Corporate Finance Commons^™

Nonmedical Limits In Individual Life Insurance, James B. Ross, Shalini E. Perumpral

Journal of Actuarial Practice (1993-2006)

This paper shows data that illustrate the substantial variation among nonmedical schedules and the dramatic increase in their amount limits from 1972 through 1992. Coefficients of variation are analyzed for several data subsets. We find that the variation of schedules in the sample of all firms has increased throughout the 1972-1992 period for issue ages up to 30, but has declined for issue ages beyond 30 during the 1982-1992 period. For the non-New York and stock companies our statistical tests indicate an increase in the variability of schedules over the full period 1972 to 1992.

Pension Funding By Normal Costs Or Amortization Of Unfunded Liabilities, Keith P. Sharp

Journal of Actuarial Practice (1993-2006)

We discuss the extent of the actuary's freedom in choosing the funding method for defined benefit pension plans. In particular, we look at funding through a combination of normal costs, amortization of an unfunded liabilities, and fund of assets. The IRS constraint on "reasonable funding methods" is considered, with particular mention of the aggregate entry age normal method. In addition, an algebraic development is performed of year-to-year changes in the status of a plan's funding.

What We Say In The Naic Annual Statement Blank Actuarial Opinion, Kenneth W. Faig Jr.

Journal of Actuarial Practice (1993-2006)

The new language adopted for the actuarial opinion in the National Association of Insurance Commissioners' model actuarial opinion and memorandum regulation has been weakened at the same time the responsibilities of the opining actuary have been increased. The restoration of stronger language to the actuarial opinion would enhance the professional image of the actuary. If the legal environment for professional liability inhibits such a change, the opinion should be changed to describe more precisely the work performed and the conclusion reached by the actuary.

Third Party Administrator (Tpa) Service Pricing And Incentive Contracts, Hou-Wen Jeng

Journal of Actuarial Practice (1993-2006)

This paper addresses a few of the most important pricing issues faced by a third party administrator (TPA) whose main responsibility is claims handling for self·insured employers and self·insured groups. Such pricing issues include the development of service fees using claim closure information, the selection of service durations, and the design of incentive (either activity-based or financially-based) service contracts. Formulas for pricing new and open claims are provided.

Disclosure And Confidentiality Requirements Of Corporate Pension Plan Actuaries, Theodore Konshak

Journal of Actuarial Practice (1993-2006)

Corporate pension plan actuaries are subject to the standards of the Joint Board for the Enrollment of Actuaries. The Joint Board is empowered to establish such standards under the provisions of the Employee Retirement Income Security Act of 1974, a federal law. In consideration of these statutory standards, this article will discuss whether standards published by professional actuarial organizations have any applicability. The contrast between the disclosure requirements of federal law and the confidentiality standards of the Society of Actuaries will be highlighted.

Asset Allocation In Investing To Meet Liabilities, Anthony Dardis, Vinh Loi Huynh

Journal of Actuarial Practice (1993-2006)

We present some rudimentary concepts on asset/liability management and describe an approach to asset allocation modeling for institutions that invest to meet liabilities. The traditional risk/reward framework of financial economics is used as a starting pOint. The definitions of risk and reward are then refined with regard to the institution under consideration. A simple model of a U.S. life office is examined. We assume that the only investments available are domestic stocks and long-dated government bonds. Stochastic simulation is used to create a large number of future investment scenarios using historical total return data for these asset classes. The ability …

Concentration In American Property-Casualty Companies, Edward Nissan

Journal of Actuarial Practice (1993-2006)

A Theil's entropy index utilizing premiums written as units is employed to measure trends in concentration of the largest 200 property-casualty companies in the United States between 1985 and 1993 based on Best's Insurance Report data. Each of the indexes confirms that concentration trends experienced no increase for the whole period for all 200 firms, the top 20, and subsets of lower ranked companies. Significant differences are observed, however, between groups of companies for the same period.

Methodologies For Determining Reserve Liabilities In The Workers Compensation High Deductible Program, Jerome J. Siewert

Journal of Actuarial Practice (1993-2006)

In this paper I describe several approaches for estimating liabilities under a high deductible program, including a proposal for a more sophisticated approach relying upon a loss distribution model. The discussion addresses several related issues dealing with deductible size and mix, absence of longterm histories, and the determination of consistent loss development factors among deductible limits. In addition, I propose several approaches for estimating aggregate loss limit charges, if any, and the asset value for associated servicing revenue.

Participating Gics: Performance Attribution Analysis, Alec Stais, John P. Toohey Iii

Journal of Actuarial Practice (1993-2006)

The increasing popularity of participating GICs has created a need for an objective understanding of their performance. The fixed income attribution techniques are not adequate for measuring participating GIC performance because they typically restrict performance measurement to concepts such as duration management, sector rotation, and issue selection. We develop an attribution technique based on four components or effects that are helpful in explaining the changes in credited rates. They are the constant duration effect, the reinvestment effect, the cash flow effect, and the investment effect. The underlying mathematical approach to calculating these effects is presented along with examples.

Bias Of Excluding High And Low Data For Long-Tailed Distributions, Cheng-Sheng Peter Wu

Journal of Actuarial Practice (1993-2006)

Property and casualty actuaries frequently employ a technique of averaging (called high-low averages) that excludes the same amount of data at both ends. For example, (0 in selecting loss development factors, the middle three of the latest five years or the middle eight of latest 12 quarters sometimes are used, or (ii) in calculating average expense ratios, the largest expense ratios and the smallest expense ratios may be removed from the sample. Although highlow averages can reduce the impact of influential data on analyzed results, the averages will result in downward bias when they are applied to pricing or reserving …

An Approach To Estimating Market Value And Duration Of Interest-Sensitive Whole Life Contracts, Thomas J. Merfeld

Journal of Actuarial Practice (1993-2006)

A fixed premium interest·sensitive whole life contract is analyzed in order to estimate its market value. In addition, using various definitions of duration, we determine the duration of the contract for each definition. The results of this analysis have implications for market value accounting of life insurance liabilities and for life company portfolio management.

Nonmedical Limits In Individual Life Insurance, James B. Ross, Shalini E. Perumpral

Journal of Actuarial Practice (1993-2006)

This paper shows data that illustrate the substantial variation among nonmedical schedules and the dramatic increase in their amount limits from 1972 through 1992. Coefficients of variation are analyzed for several data subsets. We find that the variation of schedules in the sample of all firms has increased throughout the 1972-1992 period for issue ages up to 30, but has declined for issue ages beyond 30 during the 1982-1992 period. For the non-New York and stock companies our statistical tests indicate an increase in the variability of schedules over the full period 1972 to 1992.

A Reliance Damages Approach To Corporate Lockups, David A. Skeel Jr.

All Faculty Scholarship

No abstract provided.

America's Shifting Fascination With Comparative Corporate Governance, Edward B. Rock

All Faculty Scholarship

No abstract provided.

Proprietary Norms In Corporate Law: An Essay On Reading Gambotto In The United States, Deborah A. Demott

Faculty Scholarship

No abstract provided.

Ricardian Equivalence: Further Evidence, Atreya Chakraborty

Atreya Chakraborty

The Ricardian Hypothesis states that for a given level of government expenditure, aggregate demand is neutral to changes in the debt-to-tax ratio. Many economists argue that the private and government sectors have different planning horizons which will lead to deviations from Ricardian equivalence. In this paper, by using a model that nests both Ricardian equivalence and an alternative hypothesis, we empirically investigate whether the private sector has a shorter planning horizon than the government sector. The evidence presented in this study suggests that there is no difference between the planning horizons of the private and government sectors.

International Market Segmentation And Euro Debt Issues, Stavros B. Thomadakis, Nilufer Usmen

Department of Accounting and Finance Faculty Scholarship and Creative Works

Implications of capital market segmentation for international capital structure (ICS)-capital structure consisting of equity issued in one country and debt issued in another-are examined. Necessary conditions for the emergence of ICS are analyzed under two options for debt issues (foreign debt and Eurodebt) and comparisons are made. It is shown that in cases where the project cannot support an ICS including foreign debt Eurobonds can be issued and would be profitable.

Journal Of Actuarial Practice, Volume 3, No.2, 1995, Colin Ramsay , Editor

Journal of Actuarial Practice (1993-2006)

ARTICLES

Measuring and Managing Catastrophe Risk • Ronald T. Kozlowski and Stuart B. Mathewson

Discussion • Rade T. Musulin & Authors' Reply

Sensitivity Testing of Property/Casualty Cash Flows • Ralph S. Blanchard, III and Eduardo P. Marchen

A Pension Plan Incorporating Both Defined Benefit and Defined Contribution Principles • M. Zaki Khorasanee

Expected Loss Development in Workers' Compensation Pricing: A Shift in Credibility • Christopher J. Poteet

Editor - Colin Ramsay, University of Nebraska. Associate Editors: Robert Brown, University of Waterloo ○ Cecil Bykerk, Mutual of Omaha ○ Ruy Cardoso, Actuarial Frameworks ○ Samuel Cox, Georgia State University ○ David …

Sensitivity Testing Of Prdperty/Casualty Cash Flows, Ralph S. Blanchard Iii, Eduardo P. Marchena

Journal of Actuarial Practice (1993-2006)

The paper outlines an approach that has evolved at Aetna through ten years of property/casualty insurance cash flow testing. Methodologies and approaches to setting parameters reflecting both default and call/prepayment risk are discussed for major invested asset categories. Modeling runoff cash flows for a base scenario (and, for some of these assets, shocked scenarios) also is examined for major non-invested asset categories. Loss reserve cash flow modeling is not addressed, except for a brief description of one approach to shocking projected flows. Finally, various alternatives are given for presenting cash flow testing results to management and non-actuarial audiences.

Discussion Of Leonard T. Guarini And Edward P. Lotkowski's "Model Year Rating For Automobile Liability And Injury Coverages", Cheng-Sheng Peter Wu

Journal of Actuarial Practice (1993-2006)

No abstract provided.

Surveillance Of Life Insurer Solvency: A Comparison Of Stock And The Multiple Scenario Cash Flow Financial Stress Tests, Ronald W. Spahr, Paul L. Gronewoller

Journal of Actuarial Practice (1993-2006)

The solvency of life insurance companies may be threatened by interest rate risk when the maturities of assets and liabilities are mismatched. The National Association of Insurance Commissioners' (NAIC) multiple scenario cashflow test (MSCFT) and the Office of Thrift Supervision (OTS) net portfolio value model (stock) approaches to financial stress tests are illustrated and analyzed with respect to their capacity to estimate the impact of potential changes in interest rates on life insurance company capital and surplus. Each approach is illustrated with the assets and liabilities of three hypothetical life insurance company capital levels (high, average, and below average) and …

Expected Loss Development In Workers' Compensation Pricing: A Shift In Credibility, Christopher J. Poteet

Journal of Actuarial Practice (1993-2006)

This paper shows that expected loss development is equivalent to adjusting the full credibility standard and applying credibility by policy period. Expected loss development should not be used in workers' compensation ratemaking. The credibility is correct before being adjusted.

Decision Making Under Conflicting Criteria In Pension Valuations: An Expected Utility Model, Lisa Lipowski Posey, Arnold F. Shapiro

Journal of Actuarial Practice (1993-2006)

Many of the criteria used by actuaries when selecting assumptions for pension plan valuations often conflict. As a result, actuaries must weigh the various costs and benefits associated with a particular set of assumptions. We use expected utility theory to model the process of chOOSing actuarial assumptions when faced with potentially conflicting criteria. The three criteria considered are prudence, best estimate, and conservatism. The actual contribution chosen by the actuary is found to depend on the contribution level that triggers a red flag with respect to tax deductibility. If this level is relatively low, the actuary chooses a high contribution …

Cross-Tested Defined Contribution Plans, Ho Kuen Ng

Journal of Actuarial Practice (1993-2006)

Cross-tested plans are defined contribution plans that test allocations for nondiscrimination. The test is based on a plan's actuarial equivalent annuity benefits. Cross-tested plans have become popular among small plan sponsors after the release of the nondiscrimination regulations. This paper investigates the pros and cons of cross-testing.

Discussion Of Ronald T. Kozlowski And Stuart B. Mathewson's "Measuring And Managing Catastrophe Risk", Rade T. Musulin

Journal of Actuarial Practice (1993-2006)

Mr. Kozlowski and Mr. Mathewson's paper provides a good introduction to the development and use of models in the property insurance industry. It will be a valuable addition to the regrettably sparse actuarialliterature in this area. This discussion will offer several comments on the ideas raised in the paper, focusing on how models can be used to enhance an actuary's work. The use of models has sparked major controversies between regulators and insurers in several jurisdictions, notably Florida. Controversy is not limited to the regulatory arena, however. Because models are being used by reinsurers to rate contracts and by A.M. …

Measuring And Managing Catastrophe Risk, Ronald T. Kozlowski, Stuart B. Mathewson

Journal of Actuarial Practice (1993-2006)

We introduce some of the basic principles behind property catastrophe modeling via simulations. The output of such simulations can be explored via modernized pin maps and loss likelihood curves. We also briefly discuss some of the uses of catastrophe modeling in addition to traditional probable maximum loss estimation. Comments are made on the use of modeling by reinsurers. We hope that this article stimulates discussions on new approaches to catastrophe modeling.

A Pension Plan Incorporating Both Defined Benefit And Defined Contribution Principles, Zaki M. Khorasanee

Journal of Actuarial Practice (1993-2006)

We propose a defined contribution pension plan with an explicitly defined benefit formula. Such a plan is expected to pay more stable and predictable benefits over time than one based on the money purchase principle. The properties of the plan are investigated through simulation. Methods for distributing surpluses and eliminating deficiencies that involve adjusting the rate of benefit accrual (rather than varying the rate of contribution) are discussed. The behavior of the plan under a scenario of persistently unfavorable investment experience is Simulated, and methods for satisfactorily dealing with such a scenario are considered. The plan actuary is expected to …

Simulation Of Investment Returns For A Money Purchase Fund, Zaki M. Khorasanee

Journal of Actuarial Practice (1993-2006)

This paper examines the problem of investment risk in money purchase pension plans. The disadvantages of modeling equity returns as independent, identically distributed random variables are conSidered, and a modified stochastic model of equity returns is proposed. This modified stochastic model is used to estimate the variability in a plan member's retirement fund and to compare various alternatives to investing 100 percent of the assets in ordinary shares. Varying conclusions are drawn about the likely success of these alternative investment strategies in reducing investment risk.

Hiv, Aids, Markov Processes, And Health And Disability Insurance, Steven Haberman

Journal of Actuarial Practice (1993-2006)

This paper presents a Markov model of the transmission and development of HIV and AIDS. The Markov model is used to derive functions needed in the calculation of disability insurance premiums, reserves, and cash flows. An application to health insurance and disability insurance is provided.

Discussion Of Brian Jones' "Actuarial Conservatism: Not In Public Sector Defined Benefit Pension Plans", Richard Daskais

Journal of Actuarial Practice (1993-2006)

No abstract provided.