Spring E-Forum Papers Available
The 2009 Spring E-Forum, which includes the 2009 Reinsurance Call Papers, has been published and is available online. Following is a brief synopsis of the papers you can find in this issue.
Most actuaries learn loss development on the job and pick up whatever techniques are being used by those around them. In “Unstable Loss Development Factors,” Gary Blumsohn and Michael Laufer describe a recent survey demonstrating the variety of methods and variability of selections of loss development factors (prior to consideration of the tail) and the variability of the resulting reserve projections.
Existing models of the market price of cat bonds are often overly exotic or too simplistic. Neil Bodoff and Yunbo Gan analyze several years of cat bond prices “when issued” in their paper “An Analysis of the Market Price of Cat Bonds.” They describe the market clearing issuance price of cat bonds as a linear function of expected loss, with parameters that vary by peril and zone.
Risk transfer analysis has many nuances that can trip up an actuary testing a contract. In “Common Pitfalls and Practical Considerations in Risk Transfer Analysis,” Derek Freihaut and Paul Vendetti discuss several of these pitfalls and provide direction on how to address them based on previously published materials from the accounting boards, the American Academy of Actuaries (AAA), and the Casualty Actuarial Society (CAS).
In 1980, Stephen D’Arcy wrote a paper to provide insurers with a strategy to immunize against inflation. Given the threat inflation poses to insurance firms, Richard Krivo’s “An Update to D’Arcy’s ‘A Strategy for Property-Liability Insurers in Inflationary Times’”, brings this seminal paper up to date . Over the year 2008, it appeared that inflation was going to be a significant obstacle for the insurance industry on the basis of a sharp increase in the cost of commodities and increasing severity trends for property coverage as a result.
In “Modeling Paid and Incurred Losses Together,” Leigh J. Halliwell discusses how the modeling skills of actuaries and academicians have developed to the point of their seeking joint models for paid and incurred losses. The key to such models is covariance; heteroskedastic models cannot serve the purpose. Properly accounting for covariance in the linear statistical model will provide an exact, sound, and elegant solution to the problem.
In “The Cost of Risk: A COTOR-VALCON Discussion,” John A. Major summarizes a discussion from the COTOR-VALCON e-mail list on the relationship between an insurer’s risk and cost of capital. The paper focuses on the applicability of the capital asset pricing model (CAPM) and the effects of financial frictions.
Property/casualty reserves are estimates of losses and loss development and as such will not match the ultimate results. “Quantifying Uncertainty In Reserve Estimates,” by Zia Rehman and Stuart Klugman, provides a comprehensive and practical methodology for quantifying risk that includes three sources of error: model error (the methodology used does not accurately reflect the development process), parameter error (model parameters are calibrated from the data), and process error (future development is random).
To read these and other E-Forum papers, visit the e-forum website.