Description: This paper argues that no single valuation basis is completely reliable: neither market price nor other alternatives can accurately measure value. Therefore, this paper proposes that a preferable solution is to simultaneously record two bases of valuation: market price and appraisal value. Thus by expanding the dimensionality of financial reporting, one can provide a broader, richer and more accurate measurement of value. Presented at 2010 Enterprise Risk Management Symposium, Society of Actuaries, April 12-15, 2010

Description: Exploration of sources of volatility in retiree health valuations, noting how volatility arises and might be mitigated, with discussion of valuation parameters more problematic for retiree health benefits than for pensions. Three significant influences on retiree health valuation volatility are covered-- changes in benefit level, fluctuations in cost level, and alterations in eligibility for, or duration of, benefit – and attention focused on the last two. Specific conclusions result in recommendations, which are supported by practical examples contrasting volatile measurement results with those likely from the recommended practices. Theoretical discussion includes health claim variation, health trend usage, financial economics, option pricing, discount rates, and deterministic vs. stochastic modeling.

Description: This paper represents a brief progress report on research, being sponsored by the Casualty Actuarial Society CAS and the Society of Actuaries SOA, in the area of modeling of economic series. In particular, research is being undertaken to provide a foundation for the actuarial community’s modeling of a variety of economic variables, including interest rates, equity returns, inflation, unemployment rates, and real estate price levels. The specific objectives of this research are to provide a summary of the literature in the area of economic scenario modeling, identify data sources and methodologies in this area useful to the actuarial profession, and produce working software for economic modeling, including appropriate documentation, to be made available to the general actuarial community in order to allow actuaries to use and build upon this research.

Description: Chapter 4 describes growth issues including multiple account problems of the old SAR, the amount of money in the AFOREs, and portfolio composition in the AFOREs. From Retrospective and Perspective Analysis of the Privatized Mandatory Pension System in Mexico, M-RS02-1.

Description: In this paper, we illustrate how to value American-style options using the Least-Squares Monte Carlo LSM approach proposed by Longstaff and Schwartz 2001 and investigate whether there exists an optimal regression complexity in the LSM framework for options pricing. In particular, we use the smoothing spline in the regression step, which allows us to control the regression complexity on a continuous scale with just one tuning parameter. Numerical results on American put options indicate that we need to use more than a linear regression, but as the regression becomes more complex, the accuracy of the LSM method quickly deteriorates. From 39th Actuarial Research Conference.

Description: This paper discusses the martingale approach for pricing American-type options without an expiry date. These options include the perpetual American put option and the perpetual maximum option in one stock case. The word “perpetual” means that the option has no expiry date. A main tool in this approach is the principle of smooth pasting.

Description: Many risk management decisions involve the timing of implementing risk strategies. The cost of hedging, capital raising and securitization changes with the economic environment. The timing of de-risking and investment in new risk management functions affect the cost and benefit of these projects as well. Like investment timing, it is important to consider the timing in risk management decisions to maximize the gain of risk management projects. This paper discusses methods of determining the appropriate timing of implementing a risk management strategy or investing in risk management projects. It explains the human biases that may lead to inferior timing decisions. It also covers the costs and benefits of risk management projects and the impact of new information on the decision-making process. Timing considerations for financial risk hedging, insurance risk hedging and investment in new risk management projects are explained. Factors used for timing decisions include economic conditions, market volatility, credit rating, borrowing cost, capital adequacy and financial resources.

Description: This paper, originally published in 1992 in the Transactions of Society of Actuaries Vol. 44, deals with a topic that is becoming increasingly important to actuaries in most fields of practice. “Without relying on formulas, this paper presents the important concepts underlying the theory of arbitrage-free pricing of interest-rate-contingent cash flows.” This paper, by James A. Tilley, won the 1992-93 Annual Prize, and the Halmstad Prize for 1992. The paper includes written discussion and the author’s review of the discussions.

Description: This article presents some observations on inverted yield curves of U.S. Treasury securities and the correlation of volatility of Treasury security interest rates with their absolute level. The time covered by the study is December 1953 to December 1988. From Society of Actuaries Financial Reporting Monograph, M-AS99-1.

Description: There have been continual advances in the modeling of financial series but most are aimed at the pricing of derivatives. Different criteria are needed for development of scenarios for risk management. Some recent methods will be reviewed with an eye on risk-management applications, including using the simulated method of moments to parameterize multifactor models, fractional differencing and other methods to model series with persistent autocorrelation, and models to flatten out the volatility smile, such as jump-diffusion models. These methods will be illustrated with applications to inflation, interest rates, equity prices and exchange rates.