaud, Jean-François. - De Finetti’s optimal dividends problem with an affine penalty function at ruin. - No. pages: 11. [RKN: 72431] Shelved at: Per: IME (Oxf) Insurance: Mathematics & Economics (2010) 46 (1) : 98-108. Abstract: In a Lévy insurance risk model, under the assumption that the tail of the Lévy measure is log-convex, we show that either a horizontal barrier strategy or the take-the-money-and-run strategy maximizes, among all admissible strategies, the dividend payments subject to an affine penalty function at ruin. As a key step for the proof, we prove that, under the aforementioned condition on the jump measure, the scale function of the spectrally negative Lévy process has a log-convex derivative. Keywords: Insurance risk theory; Optimal dividends; Deficit at ruin; Gerber–Shiu functions; Lévy processes; Stochastic control; Log-convexity Loisel, Stéphane; Mazza, Christian; Rullière, Didier. - Convergence and asymptotic variance of bootstrapped finite-time ruin probabilities with partly shifted risk processes. - No. pages: 8. [RKN: 72411] Shelved at: Per: IME (Oxf) Insurance: Mathematics & Economics (2009) 45 (3) : 374-381. Abstract: In the classical risk model, we prove the weak convergence of a sequence of empirical finite-time ruin probabilities. In an earlier paper (see Loisel et al., (2008)), we proved an equivalent result in the special case where the initial reserve is zero, and checked that numerically the general case seems to be true. In this paper, we prove the general case (with a nonnegative initial reserve), which is important for applications to estimation risk. So-called partly shifted risk processes are introduced, and used to derive an explicit expression of the asymptotic variance of the considered estimator. This provides a clear representation of the influence function associated with finite time ruin probabilities and gives a useful tool to quantify estimation risk according to new regulations. Keywords: Finite-time ruin probability; Robustness; Solvency II; Reliable ruin probability; Asymptotic normality; Influence function; Estimation Risk Solvency Margin (ERSM); Partly shifted risk process Malinovskii, Vsevolod K. - Scenario Analysis for a Multi-Period Diffusion Model of Risk. - No. pages: 28. [RKN: 71973] Shelved at: Per: Astin Bull (Oxf) [Faculty: JOU/AST] ASTIN Bulletin (2009) 39 (2) : 649-676. Abstract: This paper extends and develops the results of a previous paper Malinovskii (2007). Dealing with a simplistic diffusion multi-year model of insurance operations, this paper illustrates the adaptive control approach when the object of control is the balance of solvency and equity. Compared to the previous paper, a new element is the “scenario of nature”, or the incomplete knowledge of future risk, which is quite often the case in insurance. It introduces a new and inevitable randomness in the model and leads to a qualitative difference in its behaviour. Keywords: Multi-period insurance process; diffusion annual mechanisms; volatile scenario; solvency; equity; adaptive control strategies Renaud, Jean-François. - The distribution of tax payments in a Lévy insurance risk model with a surplus-dependent taxation structure. - No. pages: 5. [RKN: 72396] Shelved at: Per: IME (Oxf) Insurance: Mathematics & Economics (2009) 45 (2) : 242-246. Abstract: We study the distribution of tax payments in the model of Kyprianou and Zhou [Kyprianou, A.E., Zhou, X., 2009. General tax structures and the Lévy insurance risk model. J. Appl. Probab. (in press)], that is a Lévy insurance risk model with a surplus-dependent tax rate. More precisely, after a short discussion on the so-called tax identity, we derive a recursive formula for arbitrary moments of the discounted tax payments until ruin and we identify the distribution of the tax payments when there is no force of interest. Keywords: Insurance risk theory; General taxation structure; Tax payments; Lévy processes Schmeiser, Hato; Siegel, Caroline. - Regulating Insurance Groups : a Comparison of Risk-Based 100
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Solvency Models. - St Gallen: - Institute of Insurance Economics, 2010. - (Working papers on risk management and insurance no. 79). - No. pages: 26. [RKN: 72841] URL: http://www.ivw.unisg.ch/org/ivw/web.nsf/SysWebRessources/WP79/$FILE/Regulating+Insur ance+Groups.pdf Abstract: Since the 1990s, there has been extensive growth of financial groups involved in the insurance sector. As a result, supervisors and regulators are currently developing group-wide capital standards intended to enable effective monitoring of the financial soundness of such groups. Some jurisdictions are taking steps towards a consolidated approach, which views the group as one single integrated entity, while others model the group as a collection of interrelated but separate legal entities. This paper provides a theoretical as well as a numerical comparison of these two approaches to group-wide solvency assessment in light of the different regulatory issues and challenges associated with consideration of group effects. As a benchmark case, we consider a “silo approach” that is based on a solo assessment of the risks and solvency capital requirements of each legal entity within the insurance group. Our analysis contributes to the ongoing discussion about the best way to conduct group-wide solvency assessments. Key words: Solvency, insurance group, regulation, risk management Sherris, Michael; Njenga, Carolyn. - Longevity Risk and the Econometric Analysis of Mortality Trends and Volatility. - UNSW Australian School of Business Research, 2009. - (UNSW Australian School of Business Research Paper No. 2009ACTL08). [RKN: 71634] URL: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1458084 Abstract: Longevity risk and the modelling of trends and volatility for mortality improvement has attracted increased attention driven by ageing populations around the world and the expected financial implications. The original Lee-Carter model that was used for longevity risk assessment included a single improvement factor with differential impacts by age. Financial models that allow for risk pricing and risk management have attracted increasing attention along with multiple factor models. This paper investigates trends, including common trends through co-integration, and the factors driving the volatility of mortality using principal components analysis for a number of developed countries including Australia, England, Japan, Norway and USA. The results demonstrate the need for multiple factors for modelling mortality rates across all these countries. The basic structure of the Lee-Carter model can not adequately model the random variation and the full risk structure of mortality changes. Trends by country are found to be stochastic. Common trends and co-integrating relationships are found across ages highlighting the benefits from modelling mortality rates as a system in a Vector-Autoregressive (VAR) model and capturing long run equilibrium relationships in a Vector Error-Correction Model (VECM) framework. Keywords: longevity risk, unit roots, VAR, VECM Solnik, Bruno. - Lessons we have learned regarding risk management modeling [copies of slides only] - Institute of Actuaries and Faculty of Actuaries, 2010. - (Risk and Investment Conference 2010 Caledonian Hotel, Edinburgh, 13-15 June 2010). [RKN: 73027] URL: http://www.actuaries.org.uk/research-and-resources/documents/lessons-we-havelearned-regarding-risk-management-modelling-slides Sweeting, Paul J. - Modelling and managing risk. [RKN: 39349] Shelved at: Per: BAJ (Oxf); Per: BAJ (Lon) [Faculty: BRI/ACT] BAJ (2007) 13 (3) : 579-636. URL: http://www.actuaries.org.uk/research-and-resources/pages/access-journals Abstract: This paper looks at the risks faced by financial institutions, and how they can be modelled and managed. I compare the way in which each of the risks affects different types of financial institution and look for similarities (and differences) across industries. Finally, I consider what makes a good risk management system.
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Sweeting, Paul J. - Modelling and managing risk : Abstract of the discussion held by the Faculty of Actuaries. [RKN: 39433] Shelved at: Per: BAJ (Oxf); Per: BAJ (Lon) [Faculty: BRI/ACT] BAJ (2008) 14 (1) : 111-125. URL: http://www.actuaries.org.uk/research-and-resources/pages/access-journals Abstract: Discussion about Paul Sweeting’s paper. This paper looks at the risks faced by financial institutions, and how they can be modelled and managed. It compares the way in which each of the risks affects different types of financial institution and look for similarities (and differences) across industries. Finally, it consider what makes a good risk management system. Vlaev, Ivo; Stewart, Neil; Chater, Nick. - Risk preference discrepancy : a prospect relativity account of the discrepancy between risk preferences in laboratory gambles and real world investments. [RKN: 39305] Shelved at: UHG/LA pam (Oxf) Journal of Behavioral Finance (2008) 9 : 132-148. Abstract: In this article, we presented evidence that people are more risk averse when investing in financial products in the real world than when they make risky choices between gambles in laboratory experiments. To provide an account for this discrepancy, we conducted experiments which showed that the range of offered investment funds that vary in their risk-reward characteristics had a significant effect on the distribution of hypothetical funds to those products. We also showed that people are able to use the context provided by the choice set in order to make relative riskiness judgments for investment products. This context dependent relativistic nature of risk preferences is proposed as a plausible explanation of the risk preference discrepancy between laboratory experiments and real-world investments. We also discuss other possible theoretical interpretations of the discrepancy. Wu, X. - Ruin probabilities for a risk model with two classes of risk processes. - No. pages: 22. [RKN: 36856] Australian Actuarial Journal (2010) 16 (1) : 87-108. URL: http://www.actuaries.asn.au/Libraries/Information_Knowledge/46305_AAJ_v16i1_comp.sflb. ashx Abstract: In this paper a risk model with two classes of business is considered, in which claim number processes are modelled by two independent Erlang(2) processes, aiming to calculate probabilities of ruin caused by a claim from a certain class. To do so, integro-differential equations for the ruin probabilities are derived and their Laplace transforms are then obtained. At the end of this paper, numerical results for the ruin probabilities are calculated for individual claim sizes with exponential and Gamma distributions. Keywords: Erlang risk process; Integro-differential equations; Laplace transforms Zhou, Ming; Cai, Jun. - A perturbed risk model with dependence between premium rates and claim sizes. - No. pages: 11. [RKN: 72412] Shelved at: Per: IME (Oxf) Insurance: Mathematics & Economics (2009) 45 (3) : 382-392. Abstract: This paper considers a dependent risk model with diffusion for the surplus of an insurer, in which a current premium rate will be adjusted after a claim occurs and the adjusted rate is determined by the amount of the claim. At the same time, the diffusion is changed correspondingly. Using Rouché’s theorem, we first derive the closed-form solution for the Laplace transform of the survival probability in the dependent risk model. Then, using the Laplace transform, we derive a defective renewal equation satisfied by the survival probability. For the exponential claim sizes, we present the explicit recursion expression for the survival probability, by which we can exactly solve the survival probability step-by-step. We also illustrate the influence of the model parameters in the dependent risk model on the survival probability by numerical examples. Keywords: Dependence; Laplace transform; Dickson–Hipp operator; Defective renewal equation; Rouché’s theorem; Closed contour; Diffusion; Survival probability 102
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Monopoly Quiggin, John; Chambers, Robert G. - Bargaining power and efficiency in insurance contracts. [RKN: 39293] Shelved at: Per: Geneva (Oxf) Geneva Risk and Insurance Review (2009) 34 (1) : 47-73. Abstract: Insurance contracts are frequently modelled as principal–agent relationships. The purpose of this paper is to examine the interaction between differential bargaining power and the efficiency of insurance contracts. The analysis is undertaken in a framework of state-contingent production, which allows us to consider, as separate choices, the level of effort committed by the client and the riskiness of the equilibrium state-contingent production vector. Our central result is that, in the presence of hold-up problems, the exercise of monopoly power by insurers leads clients to undertake socially costly self-protection, leading to suboptimal levels of insurance. Clients can exploit information asymmetries to offset the bargaining power of the insurer, but this process is also socially costly. Hence, competitive markets for insurance will yield a Paretosuperior outcome to the constrained Pareto-optimum reached in markets where insurers have monopoly power. More generally, in a bargaining situation, an increase in the bargaining power of clients will increase social welfare.
Monte Carlo techniques Fries, Christian P; Joshi, Mark S. - Conditional analytic Monte-Carlo scheme of auto-callable products. - Victoria: - University of Melbourne, 2008. - (Centre for Actuarial Studies, University of Melbourne, Research Paper no. 173). - No. pages: 26. [RKN: 69459] [Faculty: UNI/MEL] Abstract: In this paper we present a generic method for the Monte-Carlo pricing of (generalized) auto-callable products (aka. trigger products), ie., products for which the payout function features a discontinuity with a (possibly) stochastic location (the trigger) and value (the payout). The Monte Carlo pricing of the products with discontinuous payout is known to come with a high Monte-Carlo error. The numerical calculation of sensitivities (ie., partial derivatives) of such prices by finite differences gives very noisy results, since the Monte-Carlo approximation (being a finite sum of discontinuous functions) is not smooth. Additionally, the Monte-Carlo error of the finitedifference approximation explodes as the shift size tends to zero. Our method combines a product specific modification of the underlying numerical scheme, which is to some extent similar to an importance sampling and/or partial proxy simulation scheme and a reformulation of the payoff function into an equivalent smooth payout. From the financial product we merely require that hitting of the stochastic trigger will result in a conditionally analytic value. Many complex derivatives can be written in this form. A class of products where this property is usually encountered are the so called auto-callables, where a trigger hit results in cancellation of all future payments except for one redemption payment, which can be valued analytically, conditionally on the trigger hit. From the model we require that its numerical implementation allows for a calculation of the transition probability of survival (ie, non-trigger hit). Many models allow this, eg, Euler schemes of Ito processes, where the trigger is model primitive. The method presented is effective across a large range of cases where other methods fail, eg small finite difference shift sizes or short time to trigger reset (approaching maturity); this means that a practitioner can use this method and be confident that it will work consistently. Hoyt, Robert E; Powell, Lawrence S; Sommer, David W. - Computing value at risk: a simulation assignment to illustrate the value of enterprise risk management. [RKN: 69057] [Faculty: RIS/MAN] Risk Management and Insurance Review (2007) 10 (2) : 299-307.
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Risk Management Reading List September 2010
Mortality Cox, Samuel H; Lin, Yijia; Pedersen, Hal. - Mortality risk modeling : Applications to insurance securitization. - No. pages: 12. [RKN: 72445] Shelved at: Per: IME (Oxf) Insurance: Mathematics & Economics (2010) 46 (1) : 242-253. Abstract: This paper proposes a stochastic mortality model featuring both permanent longevity jump and temporary mortality jump processes. A trend reduction component describes unexpected mortality improvement over an extended period of time. The model also captures the uneven effect of mortality events on different ages and the correlations among them. The model will be useful in analyzing future mortality dependent cash flows of life insurance portfolios, annuity portfolios, and portfolios of mortality derivatives. We show how to apply the model to analyze and price a longevity security. Sherris, Michael; Njenga, Carolyn. - Longevity Risk and the Econometric Analysis of Mortality Trends and Volatility. - UNSW Australian School of Business Research, 2009. - (UNSW Australian School of Business Research Paper No. 2009ACTL08). [RKN: 71634] URL: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1458084 Abstract: Longevity risk and the modelling of trends and volatility for mortality improvement has attracted increased attention driven by ageing populations around the world and the expected financial implications. The original Lee-Carter model that was used for longevity risk assessment included a single improvement factor with differential impacts by age. Financial models that allow for risk pricing and risk management have attracted increasing attention along with multiple factor models. This paper investigates trends, including common trends through co-integration, and the factors driving the volatility of mortality using principal components analysis for a number of developed countries including Australia, England, Japan, Norway and USA. The results demonstrate the need for multiple factors for modelling mortality rates across all these countries. The basic structure of the Lee-Carter model can not adequately model the random variation and the full risk structure of mortality changes. Trends by country are found to be stochastic. Common trends and co-integrating relationships are found across ages highlighting the benefits from modelling mortality rates as a system in a Vector-Autoregressive (VAR) model and capturing long run equilibrium relationships in a Vector Error-Correction Model (VECM) framework. Keywords: longevity risk, unit roots, VAR, VECM Tsai, Jeffrey T; Wang, Jennifer L; Tzeng, Larry Y. - On the optimal product mix in life insurance companies using conditional value at risk. - No. pages: 7. [RKN: 72444] Shelved at: Per: IME (Oxf) Insurance: Mathematics & Economics (2010) 46 (1) : 235-241. Abstract: This paper proposes a Conditional Value-at-Risk Minimization (CVaRM) approach to optimize an insurer’s product mix. By incorporating the natural hedging strategy of Cox and Lin (2007) and the two-factor stochastic mortality model of Cairns et al. (2006b), we calculate an optimize product mix for insurance companies to hedge against the systematic mortality risk under parameter uncertainty. To reflect the importance of required profit, we further integrate the premium loading of systematic risk. We compare the hedging results to those using the duration match method of Wang et al. (forthcoming), and show that the proposed CVaRM approach has a narrower quantile of loss distribution after hedging—thereby effectively reducing systematic mortality risk for life insurance companies. Keywords: Systematic mortality risk; Product mix; Natural hedging; Parameter risk; Conditional VaR
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Risk Management Reading List September 2010
Mortality rates Kogure, Atsuyuki; Kurachi, Yoshiyuki. - A Bayesian approach to pricing longevity risk based on risk-neutral predictive distributions. - No. pages: 11. [RKN: 72438] Shelved at: Per: IME (Oxf) Insurance: Mathematics & Economics (2010) 46 (1) : 162-172. Abstract: We present a Bayesian approach to pricing longevity risk under the framework of the Lee–Carter methodology. Specifically, we propose a Bayesian method for pricing the survivor bond and the related survivor swap designed by Denuit et al. (2007). Our method is based on the risk neutralization of the predictive distribution of future survival rates using the entropy maximization principle discussed by Stutzer (1996). The method is illustrated by applying it to Japanese mortality rates. Keywords: Bayesian approach; Pricing longevity risk; Maximum entropy principle; Risk-neutral predictive distribution; Japanese mortality rates
Mortgages Pepper, Anthony. - Mortgage endowments: a FOS risk? - Staple Inn Actuarial Society, [RKN: 71757] Shelved at: Online only [Faculty: Online only] The Actuary (2009) December URL: http://www.the-actuary.org.uk/871265 Abstract: Anthony Pepper questions the appropriateness of the Financial Ombudsman Service risk assessment Wang, Liang; Valdez, Emiliano A; Piggott, John. - Securitization of longevity risk in reverse mortgages. 2008. - No. pages: 27. [RKN: 69496] Shelved at: Per: NAAJ (Oxf); Per NAAJ (Lon) [Faculty: NOR/AME] North American Actuarial Journal (2008) 12 (4) : 345-371. URL: http://www.soa.org/news-and-publications/publications/journals/naaj/naaj-detail.aspx Abstract: The reverse mortgage market has been expanding rapidly in developed economies in recent years. The onset of demographic transition places a rapidly rising number of households in an age window in which reverse mortgages have potential appeal. Increasing prices for residential real estate over the last decade have further stimulated interest. Reverse mortgages involve various risks from the provider's perspective that may hinder the further development of these financial products. This paper addresses one method of transferring and financing the risks associated with these products through the form of secularization. Securitization is becoming a popular and attractive alternative form of risk transfer of insurance liabilities. Here we demonstrate how to construct a secularization structure for reverse mortgages similar to the one applied in traditional insurance products. Specifically, we investigate the merits of developing survivor bonds and survivor swaps for reverse mortgage products. In the case of survivor bonds, for example, we are able to compute premiums, both analytically and numerically through simulations, and to examine how the longevity risk may be transferred to the financial investors. Our numerical calculations provide an indication of the economic benefits derived from developing survivor bonds to securitize the 'longevity risk component' of reverse mortgage products. Moreover, some sensitivity analysis of these economic benefits indicates that these survivor bonds provide for a promising tool for investment diversification.
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Multivariate analysis Furman, Edward; Landsman, Zinoviy. - Multivariate Tweedie distributions and some related capital-at-risk analyses. - No. pages: 11. [RKN: 72456] Shelved at: Per: IME (Oxf) Insurance: Mathematics & Economics (2010) 46 (2) : 351-361. Abstract: We study a multivariate extension of the univariate exponential dispersion Tweedie family of distributions. The class, referred to as the multivariate Tweedie family (MTwF), on the one hand includes multivariate Poisson, gamma, inverse Gaussian, stable and compound Poisson distributions and on the other hand introduces a high variety of new dependent probabilistic models unstudied so far. We investigate various properties of MTwF and discuss its possible applications to financial risk management. Keywords: Exponential dispersion models; Multivariate Tweedie family; Cauchy’s functional equations; Risk capital allocations; The tail conditional expectation risk measure
Netherlands van Lelyveld, Iman; Liedorp, Franka; Kampman, Manuel. - An Empirical assessment of reinsurance risk. - Amsterdam: - De Nederlandsche Bank, 2009. - (DNB Working Paper No. 201 February 2009). - No. pages: 31. [RKN: 71936] URL: http://www.dnb.nl/en/binaries/Working%20paper%20201_tcm47-212957.pdf Abstract: We analyse the effect of failing reinsurance cover on the stability of Dutch insurers. As insurers often reinsure themselves with other (re)insurers, losses could spread contagiously through the sector. Using a unique and confidential data set on reinsurance exposures, we perform a scenario analysis to measure contagion risks. Based on current exposures, we find no evidence of systemic risk in the Netherlands, even if multiple reinsurance companies fail simultaneously. Next, we analyse to what extent the financial position of individual primary insurers is affected following a particular shock, considering solvency, capital and profit levels. The life insurance industry is hardly affected by reinsurance failures. The non-life industry, however, is vulnerable to a crisis in the European reinsurance market. We also find that members of smaller insurance groups are particularly exposed. Keywords : reinsurance, contagion, simulation
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Risk Management Reading List September 2010
Norway Sherris, Michael; Njenga, Carolyn. - Longevity Risk and the Econometric Analysis of Mortality Trends and Volatility. - UNSW Australian School of Business Research, 2009. - (UNSW Australian School of Business Research Paper No. 2009ACTL08). [RKN: 71634] URL: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1458084 Abstract: Longevity risk and the modeling of trends and volatility for mortality improvement has attracted increased attention driven by ageing populations around the world and the expected financial implications. The original Lee-Carter model that was used for longevity risk assessment included a single improvement factor with differential impacts by age. Financial models that allow for risk pricing and risk management have attracted increasing attention along with multiple factor models. This paper investigates trends, including common trends through co-integration, and the factors driving the volatility of mortality using principal components analysis for a number of developed countries including Australia, England, Japan, Norway and USA. The results demonstrate the need for multiple factors for modelling mortality rates across all these countries. The basic structure of the Lee-Carter model can not adequately model the random variation and the full risk structure of mortality changes. Trends by country are found to be stochastic. Common trends and co-integrating relationships are found across ages highlighting the benefits from modelling mortality rates as a system in a Vector-Autoregressive (VAR) model and capturing long run equilibrium relationships in a Vector Error-Correction Model (VECM) framework. Keywords: longevity risk, unit roots, VAR, VECM
Occupational pensions Davies, Bryn. - The distribution of risk in UK pension funds. - European Network for Research on Supplementary Pensions, 2008. - (European Network for Research on Supplementary Pensions Conference : Risk, Regulation and Solvency). - No. pages: 15. [RKN: 71954] URL: http://www.jura.unimuenster.de/go/organisation/institute/zivilrecht/aw3/profil/enrsp/papers-amsterdam2008.html Abstract: This paper analyses in more detail the changes that have taken place in the distribution of risk between employers, employees and others involved in the provision of occupational pensions. However, it is necessary first to explain something about how the UK pension system and occupational pension schemes, in particular, work. The following sections of the paper therefore provide, in turn, a description of: - The UK pension system, within which occupational pension schemes operate; - The general characteristics of occupational pension schemes in the UK and the prudential rules that govern the operation of such provision; and - The distribution of risk between the parties that are involved and how that has changed over recent years. The paper concludes with some brief comments on what lessons might be drawn from the UK’s experience of the risks inherent in any pension system. Sykes, Ian. - Regulations and investor behaviour. - Institute of Actuaries and Faculty of Actuaries, 2007. - (Finance, Investment and Risk Management Conference 2007 Seminar, 17-19 June 2007, Conrad Hilton Hotel, Dublin). [RKN: 72834] Abstract: This session is about how regulation affects the investment behaviour of Irish occupational pension schemes. This is a very specific situation to look at, but a topical one given the location of the conference this year and an interesting one because the regulations and other factors were similar, but not identical to the UK until the Pensions Act 2004 changes. Since then they have diverged.
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Risk Management Reading List September 2010
Acharyya, Madhusudan. - The fundamentals of designing an integrated model of financial risk and operational risk within an Enterprise Risk Management framework : findings of an empirical study. - CAS, 2007. - (CAS ERM Symposium 2007). [RKN: 38236] Shelved at: online only [Faculty: online only] URL: http://www.ermsymposium.org/2007/pdf/papers/Acharyya.pdf Abstract: The objective of this article is to identify and explore the fundamental issues necessary to design an integrated model of financial risk (hereinafter referred as “FR”) and OR (hereinafter referred as OR”) within the framework of Enterprise Risk Management (hereinafter referred as “ERM”) for the insurance industry. The objective was achieved by conducting an exploratory study on four major European insurers in connection with their ERM practice. The result suggests that quantification of OR is itself complex and the aim to integrate OR with FR for diversification purpose is theoretically problematic given their nature in the insurance business. However, a balance between the quantitative and qualitative approaches towards the management OR could best serve the purpose. Keywords: Enterprise Risk Management, Strategic Risk Management; Operational Risk Management; Financial Risk Management; Risk Culture; Regulations; Interdisciplinary. Dexter, N C; Ford, Chris L; Jakhria, P C; Kelliher, P O J; McCall, D; Mills, Cameron K; Probyn, A C; Raddall, Phill A; Ryan, J. - Quantifying operational risk in life insurance companies. [RKN: 38936] Shelved at: Per: BAJ (Oxf); Per: BAJ (Lon) [Faculty: BRI/ACT] BAJ (2007) 13 (2) : 257-357. URL: http://www.actuaries.org.uk/research-and-resources/pages/access-journals Abstract: This paper overviews a practical approach to the assessment of operational risk in life insurance companies. It considers how actuaries, working in conjunction with risk management professionals and senior management, can develop a framework to assess the capital requirements relating to operational risk, taking into account the capital requirements of other risks and their interaction. This paper recognises that we do not live in an ideal world, and that a lot of the data which one might want for operational risk assessment are not available. Consequently, the approach outlined in this paper takes into account the fact that management and assessment of operational risk is at an early stage of development in the life industry. In addition, it outlines some of the areas where development is necessary or desirable in the coming years. There is a section on the operational risks against which it is appropriate to hold capital. A brief review of techniques for reporting the results of the assessment is provided. The paper concludes with some thoughts on how operational risk management can be embedded more in the business, and then considers what future work will help develop the framework. OpRisk Advisory; Towers Perrin. - A New Approach for Managing Operational Risk : Addressing the Issues Underlying the 2008 Global Financial Crisis. - Society of Actuaries. Canadian Institute of Actuaries. Casualty Actuarial Society, 2009. - No. pages: 90. [RKN: 71819] URL: http://www.soa.org/files/pdf/research-new-approach.pdf Abstract: Examines approaches to operational risk management (ORM) and considerations for establishing formal operational risk programmes. Rusalovskiy, Artem. - Challenges of Solvency II implementation : Preparing for IT implementation of Solvency II regulations in insurance companies. - Germany: - VDM Verlag Dr Müller Aktiengesellschaft & Co. KG, 2008. - No. pages: 123. [RKN: 69771] [Faculty: 368 RUS]
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Risk Management Reading List September 2010
Selvaggi, Mariano. - Analysing operational losses in insurance : Evidence on the need for scaling from the ORIC database. - Association of British Insurers, 2009. - (ABI Research Paper 16). No. pages: 54. [RKN: 69772] URL: http://www.abioric.com/media/2032/abi-oric%20research%20paper%2016.pdf Abstract: This research studies robust methodologies for scaling the size and number of external losses to make them equivalent to a firm’s internal loss events. Adjusting for potential scaling biases is important when external and internal losses are merged for operational risk management and economic capital calculations. We use operational loss event in the ORIC database to provide real-world applications of the methodologies discussed. It is the first time we have used our data in this way. We set this against data on the size of the insurer where the loss occurred and additional scaling factors controlling for business lines and loss event types. The purpose of our research is not to provide final answers, but to illustrate our empirical approach and uncover early trends in operational loss data from insurance business. Young, Brendon; Coleman, Rodney. - Operational risk assessment: the commercial imperative of a more forensic approach. - Chichester: - John Wiley, 2009. - No. pages: xxvi, 430. [RKN: 38745] Shelved at: EEQ (Oxf) Abstract: This book provides investors with a sound understanding of the approaches used to assess the standing of firms and determine their true potential. It advocates a more forensic approach towards operational risk management and promotes transparency, which is seen as a facilitator of competition and efficiency as well as being a barrier to fraud, corruption and financial crime. Risk assessment is an integral part of informed decision making. The book deals with the effective management of operational risk, its primary aims being to improve the quality and stability of earnings and to reduce the probability of failure, by optimizing risk.
Optimisation Zuluaga, Luis F; Cox, Samuel H. - Improving Skewness of Mean-Variance Portfolios. - Society of Actuaries, - No. pages: 27. [RKN: 72652] Shelved at: Per: NAAJ (Oxf); Per NAAJ (Lon) [Faculty: NOR/AME] North American Actuarial Journal (2010) 14 (1) : 59-85. URL: http://www.soa.org/news-and-publications/publications/journals/naaj/naaj-detail.aspx Abstract: The widely accepted belief that asset returns and insurance product line margins are not normally distributed has motivated the use of skewness (or higher than second-order moments) in the context of optimal risk-reward portfolio allocation. Here we propose an optimization-based methodology to substantially improve the skewness of portfolios in the mean-variance efficient frontier. Unlike other related methods, the proposed methodology is very intuitive, noniterative, and simple to implement, and it can be readily and efficiently carried out using state-of-the-art optimization solvers. These characteristics should be very appealing to risk managers.
Option pricing Chen, H; Cox, S. - An Option–based Operational Risk Management on Pandemics. 2008. [RKN: 38541] Shelved at: Online only [Faculty: Online only] Actuarial Research Clearing House (ARCH) (2008) 1 URL: http://www.soa.org/news-and-publications/publications/proceedings/arch/arch-2008iss1.aspx Abstract: In this paper, we employ the theory of real option pricing to address problems in the area of operational risk management. Particularly, we develop a two-stage model to help firms determine the optimal triggers in the event of an influenza pandemic. In the first stage, we propose a regime-dependent epidemic model to simulate the spread of the virus, depending on whether the firm is active or inactive. In the second stage, we view the reactivation decision as a call option and 109
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Risk Management Reading List September 2010
the suspension decision as a put option, and use dynamic programming method to determine the optimal switching thresholds. Our numerical experiments suggest that given the parameter values in our paper, it is optimal for the firm to suspend the business (or parts of its business) when the fraction of infected employees is higher than 18%, and to reactivate the operation anytime the fraction drops to 3%. When considering the uncertainty in the future, firms are more conservative about the decisions of suspension and reactivation. If the firm incurs switching costs, the suspension threshold increases with costs, while the reactivation threshold decreases with costs. By implementing policies to control the disease, firms can meet their social obligations and in the meantime, increase their values in both regimes. Key Words: Real Option Valuation, Epidemic Risk, Operational Risk Management, RegimeSwitching Model, Dynamic Programming Chen, Hua; Cox, Samuel H. - An option-based operational risk management model for pandemics. 2009. - No. pages: 23. [RKN: 69511] Shelved at: Per: NAAJ (Oxf); Per NAAJ (Lon) [Faculty: NOR/AME] North American Actuarial Journal (2009) 13 (1) : 54-76. URL: http://www.soa.org/library/journals/north-american-actuarial-journal/2009/no-01/naaj2009-vol13-no1-chen.pdf Abstract: In this paper we employ the theory of real option pricing to address problems in the area of operational risk management. We develop a two-stage model to help firms determine the optimal suspension-reactivation triggers in the events of pandemics. In the first stage, we propose a regime-dependent epidemic model to simulate the spread of the virus, depending on whether the firm is active or inactive. In the second stage, we view the reactivation decision as a call option and the suspension decision as a put option, and use dynamic programming methods to obtain the optimal switching thresholds. Our method can be regarded as a quantitative implementation of the CDC’s instructions for pandemic preparation. We find that when they take the uncertainty of disease transmission into consideration, firms are more conservative about the decisions of suspension and reactivation. We also find that when firms incur switching costs, the suspension threshold increases with costs, whereas the reactivation threshold decreases with costs. By adopting disease control policies, firms can increase their values in both regimes.
Outliers Grané, Aurea; Veiga, Helena. - Outliers in GARCH models and the estimation of risk measures. Madrid: - Departamento de Estadística, Universidad Carlos III de Madrid, 2010. - (Working Paper 10-05). - No. pages: 21. [RKN: 72623] URL: http://e-archivo.uc3m.es/bitstream/10016/6699/1/ws100502.pdf Abstract: In this paper we focus on the impact of additive level outliers on the calculation of risk measures, such as minimum capital risk requirements, and compare four alternatives of reducing these measures' estimation biases. The first three proposals proceed by detecting and correcting outliers before estimating these risk measures with the GARCH(1,1) model, while the fourth procedure fits a Student’s t-distributed GARCH(1,1) model directly to the data. The former group includes the proposal of Grané and Veiga (2010), a detection procedure based on wavelets with hard- or soft-thresholding filtering, and the well known method of Franses and Ghijsels (1999). The first results, based on Monte Carlo experiments, reveal that the presence of outliers can bias severely the minimum capital risk requirement estimates calculated using the GARCH(1,1) model. The message driven from the second results, both empirical and simulations, is that outlier detection and filtering generate more accurate minimum capital risk requirements than the fourth alternative. Moreover, the detection procedure based on wavelets with hard-thresholding filtering gathers a very good performance in attenuating the effects of outliers and generating accurate minimum capital risk requirements out-of-sample, even in pretty volatile periods. Keywords: Minimum Capital Risk Requirements, Outliers, Wavelets
Outstanding claims 110
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Risk Management Reading List September 2010
Bjorkwall, Susanna; Hossjer, Ola; Ohlsson, Esbjorn. - Non-parametric and parametric bootstrap techniques for age-to-age development factor methods in stochastic claims reserving. - No. pages: 26. [RKN: 71758] Shelved at: Per: SAJ [Faculty: SCA/ACT] Scandinavian Actuarial Journal (2009) 4 : 306-331. Abstract: In the literature, one of the main objects of stochastic claims reserving is to find models underlying the chain-ladder method in order to analyze the variability of the outstanding claims, either analytically or by bootstrapping. In bootstrapping these models are used to find a full predictive distribution of the claims reserve, even though there is a long tradition of actuaries calculating the reserve estimate according to more complex algorithms than the chain-ladder, without explicit reference to an underlying model. In this paper we investigate existing bootstrap techniques and suggest two alternative bootstrap procedures, one non-parametric and one parametric, by which the predictive distribution of the claims reserve can be found for other age-toage development factor methods than the chain-ladder, using some rather mild model assumptions. For illustration, the procedures are applied to three different development triangles. Keywords: Bootstrap; Chain-ladder; Development factor method; Development triangle; Stochastic claims reserving
Pareto distribution Campana, Antonella. - On Tail Value-at-Risk for sums of non-independent random variables with a generalized Pareto distribution. [RKN: 37742] Shelved at: Per: Geneva (Oxf) Geneva Risk and Insurance Review (2007) 32 (2) : 169-180. Abstract: Recently in actuarial literature several authors have derived lower and upper bounds in the sense of convex order for sums of random variables with given marginal distributions and unknown dependency structure. In this paper, we derive convex bounds for sums of nonindependent and identically distributed random variables when marginal distributions are mixture models. In particular, we examine some well-known risk measures and we find approximations for Tail Value-at-Risk of the sums considered when marginal distributions are generalized Pareto distributions. By numerical examples we illustrate the goodness of the presented approximations.
Pension fund administration Stewart, Fiona. - Pension Funds’ Risk-Management Framework : Regulation and supervisory oversight. - Paris: - OECD, 2010. - (OECD Working Papers on Insurance and Private Pensions No. 40). - No. pages: 56. [RKN: 72297] URL: http://www.oecd.org/dataoecd/35/43/44633539.pdf Abstract: Drawing on the experience of the pensions and other financial sectors, this paper examines what sort of risk-management framework pension funds should have in place. Such frameworks are broken down into four main categories: management oversight and culture; strategy and risk assessment; control systems; and information and reporting. Ways in which supervisory authorities can check that such systems are operating are also considered, with a check list provided to assist pension supervisory authorities with their oversight of this important area. Key words: Pensions, Risk-management, Risk Assessment, Internal Controls Bridgeland, Sally. - Pension fund governance : a CEO’s view [copies of slides only] - Institute of Actuaries and Faculty of Actuaries, 2010. - (Risk and Investment Conference 2010 Caledonian Hotel, Edinburgh, 13-15 June 2010). [RKN: 73024] URL: http://www.actuaries.org.uk/research-and-resources/documents/pension-fundgovernance-ceos-view-slides
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Pension schemes Fulcher, Paul; Catchpole, Steven. - Practical implementation of Liability Driven Investment [copies of slides only] - Institute of Actuaries and Faculty of Actuaries, 2007. - (Finance, Investment and Risk Management Conference 2007 Seminar, 17-19 June 2007, Conrad Hilton Hotel, Dublin). [RKN: 72838] URL: http://www.actuaries.org.uk/research-and-resources/documents/presentationpractical-implementation-liability-driven-investment-w
Pensions The annuity bulk buy-out market : Abstract of a discussion meeting held by the Faculty of Actuaries on 18 February 2008. [RKN: 39665] Shelved at: Per: BAJ (Oxf); Per: BAJ (Lon) [Faculty: BRI/ACT] BAJ (2008) 14 (2) : 237-256. URL: http://www.actuaries.org.uk/research-and-resources/pages/access-journals Abstract: Report of a Sessional Meeting which takes the form of a panel discussion, asking the question 'Managing defined benefit risk management: is buy-out the future?' Hewitt, Tony. - Pension risk open forum. - Staple Inn Actuarial Society, [RKN: 39654] Shelved at: Per: Actuary (Oxf); Per: Actuary (Lon) [Faculty: SIA/ACT] The Actuary (2010) July : 28-29. URL: http://www.the-actuary.org.uk Abstract: Tony Hewitt introduces research from Imperial College Business School alumni on the influence on pensions risk on equity and bond prices. Three projects, by Adam Gregory, Louise McCarthy and Paul Nicholas, are discussed. Whelan, S F. - Defining and measuring investment risk in defined benefit pension funds. [RKN: 38310] Shelved at: Per: AAS (Oxf); Per: AAS (Lon) [Faculty: JOU/AAS] Annals of Actuarial Science (2007) 2(1) : 51-66. URL: http://www.actuaries.org.uk/research-and-resources/pages/access-journals Abstract: A formal definition of investment risk in actuarial investigations is given. Case studies estimating the investment risk associated with different investment strategies for defined benefit pension funds using historic market data are presented. It is shown that a few decades ago, when bond markets only extended in depth to 20-year maturities, the investment risk of investing in equities was of the same order of magnitude as the investment risk introduced by the duration mismatch from investing in bonds for immature schemes. It is shown that now, with the extension of the term of bond markets and introduction of strippable bonds, the least risk portfolio for the same pension liability is a bond portfolio of suitable duration. It is argued that investment risk voluntarily undertaken in defined benefit pension plans has grown markedly in recent decades, at a time when the ability to bear the investment risk has diminished. Investment risk in pension funds is quite different to investment risk for other investors, which leads to the possibility that current portfolios are not optimised — that is, there exist portfolios which increase the expected surplus without increasing risk. The formalising of our intuitive concept of investment risk in actuarial applications is a first step in the identification of more efficient portfolios. Keywords: Investment Risk; Defined Benefit Pension Funds; Investment Strategies; Risk in Actuarial Applications
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Whelan, Shane. - The mis-selling of investment risk in mandatory pension savings [copies of slides only] - Institute of Actuaries and Faculty of Actuaries, 2007. - (Finance, Investment and Risk Management Conference 2007 Seminar, 17-19 June 2007, Conrad Hilton Hotel, Dublin). [RKN: 72835] URL: http://www.actuaries.org.uk/research-and-resources/documents/mis-sellinginvestment-risk-mandatory-pension-savings-handouts
Performance Crocker, Keith J; Snow, Arthur. - Background risk and the performance of insurance markets under adverse selection . [RKN: 38801] Shelved at: Per: Geneva (Oxf) Geneva Risk and Insurance Review (2008) 33 (2) : 137-160. Abstract: Background risk can influence the performance of insurance markets that must deal with adverse selection when applicants are risk vulnerable, since they are more averse to bearing the insurable risk as a result of their exposures to background risk. We show that background risk always results in a lower deductible for the incentive constrained contract, and that a broader range of markets attains the stable sequential equilibrium cross-subsidized pair of separating contracts. We conclude that background risk always improves the performance of markets for coverage against (insurable) foreground risks that must deal with adverse selection. We also find, however, that these improvements are never sufficient to offset the cost to insureds of bearing the background risk.
Performance measurement Smith, Andrew D. - Performance measurement [copies of slides only] - Institute of Actuaries and Faculty of Actuaries, 2010. - (Risk and Investment Conference 2010 Caledonian Hotel, Edinburgh, 13-15 June 2010). [RKN: 73018] URL: http://www.actuaries.org.uk/research-and-resources/documents/risk-adjustedperformance-measurement-working-party-slides
Pharmaceutical industry Hirsch, Rachel; Pun, Kenny; Reuttner, Isabella. - Rethinking Risk Management in Financial Services : Practices from other domains. - New York, NY: - World Economic Forum. Boston Consulting Group, 2010. - No. pages: 68. [RKN: 72465] URL: http://www.weforum.org/pdf/FinancialInstitutions/RethinkingRiskManagement.pdf Abstract: While other efforts have largely focused on improving risk management in financial services “from the inside out,” this report looks at it “from the outside in” – trying to learn from practices and patterns in domains such as aviation, fisheries, wildfire fighting, immunology / epidemiology, telecommunication and pharmaceuticals. While not all of these practices are directly transferable to finance, many are and most of them provide much needed fresh perspective and thinking.
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Risk Management Reading List September 2010
Planning Harvard Business Review on managing external risk. - Boston: - Harvard Business Press, 2009. No. pages: 218. [RKN: 63329] [Faculty: 658.155 22 HAR] Abstract: "Businesses today are operating amid unprecedented uncertainty. The greater the uncertainty, the more ominous and numerous are the threats to your company. To manage external risk, you'll need to select the right analytical tools and incorporate risk into your strategic decision making. This collection shows you how, providing powerful frameworks, tools, and examples for mastering this crucial competency."
Poisson process Asimit, Alexandru V; Badescu, Andrei L. - Extremes on the discounted aggregate claims in a time dependent risk model. - No. pages: 12. [RKN: 72591] Shelved at: Per: SAJ [Faculty: SCA/ACT] Scandinavian Actuarial Journal (2010) 2 : 93-104. Abstract: This paper presents an extension of the classical compound Poisson risk model for which the inter-claim time and the forthcoming claim amount are no longer independent random variables (rv's). Asymptotic tail probabilities for the discounted aggregate claims are presented when the force of interest is constant and the claim amounts are heavy tail distributed rv's. Furthermore, we derive asymptotic finite time ruin probabilities, as well as asymptotic approximations for some common risk measures associated with the discounted aggregate claims. A simulation study is performed in order to validate the results obtained in the free interest risk model. Keywords: Compound Poisson risk model; Dependence; Discounted aggregate loss; Subexponential distribution; Value-at-risk Chi, Yichun; Jaimungal, Sebastian; Lin, X Sheldon. - An insurance risk model with stochastic volatility. - No. pages: 17. [RKN: 72427] Shelved at: Per: IME (Oxf) Insurance: Mathematics & Economics (2010) 46 (1) : 52-66. Abstract: In this paper, we extend the Cramér–Lundberg insurance risk model perturbed by diffusion to incorporate stochastic volatility and study the resulting Gerber–Shiu expected discounted penalty (EDP) function. Under the assumption that volatility is driven by an underlying Ornstein–Uhlenbeck (OU) process, we derive the integro-differential equation which the EDP function satisfies. Not surprisingly, no closed-form solution exists; however, assuming the driving OU process is fast mean-reverting, we apply the singular perturbation theory to obtain an asymptotic expansion of the solution. Two integro-differential equations for the first two terms in this expansion are obtained and explicitly solved. When the claim size distribution is of phase-type, the asymptotic results simplify even further and we succeed in estimating the error of the approximation. Hyper-exponential and mixed-Erlang distributed claims are considered in some detail. Keywords: Gerber–Shiu expected discounted penalty function; Integro-differential equation; Singular perturbation theory; Stochastic volatility; Perturbed compound Poisson risk process; Phase-type distribution; Ornstein–Uhlenbeck process Ming, Rui-Xing; Wang, Wen-Yuan; Xiao, Li-Qun. - On the time value of absolute ruin with tax. No. pages: 18. [RKN: 72428] Shelved at: Per: IME (Oxf) Insurance: Mathematics & Economics (2010) 46 (1) : 67-84. Abstract: Consider a compound Poisson surplus process of an insurer with debit interest and tax payments. When the portfolio is in a profitable situation, the insurer may pay a certain proportion of the premium income as tax payments. When the portfolio is below zero, the insurer could borrow 114
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Risk Management Reading List September 2010
money at a debit interest rate to continue his/her business. Meanwhile, the insurer will repay the debts from his/her premium income. The negative surplus may return to a positive level except that the surplus is below a certain critical level. In the latter case, we say that absolute ruin occurs. In this paper, we discuss absolute ruin quantities by defining an expected discounted penalty function at absolute ruin. First, a system of integro-differential equations satisfied by the expected discounted penalty function is derived. Second, closed-form expressions for the expected discounted total sum of tax payments until absolute ruin and the Laplace–Stieltjes transform (LST) of the total duration of negative surplus are obtained. Third, for exponential individual claims, closed-form expressions for the absolute ruin probability, the LST of the time to absolute ruin, the distribution function of the deficit at absolute ruin and the expected accumulated discounted tax are given. Fourth, for general individual claim distributions, when the initial surplus goes to infinity, we show that the ratio of the absolute ruin probability with tax to that without tax goes to a positive constant which is greater than one. Finally, we investigate the asymptotic behavior of the absolute ruin probability of a modified risk model where the interest rate on a positive surplus is involved. Keywords: Compound Poisson surplus process; Debit interest; Interest rate on positive surplus; Tax; Absolute ruin; Light and heavy-tailed claims; Expected discounted penalty function Xin, Zhang; Siu, Tak Kuen. - Optimal investment and reinsurance of an insurer with model uncertainty. - No. pages: 8. [RKN: 72375] Shelved at: Per: IME (Oxf) Insurance: Mathematics & Economics (2009) 45 (1) : 81-88. Abstract: We introduce a novel approach to optimal investment–reinsurance problems of an insurance company facing model uncertainty via a game theoretic approach. The insurance company invests in a capital market index whose dynamics follow a geometric Brownian motion. The risk process of the company is governed by either a compound Poisson process or its diffusion approximation. The company can also transfer a certain proportion of the insurance risk to a reinsurance company by purchasing reinsurance. The optimal investment–reinsurance problems with model uncertainty are formulated as two-player, zero-sum, stochastic differential games between the insurance company and the market. We provide verification theorems for the Hamilton–Jacobi–Bellman–Isaacs (HJBI) solutions to the optimal investment–reinsurance problems and derive closed-form solutions to the problems. Keywords: Optimal investment; Proportional reinsurance; Model uncertainty; Stochastic differential game; Exponential utility; Penalty of ruin; HJBI equations
Pooling Biffis, Enrico; Blake, David. - Securitizing and tranching longevity exposures. - No. pages: 12. [RKN: 72440] Shelved at: Per: IME (Oxf) Insurance: Mathematics & Economics (2010) 46 (1) : 186-197. Abstract: We consider the problem of optimally designing longevity risk transfers under asymmetric information. We focus on holders of longevity exposures that have superior knowledge of the underlying demographic risks, but are willing to take them off their balance sheets because of capital requirements. In equilibrium, they transfer longevity risk to uninformed agents at a cost, where the cost is represented by retention of part of the exposure and/or by a risk premium. We use a signalling model to quantify the effects of asymmetric information and emphasize how they compound with parameter uncertainty. We show how the cost of private information can be minimized by suitably tranching securitized cashflows, or, equivalently, by securitizing the exposure in exchange for an option on mortality rates. We also investigate the benefits of pooling several longevity exposures and the impact on tranching levels. Keywords: Longevity risk; Asymmetric information; Security design; Pooling; Tranching
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Portfolio insurance Bertrand, Philippe; Prigent, Jean-Luc. - A note on risk aversion, prudence and portfolio insurance. [RKN: 39620] Shelved at: Per: Geneva (Oxf) Geneva Risk and Insurance Review (2010) 35 (1) : 81-92. Abstract: This paper examines some properties of portfolio insurance that are linked to the risk aversion and the prudence of the investor. We provide explicit conditions to measure portfolio sensitivity to downside risk. We also characterize the degree of portfolio insurance by means of the ratio of absolute prudence to absolute risk aversion.
Portfolio investment Bowser, Marcus; Tuley, James. - Useful tool or expensive toy? [RKN: 38963] Shelved at: Per: Actuary (Oxf); Per: Actuary (Lon) The Actuary (2009) March : 28-29. URL: http://www.the-actuary.org.uk Abstract: Marcus Bowser and James Tuley discuss the usefulness of replicating portfolios in risk management. Guillen, Montserrat; Høgh, Nils; Nielson, Jens Perch; Perez-Marin, Ana M. - Froot and Stein revisited once again. [RKN: 39269] Shelved at: Per: AAS (Oxf); Per: AAS (Lon) [Faculty: JOU/AAS] Annals of Actuarial Science (2008) 3 (1+2) : 121-126. URL: http://www.actuaries.org.uk/research-and-resources/pages/access-journals Abstract: Høgh, Linton and Nielsen (2006) showed that the famous result in the award winning paper of Froot and Stein (1998) is not correct in the sense that their result does not follow from their assumptions. In this paper we show that the economic intuition behind the paper of Froot and Stein (1998) is correct and that their result can be obtained when the market is reformulated in a continuous time setting and modern market theory is employed. Keywords: Financial Risk; CAPM Transaction Costs
Portfolio management Chappell, Christopher; Jakhria, Parit; Marais, Johann; Smith, Andrew. - Understanding the risks in new asset classes. - Institute of Actuaries and Faculty of Actuaries, 2007. - (Finance, Investment and Risk Management Conference 2007 Seminar, 17-19 June 2007, Conrad Hilton Hotel, Dublin). [RKN: 72833] URL: http://www.actuaries.org.uk/research-and-resources/documents/understanding-risksnew-asset-classes Abstract: This paper reviews the mean-variance (M-V) framework and highlights some issues that investors should consider before adding the new, more exotic asset classes to their portfolios. Dunn, Gary. - A Multiple Period Gaussian Jump to Default Risk Model. - London: - Financial Services Authority, 2008. - (FSA Occasional paper 29). - No. pages: 37. [RKN: 72497] URL: http://www.fsa.gov.uk/Pages/Library/research/economic/Occasional/index.shtml Abstract: The single-factor Gaussian copula method is a common approach for default risk modelling. However, the model deals with the distribution of default losses over a single period. Proposals currently under consideration for calculating a ‘jump to default’ risk capital charge for the trading book incorporate the concept of a liquidity horizon, which will be typically shorter than the capital horizon over which the jump to default risk charge has to be calculated. The liquidity horizon specifies a period over which a portfolio can be rebalanced. Depending on the rebalancing “rules” adopted (such as the “constant level of risk” assumption), an actively managed portfolio can exhibit a more benign default loss distribution relative to that of a constant portfolio over a given 116
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Risk Management Reading List September 2010
investment (or capital) horizon. This paper develops a general multi-period Gaussian copula model that incorporates the dynamics of default risk over time. Horneff, Wolfram; Maurer, Raimond. - Mortality Contingent Claims: Impact of Capital Market, Income, and Interest Rate Risk. - Ann Arbour: - University of Michigan Retirement Research Center, 2009. - (Michigan Retirement Research Center WP 2009-222). - No. pages: 31. [RKN: 71706] URL: http://www.mrrc.isr.umich.edu/publications/papers/pdf/wp222.pdf Abstract: In this paper, we consider optimal insurance, portfolio allocation, and consumption rules for a stochastic wage earner with CRRA preferences whose lifetime is random. In a continuous time framework, the investor has to decide among short and long positions in mortality contingent claims a.k.a. life insurance, stocks, bonds, and money market investment when facing a risky stock market and interest rate risk. We find an analytical solution for the complete market case in which human capital is exactly priced. We also extend the analysis to the case where income is unspanned. An illustrative analysis shows when the wage earner’s demand for life insurance switches to the demand for annuities. Iyengar, Garud; Ma, Alfred Ka Chun. - Cash flow matching: A risk management approach. Society of Actuaries, 2009. - No. pages: 15. [RKN: 71630] Shelved at: Per: NAAJ (Oxf); Per NAAJ (Lon) [Faculty: NOR/AME] North American Actuarial Journal (2009) 13 (3) : 370-384. URL: http://www.soa.org/news-and-publications/publications/journals/naaj/naaj-detail.aspx Abstract: We propose a scenario-based optimization framework for solving the cash flow matching problem where the time horizon of the liabilities is longer than the maturities of available bonds and the interest rates are uncertain. Standard interest rate models can be used for scenario generation within this framework. The optimal portfolio is found by minimizing the cost at a specific level of shortfall risk measured by the conditional tail expectation (CTE), also known as conditional value-at-risk (CVaR) or Tail-VaR. The resulting optimization problem is still a linear program (LP) as in the classical cash flow matching approach. This framework can be employed in situations when the classical cash flow matching technique is not applicable. Kemp, Malcolm. - Extreme Events and Portfolio Construction [copies of slides only] - Institute of Actuaries and Faculty of Actuaries, 2010. - (Risk and Investment Conference 2010 Caledonian Hotel, Edinburgh, 13-15 June 2010). [RKN: 73021] URL: http://www.actuaries.org.uk/research-and-resources/documents/extreme-eventsrobust-portfolio-construction-presence-fat-tails-sli Tian, Ruilian; Cox, Samuel H; Lin, Yijia; Zuluaga, Luis F. - Portfolio Risk Management with CVaRlike Constraints. - Society of Actuaries, - No. pages: 21. [RKN: 72654] Shelved at: Per: NAAJ (Oxf); Per NAAJ (Lon) [Faculty: NOR/AME] North American Actuarial Journal (2010) 14 (1) : 86-106. URL: http://www.soa.org/news-and-publications/publications/journals/naaj/naaj-detail.aspx Abstract: A current research stream in the portfolio allocation literature develops models that take into account the asymmetric nature of asset return distributions. Our paper contributes to this research stream by extending the Krokhmal, Palmquist, and Uryasev approach. We add CVaR-like constraints in the traditional portfolio optimization problem to reshape the tails of the portfolio return distribution while not significantly affecting its mean and variance. We illustrate how to apply this approach, called the ‘‘MV + CVaR approach,’’ to manage tail risk of an insurer’s asset-liability portfolio. Finally, we compare the MV + CVaR approach with the traditional Markowitz method and a method recently introduced by Boyle and Ding. Our numerical analysis provides empirical support for the effectiveness of the MV + CVaR approach in controlling downside risk. Moreover, we find that the MV + CVaR approach may improve skewness of mean-variance portfolios, especially for high-variance portfolios.
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Risk Management Reading List September 2010
Zuluaga, Luis F; Cox, Samuel H. - Improving Skewness of Mean-Variance Portfolios. - Society of Actuaries, - No. pages: 27. [RKN: 72652] Shelved at: Per: NAAJ (Oxf); Per NAAJ (Lon) [Faculty: NOR/AME] North American Actuarial Journal (2010) 14 (1) : 59-85. URL: http://www.soa.org/news-and-publications/publications/journals/naaj/naaj-detail.aspx Abstract: The widely accepted belief that asset returns and insurance product line margins are not normally distributed has motivated the use of skewness (or higher than second-order moments) in the context of optimal risk-reward portfolio allocation. Here we propose an optimization-based methodology to substantially improve the skewness of portfolios in the mean-variance efficient frontier. Unlike other related methods, the proposed methodology is very intuitive, noniterative, and simple to implement, and it can be readily and efficiently carried out using state-of-the-art optimization solvers. These characteristics should be very appealing to risk managers.
Portfolio performance Cain, Brianna; Zurbruegg, Ralf. - Can switching between risk measures lead to better portfolio optimization? - No. pages: 12. [RKN: 72096] Shelved at: Per: J.Asset Man (Oxf) Journal of Asset Management (2010) 10 (6) : 358-369. Abstract: This article proposes a technique that involves switching between risk measures in different market environments, to capture the well-documented dynamic nature of risk within a portfolio optimization setting. In-sample results show categorically that switching between various measures, such as CVaR, time-varying (GARCH) variances and simple standard deviations, can lead to a better performance than using any single measure. Using a logistic probability model to determine when to switch between alternatives, out-of -sample results also show positive results. Given that this study only applies a basic switching system, it lends itself to easy application by practitioners through its simplicity, intuitive appeal and computational feasibility. Keywords: volatility, variance, CvaR, GARCH, model switching, portfolio allocation
Premium calculation Furman, Edward; Zitikis, Ricardas. - Weighted pricing functionals with applications to insurance: An overview. - Society of Actuaries, - No. pages: 14. [RKN: 72023] Shelved at: Per: NAAJ (Oxf); Per NAAJ (Lon) [Faculty: NOR/AME] North American Actuarial Journal (2009) 13 (4) : 483-496. URL: http://www.soa.org/news-and-publications/publications/journals/naaj/naaj-detail.aspx Abstract: We explore the role of weighted distributions in pricing insurance risks. In particular, we relate the distributions to actuarial and economic premium calculation principles and in this way provide a unifying methodology for constructing new principles and analyzing known ones. Kim, Joseph H T. - Conditional tail moments of the exponential family and its transformed distributions. - Ontario: - University of Waterloo, 2008. - (Institute of Insurance and Pension Research Research Report 08-05). - No. pages: 28. [RKN: 69979] Shelved at: Online only [Faculty: Online only] URL: http://www.stats.uwaterloo.ca/stats_navigation/IIPR/IIPR-Reports.shtml Abstract: Tail risk measures have been extensively used in the finance and actuarial literature for setting premium and risk capital. Among others the conditional tail expectation (CTE) is a popular measure in insurance applications. This paper derives the formulas of the CTE and higher moments for the exponential family class, which extends the natural exponential family, using the canonical representation. The conditional tail moments for the distributions transformed from the exponential family are also derived using the variable transformation. With the formulas developed in this paper we know the conditional tail moments for a wide range of distributions used for actuarial modelling. Keywords: conditional tail moments; exponential family; tail risk measure 118
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Risk Management Reading List September 2010
Premiums Barth, Michael M; Eckles, David L. - An Empirical Investigation of the Effect of Growth on ShortTerm Changes in Loss Ratios. - No. pages: 19. [RKN: 71778] Shelved at: Per: J.Risk Ins (Oxf) [Faculty: JOU/RIS] Journal of Risk and Insurance (2009) 76 (4) : 867-885. Abstract: Given the use of premium growth as a risk measure in regulatory and private risk assessment models, the impact of growth on underwriting profitability is an important question. Our results show a negative relationship between premium growth and changes in loss ratios, suggesting that premium growth alone does not necessarily result in higher underwriting risk. Further, there is a positive relationship between claim count growth and changes in loss ratios, suggesting that claim count growth may be a preferred measure of underwriting risk.
Pricing Bauer, Daniel; Börger, Matthias; Ruß, Jochen. - On the pricing of longevity-linked securities. - No. pages: 11. [RKN: 72436] Shelved at: Per: IME (Oxf) Insurance: Mathematics & Economics (2010) 46 (1) : 139-149. Abstract: For annuity providers, longevity risk, i.e. the risk that future mortality trends differ from those anticipated, constitutes an important risk factor. In order to manage this risk, new financial products, so-called longevity derivatives, may be needed, even though a first attempt to issue a longevity bond in 2004 was not successful. While different methods of how to price such securities have been proposed in recent literature, no consensus has been reached. This paper reviews, compares and comments on these different approaches. In particular, we use data from the United Kingdom to derive prices for the proposed first longevity bond and an alternative security design based on the different methods. Keywords: Longevity risk; Stochastic mortality; Longevity derivatives Bellis, Clare S (ed); Shepherd, John A (ed); Klugman, Stuart A; Lyon, Richard H S (ed). Understanding actuarial management: the actuarial control cycle. - 2nd ed. - Sydney: - Institute of Actuaries of Australia, 2010. - No. pages: 630. [RKN: 39617] Shelved at: EM (Oxf) [Faculty: 368.01 BEL] URL: http://www.soa.org/files/pdf/book-understanding-act.pdf Contents: Contents include: -- Risk management frameworks -- Being professional -- The need for financial products -- The context of actuarial work -- Applying risk management -- Regulation -Product design -- Modelling -- Data and assumptions -- The need for capital -- Valuing liabilities -Pricing -- Assets -- Solvency -- Profit -- Monitoring experience -- Responding to experience -Applying the actuarial control cycle Chen, Hua; Cummins, J David. - Longevity bond premiums : The extreme value approach and risk cubic pricing. - No. pages: 11. [RKN: 72437] Shelved at: Per: IME (Oxf) Insurance: Mathematics & Economics (2010) 46 (1) : 150-161. Abstract: The purpose of this study is to analyze the securitization of longevity risk with an emphasis on longevity risk modelling and longevity bond premium pricing. Various longevity derivatives have been proposed, and the capital market has experienced one unsuccessful attempt by the European Investment Bank (EIB) in 2004. After carefully analyzing the pros and cons of previous securitizations, we present our proposed longevity bonds, whose payoffs are structured as a series of put option spreads. We utilize a random walk model with drift to fit small variations of mortality improvements and employ extreme value theory to model rare longevity events. Our method is a new approach in longevity risk securitization, which has the advantage of both capturing mortality improvements within sample and extrapolating rare, out-of- sample longevity events. We demonstrate that the risk cubic model developed for pricing catastrophe 119
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Risk Management Reading List September 2010
bonds can be applied to mortality and longevity bond pricing and use the model to calculate risk premiums for longevity bonds. Keywords: Securitization; Longevity risk; Extreme value theory; Bond spreads Driver, Rebecca; O'Neill, David; Peppes, Athena. - The role of risk classification in insurance : Understanding how insurance is priced. - Association of British Insurers, 2008. - (ABI research paper 11). - No. pages: 22. [RKN: 72505] URL: http://www.abi.org.uk/Publications/The_Role_of_Risk_Classification_in_Insurance1.aspx Abstract: This paper examines the economic benefits of risk classification. First, risk classification contributes to economic efficiency. It allows the price of insurance to better reflect the cost of providing insurance coverage. This is important because it enables a more efficient allocation of scarce resources. Secondly, it limits adverse selection. A single price for different risks may lead to higher average premiums, as there is cross-subsidisation of high risks by low risks. As a result, low risks might be encouraged to leave the market. For example, there is evidence of adverse selection in the health insurance market, following the introduction of rating restrictions in 47 USA states between 19911996. Thirdly, risk classification reduces moral hazard. As individuals bear a cost for their actions, it provides incentives to mitigate risky behaviour and therefore reduce potential losses. This can have positive external effects on the rest of the economy. For example, people might have an additional incentive to stop smoking, so that they can buy cheaper health insurance. This contributes to a healthier, more productive workforce. Finally, risk classification encourages innovation and competition within the insurance industry. Insurers have incentives to create new products and serve new markets. Consumers benefit from this. Telematic-based motor insurance schemes and the widespread availability of flood insurance for homes as a result of improved flood modelling demonstrate this. Fries, Christian P; Joshi, Mark S. - Conditional analytic Monte-Carlo scheme of auto-callable products. - Victoria: - University of Melbourne, 2008. - (Centre for Actuarial Studies, University of Melbourne, Research Paper no. 173). - No. pages: 26. [RKN: 69459] [Faculty: UNI/MEL] Abstract: In this paper we present a generic method for the Monte-Carlo pricing of (generalized) auto-callable products (aka. trigger products), ie., products for which the payout function features a discontinuity with a (possibly) stochastic location (the trigger) and value (the payout). The Monte Carlo pricing of the products with discontinuous payout is known to come with a high Monte-Carlo error. The numerical calculation of sensitivities (ie., partial derivatives) of such prices by finite differences gives very noisy results, since the Monte-Carlo approximation (being a finite sum of discontinuous functions) is not smooth. Additionally, the Monte-Carlo error of the finitedifference approximation explodes as the shift size tends to zero. Our method combines a product specific modification of the underlying numerical scheme, which is to some extent similar to an importance sampling and/or partial proxy simulation scheme and a reformulation of the payoff function into an equivalent smooth payout. From the financial product we merely require that hitting of the stochastic trigger will result in a conditionally analytic value. Many complex derivatives can be written in this form. A class of products where this property is usually encountered are the so called auto-callables, where a trigger hit results in cancellation of all future payments except for one redemption payment, which can be valued analytically, conditionally on the trigger hit. From the model we require that its numerical implementation allows for a calculation of the transition probability of survival (ie, non-trigger hit). Many models allow this, eg, Euler schemes of Ito processes, where the trigger is model primitive. The method presented is effective across a large range of cases where other methods fail, eg small finite difference shift sizes or short time to trigger reset (approaching maturity); this means that a practitioner can use this method and be confident that it will work consistently.
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Risk Management Reading List September 2010
Furman, Edward; Zitikis, Ricardas. - Weighted pricing functionals with applications to insurance: An overview. - Society of Actuaries, - No. pages: 14. [RKN: 72023] Shelved at: Per: NAAJ (Oxf); Per NAAJ (Lon) [Faculty: NOR/AME] North American Actuarial Journal (2009) 13 (4) : 483-496. URL: http://www.soa.org/news-and-publications/publications/journals/naaj/naaj-detail.aspx Abstract: We explore the role of weighted distributions in pricing insurance risks. In particular, we relate the distributions to actuarial and economic premium calculation principles and in this way provide a unifying methodology for constructing new principles and analyzing known ones. Furman, Edward; Zitikis, Ricardas. - General Stein-type Covariance Decompositions with Applications to Insurance and Finance. - London, Ontario: - Actuarial Research Group, Department of Statistical and Actuarial Sciences, University of Western Ontario, 2009. - (ARG Technical Report No. 2009-3). - No. pages: 9. [RKN: 72134] URL: http://www.stats.uwo.ca/faculty/zitikis/DSAS-ARG/ARG-TR-2009/ARG-TR-2009-3.pdf Abstract: A general decomposition of covariances is formulated and proved, and its usefulness in the context of financial risk measurement and pricing is demonstrated. Keywords: Covariance decompositions; insurance pricing; economic pricing; weighted allocations; capital asset pricing model. Greenwood, Mark; Svoboda, Simona. - LPI swaps : Pricing and Trading [copies of slides only] Institute of Actuaries and Faculty of Actuaries, 2010. - (Risk and Investment Conference 2010 Caledonian Hotel, Edinburgh, 13-15 June 2010). [RKN: 73013] URL: http://www.actuaries.org.uk/research-and-resources/documents/pricing-and-tradinglimited-price-indexation-lpi-swaps Kogure, Atsuyuki; Kurachi, Yoshiyuki. - A Bayesian approach to pricing longevity risk based on risk-neutral predictive distributions. - No. pages: 11. [RKN: 72438] Shelved at: Per: IME (Oxf) Insurance: Mathematics & Economics (2010) 46 (1) : 162-172. Abstract: We present a Bayesian approach to pricing longevity risk under the framework of the Lee–Carter methodology. Specifically, we propose a Bayesian method for pricing the survivor bond and the related survivor swap designed by Denuit et al. (2007). Our method is based on the risk neutralization of the predictive distribution of future survival rates using the entropy maximization principle discussed by Stutzer (1996). The method is illustrated by applying it to Japanese mortality rates. Keywords: Bayesian approach; Pricing longevity risk; Maximum entropy principle; Risk-neutral predictive distribution; Japanese mortality rates
Probability Hao, X; Tang, Q. - Subexponential Tail of Discounted Aggregate Claims. 2008. [RKN: 38568] Shelved at: Online only [Faculty: Online only] Actuarial Research Clearing House (ARCH) (2008) 1 URL: http://www.soa.org/news-and-publications/publications/proceedings/arch/arch-2008iss1.aspx Abstract: In this paper we study the tail probability of discounted aggregate claims in a continuoustime renewal model. For the case that the common claim-size distribution is subexponential, we obtain an asymptotic formula, which holds uniformly for all time horizons within a finite interval. Then, with some additional mild assumptions on the distributions of the claim sizes and interarrival times, we further prove that this formula holds uniformly for all time horizons. In this way, we significantly extend a recent result of Tang (2007, J. Appl. Probab. 44, 285{294). Keywords: Asymptotics; Poisson process; renewal process; subexponential distribution; uniformity.
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Risk Management Reading List September 2010
Rebonato, Riccardo. - The plight of the fortune tellers: why we need to manage financial risk differently. - Woodstock: - Princeton University Press, 2007. - No. pages: 272. [RKN: 38839] Shelved at: EE/JNH (Oxf) Abstract: Today's top financial-risk professionals have come to rely on ever-more sophisticated mathematics in their attempts to come to grips with financial risk. But this excessive reliance on quantitative precision is misleading - and it puts us all at risk. This is the case that Riccardo Rebonato makes in Plight of the Fortune Tellers - and coming from someone who is both an experienced market professional and an academic, this heresy is worth listening to. Rebonato forcefully argues that we must restore genuine decision making to our financial planning, and he shows us how to do it using probability, experimental psychology, and decision theory. This is the only way to effectively manage financial risk in a manner congruent with how human beings actually react to chance. Rebonato challenges us to rethink the standard wisdom about probability in financial-risk management. Risk managers have become obsessed with measuring risk and believe that these quantitative results by themselves can guide sound financial choices - but they can't. In this book, Rebonato offers a radical yet surprisingly commonsense solution, one that seeks to remind us that managing risk comes down to real people making decisions under uncertainty. Plight of the Fortune Tellers is not only a book for the decision makers of Wall Street, it's a must-read for anyone concerned about how today's financial markets are run. The stakes have never been higher - can you risk it? Taleb, Nassim N. - The black swan: the impact of the highly improbable. - London: - Penguin books, 2008. - No. pages: 366. [RKN: 38234] Shelved at: UHB (Oxf) Abstract: What have the invention of the wheel, Pompeii, the Wall Street Crash, Harry Potter and the internet got in common? Why are all forecasters con-artists? What can Catherine the Great's lovers tell us about probability? And, why should you never run for a train or read a newspaper? This book is all about Black Swans: the random events that underlie our lives, from bestsellers to world disasters. Their impact is huge; they're impossible to predict; yet after they happen we always try to rationalize them. A rallying cry to ignore the 'experts', The Black Swan shows us how to stop trying to predict everything - and take advantage of uncertainty.
Professional conduct Hewitt, Tony. - Real-life case studies of professionalism issues [copies of slides only] - Institute of Actuaries and Faculty of Actuaries, 2010. - (Risk and Investment Conference 2010 Caledonian Hotel, Edinburgh, 13-15 June 2010). [RKN: 73022] URL: http://www.actuaries.org.uk/research-and-resources/documents/real-life-casestudies-professionalism-issues-slides Hewitt, Tony. - The Actuaries’ Code [copies of slides only] - Institute of Actuaries and Faculty of Actuaries, 2010. - (Risk and Investment Conference 2010 Caledonian Hotel, Edinburgh, 13-15 June 2010). [RKN: 73029] URL: http://www.actuaries.org.uk/research-and-resources/documents/cpd-and-actuariescode-update-slides
Professional negligence Bajtelsmit, Vickie; Thistle, Paul. - Negligence, Ignorance and the Demand for Liability Insurance. No. pages: 12. [RKN: 72017] Shelved at: Per: Geneva (Oxf) Geneva Risk and Insurance Review (2009) 34 (2) : 105-116. Abstract: This paper considers whether lack of information regarding risk exposures can lead to a demand for negligence liability insurance. We find that, under the uniform negligence rule, such as the "reasonable person" standard used to determine negligence in the U.S. and other countries, the value of information is positive and any demand for liability insurance must come from informed 122
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individuals. The necessary and sufficient condition is that good risks find it less costly to be negligent and purchase insurance. Keywords: information, tort, moral hazard, screening
Professionalism Bellis, Clare S (ed); Shepherd, John A (ed); Klugman, Stuart A; Lyon, Richard H S (ed). Understanding actuarial management: the actuarial control cycle. - 2nd ed. - Sydney: - Institute of Actuaries of Australia, 2010. - No. pages: 630. [RKN: 39617] Shelved at: EM (Oxf) [Faculty: 368.01 BEL] URL: http://www.soa.org/files/pdf/book-understanding-act.pdf Contents:: Risk management frameworks -- Being professional -- The need for financial products -The context of actuarial work -- Applying risk management -- Regulation -- Product design -Modelling -- Data and assumptions -- The need for capital -- Valuing liabilities -- Pricing -- Assets -Solvency -- Profit -- Monitoring experience -- Responding to experience -- Applying the actuarial control cycle
Profit Barth, Michael M; Eckles, David L. - An Empirical Investigation of the Effect of Growth on ShortTerm Changes in Loss Ratios. - No. pages: 19. [RKN: 71778] Shelved at: Per: J.Risk Ins (Oxf) [Faculty: JOU/RIS] Journal of Risk and Insurance (2009) 76 (4) : 867-885. Abstract: Given the use of premium growth as a risk measure in regulatory and private risk assessment models, the impact of growth on underwriting profitability is an important question. Our results show a negative relationship between premium growth and changes in loss ratios, suggesting that premium growth alone does not necessarily result in higher underwriting risk. Further, there is a positive relationship between claim count growth and changes in loss ratios, suggesting that claim count growth may be a preferred measure of underwriting risk. Gatzert, Nadine; Hoermann, Gudrun; Schmeiser, Hato. - The impact of the secondary market of life insurers' surrender profits. - No. pages: 22. [RKN: 71779] Shelved at: Per: J.Risk Ins (Oxf) [Faculty: JOU/RIS] Journal of Risk and Insurance (2009) 76 (4) : 887-908. Abstract: Life insurers often claim that the life settlement industry reduces their surrender profits and leads to an adverse shift in their portfolio of insured risks; that is, high risks remain in the portfolio instead of surrendering. In this article, we aim to quantify the effect of altered surrender behaviour––subject to the health status of an insured––in a portfolio of life insurance contracts on the surrender profits of primary insurers. Our model includes mortality heterogeneity by applying a stochastic frailty factor to a mortality table. We additionally analyze the impact of the premium payment method by comparing results for annual and single premium payments.
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Project management Gorvett, Rick; Nambiar, Vijendra. - Setting Up the Enterprise Risk Management Office : CAS ERM Symposium. 2007. - (CAS ERM Symposium). - No. pages: 11. [RKN: 38242] Shelved at: online only [Faculty: online only] URL: http://www.ermsymposium.org/2006/pdf/papers/Gorvett%20and%20Nambiar%20paper.pdf Abstract: In this paper, the concept of an Enterprise Risk Management Office (ERMO) is examined. The ERMO concept is investigated relative to another recent enterprise-wide entity that has evolved in many corporations and public institutions: the Project Management Office (PMO). The PMO is analyzed for any guidance it can provide regarding the implementation and benefits of a potential enterprise-wide and holistic approach to risk management. Guidelines and best practices for an ERMO are suggested.
Prospect theory Barberis, Nicholas. - A Model of Casino Gambling. - New Haven, CT: - Yale School of Management, 2010. - No. pages: 41. [RKN: 72557] URL: http://badger.som.yale.edu/faculty/ncb25/gb20d.pdf Abstract: Casino gambling is a hugely popular activity around the world, but there are still very few models of why people go to casinos or of how they behave when they get there. In this paper, we show that prospect theory can offer a surprisingly rich theory of gambling, one that captures many features of actual gambling behaviour. First, we demonstrate that, for a wide range of parameter values, a prospect theory agent would be willing to gamble in a casino, even if the casino only offers bets with zero or negative expected value. Second, we show that prospect theory predicts a plausible time inconsistency: at the moment he enters a casino, a prospect theory agent plans to follow one particular gambling strategy; but after he enters, he wants to switch to a different strategy. The model therefore predicts heterogeneity in gambling behaviour : how a gambler behaves depends on whether he is aware of the time-inconsistency; and, if he is aware of it, on whether he is able to commit, in advance, to his initial plan of action. Keywords: gambling, prospect theory, time inconsistency, probability weighting Qiu, Jianying; Steiger, Eva-Maria. - Understanding Risk Attitudes in two Dimensions : An Experimental Analysis. - Innsbruck: - University of Innsbruck, 2009. - (Working Papers in Economics and Statistics 2009-11). - No. pages: 31. [RKN: 72189] URL: http://www.uibk.ac.at/fakultaeten/volkswirtschaft_und_statistik/forschung/wopec/repec/inn/ wpaper/2009-11.pdf Abstract: Despite extensive studies, the nature of risk attitudes remains as one of the most vigorously discussed questions in economics and psychology. In the framework of expected utility theory, attitude towards risk originates in changes in marginal utility (the curvature of the utility function). Cumulative prospect theory (CPT) adds an additional dimension: the weighting of probabilities. By examining both dimensions, we strive to gain more insights on the nature of risk attitudes: what is the relation between the curvature of utility and probability weighting? How are these related to cognitive limitations? We ran a controlled laboratory experiment to answer these questions. Our findings suggest that the two dimensions capture different characteristics of individual risk attitudes. Though, most individuals are risk averse in both dimensions, the two dimensions show no significant correlation. In addition, only probability weighting is correlated with educational background and decision time. This suggests a relation between the convexity of probability weighting and cognitive limitations. Keywords: risk attitudes, cumulative prospect theory, experimental study
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Sandmo, Agnar. - Uncertainty in the theory of public finance. [RKN: 39615] Shelved at: Per: Geneva (Oxf) Geneva Risk and Insurance Review (2010) 35 (1) : 1-18. Abstract: This paper discusses the role that the economics of uncertainty has played in the theory of public finance. From being mostly concerned with its choice-theoretic foundations in the 1950s and 1960s, the theory of expected utility maximisation and risk averse behaviour has contributed decisively to the development of several areas of the theory of public finance. Three of these have been chosen here to illustrate the general point: The theory of taxation and risk taking with focus on portfolio choice, the role of uncertainty in public expenditure analysis (emphasising the effect of public goods provision on private risk taking) and the theory of tax evasion and compliance.
Quality systems Sonnenholzner, Michael; Friese, Sebastian; Graf von der Schulenburg, J.-Matthias. - Reinsurance brokers and advice quality : Is there a need for regulation? [RKN: 39292] Shelved at: Per: Geneva (Oxf) Geneva Risk and Insurance Review (2009) 34 (1) : 20-46. Abstract: Brokers play an increasing role in the distribution of reinsurance. In order to analyse reinsurance brokers' advice quality, we employ a model in which a monopoly broker advises cedents to buy a particular one out of similar reinsurance policies that cost the same but differ in details. The broker decides on how much to invest in his advice quality and on the price to charge for his service. We find that the broker's advice quality is generally lower and the price for his service higher than in the social optimum, even in the presence of a potential new entrant.
Rating Tennyson, Sharon. - Incentive effects of community rating in insurance markets : evidence from Massachusetts automobile insurance. [RKN: 39618] Shelved at: Per: Geneva (Oxf) Geneva Risk and Insurance Review (2010) 35 (1) : 19-46. Abstract: Rate regulations in insurance markets often impose cross-subsidies in insurance premiums from low-risk consumers to high-risk consumers. This paper develops the hypothesis that premium cross-subsidies affect risk taking by insurance consumers, and tests this hypothesis by examining the marginal impact of premium subsidies and overcharges on future insurance costs. The empirical analysis uses 1990–2003 rating cell-level data from the Massachusetts automobile insurance market, in which regulation produced large cross-subsidies across cells. Consistent with the hypothesized effects, premium subsidies are found to be significantly related to higher future insurance costs, and the opposite effects are found for premium overcharges.
Regulation American Academy of Actuaries; Financial Regulatory Reform Task Force. - Role of the Systemic Risk Regulator. - Washington, DC: - American Academy of Actuaries, 2010. - (A public policy white paper). - No. pages: 19. [RKN: 72503] URL: http://www.actuary.org/pdf/finreport/role_of_the_systemic_risk_regulator.pdf Abstract: The task force supports the establishment of a federally-based systemic risk regulator. The roles and responsibilities of the SRR should be consistent for all sectors of the financial services industry. Implementation of these roles and responsibilities for insurance companies should reflect the unique length and complexity of the insurance liability structure and a functional regulatory system that supports the objectives of the SRR.
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Baltensperger, E; Buomberger, P; Iuppa, A A; Keller, B; Wicki, A. - Regulation and intervention in the insurance industry : Fundamental issues. - Geneva Association, 2008. - (Geneva Report No. 01). - No. pages: 63. [RKN: 71581] Shelved at: online only [Faculty: online only] URL: http://www.genevaassociation.org/Home/Results.aspx?mode=free&keyword=geneva%20re port Abstract: Financial markets belong to the strongly supervised and regulated sectors of most modern economies. This applies to both banking and insurance. Traditional motives and justifications for regulation in these two industries overlap to some extent, but differ also in many ways. Financial markets have undergone extraordinary growth and structural change in recent decades, due to a variety of developments (worldwide integration of capital markets, revolution in information technology, shifting attitudes towards competition and protection in the financial services area). Along with this, existing approaches to regulation have been increasingly questioned and regulatory frameworks modified in a multitude of ways, a process very much still going on. While a very substantial body of literature concerned with the regulation of banking has developed over recent years, dealing with both its fundamental motivation and specific forms and applications of such regulation, a similar intellectual effort concerned with insurance regulation is lacking to a considerable extent. It is the aim of this paper to work towards closing this gap. Bellis, Clare S (ed); Shepherd, John A (ed); Klugman, Stuart A; Lyon, Richard H S (ed). Understanding actuarial management: the actuarial control cycle. - 2nd ed. - Sydney: - Institute of Actuaries of Australia, 2010. - No. pages: 630. [RKN: 39617] Shelved at: EM (Oxf) [Faculty: 368.01 BEL] URL: http://www.soa.org/files/pdf/book-understanding-act.pdf Contents: -- Risk management frameworks -- Being professional -- The need for financial products -- The context of actuarial work -- Applying risk management -- Regulation -- Product design -Modelling -- Data and assumptions -- The need for capital -- Valuing liabilities -- Pricing -- Assets -Solvency -- Profit -- Monitoring experience -- Responding to experience -- Applying the actuarial control cycle Bernard, Carole; Chen, An. - On the regulator-insurer-interaction in a structural model. - Ontario: University of Waterloo, 2008. - (Institute of Insurance and Pension Research Research Report 0801). - No. pages: 24. [RKN: 69975] Shelved at: Online only [Faculty: Online only] URL: http://www.stats.uwaterloo.ca/stats_navigation/IIPR/IIPR-Reports.shtml Abstract: In this paper, we provide a new insight to the previous work of Briys and de Varenne [1994], Grosen and Jørgensen [2002] and Chen and Suchanecki [2007]. We show that if the insurance company follows a risk management strategy, it can significantly change the risk exposure of the company, and that it should thus be taken into account by regulators. We first study how the regulator establishes regulation intervention levels in order to control for instance the default probability of the insurance company. This part of the analysis is based on a constant volatility and there exists a one-to-one relation between the optimal regulation level and the volatility. Given that the insurance company is informed of regulatory rules, we study how results can be significantly different when the insurance company follows a risk management strategy with non-constant volatilities. We thus highlight some limits of prior literature and believe that the value of the company’s risk management should be included in the risk exposure estimation and the market value of liabilities as well. Keywords: Life insurance policies, Default risk, Regulatory rule.
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Harrington, Scott E. - The financial crisis, systemic risk, and the future of insurance regulation. No. pages: 35. [RKN: 71775] Shelved at: Per: J.Risk Ins (Oxf) [Faculty: JOU/RIS] Journal of Risk and Insurance (2009) 76 (4) : 785-819. Abstract: This article considers the role of American International Group (AIG) and the insurance sector in the 2007–2009 financial crisis and the implications for insurance regulation. Following an overview of the causes of the crisis, I explore the events and policies that contributed to federal government intervention to prevent bankruptcy of AIG and the scope of federal assistance to AIG. I discuss the extent to which insurance in general poses systemic risk and whether a systemic risk regulator is desirable for insurers or other nonbank financial institutions. The last two sections of the article address the financial crisis's implications for proposed optional and/or mandatory federal chartering and regulation of insurers and for insurance regulation in general. Hull, John. - Risk management and financial institutions. - Pearson Education, 2007. - No. pages: 500. [RKN: 69114] [Faculty: 332.1 HUL] Kemp, Malcolm; Varnell, Elliot. - Regulatory frameworks: lessons learned and potential implications of the Credit Crisis [copies of slides only] - Institute of Actuaries and Faculty of Actuaries, 2010. - (Risk and Investment Conference 2010 Caledonian Hotel, Edinburgh, 13-15 June 2010). [RKN: 73026] URL: http://www.actuaries.org.uk/research-and-resources/documents/regulatoryframeworks-lessons-learned-crisis-and-potential-implicat Kull, Andreas. - Sharing Risk: An Economic Perspective. - No. pages: 23. [RKN: 71971] Shelved at: Per: Astin Bull (Oxf) [Faculty: JOU/AST] ASTIN Bulletin (2009) 39 (2) : 591-613. Abstract: We revisit the relative retention problem originally introduced by de Finetti using concepts recently developed in risk theory and quantitative risk management. Instead of using the Variance as a risk measure we consider the Expected Shortfall (Tail-Value-at-Risk) and include capital costs and take constraints on risk capital into account. Starting from a risk-based capital allocation, the paper presents an optimization scheme for sharing risk in a multi-risk class environment. Risk sharing takes place between two portfolios and the pricing of risk transfer reflects both portfolio structures. This allows us to shed more light on the question of how optimal risk sharing is characterized in a situation where risk transfer takes place between parties employing similar risk and performance measures. Recent developments in the regulatory domain (‘risk-based supervision’) pushing for common, insurance industry-wide risk measures underline the importance of this question. The paper includes a simple non-life insurance example illustrating optimal risk transfer in terms of retentions of common reinsurance structures. Keywords: Sharing and pooling of risk; reinsurance; optimal retentions; risk-based capital; capital cost Pepper, Anthony. - Mortgage endowments: a FOS risk? - Staple Inn Actuarial Society, [RKN: 71757] Shelved at: Online only [Faculty: Online only] The Actuary (2009) December URL: http://www.the-actuary.org.uk/871265 Abstract: Anthony Pepper questions the appropriateness of the Financial Ombudsman Service risk assessment
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Schmeiser, Hato; Siegel, Caroline. - Regulating Insurance Groups : a Comparison of Risk-Based Solvency Models. - St Gallen: - Institute of Insurance Economics, 2010. - (Working papers on risk management and insurance no. 79). - No. pages: 26. [RKN: 72841] URL: http://www.ivw.unisg.ch/org/ivw/web.nsf/SysWebRessources/WP79/$FILE/Regulating+Insur ance+Groups.pdf Abstract: Since the 1990s, there has been extensive growth of financial groups involved in the insurance sector. As a result, supervisors and regulators are currently developing group-wide capital standards intended to enable effective monitoring of the financial soundness of such groups. Some jurisdictions are taking steps towards a consolidated approach, which views the group as one single integrated entity, while others model the group as a collection of interrelated but separate legal entities. This paper provides a theoretical as well as a numerical comparison of these two approaches to group-wide solvency assessment in light of the different regulatory issues and challenges associated with consideration of group effects. As a benchmark case, we consider a “silo approach” that is based on a solo assessment of the risks and solvency capital requirements of each legal entity within the insurance group. Our analysis contributes to the ongoing discussion about the best way to conduct group-wide solvency assessments. Key words: Solvency, insurance group, regulation, risk management Sonnenholzner, Michael; Friese, Sebastian; Graf von der Schulenburg, J.-Matthias. - Reinsurance brokers and advice quality : Is there a need for regulation? [RKN: 39292] Shelved at: Per: Geneva (Oxf) Geneva Risk and Insurance Review (2009) 34 (1) : 20-46. Abstract: Brokers play an increasing role in the distribution of reinsurance. In order to analyse reinsurance brokers' advice quality, we employ a model in which a monopoly broker advises cedents to buy a particular one out of similar reinsurance policies that cost the same but differ in details. The broker decides on how much to invest in his advice quality and on the price to charge for his service. We find that the broker's advice quality is generally lower and the price for his service higher than in the social optimum, even in the presence of a potential new entrant. Sykes, Ian. - Regulations and investor behaviour. - Institute of Actuaries and Faculty of Actuaries, 2007. - (Finance, Investment and Risk Management Conference 2007 Seminar, 17-19 June 2007, Conrad Hilton Hotel, Dublin). [RKN: 72834] Abstract: This session is about how regulation affects the investment behaviour of Irish occupational pension schemes. This is a very specific situation to look at, but a topical one given the location of the conference this year and an interesting one because the regulations and other factors were similar, but not identical to the UK until the Pensions Act 2004 changes. Since then they have diverged.
Reinsurance De Alba, Enrique; Zuniga, Jesus; Corzo, Marco A. Ramírez. - Measurement and transfer of catastrophic risks : A simulation analysis. - Ontario: - University of Waterloo, 2008. - (Institute of Insurance and Pension Research Research Report 08-03). - No. pages: 22. [RKN: 69977] Shelved at: Online only [Faculty: Online only] URL: http://www.stats.uwaterloo.ca/stats_navigation/IIPR/IIPR-Reports.shtml Abstract: When analyzing catastrophic risk, traditional measures for evaluating risk, such as the probable maximum loss (PML), value at risk (VaR), tail-VaR , and others, can become practically impossible to obtain analytically in certain types of insurance, such as earthquake, and certain types of reinsurance arrangements, specially nonproportional with reinstatements. Given the available information, it can be very difficult for an insurer to measure its risk exposure. The transfer of risk in this type of insurance is usually done through reinsurance schemes combining diverse types of contracts that can greatly reduce the extreme tail of the cedant’s loss distribution. This effect can be assessed mathematically. The PML is defined in terms of a very extreme quantile. Also, under standard operating conditions, insurers use several “layers” of non proportional reinsurance that may or may not be combined with some type of proportional 128
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reinsurance. The resulting reinsurance structures will then be very complicated to analyze and to evaluate their mitigation or transfer effects analytically, so it may be necessary to use alternative approaches, such as Monte Carlo simulation methods. This is what we do in this paper in order to measure the effect of a complex reinsurance treaty on the risk profile of an insurance company. We compute the pure risk premium, PML as well as a host of results: impact on the insured portfolio, risk transfer effect of reinsurance programs, proportion of times reinsurance is exhausted, percentage of years it was necessary to use the contractual reinstatements, etc. Since the estimators of quantiles are known to be biased, we explore the alternative of using an Extreme Value approach to complement the analysis. Keywords: Quantile, Extreme Value, Monte Carlo Methods, PML, VAR, Reinsurance. Kull, Andreas. - Sharing Risk: An Economic Perspective. - No. pages: 23. [RKN: 71971] Shelved at: Per: Astin Bull (Oxf) [Faculty: JOU/AST] ASTIN Bulletin (2009) 39 (2) : 591-613. Abstract: We revisit the relative retention problem originally introduced by de Finetti using concepts recently developed in risk theory and quantitative risk management. Instead of using the Variance as a risk measure we consider the Expected Shortfall (Tail-Value-at-Risk) and include capital costs and take constraints on risk capital into account. Starting from a risk-based capital allocation, the paper presents an optimization scheme for sharing risk in a multi-risk class environment. Risk sharing takes place between two portfolios and the pricing of risk transfer reflects both portfolio structures. This allows us to shed more light on the question of how optimal risk sharing is characterized in a situation where risk transfer takes place between parties employing similar risk and performance measures. Recent developments in the regulatory domain (‘risk-based supervision’) pushing for common, insurance industry-wide risk measures underline the importance of this question. The paper includes a simple non-life insurance example illustrating optimal risk transfer in terms of retentions of common reinsurance structures. Keywords: Sharing and pooling of risk; reinsurance; optimal retentions; risk-based capital; capital cost Sonnenholzner, Michael; Friese, Sebastian; Graf von der Schulenburg, J.-Matthias. - Reinsurance brokers and advice quality : Is there a need for regulation? [RKN: 39292] Shelved at: Per: Geneva (Oxf) Geneva Risk and Insurance Review (2009) 34 (1) : 20-46. Abstract: Brokers play an increasing role in the distribution of reinsurance. In order to analyse reinsurance brokers' advice quality, we employ a model in which a monopoly broker advises cedents to buy a particular one out of similar reinsurance policies that cost the same but differ in details. The broker decides on how much to invest in his advice quality and on the price to charge for his service. We find that the broker's advice quality is generally lower and the price for his service higher than in the social optimum, even in the presence of a potential new entrant. Tan, K S; Weng, C. - Enhancing Insurer Value Using Reinsurance and Value–at–Risk Criterion [abstract only] 2008. [RKN: 38564] Shelved at: Online only [Faculty: Online only] Actuarial Research Clearing House (ARCH) (2008) 1 URL: http://www.soa.org/news-and-publications/publications/proceedings/arch/arch-2008iss1.aspx Abstract: The quest for optimal reinsurance design has remained an interesting problem among insurers, reinsurers, and academicians. An appropriate use of reinsurance can reduce the underwriting risk of an insurer and thereby enhances 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 total risk of the insurer while subjecting to a profitability constraint. The proposed optimal reinsurance model, therefore, has the advantage of exploiting the classic 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 convex functions, explicit solutions are derived. 129
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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 can be in the form of pure stop-loss reinsurance, quota-share reinsurance, or some combination of them. van Lelyveld, Iman; Liedorp, Franka; Kampman, Manuel. - An Empirical assessment of reinsurance risk. - Amsterdam: - De Nederlandsche Bank, 2009. - (DNB Working Paper No. 201 February 2009). - No. pages: 31. [RKN: 71936] URL: http://www.dnb.nl/en/binaries/Working%20paper%20201_tcm47-212957.pdf Abstract: We analyse the effect of failing reinsurance cover on the stability of Dutch insurers. As insurers often reinsure themselves with other (re)insurers, losses could spread contagiously through the sector. Using a unique and confidential data set on reinsurance exposures, we perform a scenario analysis to measure contagion risks. Based on current exposures, we find no evidence of systemic risk in the Netherlands, even if multiple reinsurance companies fail simultaneously. Next, we analyse to what extent the financial position of individual primary insurers is affected following a particular shock, considering solvency, capital and profit levels. The life insurance industry is hardly affected by reinsurance failures. The non-life industry, however, is vulnerable to a crisis in the European reinsurance market. We also find that members of smaller insurance groups are particularly exposed. Keywords : reinsurance, contagion, simulation Xin, Zhang; Siu, Tak Kuen. - Optimal investment and reinsurance of an insurer with model uncertainty. - No. pages: 8. [RKN: 72375] Shelved at: Per: IME (Oxf) Insurance: Mathematics & Economics (2009) 45 (1) : 81-88. Abstract: We introduce a novel approach to optimal investment–reinsurance problems of an insurance company facing model uncertainty via a game theoretic approach. The insurance company invests in a capital market index whose dynamics follow a geometric Brownian motion. The risk process of the company is governed by either a compound Poisson process or its diffusion approximation. The company can also transfer a certain proportion of the insurance risk to a reinsurance company by purchasing reinsurance. The optimal investment–reinsurance problems with model uncertainty are formulated as two-player, zero-sum, stochastic differential games between the insurance company and the market. We provide verification theorems for the Hamilton–Jacobi–Bellman–Isaacs (HJBI) solutions to the optimal investment–reinsurance problems and derive closed-form solutions to the problems. Keywords: Optimal investment; Proportional reinsurance; Model uncertainty; Stochastic differential game; Exponential utility; Penalty of ruin; HJBI equations
Reputation risk Honey, Garry. - A short guide to reputation risk. - Gower, 2009. - No. pages: 119. [Faculty: 519.287 HON] Abstract: This guide will show you how to: - Identify the value of your reputation and mitigate risk of damage to this value. - Measure your reputation as an intangible asset and part of intellectual capital. - Manage the drivers of reputation effectively within your organization. - Report reputation risk management to inspire confidence among stakeholders.
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Research Chan, Kam C; Liano, Kartono. - Influential articles, journals and institutions in risk management and insurance. 2009. - No. pages: 15. [RKN: 69456] [Faculty: RIS/MAN] Risk Management and Insurance Review (2009) 12 (1) : 125-139. Abstract: We use a threshold citation approach to measure the influence of articles, journals, and institutions in risk management and insurance research. The three frequently cited articles in risk management and insurance research are "Increasing Risk: I. A Definition" by Rothschild and Stiglitz (1970), "Precautionary Saving in the Small and in the Large" by Kimball (1990), and "Equilibrium in Competitive Insurance Markets: An Essay on the Economics of Imperfect Information" by Rothschild and Stiglitz (1990). Journal of Risk and Insurance, Econometrica, and Journal of Political Economy are the three influential journals in risk management and insurance research. Furthermore, the five influential institutions in risk management and insurance research are the University of Pennsylvania, Harvard University, the University of Rochester, the University of Michigan, and Massachusetts Institute of Technology. Colquitt, L Lee; Sommer, David W; Ferguson, William L. - A Citation Analysis of Risk, Insurance, and Actuarial Research: 2001 Through 2005. - No. pages: 21. [RKN: 71781] Shelved at: Per: J.Risk Ins (Oxf) [Faculty: JOU/RIS] Journal of Risk and Insurance (2009) 76 (4) : 933-953. Abstract: The bibliographies of 17 risk journals were evaluated to determine the relative influence of these risk journals on risk, insurance, and actuarial research published during the years 2001 through 2005. Tables are provided that show the frequency with which each of these journals cites itself and the other sample journals. The journals are ranked, within two groups (risk and insurance group and actuarial group), based on their total influence (total citations including and excluding self-citations) and their per article influence (per article citations including and excluding selfcitations). Finally, the most frequently cited articles from each risk journal are reported. Hewitt, Tony. - Pension risk open forum. - Staple Inn Actuarial Society, [RKN: 39654] Shelved at: Per: Actuary (Oxf); Per: Actuary (Lon) [Faculty: SIA/ACT] The Actuary (2010) July : 28-29. URL: http://www.the-actuary.org.uk Abstract: Tony Hewitt introduces research from Imperial College Business School alumni on the influence on pensions risk on equity and bond prices. Three projects, by Adam Gregory, Louise McCarthy and Paul Nicholas, are discussed.
Reserves Ohlsson, Esbjörn; Lauzeningks, Jan. - The one-year non-life insurance risk. - No. pages: 6. [RKN: 72391] Shelved at: Per: IME (Oxf) Insurance: Mathematics & Economics (2009) 45 (2) : 203-208. Abstract: A major part of the literature on non-life insurance reserve risk has been devoted to the ultimo risk, the risk in the full run-off of the liabilities. This is in contrast to the short time horizon in internal risk models at insurance companies, and the one-year risk perspective taken in the Solvency II project of the European Community. This paper aims at clarifying the one-year risk concept and describing simulation approaches, in particular for the one-year reserve risk. We also discuss the one-year premium risk and its relation to the premium reserve. Finally, we initiate a discussion on the role of risk margins and discounting for the reserve and premium risk, with focus on the Cost-of-Capital method. We show that risk margins do not affect the reserve risk and show how reserve duration can be used for easy calculation of risk margins
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Risk Management Reading List September 2010
Risk Barton, Keith. - Shared risks : Letter. [RKN: 38869] Shelved at: Per: Actuary (Oxf); Per: Actuary (Lon) The Actuary (2009) Jan/Feb : 7. URL: http://www.the-actuary.org.uk Abstract: Letter about risk sharing Hibbert, John. - Hot topics – recent issues [copies of slides only] - Institute of Actuaries and Faculty of Actuaries, 2010. - (Risk and Investment Conference 2010 Caledonian Hotel, Edinburgh, 13-15 June 2010). [RKN: 73023] URL: http://www.actuaries.org.uk/research-and-resources/documents/financial-crisis-slides McLean, Colin. - Impact of Behavioural Finance on Investment [copies of slides only] - Institute of Actuaries and Faculty of Actuaries, 2010. - (Risk and Investment Conference 2010 Caledonian Hotel, Edinburgh, 13-15 June 2010). [RKN: 73032] URL: http://www.actuaries.org.uk/research-and-resources/documents/impact-behaviouralfinance-investment-slides Orros, George C; Cantle, Neil J. - ERM for Strategic and Emerging Risks [copies of slides only] Institute of Actuaries and Faculty of Actuaries, 2010. - (Risk and Investment Conference 2010 Caledonian Hotel, Edinburgh, 13-15 June 2010). [RKN: 73012] URL: http://www.actuaries.org.uk/research-and-resources/documents/erm-strategic-andemerging-risks-working-party-slides Smith, Andrew. - Sovereign Credit Risk [copies of slides only] - Institute of Actuaries and Faculty of Actuaries, 2010. - (Risk and Investment Conference 2010 Caledonian Hotel, Edinburgh, 13-15 June 2010). [RKN: 73025] URL: http://www.actuaries.org.uk/research-and-resources/documents/sovereign-credit-riskslides Smith, Andrew D. - Reconciling Risk Measures [copies of slides only] - Institute of Actuaries and Faculty of Actuaries, 2010. - (Risk and Investment Conference 2010 Caledonian Hotel, Edinburgh, 13-15 June 2010). [RKN: 73008] URL: http://www.actuaries.org.uk/research-and-resources/documents/reconciling-differentrisk-measures-working-party Haslip, Gareth. - Risk assessment. [RKN: 38758] Shelved at: Per: Actuary (Oxf); Per: Actuary (Lon) The Actuary (2008) December : 28-30. URL: http://www.the-actuary.org.uk Abstract: Description of the calculation methodologies for Solvency II risk margin requirements for non-life insurers.
Risk analysis Avanzi, Benjamin. - Strategies for dividend distribution: a review. - No. pages: 35. [RKN: 69806] Shelved at: Per: NAAJ (Oxf); Per NAAJ (Lon) [Faculty: NOR/AME] North American Actuarial Journal (2009) 13 (2) : 217-251. URL: http://www.soa.org/news-and-publications/publications/journals/naaj/naaj-detail.aspx Abstract: In today's world of financial uncertainty, one major public concern is to assess (and possibly improve) the stability of companies that take on risks. Actuaries have been aware of that issue for a very long time and have a great experience in modeling the activity of a risk business. During the first part of the twentieth century, they focused on the probability of ruin to assess the stability of their company. In his seminal paper of 1957 Bruni de Finetti criticized this approach and laid the foundations of what would become an increasingly popular topic: the study of dividend 132
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Risk Management Reading List September 2010
strategies. The contributions made by actuaries in that field constitute a substantial body of knowledge, whose interest is relevant not only to insurance but also to a much broader range of areas of practice. In this paper we aim at a taxonomical synthesis of the 50 years of actuarial research that followed de Finetti's original paper. Christodoulakis, George (ed); Satchell, Stephen E (ed). - The analytics of risk model validation. Elsevier, 2008. - No. pages: 201. [RKN: 69115] [Faculty: 519.2 CHR] Contents: About 1. Determinants of small business default - 1 -- 2. Validation of stress testing models - 13 -- 3. The validity of credit risk model validation models - 27 -- 4. A moments-based procedure for evaluating risk forecasting models - 45 -- 5. Measuring concentration risk in credit portfolios - 59 -- 6. A simple method for regulators to cross-check operational risk loss models for banks - 79 -- 7. Of the credibility of mapping and benchmarking credit risk estimates for internal rating systems - 91 -- 8. Analytic models of the ROC curve: applications to credit rating model validation - 113 -- 9. The validation of the equity portfolio risk models - 135 -- 10. Dynamic risk analysis and risk model evaluation - 149 -- 11. Validation of internal rating systems and PD estimates Colquitt, L Lee; Sommer, David W; Ferguson, William L. - A Citation Analysis of Risk, Insurance, and Actuarial Research: 2001 Through 2005. - No. pages: 21. [RKN: 71781] Shelved at: Per: J.Risk Ins (Oxf) [Faculty: JOU/RIS] Journal of Risk and Insurance (2009) 76 (4) : 933-953. Abstract: The bibliographies of 17 risk journals were evaluated to determine the relative influence of these risk journals on risk, insurance, and actuarial research published during the years 2001 through 2005. Tables are provided that show the frequency with which each of these journals cites itself and the other sample journals. The journals are ranked, within two groups (risk and insurance group and actuarial group), based on their total influence (total citations including and excluding self-citations) and their per article influence (per article citations including and excluding selfcitations). Finally, the most frequently cited articles from each risk journal are reported.
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De Alba, Enrique; Zuniga, Jesus; Corzo, Marco A. Ramírez. - Measurement and transfer of catastrophic risks : A simulation analysis. - Ontario: - University of Waterloo, 2008. - (Institute of Insurance and Pension Research Research Report 08-03). - No. pages: 22. [RKN: 69977] Shelved at: Online only [Faculty: Online only] URL: http://www.stats.uwaterloo.ca/stats_navigation/IIPR/IIPR-Reports.shtml Abstract: When analyzing catastrophic risk, traditional measures for evaluating risk, such as the probable maximum loss (PML), value at risk (VaR), tail-VaR , and others, can become practically impossible to obtain analytically in certain types of insurance, such as earthquake, and certain types of reinsurance arrangements, specially nonproportional with reinstatements. Given the available information, it can be very difficult for an insurer to measure its risk exposure. The transfer of risk in this type of insurance is usually done through reinsurance schemes combining diverse types of contracts that can greatly reduce the extreme tail of the cedant’s loss distribution. This effect can be assessed mathematically. The PML is defined in terms of a very extreme quantile. Also, under standard operating conditions, insurers use several “layers” of non proportional reinsurance that may or may not be combined with some type of proportional reinsurance. The resulting reinsurance structures will then be very complicated to analyze and to evaluate their mitigation or transfer effects analytically, so it may be necessary to use alternative approaches, such as Monte Carlo simulation methods. This is what we do in this paper in order to measure the effect of a complex reinsurance treaty on the risk profile of an insurance company. We compute the pure risk premium, PML as well as a host of results: impact on the insured portfolio, risk transfer effect of reinsurance programs, proportion of times reinsurance is exhausted, percentage of years it was necessary to use the contractual reinstatements, etc. Since the estimators of quantiles are known to be biased, we explore the alternative of using an Extreme Value approach to complement the analysis. Keywords: Quantile, Extreme Value, Monte Carlo Methods, PML, VAR, Reinsurance. Hoyt, Robert E; Powell, Lawrence S; Sommer, David W. - Computing value at risk: a simulation assignment to illustrate the value of enterprise risk management. [RKN: 69057] [Faculty: RIS/MAN] Risk Management and Insurance Review (2007) 10 (2) : 299-307. Koster, Ferry. - Risk management in a globalizing world : An empirical analysis of individual preferences in 26 European countries. [RKN: 39262] Shelved at: Per: ISSR (Oxf) International Social Security Review (2009) 62 (3) : 79-98. Abstract: The risks that individuals face in everyday life, such as illness and unemployment, can be covered using market, government, or community mechanisms. The market can function with a lower level of solidarity compared to the other two mechanisms; the government mechanism requires the highest level of compulsory solidarity and communities are associated with voluntary solidarity. Social context affects individual preferences with regard to any one of these mechanisms. This article investigates to what extent these preferences are influenced by globalization: the economic, social and political openness of countries. The dataset used in this study combines data from the European Values Study 1999-2000 (EVS), the International Monetary Fund (IMF), and the KOF Index of Globalization, and contains information about 31,554 people living in 26 European countries. The results derived from logistic multilevel analysis show that preferences towards the organization of solidarity are related to the different dimensions of globalization. Melnick, Edward; Everitt, Brian. - Encyclopaedia of Quantitative Risk Analysis and Assessment. Chicester: - John Wiley & Sons, 2008. - No. pages: 1954. - 4 vols. [RKN: 38534] Shelved at: EEQ (Oxf) Abstract: Leading the way in this field, the Encyclopedia of Quantitative Risk Analysis and Assessment will be the first publication to offer a modern, comprehensive and in-depth resource to the huge variety of disciplines involved. A truly international work, its coverage ranges across risk issues pertinent to life scientists, engineers, policy makers, healthcare professionals, the finance industry, the military and practising statisticians. Drawing on the expertise of world-renowned 134
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authors and editors in this field this title will provide up-to-date material on drug safety, investment theory, public policy applications, transportation safety, public perception of risk, epidemiological risk, national defence and security, critical infrastructure, and program management. OpRisk Advisory; Towers Perrin. - A New Approach for Managing Operational Risk : Addressing the Issues Underlying the 2008 Global Financial Crisis. - Society of Actuaries. Canadian Institute of Actuaries. Casualty Actuarial Society, 2009. - No. pages: 90. [RKN: 71819] URL: http://www.soa.org/files/pdf/research-new-approach.pdf Abstract: Examines approaches to operational risk management (ORM) and considerations for establishing formal operational risk programmes. Ren, Jiandong; Li, Shuanming. - The analysis of perturbed risk processes with Markovian arrivals. - Victoria: - University of Melbourne, 2009. - (Centre for Actuarial Studies, University of Melbourne, Research Paper no. 187). - No. pages: 18. [RKN: 72116] URL: http://mercury.ecom.unimelb.edu.au/SITE/actwww/wps2009/187.pdf Abstract: In this paper, we study the perturbed risk processes with Markovian arrivals. We present explicit formulas for the Laplace transform of the time to cross a certain level before ruin, the Laplace transform of the time of recovery and the distribution of the maximum severity of ruin, as well as the expected discounted dividends and the distribution of the total dividends prior to ruin for the risk model in the presence of a constant dividend barrier. Keywords: Perturbed risk processes; Markovian arrival processes; First passage times; Time of recovery; Maximum severity of ruin; Dividend barrier Taboga, Marco. - The riskiness of corporate bonds. - Roma: - Banca d'Italia, 2009. - (Working paper no. 730). - No. pages: 45. [RKN: 72183] URL: http://www.bancaditalia.it/pubblicazioni/econo/temidi/td09/td730_09/en_td_730_09/en_tema _730.pdf Abstract: When the riskiness of an asset increases, then, arguably, some risk-averse agents that were previously willing to hold on to the asset are no longer willing to do so. Aumann and Serrano (2008) have recently proposed an index of riskiness that helps to make this intuition rigorous. We use their index to analyze the riskiness of corporate bonds and how this can change over time and across rating classes and how it compares to the riskiness of other financial instruments. We find statistically significant evidence that a number of financial and macroeconomic variables can predict time-variation in the riskiness of corporate bonds, including in ways one might not expect. For example, a higher yield-to-maturity lowers riskiness by reducing the frequency and the magnitude of negative holding-period returns. Keywords: riskiness, predictability, corporate bonds.
Risk assessment Barth, Michael M; Eckles, David L. - An Empirical Investigation of the Effect of Growth on ShortTerm Changes in Loss Ratios. - No. pages: 19. [RKN: 71778] Shelved at: Per: J.Risk Ins (Oxf) [Faculty: JOU/RIS] Journal of Risk and Insurance (2009) 76 (4) : 867-885. Abstract: Given the use of premium growth as a risk measure in regulatory and private risk assessment models, the impact of growth on underwriting profitability is an important question. Our results show a negative relationship between premium growth and changes in loss ratios, suggesting that premium growth alone does not necessarily result in higher underwriting risk. Further, there is a positive relationship between claim count growth and changes in loss ratios, suggesting that claim count growth may be a preferred measure of underwriting risk.
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Brazauskas, V. - A Nonpararmetric Test for Comparing the Riskiness of Portfolios [abstract only] 2008. [RKN: 38559] Shelved at: Online only [Faculty: Online only] Actuarial Research Clearing House (ARCH) (2008) 1 URL: http://www.soa.org/news-and-publications/publications/proceedings/arch/arch-2008iss1.aspx Abstract: Inspired by the problem of testing hypotheses about the equality of several risk measure values, we find that the ""nested L-statistic"" -- a notion introduced herein is natural and particularly convenient. Indeed, the test statistic that we explore in this paper is a nested L-statistic. We discuss large-sample properties of the statistic, investigate its performance using a simulation study, and consider an example involving the comparison of risk measure values where the risks of interest are those associated with tornado damage in different time periods and different regions. Carey, Janet M; Burgman, Mark A. - Linguistic Uncertainty in Qualitative Risk Analysis and How to Minimize It. - New York Academy of Sciences, - No. pages: 5. [RKN: 72627] Annals of the New York Academy of Sciences (2008) 1128 : 13-17. URL: http://www.acera.unimelb.edu.au/materials/endorsed/0611_Carey.pdf Abstract: Most risk assessments assume uncertainty may be decomposed into variability and incertitude. Language is often overlooked as a source of uncertainty, but linguistic uncertainty may be pervasive in workshops, committees, and other face-to-face language-based settings where it can result in misunderstanding and arbitrary disagreement. Here we present examples of linguistic uncertainty drawn from qualitative risk analysis undertaken in stakeholder workshops and describe how the uncertainties were treated. We used a process of iterative re-assessment of likelihoods and consequences, interspersed with facilitated discussion, to assist in the reduction of language-based uncertainty. The effects of this process were evident as changes in the level of agreement among groups of assessors in the ranking of hazards. Key words: risk analysis; linguistic uncertainty; ambiguity; vagueness; underspecificity; context dependence Christodoulakis, George (ed); Satchell, Stephen E (ed). - The analytics of risk model validation. Elsevier, 2008. - No. pages: 201. [RKN: 69115] [Faculty: 519.2 CHR] Contents: 1. Determinants of small business default - 1 -- 2. Validation of stress testing models 13 -- 3. The validity of credit risk model validation models - 27 -- 4. A moments-based procedure for evaluating risk forecasting models - 45 -- 5. Measuring concentration risk in credit portfolios 59 -- 6. A simple method for regulators to cross-check operational risk loss models for banks - 79 - 7. Of the credibility of mapping and benchmarking credit risk estimates for internal rating systems - 91 -- 8. Analytic models of the ROC curve: applications to credit rating model validation - 113 -- 9. The validation of the equity portfolio risk models - 135 -- 10. Dynamic risk analysis and risk model evaluation - 149 -- 11. Validation of internal rating systems and PD estimates Financial Services Authority. - Financial Risk Outlook 2010. - London: - Financial Services Authority, 2010. - No. pages: 88. [RKN: 72242] Shelved at: 002128 URL: http://www.fsa.gov.uk/pubs/plan/financial_risk_outlook_2010.pdf Abstract: The report is divided into four sections: Macroeconomic background and outlook looks at how fiscal and monetary policy support has limited the scale and duration of the global recession, and the future impact of its removal; Financial Stability and Prudential Risks and Issues highlights the importance of effectively managing prudential and financial stability risks for all stakeholders in the financial system. The chapter explores the new regulatory frameworks being developed to strengthen firms’ capital and liquidity management under stressed conditions and the FSA’s updated stress test; Market Risks and Issues explores risks derived directly from the crisis and other ongoing risks to which regulators and market participants need to respond; Retail Conduct Risks and Issues identifies retail conduct of business risks, some of which have 136
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Risk Management Reading List September 2010
resulted from today’s specific economic circumstances but many of which are rooted in enduring features of retail financial services markets: such as business models that cross subsidise lossmaking core products and very high margin products. Franklin, James; Sisson, Scott. - Assessment of Strategies for Evaluating Extreme Risks. Australian Centre of Excellence for Risk Analysis (ACERA), 2007. - (ACERA Project No 0602). No. pages: 61. [RKN: 72628] URL: http://www.acera.unimelb.edu.au/materials/endorsed/0602.pdf Abstract: It is in the nature of risk for extreme events that there is no or very little directly relevant data, so expert opinion must be relied on heavily. But expert opinion must be as fully informed as possible – by the data that is available, by other experts, by reasoned opinions of stakeholders, and by the use of commonsense reasoning applied to the diverse reasons put “on the table”. We survey a variety of case studies and a number of quantitative and non-quantitative methods that show promise for improving extreme risk analysis. We argue that an “advocacy model” similar to that used in the Basel II compliance regime for bank operational risks and Biosecurity Australia’s Import Risk Assessments is ideal for permitting the diversity of relevant evidence to be presented and soundly evaluated. We recommend that the process be enhanced in four ways – by better education of the risk evaluators in certain statistical methods (extreme value theory, Bayesian methods of combining expert opinion with data, and robustness methods such as InfoGap Theory); by better education of statisticians in non-numerical methods including legal-style advocacy and causal modeling; by education of all parties in the psychological findings on expert judgement; and by the use of independent facilitators such as consultants to mediate between the regulator / evaluator and the client / stakeholder. Global Risk Network; World Economic Forum; Citigroup; Marsh & McLennan Companies; Swiss Re; Wharton School Risk Center; Zurich Financial Services. - Global Risks 2008 : A Global Risk Network Report. - Geneva: - World Economic Forum, 2008. - No. pages: 54. [RKN: 69132] Shelved at: online only [Faculty: online only] URL: http://www.weforum.org/pdf/globalrisk/report2008.pdf Contents: Introduction - 4 Focus on Emerging Issues in Global Risk - 6 Assessing Global Risks in 2008 - 20 Networked World, Networked Risks - 25 Financial Markets, Risk Transfer and Risk Mitigation - 30 Structuring Mitigation at the State and International Level: Taking the Country Risk Officer Forward Appendix 1: Taxonomy of Global Risk: Trends, Issues of Concern, Risks - 41 Appendix 2: Risk Assessments - 45 Horneff, Wolfram; Maurer, Raimond. - Mortality Contingent Claims: Impact of Capital Market, Income, and Interest Rate Risk. - Ann Arbour: - University of Michigan Retirement Research Center, 2009. - (Michigan Retirement Research Center WP 2009-222). - No. pages: 31. [RKN: 71706] URL: http://www.mrrc.isr.umich.edu/publications/papers/pdf/wp222.pdf Abstract: In this paper, we consider optimal insurance, portfolio allocation, and consumption rules for a stochastic wage earner with CRRA preferences whose lifetime is random. In a continuous time framework, the investor has to decide among short and long positions in mortality contingent claims a.k.a. life insurance, stocks, bonds, and money market investment when facing a risky stock market and interest rate risk. We find an analytical solution for the complete market case in which human capital is exactly priced. We also extend the analysis to the case where income is unspanned. An illustrative analysis shows when the wage earner’s demand for life insurance switches to the demand for annuities.
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Hoyt, Robert E; Powell, Lawrence S; Sommer, David W. - Computing value at risk: a simulation assignment to illustrate the value of enterprise risk management. [RKN: 69057] [Faculty: RIS/MAN] Risk Management and Insurance Review (2007) 10 (2) : 299-307. Melnick, Edward; Everitt, Brian. - Encyclopaedia of Quantitative Risk Analysis and Assessment. Chicester: - John Wiley & Sons, 2008. - No. pages: 1954. - 4 vols. [RKN: 38534] Shelved at: EEQ (Oxf) Abstract: Leading the way in this field, the Encyclopedia of Quantitative Risk Analysis and Assessment will be the first publication to offer a modern, comprehensive and in-depth resource to the huge variety of disciplines involved. A truly international work, its coverage ranges across risk issues pertinent to life scientists, engineers, policy makers, healthcare professionals, the finance industry, the military and practising statisticians. Drawing on the expertise of world-renowned authors and editors in this field this title will provide up-to-date material on drug safety, investment theory, public policy applications, transportation safety, public perception of risk, epidemiological risk, national defence and security, critical infrastructure, and program management. Pepper, Anthony. - Mortgage endowments: a FOS risk? - Staple Inn Actuarial Society, [RKN: 71757] Shelved at: Online only [Faculty: Online only] The Actuary (2009) December URL: http://www.the-actuary.org.uk/871265 Abstract: Anthony Pepper questions the appropriateness of the Financial Ombudsman Service risk assessment World Economic Forum; Citi; Marsh & McLennan Companies; Swiss Re; Wharton School Risk Center; Zurich Financial Services. - Global Risks 2010 : A Global Risk Network Report. - Geneva: - World Economic Forum, 2010. - No. pages: 52. [RKN: 72502] URL: http://www.weforum.org/pdf/globalrisk/globalrisks2010.pdf Abstract: This year’s report explores a set of risks that share a potential for wider systemic impact and are strongly linked to a number of significant, long-term trends. First, there are those which feature highly on the Global Risks Landscape and which predated the recession but have been exacerbated by its impact through greater resources constraints or short-term thinking. These include: Fiscal crises and the social and political implications of high unemployment Underinvestment in infrastructure, both new and existing, and its consequences for growth, resource scarcity and climate change adaptation Chronic diseases and their impact on both advanced economies and developing countries. The report also notes how concerns over further asset bubbles remain strong, as indicated by the Global Risk Network Partner’s assessment for the Global Risks Landscape. The other risks discussed in this report are equally systemic in nature and also require better global governance but they currently feature less prominently on the Global Risks Landscape. The report raises these risks to understand if there is an “awareness gap” around these areas and suggests that they should not be forgotten in the focus on an integrated and longer term view of risks. These risks include: transnational crime and corruption; biodiversity loss; and cybervulnerability. Young, Brendon; Coleman, Rodney. - Operational risk assessment: the commercial imperative of a more forensic approach. - Chichester: - John Wiley, 2009. - No. pages: xxvi, 430. [RKN: 38745] Shelved at: EEQ (Oxf) Abstract: This book provides investors with a sound understanding of the approaches used to assess the standing of firms and determine their true potential. It advocates a more forensic approach towards operational risk management and promotes transparency, which is seen as a facilitator of competition and efficiency as well as being a barrier to fraud, corruption and financial crime. Risk assessment is an integral part of informed decision making. The book deals with the 138
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Risk Management Reading List September 2010
effective management of operational risk, its primary aims being to improve the quality and stability of earnings and to reduce the probability of failure, by optimizing risk.
Risk aversion Cather, David A. - A Gentle Introduction to Risk Aversion and Utility Theory. - No. pages: 9. [RKN: 72292] [Faculty: RIS/MAN] Risk Management and Insurance Review (2010) 13 (1) : 127-145. Abstract: While the topics of risk aversion and utility theory have been discussed extensively in the academic literature on risk and insurance, this literature does not include a pedagogical discussion that is widely accessible for classroom use. This article provides a practical introduction to risk aversion that is designed for readers with little prerequisite course work in economics or statistics. We describe a simple model of insurance demand that can be applied to the property, liability, life, and health insurance markets. We also demonstrate how risk aversion affects a variety of real-life insurance decisions made under conditions of uncertainty, including how much the market will bear to pay for insurance administrative expenses and how demand varies for different types of auto insurance coverage. Exercises and practice problems are provided so that readers can test their mastery of the concepts presented in the article. An instructional note on using this article to teach risk aversion in the classroom is also provided. Dowd, Kevin; Cotter, John; Sorwar, Ghulam. - Spectral Risk Measures: Properties and Limitations. - Nottingham: - Centre for Risk & Insurance Studies, 2008. - (CRIS Discussion Paper Series – 2008.II). - No. pages: 28. [RKN: 72196] URL: http://www.nottingham.ac.uk/business/cris/papers/2008-2.pdf Abstract: Spectral risk measures (SRMs) are risk measures that take account of user riskaversion, but to date there has been little guidance on the choice of utility function underlying them. This paper addresses this issue by examining alternative approaches based on exponential and power utility functions. A number of problems are identified with both types of spectral risk measure. The general lesson is that users of spectral risk measures must be careful to select utility functions that fit the features of the particular problems they are dealing with, and should be especially careful when using power SRMs. Keywords: coherent risk measures, spectral risk measures, exponential utility, power utility Eisenhauer, Joseph G. - Relative Risk Aversion as an Arc Elasticity. - No. pages: 6. [RKN: 72294] [Faculty: RIS/MAN] Risk Management and Insurance Review (2010) 13 (1) : 161-172. Abstract: Risk aversion is the central reason why individuals purchase insurance and undertake other forms of risk management. But deriving the Pratt–Arrow coefficient of relative risk aversion from a utility function requires familiarity with differential calculus—a level of mathematics beyond the prerequisites for most introductory risk management courses. Thus, students are not exposed to one of the most important and fundamental concepts in the field unless and until they take more advanced courses. The present article demonstrates that relative risk aversion can be obtained as an arc elasticity using only elementary mathematics. This approach highlights the relationship between risk aversion and the demand for insurance, and integrates concepts from the principles of economics course, helping to unify the business curriculum. Numerical examples are easily computed and graphed using electronic spreadsheets, providing students with a hands-on learning experience. For sufficiently small risks, the arc elasticity measure reduces to the Pratt–Arrow coefficient, providing a platform for discussing the difference between large-scale and small-scale risk aversion in upper-level courses.
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Hammitt, James K; Haninger, Kevin; Treich, Nicolas. - Effects of Health and Longevity on Financial Risk Tolerance. - No. pages: 23. [RKN: 72018] Shelved at: Per: Geneva (Oxf) Geneva Risk and Insurance Review (2009) 34 (2) : 117-139. Abstract: We investigate the effects of health and life expectancy on tolerance of financial risk. Using a standard life-cycle model, we find that the effects of health and life expectancy on preferences over lifetime-income risk are theoretically ambiguous. However, risk tolerance is independent of health and life expectancy when utility takes one of the standard (harmonic absolute risk aversion) functional forms or when optimal consumption is constant over time. Our empirical results, using data from a stated-preference survey (n=2,795), suggest that financial risk tolerance is positively associated with both health and life expectancy; hence utility is not consistent with standard functional forms. Keywords: risk tolerance, health, longevity, life-cycle model, consumption, stated preference Iezzi, Stefano. - Investors’ risk attitude and risky behavior : a Bayesian approach with imperfect information. - Roma: - Banca d'Italia, 2008. - (Working paper no. 692). - No. pages: 33. [RKN: 72182] URL: http://www.bancaditalia.it/pubblicazioni/econo/temidi/td08/td692_08/entd692_08/en_tema_6 92.pdf Abstract: In a choice model of risky assets the role of risk aversion is analyzed. The measure of risk preference comes from a direct subjective survey question and it is considered as an imperfect information about the true risk attitude of investors. Misclassification between the true and the observed risk aversion is explicitly taken into account in the empirical model. A Data Augmentation approach, a Bayesian procedure for incomplete-data problems, is applied on data from the 2006 Survey of Household Income and Wealth by the Bank of Italy. Results indicate that when misclassification of investors is taken into account model estimates show the good performance of the subjective question when used as a control in a portfolio choice models. Moreover risk aversion emerges as a strong predictor of the probability to hold risky assets. The analysis also shows that probability of misclassification decreases as latent risk aversion increases, that means that more risk tolerant investors tend to be classified erroneously more often than less risk tolerant investors. Keywords: portfolio choice, risk attitude, misclassification error, Bayesian analysis. Li, Jingyuan. - Comparative higher-degree Ross risk aversion. - No. pages: 4. [RKN: 72406] Shelved at: Per: IME (Oxf) Insurance: Mathematics & Economics (2009) 45 (3) : 333-336. Abstract: We provide generalized comparative global conditions for higher-degree Ross risk aversion, which are similar to those studied by Ross for risk aversion. This generalization corresponds to the special cases of comparative risk aversion as developed by Ross (1981) and of comparative downside risk aversion as developed by Modica and Scarsini (2005). Keywords: Comparative statics; Higher-degree Ross risk aversion; Risk premium
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Risk Management Reading List September 2010
Malevergne, Y; Rey, B. - On cross-risk vulnerability. - No. pages: 6. [RKN: 72393] Shelved at: Per: IME (Oxf) Insurance: Mathematics & Economics (2009) 45 (2) : 224-229. Abstract: We introduce the notion of cross-risk vulnerability to generalize the concept of risk vulnerability introduced by Gollier and Pratt [Gollier, C., Pratt, J.W. 1996. Risk vulnerability and the tempering effect of background risk. Econometrica 64, 1109–1124]. While risk vulnerability captures the idea that the presence of an unfair financial background risk should make risk-averse individuals behave in a more risk-averse way with respect to an independent financial risk, crossrisk vulnerability extends this idea to the impact of a non-financial background risk on the financial risk. It provides an answer to the question of the impact of a background risk on the optimal coinsurance rate and on the optimal deductible level. We derive necessary and sufficient conditions for a bivariate utility function to exhibit cross-risk vulnerability both toward an actuarially neutral background risk and toward an unfair background risk. We also analyze the question of the sub-additivity of risk premia and show to what extent cross-risk vulnerability provides an answer. Keywords: Risk aversion; Risk vulnerability; Multivariate risk; Background risk Taboga, Marco. - The riskiness of corporate bonds. - Roma: - Banca d'Italia, 2009. - (Working paper no. 730). - No. pages: 45. [RKN: 72183] URL: http://www.bancaditalia.it/pubblicazioni/econo/temidi/td09/td730_09/en_td_730_09/en_tema _730.pdf Abstract: When the riskiness of an asset increases, then, arguably, some risk-averse agents that were previously willing to hold on to the asset are no longer willing to do so. Aumann and Serrano (2008) have recently proposed an index of riskiness that helps to make this intuition rigorous. We use their index to analyze the riskiness of corporate bonds and how this can change over time and across rating classes and how it compares to the riskiness of other financial instruments. We find statistically significant evidence that a number of financial and macroeconomic variables can predict time-variation in the riskiness of corporate bonds, including in ways one might not expect. For example, a higher yield-to-maturity lowers riskiness by reducing the frequency and the magnitude of negative holding-period returns. Keywords: riskiness, predictability, corporate bonds. Wang, Kili C; Huang, Rachel J; Tzeng, Larry Y. - Empirical evidence for advantageous selection in the commercial fire insurance market. [RKN: 39291] Shelved at: Per: Geneva (Oxf) Geneva Risk and Insurance Review (2009) 34(1) : 1-19. Abstract: De Meza and Webb (2001) indicated that individuals with a higher degree of risk aversion would demand more insurance and invest in self-protection to reduce risk probability when both the preference type and investment in self-protection are hidden from insurers. They referred to the negative correlation between market insurance and risk type as advantageous selection. However, the relationship between risk type and the degree of risk aversion is debatable in both theoretical and empirical research. This paper therefore proposes that advantageous selection could be supported from another angle by directly examining the relationships that exist among market insurance, self-protection, and risk probability. By focusing on the commercial fire insurance market, information on the purchase of market insurance, investment in self-protection, and fire accident records is hand-collected by means of a unique survey. It is found that firms purchasing market insurance have a greater tendency to channel efforts into self-protection. It is also found that firms expending effort on self-protection are less likely to suffer a fire accident. Furthermore, it is found that firms with commercial fire insurance have less chance of suffering a fire accident than those without such insurance. Each of the above three findings jointly supports the view that advantageous selection could play a critical role in the commercial fire insurance market.
Risk-based capital Kull, Andreas. - Sharing Risk: An Economic Perspective. - No. pages: 23. 141
[RKN: 71971]
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Risk Management Reading List September 2010
Shelved at: Per: Astin Bull (Oxf) [Faculty: JOU/AST] ASTIN Bulletin (2009) 39 (2) : 591-613. Abstract: We revisit the relative retention problem originally introduced by de Finetti using concepts recently developed in risk theory and quantitative risk management. Instead of using the Variance as a risk measure we consider the Expected Shortfall (Tail-Value-at-Risk) and include capital costs and take constraints on risk capital into account. Starting from a risk-based capital allocation, the paper presents an optimization scheme for sharing risk in a multi-risk class environment. Risk sharing takes place between two portfolios and the pricing of risk transfer reflects both portfolio structures. This allows us to shed more light on the question of how optimal risk sharing is characterized in a situation where risk transfer takes place between parties employing similar risk and performance measures. Recent developments in the regulatory domain (‘risk-based supervision’) pushing for common, insurance industry-wide risk measures underline the importance of this question. The paper includes a simple non-life insurance example illustrating optimal risk transfer in terms of retentions of common reinsurance structures. Keywords: Sharing and pooling of risk; reinsurance; optimal retentions; risk-based capital; capital cost
Risk characteristics Filipovic, Damir. - Multi-Level Risk Aggregation. - No. pages: 11. [RKN: 71969] Shelved at: Per: Astin Bull (Oxf) [Faculty: JOU/AST] ASTIN Bulletin (2009) 39 (2) : 565-575. Abstract: In this paper we compare the current Solvency II standard and a genuine bottom-up approach to risk aggregation. This is understood to be essential for developing a deeper insight into the possible differences between the diversification assumptions between the standard approach and internal models. Peng, Li; Lim, Andrew E B; Shanthikumar, J George. - Optimal risk transfer for agents with germs. [RKN: 39542] Shelved at: Per: IME (Oxf) Insurance: Mathematics & Economics (2010) 47 (1) : 1-12. Abstract: We introduce a new class of risk measures called generalized entropic risk measures (GERMS) that allow economic agents to have different attitudes towards different sources of risk. We formulate the problem of optimal risk transfer in terms of these risk measures and characterize the optimal transfer contract. The optimal contract involves what we call intertemporal sourcedependent quotient sharing, where agents linearly share changes in the aggregate risk reserve that occur in response to shocks to the system over time, with scaling coefficients that depend on the attitudes of each agent towards the source of risk causing the shock. Generalized entropic risk measures are not dilations of a common base risk measure, so our results extend the class of risk measures for which explicit characterizations of the optimal transfer contract can be found. Keywords: Convex risk measure; Optimal risk transfer; Risk sharing; Generalized entropic risk measure; Generalized exponential premium; Intertemporal source-dependent quotient sharing; Risk management
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Risk classification Driver, Rebecca; O'Neill, David; Peppes, Athena. - The role of risk classification in insurance : Understanding how insurance is priced. - Association of British Insurers, 2008. - (ABI research paper 11). - No. pages: 22. [RKN: 72505] URL: http://www.abi.org.uk/Publications/The_Role_of_Risk_Classification_in_Insurance1.aspx Abstract: This paper examines the economic benefits of risk classification. First, risk classification contributes to economic efficiency. It allows the price of insurance to better reflect the cost of providing insurance coverage. This is important because it enables a more efficient allocation of scarce resources. Secondly, it limits adverse selection. A single price for different risks may lead to higher average premiums, as there is cross-subsidisation of high risks by low risks. As a result, low risks might be encouraged to leave the market. For example, there is evidence of adverse selection in the health insurance market, following the introduction of rating restrictions in 47 USA states between 19911996. Thirdly, risk classification reduces moral hazard. As individuals bear a cost for their actions, it provides incentives to mitigate risky behaviour and therefore reduce potential losses. This can have positive external effects on the rest of the economy. For example, people might have an additional incentive to stop smoking, so that they can buy cheaper health insurance. This contributes to a healthier, more productive workforce. Finally, risk classification encourages innovation and competition within the insurance industry. Insurers have incentives to create new products and serve new markets. Consumers benefit from this. Telematic-based motor insurance schemes and the widespread availability of flood insurance for homes as a result of improved flood modelling demonstrate this. Kelliher, Patrick. - Classification of different risks [copies of slides only] - Institute of Actuaries and Faculty of Actuaries, 2010. - (Risk and Investment Conference 2010 Caledonian Hotel, Edinburgh, 13-15 June 2010). [RKN: 73020] URL: http://www.actuaries.org.uk/research-and-resources/documents/characteristicsdifferent-risks-working-party-slides Neuhaus, Walther. - Risk equalisation by mixed schemes. 2008. - No. pages: 34. [RKN: 69395] Shelved at: Per: AAJ (Oxf) [Faculty: AUS/ACT] Australian Actuarial Journal (2008) 14 (2) : 193-226. URL: http://www.actuaries.asn.au/PublicationAndResearch/Library/AAJ?docType=Publication_A AJ&docTypeID=227&year=Select%20Year Abstract: This paper shows how a risk equalisation scheme using risk-based capitation (RBC) can be mollified by adding partial equalisation of health insurers' differential utilisation rates. A risk equalisation scheme that combines RBC with partial equalisation of the 'utilisation component' is called a 'mixed scheme'. Besides introducing the reader to mixed equalisation schemes, the aim of this paper is twofold. Firstly, to illustrate by a simple, made-up example how a mixed scheme responds to self-selection effects more efficiently than a RBC scheme. Secondly, to outline how a mixed scheme could be designed in practice, using only statistics that are available in the Australian private health insurance market. Keywords: health insurance, community rating, risk equalisation
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Risk management Harvard Business Review on managing external risk. - Boston: - Harvard Business Press, 2009. No. pages: 218. [RKN: 63329] [Faculty: 658.155 22 HAR] Abstract: "Businesses today are operating amid unprecedented uncertainty. The greater the uncertainty, the more ominous and numerous are the threats to your company. To manage external risk, you'll need to select the right analytical tools and incorporate risk into your strategic decision making. This collection shows you how, providing powerful frameworks, tools, and examples for mastering this crucial competency." Enterprise risk management. Seminar, 3 July 2006. 2007. [RKN: 37908] Shelved at: Online only [Faculty: Online only] Contents: A US perspective on Enterprise Risk Management, by Godfrey Perrott and Marc Slutzky -- Enterprise risk management, by Rob Jones -- Risk geographies. Understanding risk in ndimensions, by Richard Baddon and Paul Coulthard -- ERM - doing it for real, by Colin Forrest -RAMP - Analysis and Management for Projects, by Chris Lewin -- Making strategic risk management work, by Neil Allan and Neil Cantle -- Tying it all together, by Stuart Robinson Risk management: code of practice : BS 31100:2008. - London: - BSI, 2008. - No. pages: 46. [RKN: 38976] Shelved at: BXP/739 (Oxf) Shelved at: BS 31100 2008 Abstract: BS 31100 is a key standard for risk management. It gives you an understanding on how to develop, implement and maintain effective risk management within your business. Using BS 31100 effectively can help you increase your company's effectiveness. BS 31100 establishes the principles and terminology for risk management. It also gives recommendations for the model, framework, process and implementation of risk management gained from experience and good practice. The role of the CRO in ERM - 12 May 2008. 2008. [RKN: 39014] Shelved at: online only Contents: The role of the CRO in ERM / Roger Dix -- The role of the CRO in ERM / Colin Ledlie The annuity bulk buy-out market : Abstract of a discussion meeting held by the Faculty of Actuaries on 18 February 2008. [RKN: 39665] Shelved at: Per: BAJ (Oxf); Per: BAJ (Lon) [Faculty: BRI/ACT] BAJ (2008) 14 (2) : 237-256. URL: http://www.actuaries.org.uk/research-and-resources/pages/access-journals Abstract: Report of a Sessional Meeting which takes the form of a panel discussion, asking the question 'Managing defined benefit risk management: is buy-out the future?' Anderson, Dan R; Anderson, Kenneth E. - Sustainability Risk Management. 2009. - No. pages: 14. [RKN: 69452] [Faculty: RIS/MAN] Risk Management and Insurance Review (2009) 12 (1) : 25-38. Abstract: This article features a panel discussion on sustainability risk management organized by Dan R. Anderson for the American Risk and Insurance Association 2007 annual meeting. The moderator, Mr. Dan Anderson, is the Leslie P. Schulz Professor of Risk Management and Insurance at the University of Wisconsin-Madison School of Business and author of Corporate Survival: The Critical Importance of Sustainability Risk Management. Anderson is a past president of the American Risk and Insurance Association (ARIA) and the 2007 winner of the Geneva Association/International Insurance Society Research Award, including a $10,000 stipend, for his paper, "Sustainability Risk Management as a Critical Component of Enterprise Risk Management (ERM): Global Warming—Climate Change Risks." He also was recently presented with the Risk Innovator Award by Risk and Insurance magazine for his work in sustainability risk management. The next panelist is Kenneth E. Anderson, Director of Aon's Environmental Services Group. Mr. 144
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Risk Management Reading List September 2010
Kenn Anderson is a graduate of the University of Wisconsin's Risk and Insurance Management program and has spent the last 20 years advising organizations about their exposure to environmental risk and designing, negotiating and implementing appropriate environmental insurance programs to meet specific client needs. He will emphasize business opportunities associated with sustainability risk management and the availability of insurance coverage for sustainability risks. Beasley, Mark; Pagach, Don; Warr, Richard. - Information Conveyed in Hiring Announcements of Senior Executives Overseeing Enterprise-Wide Risk Management Processes. - CAS, 2007. (CAS ERM symposium, 2007). [RKN: 38237] Shelved at: online only [Faculty: online only] URL: http://www.ermsymposium.org/2007/pdf/papers/Pagach.pdf Abstract: Enterprise risk management (ERM) is the process of analyzing the portfolio of risks facing the enterprise to ensure that the combined effect of such risks is within an acceptable tolerance. While ERM adoption is on the rise, little academic research exists about the costs and benefits of ERM. Proponents of ERM claim that ERM is designed to enhance shareholder value; however, portfolio theory suggests that costly ERM implementation would be unwelcome by shareholders who can use less costly diversification to eliminate idiosyncratic risk. This study examines equity market reactions to announcements of appointments of senior executive officers overseeing the enterprise’s risk management processes. Based on a sample of 120 announcements from 1992-2003, we find that the univariate average two-day market response is not significant, suggesting that a broad definitive statement about the benefit or cost of implementing ERM is not possible. However, our multivariate analysis reveals that market responses to such appointments are significantly positively associated with a firm’s size and prior earnings volatility, and negatively associated with the amount of cash on hand relative to liabilities and leverage on the balance sheet. These results are confined to non-financial firms, possibly be due to the regulatory requirements for enterprise risk management that already exist for financial firms. We conclude that the costs and benefits of ERM are firm-specific. Subject Areas: Enterprise risk management, chief risk officers (CROs), value creation Bellis, Clare S (ed); Shepherd, John A (ed); Klugman, Stuart A; Lyon, Richard H S (ed). Understanding actuarial management: the actuarial control cycle. - 2nd ed. - Sydney: - Institute of Actuaries of Australia, 2010. - No. pages: 630. [RKN: 39617] Shelved at: EM (Oxf) [Faculty: 368.01 BEL] URL: http://www.soa.org/files/pdf/book-understanding-act.pdf Contents: -- Risk management frameworks -- Being professional -- The need for financial products -- The context of actuarial work -- Applying risk management -- Regulation -- Product design -Modelling -- Data and assumptions -- The need for capital -- Valuing liabilities -- Pricing -- Assets -Solvency -- Profit -- Monitoring experience -- Responding to experience -- Applying the actuarial control cycle Bernard, C; Chen, A. - On the Regulator–Insurer Interaction in a Structural Model. 2008. [RKN: 38567] Shelved at: Online only [Faculty: Online only] Actuarial Research Clearing House (ARCH) (2008) 1 URL: http://www.soa.org/news-and-publications/publications/proceedings/arch/arch-2008iss1.aspx Abstract: In this paper, we provide a new insight to the previous work of Briys and de Varenne [1994], Grosen and Jørgensen [2002] and Chen and Suchanecki [2007]. We show that if the insurance company follows a risk management strategy, it can significantly change the risk exposure of the company, and that it should thus be taken into account by the regulators. We first study how the regulator establishes regulation intervention levels in order to control for instance the default probability of the insurance company (under the real world probability measure). This part of the analysis is based on a constant volatility and there exists a one-to-one relation between the optimal regulation level and the volatility. Given that the insurance company is informed of the regulatory rules, we study how results can be significantly different when the insurance company 145
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Risk Management Reading List September 2010
follows a risk management strategy with non-constant volatilities. We thus highlight the limits of prior literature and believe that the value of the risk management of the company should be included in the risk exposure estimation and the market value of liabilities as well. Bernard, Carole; Chen, An. - On the regulator-insurer-interaction in a structural model. - Ontario: University of Waterloo, 2008. - (Institute of Insurance and Pension Research Research Report 0801). - No. pages: 24. [RKN: 69975] Shelved at: Online only [Faculty: Online only] URL: http://www.stats.uwaterloo.ca/stats_navigation/IIPR/IIPR-Reports.shtml Abstract: In this paper, we provide a new insight to the previous work of Briys and de Varenne [1994], Grosen and Jørgensen [2002] and Chen and Suchanecki [2007]. We show that if the insurance company follows a risk management strategy, it can significantly change the risk exposure of the company, and that it should thus be taken into account by regulators. We first study how the regulator establishes regulation intervention levels in order to control for instance the default probability of the insurance company. This part of the analysis is based on a constant volatility and there exists a one-to-one relation between the optimal regulation level and the volatility. Given that the insurance company is informed of regulatory rules, we study how results can be significantly different when the insurance company follows a risk management strategy with non-constant volatilities. We thus highlight some limits of prior literature and believe that the value of the company’s risk management should be included in the risk exposure estimation and the market value of liabilities as well. Keywords: Life insurance policies, Default risk, Regulatory rule. Bernard, Carole; Tian, Weidong. - Insurance market effects of risk management metrics. [RKN: 39619] Shelved at: Per: Geneva (Oxf) Geneva Risk and Insurance Review (2010) 35 (1) : 47-80. Abstract: We extend the classical analysis on optimal insurance design to the case when the insurer implements regulatory requirements (Value-at-Risk). Presumably, regulators impose some risk management requirement such as VaR to reduce the insurers’ insolvency risk, as well as to improve the insurance market stability. We show that VaR requirements may better protect the insured and improve economic efficiency, but have stringent negative effects on the insurance market. Our analysis reveals that the insured are better protected in the event of greater loss irrespective of the optimal design from either the insured or the insurer perspective. However, in the presence of the VaR requirement on the insurer, the insurer's insolvency risk might be increased and there are moral hazard issues in the insurance market because the optimal contract is discontinuous. Bodoff, Neil M. - Capital Allocation by Percentile Layer. 2007. - (CAS ERM Symposium, 2007). [RKN: 38238] Shelved at: online only [Faculty: online only] URL: http://www.ermsymposium.org/2007/pdf/papers/Bodoff.pdf Abstract: Motivation. Capital allocation can have substantial ramifications upon measuring risk adjusted profitability as well as setting risk loads for pricing. Current allocation methods that emphasize the tail allocate too much capital to extreme events; “capital consumption” methods, which incorporate relative likelihood, tend to allocate insufficient capital to highly unlikely yet extremely severe losses. Method. In this paper I develop a new formulation of the meaning of holding capital equal to the Value at Risk. The new formulation views the total capital of the firm as the sum of many percentile layers of capital. Thus capital allocation varies continuously by layer and the capital allocated to any particular loss scenario is the sum of allocated capital across many percentile layers. Results. Capital Allocation by Percentile Layer produces capital allocations that differ significantly from other common methods such as VaR, TVaR, and coTVaR. Conclusions. Capital Allocation by Percentile Layer has important advantages over existing methods. It highlights a new formulation of Value at Risk and other capital standards, recognizes the capital usage of losses that do not extend into the tail, and captures the disproportionate 146
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Risk Management Reading List September 2010
capital usage of severe losses. Keywords. Capital Allocation; Percentile Layer of Capital; Value at Risk; Enterprise Risk Management; Risk Load; Risk Adjusted Profitability Bowser, Marcus; MacDonald, Jon. - The alchemy of risk. [RKN: 38386] Shelved at: Per: Actuary (Oxf); Per: Actuary (Lon) The Actuary (2008) July : 30-31. URL: http://www.the-actuary.org.uk Abstract: Article on how insurers can manage risk effectively and use it to generate profit Brazauskas, V. - A Nonpararmetric Test for Comparing the Riskiness of Portfolios [abstract only] 2008. [RKN: 38559] Shelved at: Online only [Faculty: Online only] Actuarial Research Clearing House (ARCH) (2008) 1 URL: http://www.soa.org/news-and-publications/publications/proceedings/arch/arch-2008iss1.aspx Abstract: Inspired by the problem of testing hypotheses about the equality of several risk measure values, we find that the ""nested L-statistic"" -- a notion introduced herein is natural and particularly convenient. Indeed, the test statistic that we explore in this paper is a nested L-statistic. We discuss large-sample properties of the statistic, investigate its performance using a simulation study, and consider an example involving the comparison of risk measure values where the risks of interest are those associated with tornado damage in different time periods and different regions. Cain, Brianna; Zurbruegg, Ralf. - Can switching between risk measures lead to better portfolio optimization? - No. pages: 12. [RKN: 72096] Shelved at: Per: J.Asset Man (Oxf) Journal of Asset Management (2010) 10 (6) : 358-369. Abstract: This article proposes a technique that involves switching between risk measures in different market environments, to capture the well-documented dynamic nature of risk within a portfolio optimization setting. In-sample results show categorically that switching between various measures, such as CVaR, time-varying (GARCH) variances and simple standard deviations, can lead to a better performance than using any single measure. Using a logistic probability model to determine when to switch between alternatives, out-of -sample results also show positive results. Given that this study only applies a basic switching system, it lends itself to easy application by practitioners through its simplicity, intuitive appeal and computational feasibility. Keywords: volatility, variance, CvaR, GARCH, model switching, portfolio allocation Cannon, Chris; Dunn, Neil; Singh, Budhi; Skinner, Justin. - Fit for purpose. - Staple Inn Actuarial Society, - No. pages: 2. [RKN: 72077] Shelved at: Per: Actuary (Oxf); Per: Actuary (Lon) [Faculty: SIA/ACT] The Actuary (2010) Jan / Feb : 26-27. URL: http://www.the-actuary.org.uk Abstract: Chris Cannon asks Neil Dunn, Budhi Singh and Justin Skinner how actuaries shape up as risk managers in the insurance market
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Risk Management Reading List September 2010
Caslin, John; Fadden, Damian. - How risky is my investment? - Dublin: - Society of Actuaries in Ireland, 2007. - No. pages: 26. [RKN: 72211] URL: http://web.actuaries.ie/Events%20and%20Papers/Events%202007/How%20Risky%20is%20m y%20Investment%20-paper%20.pdf?q=Events%20and%20Papers/Events%202007/How%20Risky%20is%20my%20Inves tment%20-paper-%20.pdf Abstract: The aims of this paper are: (i) to illustrate one possible way in which risk might be illustrated so that consumers might gain a better understanding of the market risk of different investment funds. The approach results in a relatively simple illustration of the likely risk of a fund generated using a simple statistical technique; (ii) to remind investors of the need to adjust for risk when comparing the investment performance of different managers even where the managers have similar investment objectives; and (iii) recognising that investors' choices are not restricted to single asset classes, to quantify the benefits of diversification for investors when risk is lowered without lowering potential returns by combining assets that do not have their periods of positive and negative returns at the same time. Chan, Kam C; Liano, Kartono. - Influential articles, journals and institutions in risk management and insurance. 2009. - No. pages: 15. [RKN: 69456] [Faculty: RIS/MAN] Risk Management and Insurance Review (2009) 12 (1) : 125-139. Abstract: We use a threshold citation approach to measure the influence of articles, journals, and institutions in risk management and insurance research. The three frequently cited articles in risk management and insurance research are "Increasing Risk: I. A Definition" by Rothschild and Stiglitz (1970), "Precautionary Saving in the Small and in the Large" by Kimball (1990), and "Equilibrium in Competitive Insurance Markets: An Essay on the Economics of Imperfect Information" by Rothschild and Stiglitz (1990). Journal of Risk and Insurance, Econometrica, and Journal of Political Economy are the three influential journals in risk management and insurance research. Furthermore, the five influential institutions in risk management and insurance research are the University of Pennsylvania, Harvard University, the University of Rochester, the University of Michigan, and Massachusetts Institute of Technology. Chaplin, Mark; Leung, Vanessa. - Does your ERM sing and dance? [RKN: 39197] Shelved at: online only [Faculty: online only] The Actuary (2009) June : 28. URL: http://www.the-actuary.org.uk Abstract: Article highlighting the moves that will make your Enterprise Risk Management (ERM) framework more dynamic. Chappell, Christopher; Jakhria, Parit; Marais, Johann; Smith, Andrew. - Understanding the risks in new asset classes. - Institute of Actuaries and Faculty of Actuaries, 2007. - (Finance, Investment and Risk Management Conference 2007 Seminar, 17-19 June 2007, Conrad Hilton Hotel, Dublin). [RKN: 72833] URL: http://www.actuaries.org.uk/research-and-resources/documents/understanding-risksnew-asset-classes Abstract: This paper reviews the mean-variance (M-V) framework and highlights some issues that investors should consider before adding the new, more exotic asset classes to their portfolios.
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Chen, H; Cox, S. - An Option–based Operational Risk Management on Pandemics. 2008. [RKN: 38541] Shelved at: Online only [Faculty: Online only] Actuarial Research Clearing House (ARCH) (2008) 1 URL: http://www.soa.org/news-and-publications/publications/proceedings/arch/arch-2008iss1.aspx Abstract: In this paper, we employ the theory of real option pricing to address problems in the area of operational risk management. Particularly, we develop a two-stage model to help firms determine the optimal triggers in the event of an influenza pandemic. In the first stage, we propose a regime-dependent epidemic model to simulate the spread of the virus, depending on whether the firm is active or inactive. In the second stage, we view the reactivation decision as a call option and the suspension decision as a put option, and use dynamic programming method to determine the optimal switching thresholds. Our numerical experiments suggest that given the parameter values in our paper, it is optimal for the firm to suspend the business (or parts of its business) when the fraction of infected employees is higher than 18%, and to reactivate the operation anytime the fraction drops to 3%. When considering the uncertainty in the future, firms are more conservative about the decisions of suspension and reactivation. If the firm incurs switching costs, the suspension threshold increases with costs, while the reactivation threshold decreases with costs. By implementing policies to control the disease, firms can meet their social obligations and in the meantime, increase their values in both regimes. Key Words: Real Option Valuation, Epidemic Risk, Operational Risk Management, RegimeSwitching Model, Dynamic Programming Chen, Hua; Cox, Samuel H. - An option-based operational risk management model for pandemics. 2009. - No. pages: 23. [RKN: 69511] Shelved at: Per: NAAJ (Oxf); Per NAAJ (Lon) [Faculty: NOR/AME] North American Actuarial Journal (2009) 13 (1) : 54-76. URL: http://www.soa.org/library/journals/north-american-actuarial-journal/2009/no-01/naaj2009-vol13-no1-chen.pdf Abstract: In this paper we employ the theory of real option pricing to address problems in the area of operational risk management. We develop a two-stage model to help firms determine the optimal suspension-reactivation triggers in the events of pandemics. In the first stage, we propose a regime-dependent epidemic model to simulate the spread of the virus, depending on whether the firm is active or inactive. In the second stage, we view the reactivation decision as a call option and the suspension decision as a put option, and use dynamic programming methods to obtain the optimal switching thresholds. Our method can be regarded as a quantitative implementation of the CDC’s instructions for pandemic preparation. We find that when they take the uncertainty of disease transmission into consideration, firms are more conservative about the decisions of suspension and reactivation. We also find that when firms incur switching costs, the suspension threshold increases with costs, whereas the reactivation threshold decreases with costs. By adopting disease control policies, firms can increase their values in both regimes. Chew, Donald H. - Corporate risk management: theory and practice. - New York: - Columbia University Press, 2007. - No. pages: 480. [RKN: 69356] Shelved at: UHG/AZM (Oxf) [Faculty: 368.01 CHE LOST] Abstract: More than 30 leading scholars and finance practitioners discuss the theory and practice of using enterprise-risk management (ERM) to increase corporate values. ERM is the corporatewide effort to manage the right-hand side of the balance sheet - a firm's total liability structure - in ways that enable management to make the most of the firm's assets. While typically working to stabilize cash flows, the primary aim of a well-designed risk management program is not to smooth corporate earnings, but to limit the possibility that surprise outcomes can threaten a company's ability to fund its major investments and carry out its strategic plan.Contributors summarize the development and use of risk management products and their practical applications. Case studies involve Merck, British Petroleum, the American airline industry, and United Grain Growers, and the conclusion addresses a variety of topics that include the pricing and use of certain derivative securities, hybrid debt, and catastrophe bonds. All the articles that comprise this book were first 149
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Risk Management Reading List September 2010
published in the "Journal of Applied Corporate Finance". Morgan Stanley's ownership of the journal is a reflection of its commitment to identifying outstanding academic research and promoting its application in the practicing corporate and investment communities. CRMPG III; Corrigan, E Gerald. - Containing systematic risk : the road to reform : The report of the CRMPG III. 2008. - No. pages: 138. [RKN: 38533] Shelved at: online only URL: http://www.crmpolicygroup.org/docs/CRMPG-III.pdf Abstract: The scope of the CRMPG III initiative was designed to focus its primary attention on the steps that must be taken by the private sector to reduce the frequency and/or severity of future financial shocks while recognizing that such future shocks are inevitable, in part because it is literally impossible to anticipate the specific timing and triggers of such events. The CRMPG III effort has focused its attention on four closely related and forward-looking aspects of financial reform and rehabilitation, including: (1) a reconsideration of the standards for consolidation under US GAAP that contemplates a significant shift of currently off-balance sheet entities to on-balance sheet status; (2) measures to better understand and manage complex financial instruments with particular emphasis on their distribution and how their risk sensitivities are disclosed; (3) risk monitoring and risk management with particular emphasis on the role of sound corporate governance and the relationship between liquidity, leverage and capital adequacy; and (4) a series of sweeping measures to enhance the resiliency of credit markets in particular and financial markets more generally with particular attention to strengthening the safeguards associated with the OTC derivatives markets with emphasis on credit default swaps (CDS). Among other things, this section of the Report urges swift industry action to create a clearinghouse for OTC derivatives, starting with CDS. Degen, M; Lambrigger, D D; Segers, J. - Risk concentration and diversification : Second-order properties. - IAP Statistics Network, 2009. - (Technical report 09028). - No. pages: 19. [RKN: 72241] URL: http://www.stat.ucl.ac.be/ISpub/tr/2009/TR09028.pdf Abstract: The quantification of diversification benefits due to risk aggregation plays a prominent role in the (regulatory) capital management of large firms within the financial industry. However, the complexity of today’s risk landscape makes a quantifiable reduction of risk concentration a challenging task. In the present paper we discuss some of the issues that may arise. The theory of second-order regular variation and second-order subexponentiality provides the ideal methodological framework to derive second-order approximations for the risk concentration and the diversification benefit. Keywords: Diversification, second-order regular variation, second-order subexponentiality, subadditivity, Value-at-Risk Degen, Matthias; Lambrigger, Dominik D; Segers, Johan. - Risk concentration and diversification : Second-order properties. - No. pages: 6. [RKN: 72522] Shelved at: Per: IME (Oxf) Insurance: Mathematics & Economics (2010) 46 (3) : 541-546. Abstract: The quantification of diversification benefits due to risk aggregation plays a prominent role in the (regulatory) capital management of large firms within the financial industry. However, the complexity of today's risk landscape makes a quantifiable reduction of risk concentration a challenging task. In the present paper we discuss some of the issues that may arise. The theory of second-order regular variation and second-order subexponentiality provides the ideal methodological framework to derive second-order approximations for the risk concentration and the diversification benefit. Keywords: Diversification ; Second-order regular variation ; Second-order subexponentiality ; Subadditivity ; Value-at-Risk
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Risk Management Reading List September 2010
Deighton, S P; Dix, Roger C; Graham, J R; Skinner, J M E. - Governance and risk management in United Kingdom insurance companies. - London: - The Actuarial Profession. Institute of Actuaries and Faculty of Actuaries, 2009. - No. pages: 54. [RKN: 38980] Shelved at: ifp 03/09; BXP/511 pam (Oxf) [Faculty: JOU/INS] URL: http://www.actuaries.org.uk/research-and-resources/documents/governance-and-riskmanagement-uk-insurance-companies Abstract: For some while there has been a growing awareness from both internal and external stakeholders that the governance and risk management in United Kingdom insurance companies needed to be enhanced. The proposed European Union Solvency II Directive makes this very explicit and the current economic turmoil has put a much stronger emphasis on the whole process: it is being seen as the right thing to do, rather than simply a regulatory requirement. In this paper, the authors set out the background to and recent history of governance for UK insurance companies, and consider how enterprise risk management can bring together the various control frameworks needed to support that governance. Whilst no two companies are the same, and hence the solutions to these issues will vary, there are several common themes linked to successful implementation. Similarly, various barriers to success are identified, together with solutions to resolve them. Derivatives Working Party of the Faculty & Institute of Actuaries. - The credit spread "puzzle". Extract from “Credit Derivatives”, Prepared by the Derivatives Working Party of the Faculty & Institute of Actuaries and presented to the Faculty of Actuaries, January 2007. - Institute of Actuaries and Faculty of Actuaries, 2007. - (Finance, Investment and Risk Management Conference 2007 Seminar, 17-19 June 2007, Conrad Hilton Hotel, Dublin). [RKN: 72830] URL: http://www.actuaries.org.uk/research-and-resources/documents/extract-creditderivatives-prepared-derivatives-working-party-facul Dix, Roger. - Risky business. [RKN: 39194] Shelved at: online only [Faculty: online only] The Actuary (2009) June : 8. URL: http://www.the-actuary.org.uk Abstract: Roger Dix acknowledges the burgeoning area of risk management as an actuarial career option, but cautions against complacency. Doff, René. - Risk management for insurers : Risk control, economic capital and Solvency II. Risk Books, 2007. - No. pages: 204. [RKN: 39273] [Faculty: 519.287 DOF] Abstract: This book will help the reader to quickly get to grips with risk management terms and techniques and how they relate specifically to the insurance industry. It also demonstrates how Solvency II is already shaping the regulatory agenda and its likely impact on the insurance industry. Risk Management for Insurers is an accessible reference for the whole insurance industry, identifying and discussing how to measure and manage seven major risk types such as: Market risk, including interest rate and equity risk; Credit risk; Liquidity risk; Non-life risk; Life risk; Operational risk; and Business risk. The main benefit of Risk Management for Insurers is that it emphasizes the practical risk management concepts, rather than technical calculations and detailed theory, making it easier for a layman to understand. All concepts and terms are applied to clear illustrative examples and the regulation and supervision developments are simple to follow. It is recommended for risk managers, actuaries, controllers, accountants, auditors, corporate finance managers, underwriting and reinsurance managers, investment managers, equity analysts and financial consultants.
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Risk Management Reading List September 2010
Dorey, Martyn; Papastamati, Konstantina. - Variable Dependency ‘D’ Distributions : A General Framework to Generate Skew Elliptical Multivariate Copulas with Polytonal Dependency. Institute of Actuaries and Faculty of Actuaries, 2007. - (Finance, Investment and Risk Management Conference 2007 Seminar, 17-19 June 2007, Conrad Hilton Hotel, Dublin). - No. pages: 32. [RKN: 72832] Abstract: A simple procedure generating a multivariate density function that satisfies high asymmetry and polytonal dependency is defined and studied. Traditional approaches to multivariate distributions develop functions that first establish joint density, with dependency inferred, and often poorly understood, as an adjunct at the end. The result is that separate copula designs, such as the Clayton or skew-T, are sought to capture particular dependency structures. The alternative approach presented here generates a joint density function after the dependency is explicitly predefined. This approach, which we have termed the D distribution, has produced a variety of satisfactory results relating to different univariate and multivariate distributions through the choice of an appropriate dependency transfer function. Here we show a new application of the transfer function to construct the flexible and hence highly applicable D distribution and D copula. This concept is connected to copulas, neural networks, skew normal distributions and conditioning on hidden variables. Key Words: Transfer functions, neural networks, polytonal dependency, local dependence function, copulas, multivariate copulas, skew multivariate distributions, skew-normal, skewCauchy, skew-T. Dowd, Kevin; Bartlett, David L; Chaplin, Mark; Kelliher, Patrick O J; O'Brien, Chris D. - Risk management in the UK insurance industry: the changing state of practice. [RKN: 38029] Shelved at: BXP pam (Oxf) International Journal of Financial Services Management (2008) 3 : 5-23. Abstract: This paper reviews a number of recent surveys relevant to risk management by UK insurers. These include the results of four surveys specifically on UK insurers. Our findings suggest that the risk management practices of UK insurers are variable, generally behind best practices in adjacent sectors, and in some cases are a cause of concern. However, we also find that they have been improving significantly. Dunn, Gary. - A Multiple Period Gaussian Jump to Default Risk Model. - London: - Financial Services Authority, 2008. - (FSA Occasional paper 29). - No. pages: 37. [RKN: 72497] URL: http://www.fsa.gov.uk/Pages/Library/research/economic/Occasional/index.shtml Abstract: The single-factor Gaussian copula method is a common approach for default risk modelling. However, the model deals with the distribution of default losses over a single period. Proposals currently under consideration for calculating a ‘jump to default’ risk capital charge for the trading book incorporate the concept of a liquidity horizon, which will be typically shorter than the capital horizon over which the jump to default risk charge has to be calculated. The liquidity horizon specifies a period over which a portfolio can be rebalanced. Depending on the rebalancing “rules” adopted (such as the “constant level of risk” assumption), an actively managed portfolio can exhibit a more benign default loss distribution relative to that of a constant portfolio over a given investment (or capital) horizon. This paper develops a general multi-period Gaussian copula model that incorporates the dynamics of default risk over time. Filipovic, Damir. - Multi-Level Risk Aggregation. - No. pages: 11. [RKN: 71969] Shelved at: Per: Astin Bull (Oxf) [Faculty: JOU/AST] ASTIN Bulletin (2009) 39 (2) : 565-575. Abstract: In this paper we compare the current Solvency II standard and a genuine bottom-up approach to risk aggregation. This is understood to be essential for developing a deeper insight into the possible differences between the diversification assumptions between the standard approach and internal models.
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Risk Management Reading List September 2010
Finance, Investment & Risk Management Board Working Party. - Practical implementation of Liability Driven Investment. - Institute of Actuaries and Faculty of Actuaries, 2007. - (Finance, Investment and Risk Management Conference 2007 Seminar, 17-19 June 2007, Conrad Hilton Hotel, Dublin). [RKN: 72837] Friedman, Joseph; Phillips, Herbert E. - The Downside Risk of Postponing Social Security Benefits. - Philadelphia, PA: - Department of Economics, Temple University, 2010. - (DETU Working Paper 10-08). - No. pages: 27. [RKN: 72620] URL: http://www.temple.edu/cla/economics/research/documents/detu_10_08.pdf Abstract: The point that only live participants may initiate or receive Social Security benefits is typically overlooked. Thus a postponement of benefits at any eligible retirement age may be likened to participation in a game of chance in which the participant is subject to a variant form of gambler’s ruin at death. The typical assumption, therefore, that a participant should automatically opt for a postponement if the present value of the resulting benefits, discounted to breakeven age, higher than the present value of the opportunity costs, carries with it the implication of risk neutrality in relation to the consequence of dying before reaching breakeven death age. While this implication of risk neutrality is sometimes correct, it is more likely not. In marked contrast to conclusions reached in previous studies, this paper shows that a single Social Security participant, who is risk averse as regards the chances - and contingent consequences - of dying before reaching breakeven death age, would be well advised to initiate benefits at the earliest age at which he or she would not be subject to earned income tax penalties. Fries, Christian P; Joshi, Mark S. - Conditional analytic Monte-Carlo scheme of auto-callable products. - Victoria: - University of Melbourne, 2008. - (Centre for Actuarial Studies, University of Melbourne, Research Paper no. 173). - No. pages: 26. [RKN: 69459] [Faculty: UNI/MEL] Abstract: In this paper we present a generic method for the Monte-Carlo pricing of (generalized) auto-callable products (aka. trigger products), ie., products for which the payout function features a discontinuity with a (possibly) stochastic location (the trigger) and value (the payout). The Monte Carlo pricing of the products with discontinuous payout is known to come with a high Monte-Carlo error. The numerical calculation of sensitivities (ie., partial derivatives) of such prices by finite differences gives very noisy results, since the Monte-Carlo approximation (being a finite sum of discontinuous functions) is not smooth. Additionally, the Monte-Carlo error of the finitedifference approximation explodes as the shift size tends to zero. Our method combines a product specific modification of the underlying numerical scheme, which is to some extent similar to an importance sampling and/or partial proxy simulation scheme and a reformulation of the payoff function into an equivalent smooth payout. From the financial product we merely require that hitting of the stochastic trigger will result in a conditionally analytic value. Many complex derivatives can be written in this form. A class of products where this property is usually encountered are the so called auto-callables, where a trigger hit results in cancellation of all future payments except for one redemption payment, which can be valued analytically, conditionally on the trigger hit. From the model we require that its numerical implementation allows for a calculation of the transition probability of survival (ie, non-trigger hit). Many models allow this, eg, Euler schemes of Ito processes, where the trigger is model primitive. The method presented is effective across a large range of cases where other methods fail, eg small finite difference shift sizes or short time to trigger reset (approaching maturity); this means that a practitioner can use this method and be confident that it will work consistently. Fulcher, Paul. - The credit spread "puzzle" [copies of slides only] - Institute of Actuaries and Faculty of Actuaries, 2007. - (Finance, Investment and Risk Management Conference 2007 Seminar, 17-19 June 2007, Conrad Hilton Hotel, Dublin). [RKN: 72831] URL: http://www.actuaries.org.uk/research-and-resources/documents/credit-spread-puzzleliquidity-premium-and-implications-annuity-bus
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Risk Management Reading List September 2010
Fulcher, Paul; Catchpole, Steven. - Practical implementation of Liability Driven Investment [copies of slides only] - Institute of Actuaries and Faculty of Actuaries, 2007. - (Finance, Investment and Risk Management Conference 2007 Seminar, 17-19 June 2007, Conrad Hilton Hotel, Dublin). [RKN: 72838] URL: http://www.actuaries.org.uk/research-and-resources/documents/presentationpractical-implementation-liability-driven-investment-w Furman, Edward; Landsman, Zinoviy. - Multivariate Tweedie distributions and some related capital-at-risk analyses. - No. pages: 11. [RKN: 72456] Shelved at: Per: IME (Oxf) Insurance: Mathematics & Economics (2010) 46 (2) : 351-361. Abstract: We study a multivariate extension of the univariate exponential dispersion Tweedie family of distributions. The class, referred to as the multivariate Tweedie family (MTwF), on the one hand includes multivariate Poisson, gamma, inverse Gaussian, stable and compound Poisson distributions and on the other hand introduces a high variety of new dependent probabilistic models unstudied so far. We investigate various properties of MTwF and discuss its possible applications to financial risk management. Keywords: Exponential dispersion models; Multivariate Tweedie family; Cauchy’s functional equations; Risk capital allocations; The tail conditional expectation risk measure Gatzlaff, Kevin M; McCullough, Kathleen A. - The Effect of Data Breaches on Shareholder Wealth. - No. pages: 12. [RKN: 72289] [Faculty: RIS/MAN] Risk Management and Insurance Review (2010) 13 (1) : 61-83. Abstract: Many companies face the risk of a data breach exposing stored personal information of customers and employees. The frequency of such incidents has been increasing over time and can result in significant costs for the affected firm. This article examines the stock market's assessment of the cost of data breaches at publicly traded companies in which personal information such as customer and/or employee data are exposed. Using event study methodology on a sample of 77 events between the beginning of 2004 and the end of 2006, we find that the overall effect of a data breach on shareholder wealth is negative and statistically significant. Based on a cross-sectional analysis of the cumulative abnormal returns, we find a negative association between market reaction and firms that are less forthcoming about the details of the breach. We also find that firms with higher market-to-book ratios experience greater negative abnormal returns associated with a data breach. Further, we find that firm size and subsidiary status mitigate the negative effect of a data breach on the firm's stock price and that the negative market reaction to a data breach is more significant in the most recent time periods of the sample. Godhole, Deepak. - From silo based to integrated risk management - enterprise risk management. [RKN: 39307] Shelved at: Per: Bimaquest (Oxf) Bimaquest (2009) 9 (2) : 1-20. Abstract: ERM is essentially a process effected by an entity's board of directors, top management and applied in strategy setting across the enterprise, designed to identify potential events that may affect the entity, manage those risk which are within its risk appetite, transfer the rest and provide reasonable assurance regarding achievement of the overall corporate objectives. The successful implementation or ERP in an organization depends on culture, intellectual capital, skills/talent, data availability, IT processes and top management involvement, support and commitment. Implementation of ERM has made a great deal of progress and shareholders have benefited. Guszcza, James. - Black swans and red herrings. [RKN: 39325] Shelved at: Per: Actuary (Oxf); Per: Actuary (Lon) The Actuary (2009) August : 24-26. URL: http://www.the-actuary.org.uk Abstract: James Guszcza explores model risk in the context of outlier events and Knightian uncertainty. He discusses the three faces of risk (process risk, parameter risk, and model risk). 154
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Risk Management Reading List September 2010
Harrington, Scott E. - The financial crisis, systemic risk, and the future of insurance regulation. No. pages: 35. [RKN: 71775] Shelved at: Per: J.Risk Ins (Oxf) [Faculty: JOU/RIS] Journal of Risk and Insurance (2009) 76 (4) : 785-819. Abstract: This article considers the role of American International Group (AIG) and the insurance sector in the 2007–2009 financial crisis and the implications for insurance regulation. Following an overview of the causes of the crisis, I explore the events and policies that contributed to federal government intervention to prevent bankruptcy of AIG and the scope of federal assistance to AIG. I discuss the extent to which insurance in general poses systemic risk and whether a systemic risk regulator is desirable for insurers or other nonbank financial institutions. The last two sections of the article address the financial crisis's implications for proposed optional and/or mandatory federal chartering and regulation of insurers and for insurance regulation in general. Haste, Andy. - Risky Business: Insurance and Society. - London: - Chartered Insurance Institute. CII, 2009. - No. pages: 4. [RKN: 39353] Shelved at: online only [Faculty: online only] URL: http://www.cii.co.uk/downloaddata/TP23_HasteRSA_Managing_Risk_18Aug2009.pdf Abstract: This article, the first of a series of four on risk and insurance, explores the basic elements of risk management, the value it can add to peoples’ freedom and choices and the future challenges that insurers face in taking on and assessing levels of risk. Insurance provides an important and often forgotten social value to consumers and businesses. Its benefits range from providing security in the face of potentially catastrophic losses at home or abroad to providing freedom from liability allowing firms to explore new and dynamic fields. While the basic principle of providing peace of mind has stayed the same for over 300 years, the processes for doing this have become increasingly sophisticated. New techniques such as accurate flood mapping and telematics technology have resulted in more competitive propositions in both commercial and personal lines. Insurance has also had the effect of influencing behaviour, such as incentivising safer or more climate-friendly consumers or more sustainable business practices. Looking ahead, insurers and government will need to develop mutual working and understanding. In the area of climate change, underwriters must contend with the need to develop realistic risk modelling for related scenarios despite not being aware of their full impact or likelihood. Meanwhile, policymakers must consider the unintended consequences that otherwise well-intentioned legislation could hold for insurers. Hirsch, Rachel; Pun, Kenny; Reuttner, Isabella. - Rethinking Risk Management in Financial Services : Practices from other domains. - New York, NY: - World Economic Forum. Boston Consulting Group, 2010. - No. pages: 68. [RKN: 72465] URL: http://www.weforum.org/pdf/FinancialInstitutions/RethinkingRiskManagement.pdf Abstract: While other efforts have largely focused on improving risk management in financial services “from the inside out,” this report looks at it “from the outside in” – trying to learn from practices and patterns in domains such as aviation, fisheries, wildfire fighting, immunology / epidemiology, telecommunication and pharmaceuticals. While not all of these practices are directly transferable to finance, many are and most of them provide much needed fresh perspective and thinking. Hitchcox, A N; Klumpes, P J M; McGaughey, K W; Smith, A D; Taverner, N H. - ERM for insurance companies - Adding the investor's point of view. - London: - Institute of Actuaries, 2010. - No. pages: 48. [RKN: 72028] Shelved at: ifp 01/10 (Oxf); ifp 01/10 (Lon) [Faculty: JOU/INS] URL: http://www.actuaries.org.uk/research-and-resources/documents/erm-insurancecompanies-adding-investors-point-view Abstract: A major outcome of ERM activities in insurance companies has been the bringing together of all of the key risks in the company, to be managed together in a holistic fashion. The authors of this paper believe that an ERM framework also needs to look beyond the company, and have regard to the risk management needs of investors, from the point of view of the contribution of the insurance company to the overall risk and reward of their total investment portfolios. To 155
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Risk Management Reading List September 2010
meet these needs, the ERM framework needs to provide sufficient information on topics such as systematic risk, potential correlations of earnings from future new business with macroeconomic trends, other risks to franchise value, and sources of model risk within the company. The paper does not provide solutions for the issues described above; but limits itself to describing and discussing the direction for some important new initiatives in ERM activities. Keywords: Risk Management; Enterprise Risk Management (ERM); Systematic Risk; Franchise Value; Buffer Capital; Cost of Capital; Replicating Portfolio; Parameter Risk; Model Risk; Agency Risk; Risk Governance; Risk Disclosure. Hopkin, Paul. - Fundamentals of Risk Management : Understanding, Evaluating and Implementing Effective Risk Management. - London: - Kogan Page, 2010. - No. pages: 357. [RKN: 72535] [Faculty: 658.15 HOP] Abstract: Fundamentals of Risk Management provides a comprehensive introduction to the subject of commercial and business risk. It is suitable for those studying for a career in risk as well as a broad range of risk professionals. The book examines the key components of risk management and how it can be applied. Examples are provided that demonstrate the benefits of risk management to organisations in the public and private sector. Hoyt, Robert E; Powell, Lawrence S; Sommer, David W. - Computing value at risk: a simulation assignment to illustrate the value of enterprise risk management. [RKN: 69057] [Faculty: RIS/MAN] Risk Management and Insurance Review (2007) 10 (2) : 299-307. Hoyt, Robert E; Dumm, Randy E; McCullough, Kathleen A. - Risk Management Case Project. No. pages: 7. [RKN: 72293] [Faculty: RIS/MAN] Risk Management and Insurance Review (2010) 13 (1) : 147-159. Abstract: Case projects are valuable tools for teaching risk management and insurance (RMI). This article describes a flexible case study approach that can be used as a comprehensive capstone project for the RMI major or in modules for graduate and undergraduate RMI courses. The project incorporates both fundamental RMI concepts and emerging trends in the field. The use of the case project provides benefits to both students and the RMI program, especially given the increasing pressure for assessment in college curricula. Iyengar, Garud; Ma, Alfred Ka Chun. - Cash flow matching: A risk management approach. Society of Actuaries, 2009. - No. pages: 15. [RKN: 71630] Shelved at: Per: NAAJ (Oxf); Per NAAJ (Lon) [Faculty: NOR/AME] North American Actuarial Journal (2009) 13 (3) : 370-384. URL: http://www.soa.org/news-and-publications/publications/journals/naaj/naaj-detail.aspx Abstract: We propose a scenario-based optimization framework for solving the cash flow matching problem where the time horizon of the liabilities is longer than the maturities of available bonds and the interest rates are uncertain. Standard interest rate models can be used for scenario generation within this framework. The optimal portfolio is found by minimizing the cost at a specific level of shortfall risk measured by the conditional tail expectation (CTE), also known as conditional value-at-risk (CVaR) or Tail-VaR. The resulting optimization problem is still a linear program (LP) as in the classical cash flow matching approach. This framework can be employed in situations when the classical cash flow matching technique is not applicable. Keating, Con. - To what extent does a conflict exist between risk management that benefits regulators compared to risk management that benefits shareholders? - Institute of Actuaries and Faculty of Actuaries, 2007. - (Finance, Investment and Risk Management Conference 2007 Seminar, 17-19 June 2007, Conrad Hilton Hotel, Dublin). - No. pages: 18. [RKN: 72828] URL: http://www.actuaries.org.uk/research-and-resources/documents/what-extent-doesconflict-exist-between-risk-management-benefits-re Koster, Ferry. - Risk management in a globalizing world : An empirical analysis of individual preferences in 26 European countries. [RKN: 39262] 156
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Risk Management Reading List September 2010
Shelved at: Per: ISSR (Oxf) International Social Security Review (2009) 62 (3) : 79-98. Abstract: The risks that individuals face in everyday life, such as illness and unemployment, can be covered using market, government, or community mechanisms. The market can function with a lower level of solidarity compared to the other two mechanisms; the government mechanism requires the highest level of compulsory solidarity and communities are associated with voluntary solidarity. Social context affects individual preferences with regard to any one of these mechanisms. This article investigates to what extent these preferences are influenced by globalization: the economic, social and political openness of countries. The dataset used in this study combines data from the European Values Study 1999-2000 (EVS), the International Monetary Fund (IMF), and the KOF Index of Globalization, and contains information about 31,554 people living in 26 European countries. The results derived from logistic multilevel analysis show that preferences towards the organization of solidarity are related to the different dimensions of globalization. Krutov, Alex. - Investing in Insurance Risk : Insurance-Linked Securities - A Practitioner's Perspective. - London: - Risk Books, 2010. - No. pages: 480. [RKN: 72674] [Faculty: 332.6 KRU] Abstract: Insurance-linked securities and certain reinsurance instruments provide the ability to invest in insurance directly, as opposed to investing in equities or debt issued by insurance and reinsurance companies. The “pure” insurance risk component of these investments can range from that of property catastrophe to longevity, all of which provide limited correlation with the investment performance of traditional asset types. Securitisation of insurance risk has also become an important tool for risk and capital management that can be utilised by insurance companies alongside the more traditional approaches. It offers insurance and reinsurance companies additional flexibility at a time when the landscape keeps changing and the ability to respond to changes quickly is a critical source of competitive advantage. Investing in Insurance Risk by Alex Krutov looks at all of the issues involved in investing in insurance risk and insurance securitisation. It examines the various types of insurance-linked securities now available to investors, along with techniques for their analysis. In addition, the book explains the considerations insurance companies face in transferring insurance risk to the capital markets. The book is somewhat provocatively titled Investing in Insurance Risk to emphasize that investing always involves the potential of both return and risk. This is particularly clear in a field such as insurance-linked securities, where risk transfer—rather than simply raising capital—is often the primary driver for issuing these securities. The ability to analyze the risk-return profile of these investments is essential for both issuing and investing in them. The book is designed to serve as a valuable resource to those active in the insurance-linked securities marketplace, while also aiding basic understanding of the topics for those new to the field. The author offers a clear practitioner’s perspective as opposed to an academic one; this hands-on approach is particularly important in a market that is new and still evolving. (Publisher's blurb) Lewin, Chris. - To uncertainty ... and beyond. - Staple Inn Actuarial Society, - No. pages: 1. [RKN: 71738] Shelved at: Per: Actuary (Oxf); Per: Actuary (Lon) [Faculty: SIA/ACT] The Actuary (2009) December : 24. URL: http://www.the-actuary.org.uk Abstract: Chris Lewin charts the development of a ground-breaking enterprise risk management (ERM) guide based on the management of wider uncertainty beyond the variability of foreseeable events Mandelbrot, Benoit B; Hudson, Richard L. - The (mis)behaviour of markets : A fractal view of risk, ruin, and reward. - Profile Books, 2008. - No. pages: 326. [RKN: 71051] [Faculty: 519.287 MAN] 157
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Risk Management Reading List September 2010
Abstract: Re-evaluation of the standard tools and models of modern financial theory. Melnick, Edward; Everitt, Brian. - Encyclopaedia of Quantitative Risk Analysis and Assessment. Chicester: - John Wiley & Sons, 2008. - No. pages: 1954. - 4 vols. [RKN: 38534] Shelved at: EEQ (Oxf) Abstract: Leading the way in this field, the Encyclopedia of Quantitative Risk Analysis and Assessment will be the first publication to offer a modern, comprehensive and in-depth resource to the huge variety of disciplines involved. A truly international work, its coverage ranges across risk issues pertinent to life scientists, engineers, policy makers, healthcare professionals, the finance industry, the military and practising statisticians. Drawing on the expertise of world-renowned authors and editors in this field this title will provide up-to-date material on drug safety, investment theory, public policy applications, transportation safety, public perception of risk, epidemiological risk, national defence and security, critical infrastructure, and program management. Montier, James. - Applied behavioural finance : Insights into irrational minds and markets [copies of slides only] - Institute of Actuaries and Faculty of Actuaries, 2007. - (Finance, Investment and Risk Management Conference 2007 Seminar, 17-19 June 2007, Conrad Hilton Hotel, Dublin). [RKN: 72836] URL: http://www.actuaries.org.uk/research-and-resources/documents/applied-behaviouralfinance-insights-irrational-minds-and-markets-h Mundt, André. - Dynamic risk measures under model uncertainty. [RKN: 43363] Shelved at: Per: Blätter (Lon); online only Blätter der Deutsche Gesellschaft für Versicherungs- und Finanzmathematik (2008) 29 (heft 2) : 267-293. URL: http://www.springerlink.com/content/1864-0303/ Murphy, David. - Understanding risk: the theory and practice of financial risk management. - USA: - Chapman & Hall/CRC, 2008. - No. pages: 452. [RKN: 69516] [Faculty: 519.287 MUR] Abstract: Blending a quantitative approach with a more informal style, this book explains how to understand financial risk and how the severity and frequency losses can be controlled. The book begins by introducing the basics of risk management and the behaviour of financial instruments. The next section focuses on regulatory capital standards and models, addressing value-at-risk (VaR) models, portfolio credit risk, tranching, operational risk and the Basel accords. The author then deals with asset/liability management (ALM) and liquidity management. The last part explores structured finance and a variety of new trading instruments, including inflation-linked products, sophisticated equity basket options and convertible bonds. O'Brien, Christopher D. - Show me the money. [RKN: 39199] Shelved at: online only [Faculty: online only] The Actuary (2009) June : 33. URL: http://www.the-actuary.org.uk Abstract: Article about how managers' remuneration can affect their risk management strategies. The article summarises three papers that look at whether risk decisions depend on the incentives and characteristics of managers. OpRisk Advisory; Towers Perrin. - A New Approach for Managing Operational Risk : Addressing the Issues Underlying the 2008 Global Financial Crisis. - Society of Actuaries. Canadian Institute of Actuaries. Casualty Actuarial Society, 2009. - No. pages: 90. [RKN: 71819] URL: http://www.soa.org/files/pdf/research-new-approach.pdf Abstract: Examines approaches to operational risk management (ORM) and considerations for establishing formal operational risk programmes. Orros, George; Smith, John. - Health at risk. - Staple Inn Actuarial Society, - No. pages: 3. [RKN: 71739] Shelved at: Per: Actuary (Oxf); Per: Actuary (Lon) [Faculty: SIA/ACT] 158
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Risk Management Reading List September 2010
The Actuary (2009) December : 25-27. URL: http://www.the-actuary.org.uk Abstract: George Orros and John Smith consider a practical enterprise risk management (ERM) framework for health and care insurance companies. Keywords: Early warning indicators, key performance indicators, risk heat maps Peng, Li; Lim, Andrew E B; Shanthikumar, J George. - Optimal risk transfer for agents with germs. [RKN: 39542] Shelved at: Per: IME (Oxf) Insurance: Mathematics & Economics (2010) 47 (1) : 1-12. Abstract: We introduce a new class of risk measures called generalized entropic risk measures (GERMS) that allow economic agents to have different attitudes towards different sources of risk. We formulate the problem of optimal risk transfer in terms of these risk measures and characterize the optimal transfer contract. The optimal contract involves what we call intertemporal sourcedependent quotient sharing, where agents linearly share changes in the aggregate risk reserve that occur in response to shocks to the system over time, with scaling coefficients that depend on the attitudes of each agent towards the source of risk causing the shock. Generalized entropic risk measures are not dilations of a common base risk measure, so our results extend the class of risk measures for which explicit characterizations of the optimal transfer contract can be found. Keywords: Convex risk measure; Optimal risk transfer; Risk sharing; Generalized entropic risk measure; Generalized exponential premium; Intertemporal source-dependent quotient sharing; Risk management Powers, Michael R. - Using aumann-shapley values to allocate insurance risk: the case of inhomogeneous losses. - No. pages: 15. [RKN: 68936] Shelved at: Per: NAAJ (Oxf); Per NAAJ (Lon) [Faculty: NOR/AME] North American Actuarial Journal (2007) 11 (3) : 113-127. URL: http://www.soa.org/news-and-publications/publications/journals/naaj/naaj-detail.aspx Abstract: The problem of allocating responsibility for risk among members of a portfolio arises in a variety of financial and risk-management contexts. Examples are particularly prominent in the insurance sector, where actuaries have long sought methods for distributing capital (net worth) across a number of distinct exposure units or accounts according to their relative contributions to the total ‘‘risk’’ of an insurer’s portfolio. Although substantial work has been done on this problem, no satisfactory solution has yet been presented for the case of inhomogeneous loss distributions— that is, losses X (x) FX such that FXt(x) FtX(x) for some t 0. The purpose of this article is to show that the value-assignment method of nonatomic cooperative games proposed in 1974 by Aumann and Shapley may be used to solve risk-allocation problems involving losses of this type. This technique is illustrated by providing analytical solutions for a useful class of multivariatenormal loss distributions. Rebonato, Riccardo. - The plight of the fortune tellers: why we need to manage financial risk differently. - Woodstock: - Princeton University Press, 2007. - No. pages: 272. [RKN: 38839] Shelved at: EE/JNH (Oxf) Abstract: Today's top financial-risk professionals have come to rely on ever-more sophisticated mathematics in their attempts to come to grips with financial risk. But this excessive reliance on quantitative precision is misleading - and it puts us all at risk. This is the case that Riccardo Rebonato makes in Plight of the Fortune Tellers - and coming from someone who is both an experienced market professional and an academic, this heresy is worth listening to. Rebonato forcefully argues that we must restore genuine decision making to our financial planning, and he shows us how to do it using probability, experimental psychology, and decision theory. This is the only way to effectively manage financial risk in a manner congruent with how human beings actually react to chance. Rebonato challenges us to rethink the standard wisdom about probability in financial-risk management. Risk managers have become obsessed with measuring risk and believe that these quantitative results by themselves can guide sound financial choices - but they can't. In this book, Rebonato offers a radical yet surprisingly commonsense solution, one that seeks to remind us that managing risk comes down to real people making decisions under 159
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Risk Management Reading List September 2010
uncertainty. Plight of the Fortune Tellers is not only a book for the decision makers of Wall Street, it's a must-read for anyone concerned about how today's financial markets are run. The stakes have never been higher - can you risk it? Schoenmaker, Dirk; Oosterloo, Sander; Winkels, Otto. - The emergence of cross-border insurance groups within Europe with centralised risk management. [RKN: 39043] Shelved at: Per: Geneva (Oxf) Geneva Papers on Risk and Insurance (2008) 33 (3) : 530-546. Abstract: This paper analyses the degree of internationalisation of insurance business. Using a novel data set of 25 large EU insurance groups, we find that the insurance industry has a strong international orientation. About 55 percent of the business of these large insurance groups is conducted abroad. The cross-border activities are predominantly within Europe (30–35 percent) and less so in the rest of the world (20–25 percent). Next, this paper examines the impact of internationalisation on the organisational structure. We find a clear trend towards centralising risk and capital management activities within large insurance groups, though insurance remains at the same time a local business. Applying the hub and spoke model, we identify which functions are executed at the centre (hub) and which functions are performed at the level of the local business units (spokes). Selvaggi, Mariano. - Analysing operational losses in insurance : Evidence on the need for scaling from the ORIC database. - Association of British Insurers, 2009. - (ABI Research Paper 16). No. pages: 54. [RKN: 69772] URL: http://www.abioric.com/media/2032/abi-oric%20research%20paper%2016.pdf Abstract: This research studies robust methodologies for scaling the size and number of external losses to make them equivalent to a firm’s internal loss events. Adjusting for potential scaling biases is important when external and internal losses are merged for operational risk management and economic capital calculations. We use operational loss event in the ORIC database to provide real-world applications of the methodologies discussed. It is the first time we have used our data in this way. We set this against data on the size of the insurer where the loss occurred and additional scaling factors controlling for business lines and loss event types. The purpose of our research is not to provide final answers, but to illustrate our empirical approach and uncover early trends in operational loss data from insurance business. Society of Actuaries. - Companion Guide To The Global Risk Management Designation Recognition Treaty. - Society of Actuaries, 2009. - No. pages: 7. [RKN: 71930] URL: http://www.soa.org/files/pdf/cera-treaty-exec-summary.pdf Abstract: A summary of the Global Enterprise Risk Management Designation Recognition Treaty for the launch of the Chartered Enterprise Risk Analyst (CERA) credential as a global risk management designation. Solnik, Bruno. - Lessons we have learned regarding risk management modeling [copies of slides only] - Institute of Actuaries and Faculty of Actuaries, 2010. - (Risk and Investment Conference 2010 Caledonian Hotel, Edinburgh, 13-15 June 2010). [RKN: 73027] URL: http://www.actuaries.org.uk/research-and-resources/documents/lessons-we-havelearned-regarding-risk-management-modelling-slides
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Risk Management Reading List September 2010
Stewart, Fiona. - Pension Funds’ Risk-Management Framework : Regulation and supervisory oversight. - Paris: - OECD, 2010. - (OECD Working Papers on Insurance and Private Pensions No. 40). - No. pages: 56. [RKN: 72297] URL: http://www.oecd.org/dataoecd/35/43/44633539.pdf Abstract: Drawing on the experience of the pensions and other financial sectors, this paper examines what sort of risk-management framework pension funds should have in place. Such frameworks are broken down into four main categories: management oversight and culture; strategy and risk assessment; control systems; and information and reporting. Ways in which supervisory authorities can check that such systems are operating are also considered, with a check list provided to assist pension supervisory authorities with their oversight of this important area. Key words: Pensions, Risk-management, Risk Assessment, Internal Controls Sweeting, Paul J. - Modelling and managing risk. - Faculty and Institute of Actuaries, 2007. - No. pages: 43. [RKN: 37580] Shelved at: ifp 4/07 (Oxf) [Faculty: TRA/FAC] URL: http://www.actuaries.org.uk/research-and-resources/documents/modelling-andmanaging-risk Abstract: This paper looks at the risks faced by financial institutions, and how they can be modelled and managed. I compare the way in which each of the risks affects different types of financial institution and look for similarities (and differences) across industries. Finally, I consider what makes a good risk management system. Keywords: Financial Risk; Operational Risk; Modelling; Pension Fund; Insurance Company; Bank Sweeting, Paul J. - Modelling and managing risk. [RKN: 39349] Shelved at: Per: BAJ (Oxf); Per: BAJ (Lon) [Faculty: BRI/ACT] BAJ (2007) 13 (3) : 579-636. URL: http://www.actuaries.org.uk/research-and-resources/pages/access-journals Abstract: This paper looks at the risks faced by financial institutions, and how they can be modelled and managed. I compare the way in which each of the risks affects different types of financial institution and look for similarities (and differences) across industries. Finally, I consider what makes a good risk management system. Sweeting, Paul J. - Modelling and managing risk : Abstract of the discussion held by the Faculty of Actuaries. [RKN: 39433] Shelved at: Per: BAJ (Oxf); Per: BAJ (Lon) [Faculty: BRI/ACT] BAJ (2008) 14 (1) : 111-125. URL: http://www.actuaries.org.uk/research-and-resources/pages/access-journals Abstract: Discussion about Paul Sweeting’s paper. This paper looks at the risks faced by financial institutions, and how they can be modelled and managed. It compares the way in which each of the risks affects different types of financial institution and look for similarities (and differences) across industries. Finally, it consider what makes a good risk management system. Swiss Reinsurance Company. - Commercial liability: A challenge for businesses and their insurers. - Zurich: - Swiss Reinsurance Company, - No. pages: 34. [RKN: 71956] [Faculty: SIG/SWI] Sigma (2009) 5 URL: http://www.swissre.com Contents: Introduction: characteristics of liability insurance -- How much insurance do businesses buy and why? -- What are the key issues? -- What can insurers do to keep liability risk insurable? Sykes, Ian. - Regulations and investor behaviour. - Institute of Actuaries and Faculty of Actuaries, 2007. - (Finance, Investment and Risk Management Conference 2007 Seminar, 17-19 June 2007, Conrad Hilton Hotel, Dublin). [RKN: 72834] Abstract: This session is about how regulation affects the investment behaviour of Irish occupational pension schemes. This is a very specific situation to look at, but a topical one given the location of the conference this year and an interesting one because the regulations and other 161
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Risk Management Reading List September 2010
factors were similar, but not identical to the UK until the Pensions Act 2004 changes. Since then they have diverged. Telford, P G; Browne, B A; Collinge, E J; Fulcher, P; Johnson, B E; Little, W; Lu, J L C; Nurse, J M; Smith, D W; Zhang, F. - Developments in the management of annuity business. - Faculty of Actuaries and Institute of Actuaries, 2010. - No. pages: 96. [RKN: 72306] [Faculty: JOU/INS] URL: http://www.actuaries.org.uk/research-and-resources/documents/developmentsmanagement-annuity-business Abstract: The focus of the paper is non-profit lifetime annuities in the UK. Annuity insurers have been faced with, or have initiated, an unprecedented amount of change during the last decade, and rapid change is still continuing. We draw out implications for the actuarial management of the business, arising from the evolution of: longevity risk assessment and management, investment strategy and operations, financial reporting, and enterprise risk management. We discuss Solvency II in some technical depth, analysing the proposed rules for technical provisions and solvency capital requirement. Keywords: Annuities; Retirement Income; Longevity; Mortality Improvement; Reinsurance; Underwriting; Collateral; Investment; Asset-Liability Management; Financial Reporting; IFRS; Pillar I; Individual Capital Assessment; Enterprise Risk Management; Solvency II; Illiquidity Premium; Economic Capital Vlaev, Ivo; Stewart, Neil; Chater, Nick. - Risk preference discrepancy : a prospect relativity account of the discrepancy between risk preferences in laboratory gambles and real world investments. [RKN: 39305] Shelved at: UHG/LA pam (Oxf) Journal of Behavioral Finance (2008) 9 : 132-148. Abstract: In this article, we presented evidence that people are more risk averse when investing in financial products in the real world than when they make risky choices between gambles in laboratory experiments. To provide an account for this discrepancy, we conducted experiments which showed that the range of offered investment funds that vary in their risk-reward characteristics had a significant effect on the distribution of hypothetical funds to those products. We also showed that people are able to use the context provided by the choice set in order to make relative riskiness judgments for investment products. This context dependent relativistic nature of risk preferences is proposed as a plausible explanation of the risk preference discrepancy between laboratory experiments and real-world investments. We also discuss other possible theoretical interpretations of the discrepancy. Wagner, Niklas. - Credit risk: models, derivatives and management. - United States: - Chapman & Hall/CRC, 2008. - No. pages: 574. [RKN: 69517] [Faculty: 519.287 CRE] Whelan, Shane. - The mis-selling of investment risk in mandatory pension savings [copies of slides only] - Institute of Actuaries and Faculty of Actuaries, 2007. - (Finance, Investment and Risk Management Conference 2007 Seminar, 17-19 June 2007, Conrad Hilton Hotel, Dublin). [RKN: 72835] URL: http://www.actuaries.org.uk/research-and-resources/documents/mis-sellinginvestment-risk-mandatory-pension-savings-handouts Xin, Zhang; Siu, Tak Kuen. - Optimal investment and reinsurance of an insurer with model uncertainty. - No. pages: 8. [RKN: 72375] Shelved at: Per: IME (Oxf) Insurance: Mathematics & Economics (2009) 45 (1) : 81-88. Abstract: We introduce a novel approach to optimal investment–reinsurance problems of an insurance company facing model uncertainty via a game theoretic approach. The insurance company invests in a capital market index whose dynamics follow a geometric Brownian motion. The risk process of the company is governed by either a compound Poisson process or its 162
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Risk Management Reading List September 2010
diffusion approximation. The company can also transfer a certain proportion of the insurance risk to a reinsurance company by purchasing reinsurance. The optimal investment–reinsurance problems with model uncertainty are formulated as two-player, zero-sum, stochastic differential games between the insurance company and the market. We provide verification theorems for the Hamilton–Jacobi–Bellman–Isaacs (HJBI) solutions to the optimal investment–reinsurance problems and derive closed-form solutions to the problems. Keywords: Optimal investment; Proportional reinsurance; Model uncertainty; Stochastic differential game; Exponential utility; Penalty of ruin; HJBI equations Zhou, Chen. - Dependence structure of risk factors and diversification effects. - No. pages: 10. [RKN: 72521] Shelved at: Per: IME (Oxf) Insurance: Mathematics & Economics (2010) 46 (3) : 531-540. Abstract: In this paper, we study the aggregated risk from dependent risk factors under the multivariate Extreme Value Theory (EVT) framework. We consider the heavy-tailedness of the risk factors as well as the non-parametric tail dependence structure. This allows a large range of models on the dependence. We assess the Value-at-Risk of a diversified portfolio constructed from dependent risk factors. Moreover, we examine the diversification effects under this setup. Keywords: Aggregated risk ; Diversification effect ; Multivariate extreme value theory
Risk measurement Clare, Andrew. - Developing a risk rating methodology. - London: - Association of British Insurers. Investment Management Association, 2010. - No. pages: 81. [RKN: 72318] URL: http://www.abi.org.uk/Publications/ABI_Publications_Developing_a_Risk_Rating_Methodol ogy_ecf.aspx Abstract: This report provides analysis and views on whether it is possible and/or desirable to use a single measure of risk to categorise a wide range of investment funds, from traditional long only funds to more complex structured products. In effect it provides views and analysis about the appropriate empirical engine that should be used to drive an EU-wide risk rating process. Dowd, Kevin; Cotter, John; Sorwar, Ghulam. - Spectral Risk Measures: Properties and Limitations. - Nottingham: - Centre for Risk & Insurance Studies, 2008. - (CRIS Discussion Paper Series – 2008.II). - No. pages: 28. [RKN: 72196] URL: http://www.nottingham.ac.uk/business/cris/papers/2008-2.pdf Abstract: Spectral risk measures (SRMs) are risk measures that take account of user riskaversion, but to date there has been little guidance on the choice of utility function underlying them. This paper addresses this issue by examining alternative approaches based on exponential and power utility functions. A number of problems are identified with both types of spectral risk measure. The general lesson is that users of spectral risk measures must be careful to select utility functions that fit the features of the particular problems they are dealing with, and should be especially careful when using power SRMs. Keywords: coherent risk measures, spectral risk measures, exponential utility, power utility
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Risk Management Reading List September 2010
Furman, Edward; Zitikis, Ricardas. - General Stein-type Covariance Decompositions with Applications to Insurance and Finance. - London, Ontario: - Actuarial Research Group, Department of Statistical and Actuarial Sciences, University of Western Ontario, 2009. - (ARG Technical Report No. 2009-3). - No. pages: 9. [RKN: 72134] URL: http://www.stats.uwo.ca/faculty/zitikis/DSAS-ARG/ARG-TR-2009/ARG-TR-2009-3.pdf Abstract: A general decomposition of covariances is formulated and proved, and its usefulness in the context of financial risk measurement and pricing is demonstrated. Keywords: Covariance decompositions; insurance pricing; economic pricing; weighted allocations; capital asset pricing model. Peng, Li; Lim, Andrew E B; Shanthikumar, J George. - Optimal risk transfer for agents with germs. [RKN: 39542] Shelved at: Per: IME (Oxf) Insurance: Mathematics & Economics (2010) 47 (1) : 1-12. Abstract: We introduce a new class of risk measures called generalized entropic risk measures (GERMS) that allow economic agents to have different attitudes towards different sources of risk. We formulate the problem of optimal risk transfer in terms of these risk measures and characterize the optimal transfer contract. The optimal contract involves what we call intertemporal sourcedependent quotient sharing, where agents linearly share changes in the aggregate risk reserve that occur in response to shocks to the system over time, with scaling coefficients that depend on the attitudes of each agent towards the source of risk causing the shock. Generalized entropic risk measures are not dilations of a common base risk measure, so our results extend the class of risk measures for which explicit characterizations of the optimal transfer contract can be found. Keywords: Convex risk measure; Optimal risk transfer; Risk sharing; Generalized entropic risk measure; Generalized exponential premium; Intertemporal source-dependent quotient sharing; Risk management
Risk theory Albrecher, Hansjörg; Hipp, Christian. - Lundberg’s risk process with tax. [RKN: 43354] Shelved at: Per: Blätter (Lon); online only Blätter der Deutsche Gesellschaft für Versicherungs- und Finanzmathematik (2007) 28 (heft 1) : 13-28. URL: http://www.springerlink.com/content/1864-0303/ Badescu, Andrei; Breuer, Lothar. - The use of vector-valued martingales in risk theory. [RKN: 43359] Shelved at: Per: Blätter (Lon); online only Blätter der Deutsche Gesellschaft für Versicherungs- und Finanzmathematik (2008) 29 (heft 1) : 1-12. URL: http://www.springerlink.com/content/1864-0303/
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Risk Management Reading List September 2010
Cai, J; Zhou, M. - A Risk Model When Premium Rate Depends on Claim Size [abstract only] 2008. [RKN: 38560] Shelved at: Online only [Faculty: Online only] Actuarial Research Clearing House (ARCH) (2008) 1 URL: http://www.soa.org/news-and-publications/publications/proceedings/arch/arch-2008iss1.aspx Abstract: This paper considers a dependent classical risk model with diffusion, in which the premium rate is determined by the amount of the previous claim. It is assumed that different claim size will lead to different premium rate, such as a large claim size will lead to higher premium rate and small claim size will allow to be lower premium rate. At the same time, we can also assume that each premium rate has a different diffusion coefficient. Using the tool of Laplace transform, we give the closed Laplace transform form of the survival probability. Moreover, we also show that the survival probability can be obtained step by step by employing renewal equations. At last, some examples are presented to show the influence of parameters on the probability of ruin. De Alba, Enrique; Zuniga, Jesus; Corzo, Marco A. Ramírez. - Measurement and transfer of catastrophic risks : A simulation analysis. - Ontario: - University of Waterloo, 2008. - (Institute of Insurance and Pension Research Research Report 08-03). - No. pages: 22. [RKN: 69977] Shelved at: Online only [Faculty: Online only] URL: http://www.stats.uwaterloo.ca/stats_navigation/IIPR/IIPR-Reports.shtml Abstract: When analyzing catastrophic risk, traditional measures for evaluating risk, such as the probable maximum loss (PML), value at risk (VaR), tail-VaR , and others, can become practically impossible to obtain analytically in certain types of insurance, such as earthquake, and certain types of reinsurance arrangements, specially nonproportional with reinstatements. Given the available information, it can be very difficult for an insurer to measure its risk exposure. The transfer of risk in this type of insurance is usually done through reinsurance schemes combining diverse types of contracts that can greatly reduce the extreme tail of the cedant’s loss distribution. This effect can be assessed mathematically. The PML is defined in terms of a very extreme quantile. Also, under standard operating conditions, insurers use several “layers” of non proportional reinsurance that may or may not be combined with some type of proportional reinsurance. The resulting reinsurance structures will then be very complicated to analyze and to evaluate their mitigation or transfer effects analytically, so it may be necessary to use alternative approaches, such as Monte Carlo simulation methods. This is what we do in this paper in order to measure the effect of a complex reinsurance treaty on the risk profile of an insurance company. We compute the pure risk premium, PML as well as a host of results: impact on the insured portfolio, risk transfer effect of reinsurance programs, proportion of times reinsurance is exhausted, percentage of years it was necessary to use the contractual reinstatements, etc. Since the estimators of quantiles are known to be biased, we explore the alternative of using an Extreme Value approach to complement the analysis. Keywords: Quantile, Extreme Value, Monte Carlo Methods, PML, VAR, Reinsurance. Dickson, David C M; Li, Shuanming. - Erlang risk models and finite time ruin problems. - Victoria: - University of Melbourne, 2010. - (Centre for Actuarial Studies, University of Melbourne, Research Paper no. 202). - No. pages: 24. [RKN: 72345] URL: http://econ.unimelb.edu.au/SITE/actwww/wps2010/202.pdf Abstract: We consider the joint density of the time of ruin and deficit at ruin in the Erlang(n) risk model. We give a general formula for this joint density and illustrate how the components of this formula can be found in the special case when n = 2. We then show how the formula can be implemented numerically for a general value of n. We also discuss how the ideas extend to the generalised Erlang(n) risk model. Engle, Robert. - Anticipating correlations : A new paradigm for risk management. - Princeton University Press, 2009. - No. pages: 154. [RKN: 69777] [Faculty: 519.287 ENG]
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Kim, Joseph H T. - Conditional tail moments of the exponential family and its transformed distributions. - Ontario: - University of Waterloo, 2008. - (Institute of Insurance and Pension Research Research Report 08-05). - No. pages: 28. [RKN: 69979] Shelved at: Online only [Faculty: Online only] URL: http://www.stats.uwaterloo.ca/stats_navigation/IIPR/IIPR-Reports.shtml Abstract: Tail risk measures have been extensively used in the finance and actuarial literature for setting premium and risk capital. Among others the conditional tail expectation (CTE) is a popular measure in insurance applications. This paper derives the formulas of the CTE and higher moments for the exponential family class, which extends the natural exponential family, using the canonical representation. The conditional tail moments for the distributions transformed from the exponential family are also derived using the variable transformation. With the formulas developed in this paper we know the conditional tail moments for a wide range of distributions used for actuarial modelling. Keywords: conditional tail moments; exponential family; tail risk measure Mera, A. - Analysis of a Threshold Strategy in the Discrete–time Sparre Andersen Model. 2008. [RKN: 38561] Shelved at: Online only [Faculty: Online only] Actuarial Research Clearing House (ARCH) (2008) 1 URL: http://www.soa.org/news-and-publications/publications/proceedings/arch/arch-2008iss1.aspx Abstract: In this thesis, it is shown that the application of a threshold on the surplus level of a particular discrete-time delayed Sparre Andersen insurance risk model results in a process that can be analyzed as a doubly infinite Markov chain with finite blocks. Two fundamental cases, encompassing all possible values of the surplus level at the time of the first claim, are explored in detail. Matrix analytic methods are employed to establish a computational algorithm for each case. The resulting procedures are then used to calculate the probability distributions associated with fundamental ruin-related quantities of interest, such as the time of ruin, the surplus immediately prior to ruin, and the deficit at ruin. The ordinary Sparre Andersen model, an important special case of the general model, with varying threshold levels is considered in a numerical illustration. Rusalovskiy, Artem. - Challenges of Solvency II implementation : Preparing for IT implementation of Solvency II regulations in insurance companies. - Germany: - VDM Verlag Dr Müller Aktiengesellschaft & Co. KG, 2008. - No. pages: 123. [RKN: 69771] [Faculty: 368 RUS]
Ruin probability Asimit, Alexandru V; Badescu, Andrei L. - Extremes on the discounted aggregate claims in a time dependent risk model. - No. pages: 12. [RKN: 72591] Shelved at: Per: SAJ [Faculty: SCA/ACT] Scandinavian Actuarial Journal (2010) 2 : 93-104. Abstract: This paper presents an extension of the classical compound Poisson risk model for which the inter-claim time and the forthcoming claim amount are no longer independent random variables (rv's). Asymptotic tail probabilities for the discounted aggregate claims are presented when the force of interest is constant and the claim amounts are heavy tail distributed rv's. Furthermore, we derive asymptotic finite time ruin probabilities, as well as asymptotic approximations for some common risk measures associated with the discounted aggregate claims. A simulation study is performed in order to validate the results obtained in the free interest risk model. Keywords: Compound Poisson risk model; Dependence; Discounted aggregate loss; Subexponential distribution; Value-at-risk
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Risk Management Reading List September 2010
Avanzi, Benjamin. - Strategies for dividend distribution: a review. - No. pages: 35. [RKN: 69806] Shelved at: Per: NAAJ (Oxf); Per NAAJ (Lon) [Faculty: NOR/AME] North American Actuarial Journal (2009) 13 (2) : 217-251. URL: http://www.soa.org/news-and-publications/publications/journals/naaj/naaj-detail.aspx Abstract: In today's world of financial uncertainty, one major public concern is to assess (and possibly improve) the stability of companies that take on risks. Actuaries have been aware of that issue for a very long time and have a great experience in modelling the activity of a risk business. During the first part of the twentieth century, they focused on the probability of ruin to assess the stability of their company. In his seminal paper of 1957 Bruni de Finetti criticized this approach and laid the foundations of what would become an increasingly popular topic: the study of dividend strategies. The contributions made by actuaries in that field constitute a substantial body of knowledge, whose interest is relevant not only to insurance but also to a much broader range of areas of practice. In this paper we aim at a taxonomical synthesis of the 50 years of actuarial research that followed de Finetti's original paper. Benouaret, Zina; Aïssani, Djamil. - Strong stability in a two-dimensional classical risk model with independent claims. - No. pages: 10. [RKN: 72590] Shelved at: Per: SAJ [Faculty: SCA/ACT] Scandinavian Actuarial Journal (2010) 2 : 83-92. Abstract: In this paper, we study the strong stability of ruin probabilities in risk models. The question of stability naturally arises in risk theory since the governing parameters in these models can only be estimated with uncertainty. Moreover, in most cases there are not explicit expressions known for the ruin probabilities. Our objective is to present the applicability of the strong stability method to the bivariate classical risk model with independent claims. After clarifying the conditions to approximate the two-dimensional risk model with disturbance parameters by the twodimensional classical risk model, we obtain the stability inequalities with an exact computation of the constants. Keywords: Risk models; Ruin probabilities; Markov chain; Strong stability; Reversed process; Continuity estimates Biffis, Enrico; Morales, Manuel. - On a generalization of the Gerber–Shiu function to pathdependent penalties. - No. pages: 6. [RKN: 72430] Shelved at: Per: IME (Oxf) Insurance: Mathematics & Economics (2010) 46 (1) : 92-97. Abstract: The Expected Discounted Penalty Function (EDPF) was introduced in a series of now classical papers ([9], [11] and [12]). Motivated by applications in option pricing and risk management, and inspired by recent developments in fluctuation theory for Lévy processes, we study an extended definition of the expected discounted penalty function that takes into account a new ruin-related random variable. In addition to the surplus before ruin and deficit at ruin, we extend the EDPF to include the surplus at the last minimum before ruin. We provide an expression for the generalized EDPF in terms of convolutions in a setting involving a subordinator and a spectrally negative Lévy process. Some expressions for the classical EDPF are recovered as special cases of the generalized EDPF. Cai, J; Zhou, M. - A Risk Model When Premium Rate Depends on Claim Size [abstract only] 2008. [RKN: 38560] Shelved at: Online only [Faculty: Online only] Actuarial Research Clearing House (ARCH) (2008) 1 URL: http://www.soa.org/news-and-publications/publications/proceedings/arch/arch-2008iss1.aspx Abstract: This paper considers a dependent classical risk model with diffusion, in which the premium rate is determined by the amount of the previous claim. It is assumed that different claim size will lead to different premium rate, such as a large claim size will lead to higher premium rate and small claim size will allow to be lower premium rate. At the same time, we can also assume that each premium rate has a different diffusion coefficient. Using the tool of Laplace transform, we give the closed Laplace transform form of the survival probability. Moreover, we also show that the 167
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Risk Management Reading List September 2010
survival probability can be obtained step by step by employing renewal equations. At last, some examples are presented to show the influence of parameters on the probability of ruin. Cheung, Eric C K; Landriault, David. - On a risk model with surplus-dependent premium and tax rates. - Waterloo: - University of Waterloo, 2010. - (Waterloo Research Institute in Insurance, Securities and Quantitative Finance (WatRISQ) Working paper series 2010-05). - No. pages: 20. [RKN: 72577] URL: http://www.watrisq.uwaterloo.ca/Research/2010Reports/2010-05.pdf Abstract: In this paper, the compound Poisson risk model with surplus-dependent premium rate is analyzed in the taxation system proposed by Albrecher and Hipp (2007). In the compound Poisson risk model, Albrecher and Hipp (2007) showed that a simple relationship between the ruin probabilities in the risk model with and without tax exists. This so-called tax identity was later generalized to a surplus-dependent tax rate by Albrecher et al. (2009). This paper further generalizes these results to the Gerber-Shiu function with a generalized penalty function involving the maximum surplus prior to ruin. We show that this generalized Gerber-Shiu function in the risk model with tax is closely related to the 'original' Gerber-Shiu function in the risk model without tax defined in a dividend barrier framework. The moments of the discounted tax payments before ruin and the optimal threshold level for the tax authority to start collecting tax payments are also examined. Keywords: Gerber-Shiu function, tax identity, maximum surplus level, surplus-dependent premium, discounted tax payments. Cox, S; Lin, Y; Tian, R; Zuluaga, L. - Bounds for Ruin Probabilities and Value at Risk. 2008. [RKN: 38562] Shelved at: Online only [Faculty: Online only] Actuarial Research Clearing House (ARCH) (2008) 1 URL: http://www.soa.org/news-and-publications/publications/proceedings/arch/arch-2008iss1.aspx Abstract: In many situations, complete information about a rare event is not available, meaning the underlying probability distribution is not completely specified. This paper finds the best one can do when the incomplete information consists of estimates of the first two moments of the distribution. These are called semiparametric lower and upper bounds. We consider value-at-risk (VaR) in the sense that we find bounds on probability of portfolio return less than some small value, given only the first two moments of the portfolio components. We also apply semiparametric bounds to a rare event hitting an insurer for which losses are extraordinary high and investment income is low. We refer to this as “ruin” although the company may survive; it is just a convenient way to describe a rare event that would threaten a company’s solvency. In addition, we calculate bounds on insurance stoploss payments. The payoff of a call or put option can be considered as a special case or a transform of the stop-loss payment. In order to numerically solve the semiparametric bounds considered here, we reformulate the corresponding semiparametric bound problem as a sum of squares (SOS) program. A SOS program is an optimization problem where the variables are coefficients of polynomials, the objective is a linear combination of the variable coefficients, and the constraints are given the polynomials being SOS. This form of reformulation allows us to use one of several readily available SOS programming solvers to solve the moment problem. For the stop-loss bound problem, Cox (1991)’s method is also investigated to confirm our SOS program solutions. Our numerical examples have shown that our technique works reasonably well.
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Dickson, David C M; Li, Shuanming. - Erlang risk models and finite time ruin problems. - Victoria: - University of Melbourne, 2010. - (Centre for Actuarial Studies, University of Melbourne, Research Paper no. 202). - No. pages: 24. [RKN: 72345] URL: http://econ.unimelb.edu.au/SITE/actwww/wps2010/202.pdf Abstract: We consider the joint density of the time of ruin and deficit at ruin in the Erlang(n) risk model. We give a general formula for this joint density and illustrate how the components of this formula can be found in the special case when n = 2. We then show how the formula can be implemented numerically for a general value of n. We also discuss how the ideas extend to the generalised Erlang(n) risk model. Dickson, David C M; Li, Shuanming. - Finite time ruin problems for the Erlang(2) risk model. - No. pages: 7. [RKN: 72423] Shelved at: Per: IME (Oxf) Insurance: Mathematics & Economics (2010) 46 (1) : 12-18. Abstract: We consider the Erlang(2) risk model and derive expressions for the density of the time to ruin and the joint density of the time to ruin and the deficit at ruin when the individual claim amount distribution is (i) an exponential distribution and (ii) an Erlang(2) distribution. We also consider the special case when the initial surplus is zero. Frostig, Esther. - Asymptotic analysis of a risk process with high dividend barrier. [RKN: 39544] Shelved at: Per: IME (Oxf) Insurance: Mathematics & Economics (2010) 47 (1) : 21-26. Abstract: In this paper we study a risk model with constant high dividend barrier. We apply Keilson’s (1966) results to the asymptotic distribution of the time until occurrence of a rare event in a regenerative process, and then results of the cycle maxima for random walk to obtain the asymptotic distribution of the time to ruin and the amount of dividends paid until ruin. Loisel, Stéphane; Mazza, Christian; Rullière, Didier. - Convergence and asymptotic variance of bootstrapped finite-time ruin probabilities with partly shifted risk processes. - No. pages: 8. [RKN: 72411] Shelved at: Per: IME (Oxf) Insurance: Mathematics & Economics (2009) 45 (3) : 374-381. Abstract: In the classical risk model, we prove the weak convergence of a sequence of empirical finite-time ruin probabilities. In an earlier paper (see Loisel et al., (2008)), we proved an equivalent result in the special case where the initial reserve is zero, and checked that numerically the general case seems to be true. In this paper, we prove the general case (with a nonnegative initial reserve), which is important for applications to estimation risk. So-called partly shifted risk processes are introduced, and used to derive an explicit expression of the asymptotic variance of the considered estimator. This provides a clear representation of the influence function associated with finite time ruin probabilities and gives a useful tool to quantify estimation risk according to new regulations. Keywords: Finite-time ruin probability; Robustness; Solvency II; Reliable ruin probability; Asymptotic normality; Influence function; Estimation Risk Solvency Margin (ERSM); Partly shifted risk process Ming, Rui-Xing; Wang, Wen-Yuan; Xiao, Li-Qun. - On the time value of absolute ruin with tax. No. pages: 18. [RKN: 72428] Shelved at: Per: IME (Oxf) Insurance: Mathematics & Economics (2010) 46 (1) : 67-84. Abstract: Consider a compound Poisson surplus process of an insurer with debit interest and tax payments. When the portfolio is in a profitable situation, the insurer may pay a certain proportion of the premium income as tax payments. When the portfolio is below zero, the insurer could borrow money at a debit interest rate to continue his/her business. Meanwhile, the insurer will repay the debts from his/her premium income. The negative surplus may return to a positive level except that the surplus is below a certain critical level. In the latter case, we say that absolute ruin occurs. In this paper, we discuss absolute ruin quantities by defining an expected discounted penalty function at absolute ruin. First, a system of integro-differential equations satisfied by the expected 169
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Risk Management Reading List September 2010
discounted penalty function is derived. Second, closed-form expressions for the expected discounted total sum of tax payments until absolute ruin and the Laplace–Stieltjes transform (LST) of the total duration of negative surplus are obtained. Third, for exponential individual claims, closed-form expressions for the absolute ruin probability, the LST of the time to absolute ruin, the distribution function of the deficit at absolute ruin and the expected accumulated discounted tax are given. Fourth, for general individual claim distributions, when the initial surplus goes to infinity, we show that the ratio of the absolute ruin probability with tax to that without tax goes to a positive constant which is greater than one. Finally, we investigate the asymptotic behaviour of the absolute ruin probability of a modified risk model where the interest rate on a positive surplus is involved. Keywords: Compound Poisson surplus process; Debit interest; Interest rate on positive surplus; Tax; Absolute ruin; Light and heavy-tailed claims; Expected discounted penalty function Ren, Jiandong; Li, Shuanming. - The analysis of perturbed risk processes with Markovian arrivals. - Victoria: - University of Melbourne, 2009. - (Centre for Actuarial Studies, University of Melbourne, Research Paper no. 187). - No. pages: 18. [RKN: 72116] URL: http://mercury.ecom.unimelb.edu.au/SITE/actwww/wps2009/187.pdf Abstract: In this paper, we study the perturbed risk processes with Markovian arrivals. We present explicit formulas for the Laplace transform of the time to cross a certain level before ruin, the Laplace transform of the time of recovery and the distribution of the maximum severity of ruin, as well as the expected discounted dividends and the distribution of the total dividends prior to ruin for the risk model in the presence of a constant dividend barrier. Keywords: Perturbed risk processes; Markovian arrival processes; First passage times; Time of recovery; Maximum severity of ruin; Dividend barrier Wu, X. - Ruin probabilities for a risk model with two classes of risk processes. - No. pages: 22. [RKN: 36856] Australian Actuarial Journal (2010) 16 (1) : 87-108. URL: http://www.actuaries.asn.au/Libraries/Information_Knowledge/46305_AAJ_v16i1_comp.sflb. ashx Abstract: In this paper a risk model with two classes of business is considered, in which claim number processes are modelled by two independent Erlang(2) processes, aiming to calculate probabilities of ruin caused by a claim from a certain class. To do so, integro-differential equations for the ruin probabilities are derived and their Laplace transforms are then obtained. At the end of this paper, numerical results for the ruin probabilities are calculated for individual claim sizes with exponential and Gamma distributions. Keywords: Erlang risk process; Integro-differential equations; Laplace transforms Wu, Xueyuan. - Ruin probabilities for a risk model with two classes of risk processes. - Victoria: University of Melbourne, 2010. - (Centre for Actuarial Studies, University of Melbourne, Research Paper no. 204). - No. pages: 16. [RKN: 72347] URL: http://econ.unimelb.edu.au/SITE/actwww/wps2010/204.pdf Abstract: In this paper a risk model with two classes of business is considered, in which claim number processes are modelled by two independent Erlang(2) processes, aiming to calculate probabilities of ruin caused by a claim from a certain class. To do so, integro-differential equations for the ruin probabilities are derived and their Laplace transforms are then obtained. At the end of this paper, numerical results for the ruin probabilities are calculated for individual claim sizes with exponential and Gamma distributions. Keywords: Erlang risk process; Integro-differential equations; Laplace transforms
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Ruin theory Cheung, Eric C K; Landriault, David. - Analysis of a generalized penalty function in a semiMarkovian risk model. - Society of Actuaries, - No. pages: 17. [RKN: 72025] Shelved at: Per: NAAJ (Oxf); Per NAAJ (Lon) [Faculty: NOR/AME] North American Actuarial Journal (2009) 13 (4) : 497-513. URL: http://www.soa.org/news-and-publications/publications/journals/naaj/naaj-detail.aspx Abstract: In this paper an extension of the semi-Markovian risk model studied by Albrecher and Boxma (2005) is considered by allowing for general interclaim times. In such a model, we follow the ideas of Cheung et al. (2010b) and consider a generalization of the Gerber-Shiu function by incorporating two more random variables in the traditional penalty function, namely, the minimum surplus level before ruin and the surplus level immediately after the second last claim prior to ruin. It is shown that the generalized Gerber-Shiu function satisfies a matrix defective renewal equation. Detailed examples are also considered when either the interclaim times or the claim sizes are exponentially distributed. Finally, we also consider the case where the claim arrival process follows a Markovian arrival process. Probabilistic arguments are used to derive the discounted joint distribution of four random variables of interest in this risk model by capitalizing on an existing connection with a particular fluid flow process. Trufin, J; Albrecher, H; Denuit, M. - Properties of risk measures derived from ruin theory. - IAP Statistics Network, 2010. - (Technical report 10022). - No. pages: 16. [RKN: 72618] URL: http://www.stat.ucl.ac.be/ISpub/tr/2010/TR10022.pdf Abstract: This paper studies a risk measure inherited from ruin theory and investigates some of its properties. Specifically, we consider a 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. Key words and phrases: Ruin probability, classical risk model, Value-at-Risk (VaR), Tail-VaR, stochastic ordering.
Securities Krutov, Alex. - Investing in Insurance Risk : Insurance-Linked Securities - A Practitioner's Perspective. - London: - Risk Books, 2010. - No. pages: 480. [RKN: 72674] [Faculty: 332.6 KRU] Abstract: Insurance-linked securities and certain reinsurance instruments provide the ability to invest in insurance directly, as opposed to investing in equities or debt issued by insurance and reinsurance companies. The “pure” insurance risk component of these investments can range from that of property catastrophe to longevity, all of which provide limited correlation with the investment performance of traditional asset types. Securitisation of insurance risk has also become an important tool for risk and capital management that can be utilised by insurance companies alongside the more traditional approaches. It offers insurance and reinsurance companies additional flexibility at a time when the landscape keeps changing and the ability to respond to changes quickly is a critical source of competitive advantage. Investing in Insurance Risk by Alex Krutov looks at all of the issues involved in investing in insurance risk and insurance securitisation. It examines the various types of insurance-linked securities now available to investors, along with techniques for their analysis. In addition, the book explains the considerations insurance companies face in transferring insurance risk to the capital markets. The book is somewhat provocatively titled Investing in Insurance Risk to emphasize that investing always involves the potential of both return and risk. This is particularly clear in a field such as insurance-linked securities, where risk transfer—rather than simply raising capital—is often the primary driver for issuing these securities. The ability to analyze the risk-return profile of these 171
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investments is essential for both issuing and investing in them. The book is designed to serve as a valuable resource to those active in the insurance-linked securities marketplace, while also aiding basic understanding of the topics for those new to the field. The author offers a clear practitioner’s perspective as opposed to an academic one; this hands-on approach is particularly important in a market that is new and still evolving. (Publisher's blurb)
Securitisation Chen, Hua; Cummins, J David. - Longevity bond premiums : The extreme value approach and risk cubic pricing. - No. pages: 11. [RKN: 72437] Shelved at: Per: IME (Oxf) Insurance: Mathematics & Economics (2010) 46 (1) : 150-161. Abstract: The purpose of this study is to analyze the securitization of longevity risk with an emphasis on longevity risk modeling and longevity bond premium pricing. Various longevity derivatives have been proposed, and the capital market has experienced one unsuccessful attempt by the European Investment Bank (EIB) in 2004. After carefully analyzing the pros and cons of previous securitizations, we present our proposed longevity bonds, whose payoffs are structured as a series of put option spreads. We utilize a random walk model with drift to fit small variations of mortality improvements and employ extreme value theory to model rare longevity events. Our method is a new approach in longevity risk securitization, which has the advantage of both capturing mortality improvements within sample and extrapolating rare, out-of- sample longevity events. We demonstrate that the risk cubic model developed for pricing catastrophe bonds can be applied to mortality and longevity bond pricing and use the model to calculate risk premiums for longevity bonds. Keywords: Securitization; Longevity risk; Extreme value theory; Bond spreads Cox, Samuel H; Lin, Yijia; Pedersen, Hal. - Mortality risk modeling : Applications to insurance securitization. - No. pages: 12. [RKN: 72445] Shelved at: Per: IME (Oxf) Insurance: Mathematics & Economics (2010) 46 (1) : 242-253. Abstract: This paper proposes a stochastic mortality model featuring both permanent longevity jump and temporary mortality jump processes. A trend reduction component describes unexpected mortality improvement over an extended period of time. The model also captures the uneven effect of mortality events on different ages and the correlations among them. The model will be useful in analyzing future mortality dependent cash flows of life insurance portfolios, annuity portfolios, and portfolios of mortality derivatives. We show how to apply the model to analyze and price a longevity security. Wang, Liang; Valdez, Emiliano A; Piggott, John. - Securitization of longevity risk in reverse mortgages. 2008. - No. pages: 27. [RKN: 69496] Shelved at: Per: NAAJ (Oxf); Per NAAJ (Lon) [Faculty: NOR/AME] North American Actuarial Journal (2008) 12 (4) : 345-371. URL: http://www.soa.org/news-and-publications/publications/journals/naaj/naaj-detail.aspx Abstract: The reverse mortgage market has been expanding rapidly in developed economies in recent years. The onset of demographic transition places a rapidly rising number of households in an age window in which reverse mortgages have potential appeal. Increasing prices for residential real estate over the last decade have further stimulated interest. Reverse mortgages involve various risks from the provider's perspective that may hinder the further development of these financial products. This paper addresses one method of transferring and financing the risks associated with these products through the form of secularization. Securitization is becoming a popular and attractive alternative form of risk transfer of insurance liabilities. Here we demonstrate how to construct a secularization structure for reverse mortgages similar to the one applied in traditional insurance products. Specifically, we investigate the merits of developing survivor bonds and survivor swaps for reverse mortgage products. In the case of survivor bonds, for example, we are able to compute premiums, 172
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both analytically and numerically through simulations, and to examine how the longevity risk may be transferred to the financial investors. Our numerical calculations provide an indication of the economic benefits derived from developing survivor bonds to securitize the 'longevity risk component' of reverse mortgage products. Moreover, some sensitivity analysis of these economic benefits indicates that these survivor bonds provide for a promising tool for investment diversification. Wills, Samuel; Sherris, Michael. - Securitization, structuring and pricing of longevity risk. - No. pages: 13. [RKN: 72439] Shelved at: Per: IME (Oxf) Insurance: Mathematics & Economics (2010) 46 (1) : 173-185. Abstract: Pricing and risk management for longevity risk have increasingly become major challenges for life insurers and pension funds around the world. Risk transfer to financial markets, with their major capacity for efficient risk pooling, is an area of significant development for a successful longevity product market. The structuring and pricing of longevity risk using modern securitization methods, common in financial markets, have yet to be successfully implemented for longevity risk management. There are many issues that remain unresolved for ensuring the successful development of a longevity risk market. This paper considers the securitization of longevity risk focusing on the structuring and pricing of a longevity bond using techniques developed for the financial markets, particularly for mortgages and credit risk. A model based on Australian mortality data and calibrated to insurance risk linked market data is used to assess the structure and market consistent pricing of a longevity bond. Age dependence in the securitized risks is shown to be a critical factor in structuring and pricing longevity linked securitizations. Keywords: Longevity risk; Securitization
Shareholders Gatzlaff, Kevin M; McCullough, Kathleen A. - The Effect of Data Breaches on Shareholder Wealth. - No. pages: 12. [RKN: 72289] [Faculty: RIS/MAN] Risk Management and Insurance Review (2010) 13 (1) : 61-83. Abstract: Many companies face the risk of a data breach exposing stored personal information of customers and employees. The frequency of such incidents has been increasing over time and can result in significant costs for the affected firm. This article examines the stock market's assessment of the cost of data breaches at publicly traded companies in which personal information such as customer and/or employee data are exposed. Using event study methodology on a sample of 77 events between the beginning of 2004 and the end of 2006, we find that the overall effect of a data breach on shareholder wealth is negative and statistically significant. Based on a cross-sectional analysis of the cumulative abnormal returns, we find a negative association between market reaction and firms that are less forthcoming about the details of the breach. We also find that firms with higher market-to-book ratios experience greater negative abnormal returns associated with a data breach. Further, we find that firm size and subsidiary status mitigate the negative effect of a data breach on the firm's stock price and that the negative market reaction to a data breach is more significant in the most recent time periods of the sample.
Simulation Hoyt, Robert E; Powell, Lawrence S; Sommer, David W. - Computing value at risk: a simulation assignment to illustrate the value of enterprise risk management. [RKN: 69057] [Faculty: RIS/MAN] Risk Management and Insurance Review (2007) 10 (2) : 299-307.
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Sweeting, Paul J. - Modelling and managing risk. - Faculty and Institute of Actuaries, 2007. - No. pages: 43. [RKN: 37580] Shelved at: ifp 4/07 (Oxf) [Faculty: TRA/FAC] URL: http://www.actuaries.org.uk/research-and-resources/documents/modelling-andmanaging-risk Abstract: This paper looks at the risks faced by financial institutions, and how they can be modelled and managed. I compare the way in which each of the risks affects different types of financial institution and look for similarities (and differences) across industries. Finally, I consider what makes a good risk management system. Keywords: Financial Risk; Operational Risk; Modelling; Pension Fund; Insurance Company; Bank
Social security benefits Friedman, Joseph; Phillips, Herbert E. - The Downside Risk of Postponing Social Security Benefits. - Philadelphia, PA: - Department of Economics, Temple University, 2010. - (DETU Working Paper 10-08). - No. pages: 27. [RKN: 72620] URL: http://www.temple.edu/cla/economics/research/documents/detu_10_08.pdf Abstract: The point that only live participants may initiate or receive Social Security benefits is typically overlooked. Thus a postponement of benefits at any eligible retirement age may be likened to participation in a game of chance in which the participant is subject to a variant form of gambler’s ruin at death. The typical assumption, therefore, that a participant should automatically opt for a postponement if the present value of the resulting benefits, discounted to breakeven age, higher than the present value of the opportunity costs, carries with it the implication of risk neutrality in relation to the consequence of dying before reaching breakeven death age. While this implication of risk neutrality is sometimes correct, it is more likely not. In marked contrast to conclusions reached in previous studies, this paper shows that a single Social Security participant, who is risk averse as regards the chances - and contingent consequences - of dying before reaching breakeven death age, would be well advised to initiate benefits at the earliest age at which he or she would not be subject to earned income tax penalties.
Solvency Barth, Michael M; Eckles, David L. - An Empirical Investigation of the Effect of Growth on ShortTerm Changes in Loss Ratios. - No. pages: 19. [RKN: 71778] Shelved at: Per: J.Risk Ins (Oxf) [Faculty: JOU/RIS] Journal of Risk and Insurance (2009) 76 (4) : 867-885. Abstract: Given the use of premium growth as a risk measure in regulatory and private risk assessment models, the impact of growth on underwriting profitability is an important question. Our results show a negative relationship between premium growth and changes in loss ratios, suggesting that premium growth alone does not necessarily result in higher underwriting risk. Further, there is a positive relationship between claim count growth and changes in loss ratios, suggesting that claim count growth may be a preferred measure of underwriting risk. Bellis, Clare S (ed); Shepherd, John A (ed); Klugman, Stuart A; Lyon, Richard H S (ed). Understanding actuarial management: the actuarial control cycle. - 2nd ed. - Sydney: - Institute of Actuaries of Australia, 2010. - No. pages: 630. [RKN: 39617] Shelved at: EM (Oxf) [Faculty: 368.01 BEL] URL: http://www.soa.org/files/pdf/book-understanding-act.pdf Contents: Risk management frameworks -- Being professional -- The need for financial products -The context of actuarial work -- Applying risk management -- Regulation -- Product design -Modelling -- Data and assumptions -- The need for capital -- Valuing liabilities -- Pricing -- Assets -Solvency -- Profit -- Monitoring experience -- Responding to experience -- Applying the actuarial control cycle
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Centre for the Study of Financial Innovation; PricewaterhouseCoopers. - Insurance Banana Skins 2009 : The CSFI survey of the risks facing insurers. - Centre for the Study of Financial Innovation (CSFI), 2009. [RKN: 71821] URL: http://www.pwc.com/en_GX/gx/insurance/assets/insurance_banana_skins_2009.pdf Abstract: Surveys the risks facing the insurance industry at a time of great stress in the financial sector, and identifies those that are seen as most pressing by insurance practitioners and close observers of the insurance scene. In keeping with the current volatile financial environment, investment performance, equity markets and capital availability now head the list of insurance Banana Skins. Macro-economic trends are ranked fourth. Concerns over counterparty exposures, reinsurance security and broader systemic and solvency risks have also come to the fore. Cluskey, Graeme. - Solvency 2, Practicalities 2, after extra time : Letter to the editor. [RKN: 38605] Shelved at: Per: Actuary (Oxf); Per: Actuary (Lon) The Actuary (2008) September : 6-7. URL: http://www.the-actuary.org.uk Abstract: Letter responding to the roundtable discussion on Solvency II from August 2008, concluding that Solvency II will have positive outcomes no matter what. Haslip, Gareth. - Risk assessment. [RKN: 38758] Shelved at: Per: Actuary (Oxf); Per: Actuary (Lon) The Actuary (2008) December : 28-30. URL: http://www.the-actuary.org.uk Abstract: Description of the calculation methodologies for Solvency II risk margin requirements for non-life insurers. Malinovskii, Vsevolod K. - Scenario Analysis for a Multi-Period Diffusion Model of Risk. - No. pages: 28. [RKN: 71973] Shelved at: Per: Astin Bull (Oxf) [Faculty: JOU/AST] ASTIN Bulletin (2009) 39 (2) : 649-676. Abstract: This paper extends and develops the results of a previous paper Malinovskii (2007). Dealing with a simplistic diffusion multi-year model of insurance operations, this paper illustrates the adaptive control approach when the object of control is the balance of solvency and equity. Compared to the previous paper, a new element is the “scenario of nature”, or the incomplete knowledge of future risk, which is quite often the case in insurance. It introduces a new and inevitable randomness in the model and leads to a qualitative difference in its behaviour. Keywords: Multi-period insurance process; diffusion annual mechanisms; volatile scenario; solvency; equity; adaptive control strategies
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Risk Management Reading List September 2010
Schmeiser, Hato; Siegel, Caroline. - Regulating Insurance Groups : a Comparison of Risk-Based Solvency Models. - St Gallen: - Institute of Insurance Economics, 2010. - (Working papers on risk management and insurance no. 79). - No. pages: 26. [RKN: 72841] URL: http://www.ivw.unisg.ch/org/ivw/web.nsf/SysWebRessources/WP79/$FILE/Regulating+Insur ance+Groups.pdf Abstract: Since the 1990s, there has been extensive growth of financial groups involved in the insurance sector. As a result, supervisors and regulators are currently developing group-wide capital standards intended to enable effective monitoring of the financial soundness of such groups. Some jurisdictions are taking steps towards a consolidated approach, which views the group as one single integrated entity, while others model the group as a collection of interrelated but separate legal entities. This paper provides a theoretical as well as a numerical comparison of these two approaches to group-wide solvency assessment in light of the different regulatory issues and challenges associated with consideration of group effects. As a benchmark case, we consider a “silo approach” that is based on a solo assessment of the risks and solvency capital requirements of each legal entity within the insurance group. Our analysis contributes to the ongoing discussion about the best way to conduct group-wide solvency assessments. Key words: Solvency, insurance group, regulation, risk management
Solvency II Cannon, Chris; Dunn, Neil; Singh, Budhi; Skinner, Justin. - Fit for purpose. - Staple Inn Actuarial Society, - No. pages: 2. [RKN: 72077] Shelved at: Per: Actuary (Oxf); Per: Actuary (Lon) [Faculty: SIA/ACT] The Actuary (2010) Jan / Feb : 26-27. URL: http://www.the-actuary.org.uk Abstract: Chris Cannon asks Neil Dunn, Budhi Singh and Justin Skinner how actuaries shape up as risk managers in the insurance market Doff, René. - Risk management for insurers : Risk control, economic capital and Solvency II. Risk Books, 2007. - No. pages: 204. [RKN: 39273] [Faculty: 519.287 DOF] Abstract: This book will help the reader to quickly get to grips with risk management terms and techniques and how they relate specifically to the insurance industry. It also demonstrates how Solvency II is already shaping the regulatory agenda and its likely impact on the insurance industry. Risk Management for Insurers is an accessible reference for the whole insurance industry, identifying and discussing how to measure and manage seven major risk types such as: Market risk, including interest rate and equity risk; Credit risk; Liquidity risk; Non-life risk; Life risk; Operational risk; and Business risk. The main benefit of Risk Management for Insurers is that it emphasizes the practical risk management concepts, rather than technical calculations and detailed theory, making it easier for a layman to understand. All concepts and terms are applied to clear illustrative examples and the regulation and supervision developments are simple to follow. It is recommended for risk managers, actuaries, controllers, accountants, auditors, corporate finance managers, underwriting and reinsurance managers, investment managers, equity analysts and financial consultants. Rusalovskiy, Artem. - Challenges of Solvency II implementation : Preparing for IT implementation of Solvency II regulations in insurance companies. - Germany: - VDM Verlag Dr Müller Aktiengesellschaft & Co. KG, 2008. - No. pages: 123. [RKN: 69771] [Faculty: 368 RUS]
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Telford, P G; Browne, B A; Collinge, E J; Fulcher, P; Johnson, B E; Little, W; Lu, J L C; Nurse, J M; Smith, D W; Zhang, F. - Developments in the management of annuity business. - Faculty of Actuaries and Institute of Actuaries, 2010. - No. pages: 96. [RKN: 72306] [Faculty: JOU/INS] URL: http://www.actuaries.org.uk/research-and-resources/documents/developmentsmanagement-annuity-business Abstract: The focus of the paper is non-profit lifetime annuities in the UK. Annuity insurers have been faced with, or have initiated, an unprecedented amount of change during the last decade, and rapid change is still continuing. We draw out implications for the actuarial management of the business, arising from the evolution of: longevity risk assessment and management, investment strategy and operations, financial reporting, and enterprise risk management. We discuss Solvency II in some technical depth, analysing the proposed rules for technical provisions and solvency capital requirement. Keywords: Annuities; Retirement Income; Longevity; Mortality Improvement; Reinsurance; Underwriting; Collateral; Investment; Asset-Liability Management; Financial Reporting; IFRS; Pillar I; Individual Capital Assessment; Enterprise Risk Management; Solvency II; Illiquidity Premium; Economic Capital
Sparre Andersen model Cheung, Eric C K; Landriault, David; Willmot, Gordon E; Woo, Jae-Kyung. - Structural properties of Gerber–Shiu functions in dependent Sparre Andersen models. - No. pages: 10. [RKN: 72433] Shelved at: Per: IME (Oxf) Insurance: Mathematics & Economics (2010) 46 (1) : 117-126. Abstract: The structure of various Gerber–Shiu functions in Sparre Andersen models allowing for possible dependence between claim sizes and interclaim times is examined. The penalty function is assumed to depend on some or all of the surplus immediately prior to ruin, the deficit at ruin, the minimum surplus before ruin, and the surplus immediately after the second last claim before ruin. Defective joint and marginal distributions involving these quantities are derived. Many of the properties in the Sparre Andersen model without dependence are seen to hold in the present model as well. A discussion of Lundberg’s fundamental equation and the generalized adjustment coefficient is given, and the connection to a defective renewal equation is considered. The usual Sparre Andersen model without dependence is also discussed, and in particular the case with exponential claim sizes is considered. Keywords: Defective renewal equation; Compound geometric distribution; Ladder height; Lundberg’s fundamental equation; Generalized adjustment coefficient; Cramer’s asymptotic ruin formula; Esscher transform; Last interclaim time; NWU; NBU Ren, Jiandong. - The discounted joint distribution of the surplus prior to ruin and the deficit at ruin in a Sparre Andersen model. - No. pages: 10. [RKN: 68937] Shelved at: Per: NAAJ (Oxf); Per NAAJ (Lon) [Faculty: NOR/AME] North American Actuarial Journal (2007) 11 (3) : 128-137. URL: http://www.soa.org/news-and-publications/publications/journals/naaj/naaj-detail.aspx Abstract: In this article, we consider the risk model with phase-type interclaim times. We first derive a simple matrix-form expression for the discounted joint density of the surplus prior to ruin and the deficit at ruin when the initial surplus is zero. Then we express the discounted joint density in terms of certain expected discounted penalty functions when the initial surplus is greater than zero. This result generalizes that in Gerber and Shiu (1997). Schmidli, Hanspeter. - On the Gerber–Shiu function and change of measure. - No. pages: 8. [RKN: 72422] Shelved at: Per: IME (Oxf) Insurance: Mathematics & Economics (2010) 46 (1) : 3-11. Abstract: We consider several models for the surplus of an insurance company mainly under some light-tail assumptions. We are interested in the expected discounted penalty at ruin. By a change of measure we remove the discounting, which simplifies the expression. This leads to (defective) 177
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Risk Management Reading List September 2010
renewal equations as they had been found by different methods in the literature. If we use the change of measure such that ruin becomes certain, the renewal equations simplify to ordinary renewal equations. This helps to discuss the asymptotics as the initial capital goes to infinity. For phase-type claim sizes, explicit formulae can be derived. Keywords: Expected discounted penalty function; Change of measure; Laplace transform; Sparre– Andersen risk model; Markov-modulated risk model; Björk–Grandell risk model; Perturbed risk model; Lump sum premia Willmot, Gordon E; Woo, Jae-Kyung. - Surplus analysis for a class of Coxian interclaim time distributions with applications to mixed Erlang claim amounts. - No. pages: 10. [RKN: 72425] Shelved at: Per: IME (Oxf) Insurance: Mathematics & Economics (2010) 46 (1) : 32-41. Abstract: Gerber–Shiu analysis with the generalized penalty function proposed by Cheung et al. (in press-a) is considered in the Sparre Andersen risk model with a Kn family distribution for the interclaim time. A defective renewal equation and its solution for the present Gerber–Shiu function are derived, and their forms are natural for analysis which jointly involves the time of ruin and the surplus immediately prior to ruin. The results are then used to find explicit expressions for various defective joint and marginal densities, including those involving the claim causing ruin and the last interclaim time before ruin. The case with mixed Erlang claim amounts is considered in some detail. Keywords: Sparre Andersen risk process; Kn family of distributions; Combination of Erlangs; Mixtures of Erlangs; Defective renewal equation; Compound geometric distribution; Ladder height; Generalized Lundberg’s fundamental equation; Lagrange polynomials
Standards and specifications Risk management: code of practice : BS 31100:2008. - London: - BSI, 2008. - No. pages: 46. [RKN: 38976] Shelved at: BXP/739 (Oxf) Shelved at: BS 31100 2008 Abstract: BS 31100 is a key standard for risk management. It gives you an understanding on how to develop, implement and maintain effective risk management within your business. Using BS 31100 effectively can help you increase your company's effectiveness. BS 31100 establishes the principles and terminology for risk management. It also gives recommendations for the model, framework, process and implementation of risk management gained from experience and good practice. CRMPG III; Corrigan, E Gerald. - Containing systematic risk : the road to reform : The report of the CRMPG III. 2008. - No. pages: 138. [RKN: 38533] Shelved at: online only URL: http://www.crmpolicygroup.org/docs/CRMPG-III.pdf Abstract: The scope of the CRMPG III initiative was designed to focus its primary attention on the steps that must be taken by the private sector to reduce the frequency and/or severity of future financial shocks while recognizing that such future shocks are inevitable, in part because it is literally impossible to anticipate the specific timing and triggers of such events. The CRMPG III effort has focused its attention on four closely related and forward-looking aspects of financial reform and rehabilitation, including: (1) a reconsideration of the standards for consolidation under US GAAP that contemplates a significant shift of currently off-balance sheet entities to on-balance sheet status; (2) measures to better understand and manage complex financial instruments with particular emphasis on their distribution and how their risk sensitivities are disclosed; (3) risk monitoring and risk management with particular emphasis on the role of sound corporate governance and the relationship between liquidity, leverage and capital adequacy; and (4) a series of sweeping measures to enhance the resiliency of credit markets in particular and financial markets more generally with particular attention to strengthening the safeguards associated with the OTC derivatives markets with emphasis on credit default swaps (CDS). Among other things, this section of the Report urges swift industry action to create a clearinghouse for OTC derivatives, starting with CDS. 178
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Risk Management Reading List September 2010
Stochastic models Cox, Samuel H; Lin, Yijia; Pedersen, Hal. - Mortality risk modeling : Applications to insurance securitization. - No. pages: 12. [RKN: 72445] Shelved at: Per: IME (Oxf) Insurance: Mathematics & Economics (2010) 46 (1) : 242-253. Abstract: This paper proposes a stochastic mortality model featuring both permanent longevity jump and temporary mortality jump processes. A trend reduction component describes unexpected mortality improvement over an extended period of time. The model also captures the uneven effect of mortality events on different ages and the correlations among them. The model will be useful in analyzing future mortality dependent cash flows of life insurance portfolios, annuity portfolios, and portfolios of mortality derivatives. We show how to apply the model to analyze and price a longevity security. Yang, Sharon S; Yue, Jack C; Huang, Hong-Chih. - Modeling longevity risks using a principal component approach : A comparison with existing stochastic mortality models. - No. pages: 17. [RKN: 72446] Shelved at: Per: IME (Oxf) Insurance: Mathematics & Economics (2010) 46 (1) : 254-270. Abstract: This research proposes a mortality model with an age shift to project future mortality using principal component analysis (PCA). Comparisons of the proposed PCA model with the wellknown models—the Lee–Carter model, the age–period–cohort model (Renshaw and Haberman, 2006), and the Cairns, Blake, and Dowd model—employ empirical studies of mortality data from six countries, two each from Asia, Europe, and North America. The mortality data come from the human mortality database and span the period 1970–2005. The proposed PCA model produces smaller prediction errors for almost all illustrated countries in its mean absolute percentage error. To demonstrate longevity risk in annuity pricing, we use the proposed PCA model to project future mortality rates and analyze the underestimated ratio of annuity price for whole life annuity and deferred whole life annuity product respectively. The effect of model risk on annuity pricing is also investigated by comparing the results from the proposed PCA model with those from the LC model. The findings can benefit actuaries in their efforts to deal with longevity risk in pricing and valuation. Keywords: Longevity risk; Age–period–cohort model; Lee–Carter models; Principal component analysis
Stochastic processes Biffis, Enrico; Kyprianou, Andreas E. - A note on scale functions and the time value of ruin for Lévy insurance risk processes. - No. pages: 7. [RKN: 72429] Shelved at: Per: IME (Oxf) Insurance: Mathematics & Economics (2010) 46 (1) : 85-91. Abstract: We examine discounted penalties at ruin for surplus dynamics driven by a general spectrally negative Lévy process; the natural class of stochastic processes which contains many examples of risk processes which have already been considered in the existing literature. Following from the important contributions of [Zhou, X., 2005. On a classical risk model with a constant dividend barrier. North Am. Act. J. 95–108] we provide an explicit characterization of a generalized version of the Gerber–Shiu function in terms of scale functions, streamlining and extending results available in the literature. Keywords: Scale functions; Ruin; Spectrally negative Lévy processes; Gerber–Shiu function; Laplace transform
Stock market Gatzlaff, Kevin M; McCullough, Kathleen A. - The Effect of Data Breaches on Shareholder Wealth. 179
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- No. pages: 12. [RKN: 72289] [Faculty: RIS/MAN] Risk Management and Insurance Review (2010) 13 (1) : 61-83. Abstract: Many companies face the risk of a data breach exposing stored personal information of customers and employees. The frequency of such incidents has been increasing over time and can result in significant costs for the affected firm. This article examines the stock market's assessment of the cost of data breaches at publicly traded companies in which personal information such as customer and/or employee data are exposed. Using event study methodology on a sample of 77 events between the beginning of 2004 and the end of 2006, we find that the overall effect of a data breach on shareholder wealth is negative and statistically significant. Based on a cross-sectional analysis of the cumulative abnormal returns, we find a negative association between market reaction and firms that are less forthcoming about the details of the breach. We also find that firms with higher market-to-book ratios experience greater negative abnormal returns associated with a data breach. Further, we find that firm size and subsidiary status mitigate the negative effect of a data breach on the firm's stock price and that the negative market reaction to a data breach is more significant in the most recent time periods of the sample.
Surrender values Gatzert, Nadine; Hoermann, Gudrun; Schmeiser, Hato. - The impact of the secondary market of life insurers' surrender profits. - No. pages: 22. [RKN: 71779] Shelved at: Per: J.Risk Ins (Oxf) [Faculty: JOU/RIS] Journal of Risk and Insurance (2009) 76 (4) : 887-908. Abstract: Life insurers often claim that the life settlement industry reduces their surrender profits and leads to an adverse shift in their portfolio of insured risks; that is, high risks remain in the portfolio instead of surrendering. In this article, we aim to quantify the effect of altered surrender behavior––subject to the health status of an insured––in a portfolio of life insurance contracts on the surrender profits of primary insurers. Our model includes mortality heterogeneity by applying a stochastic frailty factor to a mortality table. We additionally analyze the impact of the premium payment method by comparing results for annual and single premium payments.
Swaps Greenwood, Mark; Svoboda, Simona. - LPI swaps : Pricing and Trading [copies of slides only] Institute of Actuaries and Faculty of Actuaries, 2010. - (Risk and Investment Conference 2010 Caledonian Hotel, Edinburgh, 13-15 June 2010). [RKN: 73013] URL: http://www.actuaries.org.uk/research-and-resources/documents/pricing-and-tradinglimited-price-indexation-lpi-swaps
Systemic risk Aikman, David; Alessandri, Piegiorgio; Eklaund, Bruno; Gai, Prasanna; Kapadia, Sujit; Martin, Elizabeth; Mora, Nada; Sterne, Gabriel; Willison, Matthew. - Funding liquidity risk in a quantitative model of systemic stability. - Bank of England, 2009. - (Bank of England Working Paper no. 372). - No. pages: 39. [RKN: 69902] Shelved at: Online only [Faculty: Online only] URL: http://www.bankofengland.co.uk/publications/workingpapers/index.htm Abstract: We demonstrate how the introduction of liability-side feedbacks affects the properties of a quantitative model of systemic risk. The model is known as RAMSI and is still in its development phase. It is based on detailed balance sheets for UK banks and encompasses macro-credit risk, interest and non-interest income risk, network interactions, and feedback effects. Funding liquidity risk is introduced by allowing for rating downgrades and incorporating a simple framework in which concerns over solvency, funding profiles and confidence may trigger the outright closure of funding markets to particular institutions. In presenting results, we focus on aggregate distributions and analysis of a scenario in which large losses at some banks can be exacerbated by liability-side 180
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feedbacks, leading to system-wide instability. American Academy of Actuaries; Financial Regulatory Reform Task Force. - Role of the Systemic Risk Regulator. - Washington, DC: - American Academy of Actuaries, 2010. - (A public policy white paper). - No. pages: 19. [RKN: 72503] URL: http://www.actuary.org/pdf/finreport/role_of_the_systemic_risk_regulator.pdf Abstract: The task force supports the establishment of a federally-based systemic risk regulator. The roles and responsibilities of the SRR should be consistent for all sectors of the financial services industry. Implementation of these roles and responsibilities for insurance companies should reflect the unique length and complexity of the insurance liability structure and a functional regulatory system that supports the objectives of the SRR. Besar, D; Booth, Philip M; Chan, K K; Milne, Alistair; Pickles, J. - Systemic risk in financial services : A discussion paper. - London: - Faculty of Actuaries. Institute of Actuaries, 2009. - No. pages: 127. [RKN: 71955] Shelved at: ifp 12/09 (Oxf); ifp 12/09 (Lon) [Faculty: JOU/INS] URL: http://www.actuaries.org.uk/research-and-resources/documents/systemic-riskfinancial-services Abstract: The current banking crisis has reminded us of how risks materialising in one part of the financial system can have a widespread impact, affecting other financial markets and institutions and the broader economy. This paper, prepared on behalf of the Actuarial Profession, examines how such events have an impact on the entire financial system and explores whether such disturbances may arise within the insurance and pensions sectors as well as within banking. The paper seeks to provide an overview of a number of banking and other financial crises which have occurred in the past, illustrated by four cases studies. It discusses what constitutes a systemic event and what distinguishes it from a large aggregate system wide shock. Finally, it discusses how policy makers can respond to the risk of such systemic financial failures. Keywords: Banking Crisis; Financial Crisis; Global Financial Crisis; Financial Deregulation; Credit Cycle; Governance; Control Mechanisms; Systemic Risk; Financial Infrastructure; Payment Systems; Short Term Funding Markets; Collateral Exposure; Securities; Derivatives; Counterparty Risk; Recession; Pension System Harrington, Scott E. - The financial crisis, systemic risk, and the future of insurance regulation. No. pages: 35. [RKN: 71775] Shelved at: Per: J.Risk Ins (Oxf) [Faculty: JOU/RIS] Journal of Risk and Insurance (2009) 76 (4) : 785-819. Abstract: This article considers the role of American International Group (AIG) and the insurance sector in the 2007–2009 financial crisis and the implications for insurance regulation. Following an overview of the causes of the crisis, I explore the events and policies that contributed to federal government intervention to prevent bankruptcy of AIG and the scope of federal assistance to AIG. I discuss the extent to which insurance in general poses systemic risk and whether a systemic risk regulator is desirable for insurers or other nonbank financial institutions. The last two sections of the article address the financial crisis's implications for proposed optional and/or mandatory federal chartering and regulation of insurers and for insurance regulation in general. Milne, Alistair. - A measured response. - Staple Inn Actuarial Society, - No. pages: 2. [RKN: 72081] Shelved at: Per: Actuary (Oxf); Per: Actuary (Lon) [Faculty: SIA/ACT] The Actuary (2010) Jan / Feb : 32-33. URL: http://www.the-actuary.org.uk Abstract: Alistair Milne reports on the findings of his research into systemic risk in response to the recent financial crisis Nier, Erlend; Yang, Jing; Yorulmazer, Tanju; Alentorn, Amadeo. - Network models and financial stability. - Bank of England, 2008. - (Bank of England Working Paper no. 346). - No. pages: 29. [RKN: 69889] Shelved at: Online only [Faculty: Online only] 181
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Risk Management Reading List September 2010
URL: http://www.bankofengland.co.uk/publications/workingpapers/index.htm Abstract: Systemic risk is a key concern for central banks charged with safeguarding overall financial stability. In this paper we investigate how systemic risk is affected by the structure of the financial system. We construct banking systems that are composed of a number of banks that are connected by interbank linkages. We then vary the key parameters that define the structure of the financial system - including its level of capitalisation, the degree to which banks are connected, the size of interbank exposures and the degree of concentration of the system - and analyse the influence of these parameters on the likelihood of contagious (knock-on) defaults. First, we find that the better capitalised banks are, the more resilient is the banking system against contagious defaults and this effect is non-linear. Second, the effect of the degree of connectivity is nonmonotonic, that is, initially a small increase in connectivity increases the contagion effect; but after a certain threshold value, connectivity improves the ability of a banking system to absorb shocks. Third, the size of interbank liabilities tends to increase the risk of knock-on default, even if banks hold capital against such exposures. Fourth, more concentrated banking systems are shown to be prone to larger systemic risk, all else equal. In an extension to the main analysis we study how liquidity effects interact with banking structure to produce a greater chance of systemic breakdown. We finally consider how the risk of contagion might depend on the degree of asymmetry (tiering) inherent in the structure of the banking system. A number of our results have important implications for public policy, which this paper also draws out. van Lelyveld, Iman; Liedorp, Franka; Kampman, Manuel. - An Empirical assessment of reinsurance risk. - Amsterdam: - De Nederlandsche Bank, 2009. - (DNB Working Paper No. 201 February 2009). - No. pages: 31. [RKN: 71936] URL: http://www.dnb.nl/en/binaries/Working%20paper%20201_tcm47-212957.pdf Abstract: We analyse the effect of failing reinsurance cover on the stability of Dutch insurers. As insurers often reinsure themselves with other (re)insurers, losses could spread contagiously through the sector. Using a unique and confidential data set on reinsurance exposures, we perform a scenario analysis to measure contagion risks. Based on current exposures, we find no evidence of systemic risk in the Netherlands, even if multiple reinsurance companies fail simultaneously. Next, we analyse to what extent the financial position of individual primary insurers is affected following a particular shock, considering solvency, capital and profit levels. The life insurance industry is hardly affected by reinsurance failures. The non-life industry, however, is vulnerable to a crisis in the European reinsurance market. We also find that members of smaller insurance groups are particularly exposed. Keywords : reinsurance, contagion, simulation
Tail risk measures Furman, Edward; Landsman, Zinoviy. - Multivariate Tweedie distributions and some related capital-at-risk analyses. - No. pages: 11. [RKN: 72456] Shelved at: Per: IME (Oxf) Insurance: Mathematics & Economics (2010) 46 (2) : 351-361. Abstract: We study a multivariate extension of the univariate exponential dispersion Tweedie family of distributions. The class, referred to as the multivariate Tweedie family (MTwF), on the one hand includes multivariate Poisson, gamma, inverse Gaussian, stable and compound Poisson distributions and on the other hand introduces a high variety of new dependent probabilistic models unstudied so far. We investigate various properties of MTwF and discuss its possible applications to financial risk management. Keywords: Exponential dispersion models; Multivariate Tweedie family; Cauchy’s functional equations; Risk capital allocations; The tail conditional expectation risk measure Kim, Joseph H T. - Conditional tail moments of the exponential family and its transformed distributions. - Ontario: - University of Waterloo, 2008. - (Institute of Insurance and Pension Research Research Report 08-05). - No. pages: 28. [RKN: 69979] Shelved at: Online only [Faculty: Online only] 182
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URL: http://www.stats.uwaterloo.ca/stats_navigation/IIPR/IIPR-Reports.shtml Abstract: Tail risk measures have been extensively used in the finance and actuarial literature for setting premium and risk capital. Among others the conditional tail expectation (CTE) is a popular measure in insurance applications. This paper derives the formulas of the CTE and higher moments for the exponential family class, which extends the natural exponential family, using the canonical representation. The conditional tail moments for the distributions transformed from the exponential family are also derived using the variable transformation. With the formulas developed in this paper we know the conditional tail moments for a wide range of distributions used for actuarial modelling. Keywords: conditional tail moments; exponential family; tail risk measure Tian, Ruilian; Cox, Samuel H; Lin, Yijia; Zuluaga, Luis F. - Portfolio Risk Management with CVaRlike Constraints. - Society of Actuaries, - No. pages: 21. [RKN: 72654] Shelved at: Per: NAAJ (Oxf); Per NAAJ (Lon) [Faculty: NOR/AME] North American Actuarial Journal (2010) 14 (1) : 86-106. URL: http://www.soa.org/news-and-publications/publications/journals/naaj/naaj-detail.aspx Abstract: A current research stream in the portfolio allocation literature develops models that take into account the asymmetric nature of asset return distributions. Our paper contributes to this research stream by extending the Krokhmal, Palmquist, and Uryasev approach. We add CVaR-like constraints in the traditional portfolio optimization problem to reshape the tails of the portfolio return distribution while not significantly affecting its mean and variance. We illustrate how to apply this approach, called the ‘‘MV + CVaR approach,’’ to manage tail risk of an insurer’s asset-liability portfolio. Finally, we compare the MV + CVaR approach with the traditional Markowitz method and a method recently introduced by Boyle and Ding. Our numerical analysis provides empirical support for the effectiveness of the MV + CVaR approach in controlling downside risk. Moreover, we find that the MV + CVaR approach may improve skewness of mean-variance portfolios, especially for high-variance portfolios. Zhou, Chen. - Dependence structure of risk factors and diversification effects. - No. pages: 10. [RKN: 72521] Shelved at: Per: IME (Oxf) Insurance: Mathematics & Economics (2010) 46 (3) : 531-540. Abstract: In this paper, we study the aggregated risk from dependent risk factors under the multivariate Extreme Value Theory (EVT) framework. We consider the heavy-tailedness of the risk factors as well as the non-parametric tail dependence structure. This allows a large range of models on the dependence. We assess the Value-at-Risk of a diversified portfolio constructed from dependent risk factors. Moreover, we examine the diversification effects under this setup. Keywords: Aggregated risk ; Diversification effect ; Multivariate extreme value theory
Tax Albrecher, Hansjörg; Hipp, Christian. - Lundberg’s risk process with tax. [RKN: 43354] Shelved at: Per: Blätter (Lon); online only Blätter der Deutsche Gesellschaft für Versicherungs- und Finanzmathematik (2007) 28 (heft 1) : 13-28. URL: http://www.springerlink.com/content/1864-0303/
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Risk Management Reading List September 2010
Cheung, Eric C K; Landriault, David. - On a risk model with surplus-dependent premium and tax rates. - Waterloo: - University of Waterloo, 2010. - (Waterloo Research Institute in Insurance, Securities and Quantitative Finance (WatRISQ) Working paper series 2010-05). - No. pages: 20. [RKN: 72577] URL: http://www.watrisq.uwaterloo.ca/Research/2010Reports/2010-05.pdf Abstract: In this paper, the compound Poisson risk model with surplus-dependent premium rate is analyzed in the taxation system proposed by Albrecher and Hipp (2007). In the compound Poisson risk model, Albrecher and Hipp (2007) showed that a simple relationship between the ruin probabilities in the risk model with and without tax exists. This so-called tax identity was later generalized to a surplus-dependent tax rate by Albrecher et al. (2009). This paper further generalizes these results to the Gerber-Shiu function with a generalized penalty function involving the maximum surplus prior to ruin. We show that this generalized Gerber-Shiu function in the risk model with tax is closely related to the 'original' Gerber-Shiu function in the risk model without tax defined in a dividend barrier framework. The moments of the discounted tax payments before ruin and the optimal threshold level for the tax authority to start collecting tax payments are also examined. Keywords: Gerber-Shiu function, tax identity, maximum surplus level, surplus-dependent premium, discounted tax payments. Ming, Rui-Xing; Wang, Wen-Yuan; Xiao, Li-Qun. - On the time value of absolute ruin with tax. No. pages: 18. [RKN: 72428] Shelved at: Per: IME (Oxf) Insurance: Mathematics & Economics (2010) 46 (1) : 67-84. Abstract: Consider a compound Poisson surplus process of an insurer with debit interest and tax payments. When the portfolio is in a profitable situation, the insurer may pay a certain proportion of the premium income as tax payments. When the portfolio is below zero, the insurer could borrow money at a debit interest rate to continue his/her business. Meanwhile, the insurer will repay the debts from his/her premium income. The negative surplus may return to a positive level except that the surplus is below a certain critical level. In the latter case, we say that absolute ruin occurs. In this paper, we discuss absolute ruin quantities by defining an expected discounted penalty function at absolute ruin. First, a system of integro-differential equations satisfied by the expected discounted penalty function is derived. Second, closed-form expressions for the expected discounted total sum of tax payments until absolute ruin and the Laplace–Stieltjes transform (LST) of the total duration of negative surplus are obtained. Third, for exponential individual claims, closed-form expressions for the absolute ruin probability, the LST of the time to absolute ruin, the distribution function of the deficit at absolute ruin and the expected accumulated discounted tax are given. Fourth, for general individual claim distributions, when the initial surplus goes to infinity, we show that the ratio of the absolute ruin probability with tax to that without tax goes to a positive constant which is greater than one. Finally, we investigate the asymptotic behavior of the absolute ruin probability of a modified risk model where the interest rate on a positive surplus is involved. Keywords: Compound Poisson surplus process; Debit interest; Interest rate on positive surplus; Tax; Absolute ruin; Light and heavy-tailed claims; Expected discounted penalty function Renaud, Jean-François. - The distribution of tax payments in a Lévy insurance risk model with a surplus-dependent taxation structure. - No. pages: 5. [RKN: 72396] Shelved at: Per: IME (Oxf) Insurance: Mathematics & Economics (2009) 45 (2) : 242-246. Abstract: We study the distribution of tax payments in the model of Kyprianou and Zhou [Kyprianou, A.E., Zhou, X., 2009. General tax structures and the Lévy insurance risk model. J. Appl. Probab. (in press)], that is a Lévy insurance risk model with a surplus-dependent tax rate. More precisely, after a short discussion on the so-called tax identity, we derive a recursive formula for arbitrary moments of the discounted tax payments until ruin and we identify the distribution of the tax payments when there is no force of interest. Keywords: Insurance risk theory; General taxation structure; Tax payments; Lévy processes Sandmo, Agnar. - Uncertainty in the theory of public finance. 184
[RKN: 39615]
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Shelved at: Per: Geneva (Oxf) Geneva Risk and Insurance Review (2010) 35 (1) : 1-18. Abstract: This paper discusses the role that the economics of uncertainty has played in the theory of public finance. From being mostly concerned with its choice-theoretic foundations in the 1950s and 1960s, the theory of expected utility maximisation and risk averse behaviour has contributed decisively to the development of several areas of the theory of public finance. Three of these have been chosen here to illustrate the general point: The theory of taxation and risk taking with focus on portfolio choice, the role of uncertainty in public expenditure analysis (emphasising the effect of public goods provision on private risk taking) and the theory of tax evasion and compliance.
Telecommunications Hirsch, Rachel; Pun, Kenny; Reuttner, Isabella. - Rethinking Risk Management in Financial Services : Practices from other domains. - New York, NY: - World Economic Forum. Boston Consulting Group, 2010. - No. pages: 68. [RKN: 72465] URL: http://www.weforum.org/pdf/FinancialInstitutions/RethinkingRiskManagement.pdf Abstract: While other efforts have largely focused on improving risk management in financial services “from the inside out,” this report looks at it “from the outside in” – trying to learn from practices and patterns in domains such as aviation, fisheries, wildfire fighting, immunology / epidemiology, telecommunication and pharmaceuticals. While not all of these practices are directly transferable to finance, many are and most of them provide much needed fresh perspective and thinking.
Transforms Biffis, Enrico; Kyprianou, Andreas E. - A note on scale functions and the time value of ruin for Lévy insurance risk processes. - No. pages: 7. [RKN: 72429] Shelved at: Per: IME (Oxf) Insurance: Mathematics & Economics (2010) 46 (1) : 85-91. Abstract: We examine discounted penalties at ruin for surplus dynamics driven by a general spectrally negative Lévy process; the natural class of stochastic processes which contains many examples of risk processes which have already been considered in the existing literature. Following from the important contributions of [Zhou, X., 2005. On a classical risk model with a constant dividend barrier. North Am. Act. J. 95–108] we provide an explicit characterization of a generalized version of the Gerber–Shiu function in terms of scale functions, streamlining and extending results available in the literature. Keywords: Scale functions; Ruin; Spectrally negative Lévy processes; Gerber–Shiu function; Laplace transform Ren, Jiandong; Li, Shuanming. - The analysis of perturbed risk processes with Markovian arrivals. - Victoria: - University of Melbourne, 2009. - (Centre for Actuarial Studies, University of Melbourne, Research Paper no. 187). - No. pages: 18. [RKN: 72116] URL: http://mercury.ecom.unimelb.edu.au/SITE/actwww/wps2009/187.pdf Abstract: In this paper, we study the perturbed risk processes with Markovian arrivals. We present explicit formulas for the Laplace transform of the time to cross a certain level before ruin, the Laplace transform of the time of recovery and the distribution of the maximum severity of ruin, as well as the expected discounted dividends and the distribution of the total dividends prior to ruin for the risk model in the presence of a constant dividend barrier. Keywords: Perturbed risk processes; Markovian arrival processes; First passage times; Time of recovery; Maximum severity of ruin; Dividend barrier
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Wu, X. - Ruin probabilities for a risk model with two classes of risk processes. - No. pages: 22. [RKN: 36856] Australian Actuarial Journal (2010) 16 (1) : 87-108. URL: http://www.actuaries.asn.au/Libraries/Information_Knowledge/46305_AAJ_v16i1_comp.sflb. ashx Abstract: In this paper a risk model with two classes of business is considered, in which claim number processes are modelled by two independent Erlang(2) processes, aiming to calculate probabilities of ruin caused by a claim from a certain class. To do so, integro-differential equations for the ruin probabilities are derived and their Laplace transforms are then obtained. At the end of this paper, numerical results for the ruin probabilities are calculated for individual claim sizes with exponential and Gamma distributions. Keywords: Erlang risk process; Integro-differential equations; Laplace transforms Wu, Xueyuan. - Ruin probabilities for a risk model with two classes of risk processes. - Victoria: University of Melbourne, 2010. - (Centre for Actuarial Studies, University of Melbourne, Research Paper no. 204). - No. pages: 16. [RKN: 72347] URL: http://econ.unimelb.edu.au/SITE/actwww/wps2010/204.pdf Abstract: In this paper a risk model with two classes of business is considered, in which claim number processes are modelled by two independent Erlang(2) processes, aiming to calculate probabilities of ruin caused by a claim from a certain class. To do so, integro-differential equations for the ruin probabilities are derived and their Laplace transforms are then obtained. At the end of this paper, numerical results for the ruin probabilities are calculated for individual claim sizes with exponential and Gamma distributions. Keywords: Erlang risk process; Integro-differential equations; Laplace transforms Zhou, Ming; Cai, Jun. - A perturbed risk model with dependence between premium rates and claim sizes. - No. pages: 11. [RKN: 72412] Shelved at: Per: IME (Oxf) Insurance: Mathematics & Economics (2009) 45 (3) : 382-392. Abstract: This paper considers a dependent risk model with diffusion for the surplus of an insurer, in which a current premium rate will be adjusted after a claim occurs and the adjusted rate is determined by the amount of the claim. At the same time, the diffusion is changed correspondingly. Using Rouché’s theorem, we first derive the closed-form solution for the Laplace transform of the survival probability in the dependent risk model. Then, using the Laplace transform, we derive a defective renewal equation satisfied by the survival probability. For the exponential claim sizes, we present the explicit recursion expression for the survival probability, by which we can exactly solve the survival probability step-by-step. We also illustrate the influence of the model parameters in the dependent risk model on the survival probability by numerical examples. Keywords: Dependence; Laplace transform; Dickson–Hipp operator; Defective renewal equation; Rouché’s theorem; Closed contour; Diffusion; Survival probability
Uncertainty Sandmo, Agnar. - Uncertainty in the theory of public finance. [RKN: 39615] Shelved at: Per: Geneva (Oxf) Geneva Risk and Insurance Review (2010) 35 (1) : 1-18. Abstract: This paper discusses the role that the economics of uncertainty has played in the theory of public finance. From being mostly concerned with its choice-theoretic foundations in the 1950s and 1960s, the theory of expected utility maximisation and risk averse behaviour has contributed decisively to the development of several areas of the theory of public finance. Three of these have been chosen here to illustrate the general point: The theory of taxation and risk taking with focus on portfolio choice, the role of uncertainty in public expenditure analysis (emphasising the effect of public goods provision on private risk taking) and the theory of tax evasion and compliance. 186
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Risk Management Reading List September 2010
Underwriting Barth, Michael M; Eckles, David L. - An Empirical Investigation of the Effect of Growth on ShortTerm Changes in Loss Ratios. - No. pages: 19. [RKN: 71778] Shelved at: Per: J.Risk Ins (Oxf) [Faculty: JOU/RIS] Journal of Risk and Insurance (2009) 76 (4) : 867-885. Abstract: Given the use of premium growth as a risk measure in regulatory and private risk assessment models, the impact of growth on underwriting profitability is an important question. Our results show a negative relationship between premium growth and changes in loss ratios, suggesting that premium growth alone does not necessarily result in higher underwriting risk. Further, there is a positive relationship between claim count growth and changes in loss ratios, suggesting that claim count growth may be a preferred measure of underwriting risk.
United Kingdom Davies, Bryn. - The distribution of risk in UK pension funds. - European Network for Research on Supplementary Pensions, 2008. - (European Network for Research on Supplementary Pensions Conference : Risk, Regulation and Solvency). - No. pages: 15. [RKN: 71954] URL: http://www.jura.unimuenster.de/go/organisation/institute/zivilrecht/aw3/profil/enrsp/papers-amsterdam2008.html Abstract: This paper analyses in more detail the changes that have taken place in the distribution of risk between employers, employees and others involved in the provision of occupational pensions. However, it is necessary first to explain something about how the UK pension system and occupational pension schemes, in particular, work. The following sections of the paper therefore provide, in turn, a description of: - The UK pension system, within which occupational pension schemes operate; - The general characteristics of occupational pension schemes in the UK and the prudential rules that govern the operation of such provision; and - The distribution of risk between the parties that are involved and how that has changed over recent years. The paper concludes with some brief comments on what lessons might be drawn from the UK’s experience of the risks inherent in any pension system. Deighton, S P; Dix, Roger C; Graham, J R; Skinner, J M E. - Governance and risk management in United Kingdom insurance companies. - London: - The Actuarial Profession. Institute of Actuaries and Faculty of Actuaries, 2009. - No. pages: 54. [RKN: 38980] Shelved at: ifp 03/09; BXP/511 pam (Oxf) [Faculty: JOU/INS] URL: http://www.actuaries.org.uk/research-and-resources/documents/governance-and-riskmanagement-uk-insurance-companies Abstract: For some while there has been a growing awareness from both internal and external stakeholders that the governance and risk management in United Kingdom insurance companies needed to be enhanced. The proposed European Union Solvency II Directive makes this very explicit and the current economic turmoil has put a much stronger emphasis on the whole process: it is being seen as the right thing to do, rather than simply a regulatory requirement. In this paper, the authors set out the background to and recent history of governance for UK insurance companies, and consider how enterprise risk management can bring together the various control frameworks needed to support that governance. Whilst no two companies are the same, and hence the solutions to these issues will vary, there are several common themes linked to successful implementation. Similarly, various barriers to success are identified, together with solutions to resolve them.
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Risk Management Reading List September 2010
Devlin, Peter L; Cahill, Stephen. - Risk and Compensation : German and UK [copies of slides only] - Institute of Actuaries and Faculty of Actuaries, 2010. - (Risk and Investment Conference 2010 Caledonian Hotel, Edinburgh, 13-15 June 2010). [RKN: 73017] URL: http://www.actuaries.org.uk/research-and-resources/documents/risk-andcompensation Whelan, Shane. - The mis-selling of investment risk in mandatory pension savings [copies of slides only] - Institute of Actuaries and Faculty of Actuaries, 2007. - (Finance, Investment and Risk Management Conference 2007 Seminar, 17-19 June 2007, Conrad Hilton Hotel, Dublin). [RKN: 72835] URL: http://www.actuaries.org.uk/research-and-resources/documents/mis-sellinginvestment-risk-mandatory-pension-savings-handouts
United States American Academy of Actuaries; Financial Regulatory Reform Task Force. - Role of the Systemic Risk Regulator. - Washington, DC: - American Academy of Actuaries, 2010. - (A public policy white paper). - No. pages: 19. [RKN: 72503] URL: http://www.actuary.org/pdf/finreport/role_of_the_systemic_risk_regulator.pdf Abstract: The task force supports the establishment of a federally-based systemic risk regulator. The roles and responsibilities of the SRR should be consistent for all sectors of the financial services industry. Implementation of these roles and responsibilities for insurance companies should reflect the unique length and complexity of the insurance liability structure and a functional regulatory system that supports the objectives of the SRR. Sherris, Michael; Njenga, Carolyn. - Longevity Risk and the Econometric Analysis of Mortality Trends and Volatility. - UNSW Australian School of Business Research, 2009. - (UNSW Australian School of Business Research Paper No. 2009ACTL08). [RKN: 71634] URL: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1458084 Abstract: Longevity risk and the modelling of trends and volatility for mortality improvement has attracted increased attention driven by ageing populations around the world and the expected financial implications. The original Lee-Carter model that was used for longevity risk assessment included a single improvement factor with differential impacts by age. Financial models that allow for risk pricing and risk management have attracted increasing attention along with multiple factor models. This paper investigates trends, including common trends through co-integration, and the factors driving the volatility of mortality using principal components analysis for a number of developed countries including Australia, England, Japan, Norway and USA. The results demonstrate the need for multiple factors for modelling mortality rates across all these countries. The basic structure of the Lee-Carter model can not adequately model the random variation and the full risk structure of mortality changes. Trends by country are found to be stochastic. Common trends and co-integrating relationships are found across ages highlighting the benefits from modelling mortality rates as a system in a Vector-Autoregressive (VAR) model and capturing long run equilibrium relationships in a Vector Error-Correction Model (VECM) framework. Keywords: longevity risk, unit roots, VAR, VECM Tennyson, Sharon. - Incentive effects of community rating in insurance markets : evidence from Massachusetts automobile insurance. [RKN: 39618] Shelved at: Per: Geneva (Oxf) Geneva Risk and Insurance Review (2010) 35 (1) : 19-46. Abstract: Rate regulations in insurance markets often impose cross-subsidies in insurance premiums from low-risk consumers to high-risk consumers. This paper develops the hypothesis that premium cross-subsidies affect risk taking by insurance consumers, and tests this hypothesis by examining the marginal impact of premium subsidies and overcharges on future insurance costs. The empirical analysis uses 1990–2003 rating cell-level data from the Massachusetts automobile insurance market, in which regulation produced large cross-subsidies across cells. Consistent with the hypothesized effects, premium subsidies are found to be significantly related to 188
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Risk Management Reading List September 2010
higher future insurance costs, and the opposite effects are found for premium overcharges.
Utility theory Cather, David A. - A Gentle Introduction to Risk Aversion and Utility Theory. - No. pages: 9. [RKN: 72292] [Faculty: RIS/MAN] Risk Management and Insurance Review (2010) 13 (1) : 127-145. Abstract: While the topics of risk aversion and utility theory have been discussed extensively in the academic literature on risk and insurance, this literature does not include a pedagogical discussion that is widely accessible for classroom use. This article provides a practical introduction to risk aversion that is designed for readers with little prerequisite course work in economics or statistics. We describe a simple model of insurance demand that can be applied to the property, liability, life, and health insurance markets. We also demonstrate how risk aversion affects a variety of real-life insurance decisions made under conditions of uncertainty, including how much the market will bear to pay for insurance administrative expenses and how demand varies for different types of auto insurance coverage. Exercises and practice problems are provided so that readers can test their mastery of the concepts presented in the article. An instructional note on using this article to teach risk aversion in the classroom is also provided.
Valuation Hull, John. - Risk management and financial institutions. - Pearson Education, 2007. - No. pages: 500. [RKN: 69114] [Faculty: 332.1 HUL] Kemp, Malcolm. - Market consistency. Model calibration in imperfect markets. - Chichester: Wiley, 2009. - No. pages: xxv,350. [RKN: 39382] Shelved at: CPFB (Oxf) Abstract: Achieving market consistency can be challenging, even for the most established finance practitioners. In "Market Consistency: Model Calibration in Imperfect Markets", leading expert Malcolm Kemp shows readers how they can best incorporate market consistency across all disciplines. Building on the author's experience as a practitioner, writer and speaker on the topic, the book explores how risk management and related disciplines might develop as fair valuation principles become more entrenched in finance and regulatory practice. This is the only text that clearly illustrates how to calibrate risk, pricing and portfolio construction models to a market consistent level, carefully explaining in a logical sequence when and how market consistency should be used, what it means for different financial disciplines and how it can be achieved for both liquid and illiquid positions. It explains why market consistency is intrinsically difficult to achieve with certainty in some types of activities, including computation of hedging parameters, and provides solutions to even the most complex problems. The book also shows how to best mark-to-market illiquid assets and liabilities and to incorporate these valuations into solvency and other types of financial analysis; it indicates how to define and identify risk-free interest rates, even when the creditworthiness of governments is no longer undoubted; and, it explores when practitioners should focus most on market consistency and when their clients or employers might have less desire for such an emphasis. Finally, the book analyses the intrinsic role of regulation and risk management within different parts of the financial services industry, identifying how and why market consistency is key to these topics, and highlights why ideal regulatory solvency approaches for long term investors like insurers and pension funds may not be the same as for other financial market participants such as banks and asset managers
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Tan, K S; Weng, C. - Enhancing Insurer Value Using Reinsurance and Value–at–Risk Criterion [abstract only] 2008. [RKN: 38564] Shelved at: Online only [Faculty: Online only] Actuarial Research Clearing House (ARCH) (2008) 1 URL: http://www.soa.org/news-and-publications/publications/proceedings/arch/arch-2008iss1.aspx Abstract: The quest for optimal reinsurance design has remained an interesting problem among insurers, reinsurers, and academicians. An appropriate use of reinsurance can reduce the underwriting risk of an insurer and thereby enhances 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 total risk of the insurer while subjecting to a profitability constraint. The proposed optimal reinsurance model, therefore, has the advantage of exploiting the classic 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 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 can be in the form of pure stop-loss reinsurance, quota-share reinsurance, or some combination of them.
Valuations Cox, S; Lin, Y; Tian, R; Zuluaga, L. - Bounds for Ruin Probabilities and Value at Risk. 2008. [RKN: 38562] Shelved at: Online only [Faculty: Online only] Actuarial Research Clearing House (ARCH) (2008) 1 URL: http://www.soa.org/news-and-publications/publications/proceedings/arch/arch-2008iss1.aspx Abstract: In many situations, complete information about a rare event is not available, meaning the underlying probability distribution is not completely specified. This paper finds the best one can do when the incomplete information consists of estimates of the first two moments of the distribution. These are called semiparametric lower and upper bounds. We consider value-at-risk (VaR) in the sense that we find bounds on probability of portfolio return less than some small value, given only the first two moments of the portfolio components. We also apply semiparametric bounds to a rare event hitting an insurer for which losses are extraordinary high and investment income is low. We refer to this as “ruin” although the company may survive; it is just a convenient way to describe a rare event that would threaten a company’s solvency. In addition, we calculate bounds on insurance stoploss payments. The payoff of a call or put option can be considered as a special case or a transform of the stop-loss payment. In order to numerically solve the semiparametric bounds considered here, we reformulate the corresponding semiparametric bound problem as a sum of squares (SOS) program. A SOS program is an optimization problem where the variables are coefficients of polynomials, the objective is a linear combination of the variable coefficients, and the constraints are given the polynomials being SOS. This form of reformulation allows us to use one of several readily available SOS programming solvers to solve the moment problem. For the stop-loss bound problem, Cox (1991)’s method is also investigated to confirm our SOS program solutions. Our numerical examples have shown that our technique works reasonably well.
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Risk Management Reading List September 2010
Value-at-risk (VAR) Asimit, Alexandru V; Badescu, Andrei L. - Extremes on the discounted aggregate claims in a time dependent risk model. - No. pages: 12. [RKN: 72591] Shelved at: Per: SAJ [Faculty: SCA/ACT] Scandinavian Actuarial Journal (2010) 2 : 93-104. Abstract: This paper presents an extension of the classical compound Poisson risk model for which the inter-claim time and the forthcoming claim amount are no longer independent random variables (rv's). Asymptotic tail probabilities for the discounted aggregate claims are presented when the force of interest is constant and the claim amounts are heavy tail distributed rv's. Furthermore, we derive asymptotic finite time ruin probabilities, as well as asymptotic approximations for some common risk measures associated with the discounted aggregate claims. A simulation study is performed in order to validate the results obtained in the free interest risk model. Keywords: Compound Poisson risk model; Dependence; Discounted aggregate loss; Subexponential distribution; Value-at-risk Bernard, Carole; Tian, Weidong. - Insurance market effects of risk management metrics. [RKN: 39619] Shelved at: Per: Geneva (Oxf) Geneva Risk and Insurance Review (2010) 35 (1) : 47-80. Abstract: We extend the classical analysis on optimal insurance design to the case when the insurer implements regulatory requirements (Value-at-Risk). Presumably, regulators impose some risk management requirement such as VaR to reduce the insurers’ insolvency risk, as well as to improve the insurance market stability. We show that VaR requirements may better protect the insured and improve economic efficiency, but have stringent negative effects on the insurance market. Our analysis reveals that the insured are better protected in the event of greater loss irrespective of the optimal design from either the insured or the insurer perspective. However, in the presence of the VaR requirement on the insurer, the insurer's insolvency risk might be increased and there are moral hazard issues in the insurance market because the optimal contract is discontinuous. Campana, Antonella. - On Tail Value-at-Risk for sums of non-independent random variables with a generalized Pareto distribution. [RKN: 37742] Shelved at: Per: Geneva (Oxf) Geneva Risk and Insurance Review (2007) 32 (2) : 169-180. Abstract: Recently in actuarial literature several authors have derived lower and upper bounds in the sense of convex order for sums of random variables with given marginal distributions and unknown dependency structure. In this paper, we derive convex bounds for sums of nonindependent and identically distributed random variables when marginal distributions are mixture models. In particular, we examine some well-known risk measures and we find approximations for Tail Value-at-Risk of the sums considered when marginal distributions are generalized Pareto distributions. By numerical examples we illustrate the goodness of the presented approximations. Degen, M; Lambrigger, D D; Segers, J. - Risk concentration and diversification : Second-order properties. - IAP Statistics Network, 2009. - (Technical report 09028). - No. pages: 19. [RKN: 72241] URL: http://www.stat.ucl.ac.be/ISpub/tr/2009/TR09028.pdf Abstract: The quantification of diversification benefits due to risk aggregation plays a prominent role in the (regulatory) capital management of large firms within the financial industry. However, the complexity of today’s risk landscape makes a quantifiable reduction of risk concentration a challenging task. In the present paper we discuss some of the issues that may arise. The theory of second-order regular variation and second-order subexponentiality provides the ideal methodological framework to derive second-order approximations for the risk concentration and the diversification benefit. 191
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Keywords: Diversification, second-order regular variation, second-order subexponentiality, subadditivity, Value-at-Risk Degen, Matthias; Lambrigger, Dominik D; Segers, Johan. - Risk concentration and diversification : Second-order properties. - No. pages: 6. [RKN: 72522] Shelved at: Per: IME (Oxf) Insurance: Mathematics & Economics (2010) 46 (3) : 541-546. Abstract: The quantification of diversification benefits due to risk aggregation plays a prominent role in the (regulatory) capital management of large firms within the financial industry. However, the complexity of today's risk landscape makes a quantifiable reduction of risk concentration a challenging task. In the present paper we discuss some of the issues that may arise. The theory of second-order regular variation and second-order subexponentiality provides the ideal methodological framework to derive second-order approximations for the risk concentration and the diversification benefit. Keywords: Diversification ; Second-order regular variation ; Second-order subexponentiality ; Subadditivity ; Value-at-Risk Huang, Jen-Tsung; Lee, Kuo-Jung; Liang, Hueimei; Lin, Wei-Fu. - Estimating value at risk of portfolio by conditional copula-GARCH method. - No. pages: 10. [RKN: 72404] Shelved at: Per: IME (Oxf) Insurance: Mathematics & Economics (2009) 45 (3) : 315-324. Abstract: Copula functions represent a methodology that describes the dependence structure of a multi-dimension random variable and has become one of the most significant new tools to handle risk factors in finance, such as Value-at Risk (VaR), which is probably the most widely used risk measure in financial institutions. Combining copula and the forecast function of the GARCH model, this paper proposes a new method, called conditional copula-GARCH, to compute the VaR of portfolios. This work presents an application of the copula-GARCH model in the estimation of a portfolio’s VaR, composed of NASDAQ and TAIEX. The empirical results show that, compared with traditional methods, the copula model captures the VaR more successfully. In addition, the Student-t copula describes the dependence structure of the portfolio return series quite well. Keywords: Copula; GARCH; VaR Nieto, María Rosa; Ruiz, Esther. - Measuring financial risk : comparison of alternative procedures to estimate VaR and ES. - Madrid: - Departamento de Estadística, Universidad Carlos III de Madrid, 2008. - (Working paper 08-73). - No. pages: 45. [RKN: 72633] URL: http://e-archivo.uc3m.es/bitstream/10016/3384/1/ws087326.pdf Abstract: We review several procedures for estimating and backtesting two of the most important measures of risk, the Value at Risk (VaR) and the Expected Shortfall (ES). The alternative estimators differ in the way the specify and estimate the conditional mean and variance and the conditional distribution of returns. The results are illustrated by estimating the VaR and ES of daily S&P500 returns. Keywords: Backtesting, extreme value, GARCH models, leverage effect Tian, Ruilian; Cox, Samuel H; Lin, Yijia; Zuluaga, Luis F. - Portfolio Risk Management with CVaRlike Constraints. - Society of Actuaries, - No. pages: 21. [RKN: 72654] Shelved at: Per: NAAJ (Oxf); Per NAAJ (Lon) [Faculty: NOR/AME] North American Actuarial Journal (2010) 14 (1) : 86-106. URL: http://www.soa.org/news-and-publications/publications/journals/naaj/naaj-detail.aspx Abstract: A current research stream in the portfolio allocation literature develops models that take into account the asymmetric nature of asset return distributions. Our paper contributes to this research stream by extending the Krokhmal, Palmquist, and Uryasev approach. We add CVaR-like constraints in the traditional portfolio optimization problem to reshape the tails of the portfolio return distribution while not significantly affecting its mean and variance. We illustrate how to apply this approach, called the ‘‘MV + CVaR approach,’’ to manage tail risk of an insurer’s asset-liability portfolio. Finally, we compare the MV + CVaR approach with the traditional Markowitz method and a method recently introduced by Boyle and Ding. Our numerical analysis provides empirical support for the effectiveness of the MV + CVaR approach in controlling downside risk. Moreover, 192
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Risk Management Reading List September 2010
we find that the MV + CVaR approach may improve skewness of mean-variance portfolios, especially for high-variance portfolios. Trufin, J; Albrecher, H; Denuit, M. - Properties of risk measures derived from ruin theory. - IAP Statistics Network, 2010. - (Technical report 10022). - No. pages: 16. [RKN: 72618] URL: http://www.stat.ucl.ac.be/ISpub/tr/2010/TR10022.pdf Abstract: This paper studies a risk measure inherited from ruin theory and investigates some of its properties. Specifically, we consider a 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. Key words and phrases: Ruin probability, classical risk model, Value-at-Risk (VaR), Tail-VaR, stochastic ordering. Tsai, Jeffrey T; Wang, Jennifer L; Tzeng, Larry Y. - On the optimal product mix in life insurance companies using conditional value at risk. - No. pages: 7. [RKN: 72444] Shelved at: Per: IME (Oxf) Insurance: Mathematics & Economics (2010) 46 (1) : 235-241. Abstract: This paper proposes a Conditional Value-at-Risk Minimization (CVaRM) approach to optimize an insurer’s product mix. By incorporating the natural hedging strategy of Cox and Lin (2007) and the two-factor stochastic mortality model of Cairns et al. (2006b), we calculate an optimize product mix for insurance companies to hedge against the systematic mortality risk under parameter uncertainty. To reflect the importance of required profit, we further integrate the premium loading of systematic risk. We compare the hedging results to those using the duration match method of Wang et al. (forthcoming), and show that the proposed CVaRM approach has a narrower quantile of loss distribution after hedging—thereby effectively reducing systematic mortality risk for life insurance companies. Keywords: Systematic mortality risk; Product mix; Natural hedging; Parameter risk; Conditional VaR Zhou, Chunyang; Wu, Chongfeng. - Optimal Insurance Under the Insurer's VaR Constraint. - No. pages: 15. [RKN: 72019] Shelved at: Per: Geneva (Oxf) Geneva Risk and Insurance Review (2009) 34 (2) : 140-154. Abstract: In this paper, we impose the insurer's Value at Risk (VaR) constraint on Arrow's optimal insurance model. The insured aims to maximize his expected utility of terminal wealth, under the constraint that the insurer wishes to control the VaR of his terminal wealth to be maintained below a prespecified level. It is shown that when the insurer's VaR constraint is binding, the solution to the problem is not linear, but piecewise linear deductible, and the insured's optimal expected utility will increase as the insurer becomes more risk-tolerant. Basak and Shapiro (2001) showed that VaR risk managers often choose larger risk exposures to risky assets. We draw a similar conclusion in this paper. It is shown that when the insured has an exponential utility function, optimal insurance based on VaR constraint causes the insurer to suffer larger losses than optimal insurance without insurer's risk constraint. Keywords: optimal insurance, value at risk, risk constraint
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Risk Management Reading List September 2010
Volatility Armitage, Seth; Fitzgerald, Adrian; Adams, Andrew. - Excess Volatility Re-visited [copies of slides only] - Institute of Actuaries and Faculty of Actuaries, 2010. - (Risk and Investment Conference 2010 Caledonian Hotel, Edinburgh, 13-15 June 2010). [RKN: 73019] URL: http://www.actuaries.org.uk/research-and-resources/documents/excess-volatilityrevisited-slides Cain, Brianna; Zurbruegg, Ralf. - Can switching between risk measures lead to better portfolio optimization? - No. pages: 12. [RKN: 72096] Shelved at: Per: J.Asset Man (Oxf) Journal of Asset Management (2010) 10 (6) : 358-369. Abstract: This article proposes a technique that involves switching between risk measures in different market environments, to capture the well-documented dynamic nature of risk within a portfolio optimization setting. In-sample results show categorically that switching between various measures, such as CVaR, time-varying (GARCH) variances and simple standard deviations, can lead to a better performance than using any single measure. Using a logistic probability model to determine when to switch between alternatives, out-of -sample results also show positive results. Given that this study only applies a basic switching system, it lends itself to easy application by practitioners through its simplicity, intuitive appeal and computational feasibility. Keywords: volatility, variance, CvaR, GARCH, model switching, portfolio allocation Chi, Yichun; Jaimungal, Sebastian; Lin, X Sheldon. - An insurance risk model with stochastic volatility. - No. pages: 17. [RKN: 72427] Shelved at: Per: IME (Oxf) Insurance: Mathematics & Economics (2010) 46 (1) : 52-66. Abstract: In this paper, we extend the Cramér–Lundberg insurance risk model perturbed by diffusion to incorporate stochastic volatility and study the resulting Gerber–Shiu expected discounted penalty (EDP) function. Under the assumption that volatility is driven by an underlying Ornstein–Uhlenbeck (OU) process, we derive the integro-differential equation which the EDP function satisfies. Not surprisingly, no closed-form solution exists; however, assuming the driving OU process is fast mean-reverting, we apply the singular perturbation theory to obtain an asymptotic expansion of the solution. Two integro-differential equations for the first two terms in this expansion are obtained and explicitly solved. When the claim size distribution is of phase-type, the asymptotic results simplify even further and we succeed in estimating the error of the approximation. Hyper-exponential and mixed-Erlang distributed claims are considered in some detail. Keywords: Gerber–Shiu expected discounted penalty function; Integro-differential equation; Singular perturbation theory; Stochastic volatility; Perturbed compound Poisson risk process; Phase-type distribution; Ornstein–Uhlenbeck process Hull, John. - Risk management and financial institutions. - Pearson Education, 2007. - No. pages: 500. [RKN: 69114] [Faculty: 332.1 HUL] Sherris, Michael; Njenga, Carolyn. - Longevity Risk and the Econometric Analysis of Mortality Trends and Volatility. - UNSW Australian School of Business Research, 2009. - (UNSW Australian School of Business Research Paper No. 2009ACTL08). [RKN: 71634] URL: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1458084 Abstract: Longevity risk and the modeling of trends and volatility for mortality improvement has attracted increased attention driven by ageing populations around the world and the expected financial implications. The original Lee-Carter model that was used for longevity risk assessment included a single improvement factor with differential impacts by age. Financial models that allow for risk pricing and risk management have attracted increasing attention along with multiple factor models. This paper investigates trends, including common trends through co-integration, and the 194
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Risk Management Reading List September 2010
factors driving the volatility of mortality using principal components analysis for a number of developed countries including Australia, England, Japan, Norway and USA. The results demonstrate the need for multiple factors for modelling mortality rates across all these countries. The basic structure of the Lee-Carter model can not adequately model the random variation and the full risk structure of mortality changes. Trends by country are found to be stochastic. Common trends and co-integrating relationships are found across ages highlighting the benefits from modelling mortality rates as a system in a Vector-Autoregressive (VAR) model and capturing long run equilibrium relationships in a Vector Error-Correction Model (VECM) framework. Keywords: longevity risk, unit roots, VAR, VECM
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