Description: This paper recommends the practical application of new portfolio risk/return measurements to achieved and back tested stock portfolio performance. This new risk measurement process addresses the issue of infinite variances empirically observed in most stock return distributions. From 2007 Enterprise Risk Management Symposium, M-AS07-1.

Description: In this Chapter we present a novel way for estimating aggregated EC figures based on Bayesian copula estimation. Contrary to the classic approach of using a single inter-risk- correlation matrix we derive a probability distribution of possible correlation matrices that enables us to tackle the important issue of parameter uncertainty. Presented at 2010 Enterprise Risk Management Symposium, Society of Actuaries, April 12-15, 2010.

Description: The author constructed the efficient frontier of new business sales by modeling the embedded value and economic capital against a universe of possible growth rates of the three lines of business in a typical three-year planning horizon. The ERM function can use the efficient frontier of new business to provide a more rigorous analysis of the impact of growth rates on the firm’s overall capital efficiency and value creation, hence forming a feedback loop with the businesses in the planning process to optimize the growth strategy.

Description: The paper focuses on value creation for European health insurance companies through the practical application of integrated ERM frameworks.

Description: In the context of insurance economics, the PH-transform is justified through some basic postulates on market premiums. In this paper the PH-transform is applied to the present value random variable in life insurance and annuities. It provides an alternative to the commonly used equivalence principle in life insurance and annuities premium calculation. This research project is sponsored by a joint AERF/CKER Grant of the Society of Actuaries.

Description: The main objective of this study is to analyze and control a surplus dependent risk process, where larger surpluses allow for a wider underwriting policy. We focus here mostly on the diffusion approximation of the risk process. The results are derived in two papers Brownian motion in Risk Theory, submitted for publication, and Surplus dependent risk processes defined by stochastic differential equations, in preparation. We only include here a long summary of these papers.

Description: In this paper, we introduce a political risk variable, d, to measure risk of foreign direct investment FDI. The political risk variable has opposite effects of loss reduction and loss prevention in Ehrlich and Becker 1972. The unique characteristics of political risk insurance make the applications of actuarially-based pricing models infeasible. In this study, by taking into account the effects of self-protection and self-insurance through the variable d and by maximizing utility function, we find the equilibrium for insured and insurer in a competitive market and in a monopoly one. In addition, under the equilibrium status, the boundary for the amount of investment, the insurance coverage, and the minimum required rate of return on the FDI are derived.

Description: In this paper, we formulate the Capital Allocation problem as an optimization problem in which we seek the mix of business that maximizes an insurance company’s Expected Net After Tax Income subject to a constraint on the Tail Value at Risk TVAR. Using the method of Lagrange multipliers, we demonstrate that the returns on the respective TVAR contributions, so-called RORAC, are equal across all lines of business when the mix of business is optimal. Although the discussions in this paper center on the TVAR, the conclusions hold true for any conditional expected value measure. Presented at 2010 Enterprise Risk Management Symposium, Society of Actuaries, April 12-15, 2010.

Description: This paper introduces a minor modification to the Wacek framework that restores market consistency and additivity. The modification shifts the basis of the cost-of-capital risk margin embedded in the fair value loss reserve from an insurer’s own solvency capital requirement with respect to its claim obligations as prescribed by Solvency II to the required market-clearing capital implied by those obligations, which depends not only on the internal characteristics of the unpaid claim portfolio but also on its correlation with the total market portfolio of unpaid claims.

Description: Non-consequentiality is quite consequential for the claims made for the applicability of Risk Theory RT to decision problems that are not transparently tactical or wholly instrumental. On the negative side, RT is not normative or even a complete heuristic in such contexts. The author takes strong exception to the common tendencies, A to link risk theory with welfarism and versions of utilitarianism, and B to claim that with or without but especially with such linkage RT is normative in both moral and rational analysis, choice and action.