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Thanks to Kimberley Ward & Pam Conlin for responding to my recent e mail
"test". Actually it had nothing to do with our test, Part 10, but with
testing a new mail server in our organization. I hope you find this
amusing. I'd like to respond to a few recent e mails since I joined the
group, as well as point out what I believe are two errors (minor) in two
readings. Would appreciate your comments.
First, Betsy Branagan asked about the distinction between pervasive and
systematic risk factors. The text appears to be ambiguous so I agree
with Kim Ward that any question on the distinction could be challenged.
Even so, how do you remember the factors? The systematic factors relate
to Investments and specifically to "markets", like the stock & bond
markets. For these markets changes in interest rates & changes in
market valuations (bull, bear) dramatically impact prices. The real
estate market has five unique aspects, but also shares these two
"change" factors; witness the bear market in real estate which began
around 89-90 and is only changing positively now. The pervasive factors
affects all Assets, which include investments but also include cash,
furniture, equipment, EDP equipment, other assets and foreign affiliates
(assets owned in other countries). For all assets, purchasing power can
be eroded by inflation (some would have to be turned into cash, but
their value still declines with inflation), there is political risk
(foreign gov't levies special tax on a specific industry like alien
insurers), and there is currency (exchange rate) risk.
Second, Chris Tait asked about the treatment of ALAE in Reinarz. My
recollection is that the author advocates including a factor for excess
ALAE, but points out that if this is not done, then the supposition is
that the factor which ISO includes for ALAE at the primary level would
be sufficient for excess limits. I don't have the text with me today,
so I will check on this. The implication being that the ISO ALAE may be
insufficient or at least has to be reviewed by the reinsurance actuary.
Third, I believe there is an error in the formula on page 6-8 of Maginn
& Tuttle. The right hand side appears to be missing a minus sign. The
correct formula would be Chg in bond price = chg in YTM * Modified
duration *(-1). Compare formula 5 on page 282 of Ferguson. I also
believe that Sholom's paper on ALM incorrectly states the formula. In
footnote 17 on page 140 he says Chg in price = (-1)*Duration*Price*Chg
in interest rate, but in the previous sentence he refers to Macauley
duration. I believe he meant to say Modified duration.
Arthur Schwartz, 1-919-733-3284, x259
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