I agree that it is appropriate for other lines.
I do have an additional comment on your statement
++
> Then the company will maximize its expected return by varying its
> distribution of assets subject to several constraints. One of the
> constraints being its own probability of surplus decline will match
> that calculated for the industry. Other constraints will include
> restrictions on the percentage of total assets in any one class.
++
I am not sure that the constraint you mentioned is necessary. If you
vary your assets to maximize return subject to a variance constraint,
you answer you get should have a limited percentage of total assets in
any one class.
Glenn Meyers
> ----------
> From: Fleming,
> Kirk[SMTP:AEGISLAN/AEGIS/FLEMINK%Aegis@MCIMAIL.COM]
> Reply To: casnet@lists.casact.org
> Sent: Tuesday, September 16, 1997 1:06 PM
> To: casnet
> Subject: Re: Measuring Risk
>
>
> Glenn, thanks for the reply. When you responded to my second
> question, you said the approach would work ". . .in the case of
> catastrophes." I'm not sure what you meant by that. The approach
> that I was proposing (and I
> wasn't very clear) would be an approach that seems like it could be
> used by any company.
>
> What I've seen done in practice is for a company to look at a sample
> of
> highly rated companies to calculate a probability of surplus declining
> by
> some percentage as a function of how leveraged the companies are, and
> by the mean and variance of their after tax return on equity.
>
> Then the company will maximize its expected return by varying its
> distribution of assets subject to several constraints. One of the
> constraints being its own probability of surplus decline will match
> that
> calculated for the industry. Other constraints will include
> restrictions on the percentage of total assets in any one class.
>
> It seems like it could work for any company, not just companies that
> cover
> catastrophe exposures.
>
>
>
> >
> >Another question about solving for risk tolerance benchmarks that
> companies
> >use. I'd appreciate comments on this approach.
> >
> >Suppose you're looking at asset allocation strategies and you define
> risk
> in
> >a certain way - - let's say probability of surplus declining 50% on a
> GAAP
> >basis while taking no more risk than a peer group of companies on the
> same
> >basis.
> >
> > Is it possible to calculate reasonably robust results of the peer
> group's
> >implied probability of surplus declining 50% on a GAAP basis using
> >historical statutory asset and liability data as the data source?
>
> This certainly can be done in the case of catastrophes. To do this
> you
> need a catastrophe model and the exposure distribution of your peer
> group
> of companies.
>
> I suspect this kind of analysis can be done with the collective risk
> model.
> The big problem with this model is that most current versions do not
> recognize correlation between the lines of business -- which can lead
> to a
> significant understatement of the variablity. The CAS Committee on
> the
> Theory of Risk is funding a project to address this problem and I am
> hopeful that the results can be posted in the next few months.
>
>
> -
>
>
>
> Visit the CAS Web Site at http://www.casact.org
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