Steve Lowe and Jim Stanard coauthored a paper in the Spring 1996 Forum where
they describe using the Asset/Liability Efficient Frontier (ALEF) together
with DFA to make decisions. ALEF requires you to make decisions considering
both risk and performance. For example, if you were selecting between
different mixes of asset classes that each had the same risk, you would pick
the one that maximized expected performance.
What do companies use as measures of risk and performance?
Examples of measures of performance might include:
- return on assets.
- return on surplus.
Lowe and Stanard list the following as measures of risk:
- probability of ruin over the next ten years.
- probability of combined ratio above 110% next year.
- expected policyholder deficit on current business.
- probability of suffering a net decline in surplus of 20% or more at the
end of three years.
- probability of failing an RBC test at any point in the next five years.
- probability of a ratings downgrade by AM Best.
- probability of a combined ratio two points or more worse than the
industry.
If companies don't think in risk benchmarking terms, I'd be interested in
hearing that also.
Thanks in advance,
Kirk Fleming
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