Finance and Financial Management Commons^™

Implied Binomial Trees In Excel Without Vba, Tom Arnold, Timothy Falcon Crack, Adam Schwartz

Finance Faculty Publications

We implement a Rubinstein-type (1994) implied binomial tree using an Excel spreadsheet, but without using VBA (Visual Basic Application). We demonstrate both the optimization needed to generate implied ending risk-neutral probabilities from a set of actual option prices and the backwards recursion needed to solve for the entire implied tree. By using only standard Excel spreadsheet functions, and not resorting to VBA, this complicated option pricing technique is now immediately transparent to academics, students, and practitioners alike. The intuition gained from our simple spreadsheet can be applied directly to the estimation of more complicated implied trees using more advanced software. …

The Relationship Between The Value Effect And Industry Affiliation, John C. Banko, C. Mitchell Conover, Gerald R. Jensen

Finance Faculty Publications

We examine industry affiliation and the relationship between stock returns and book‐to‐market equity (the value effect). The robustness of the value effect is supported as a significant value premium is shown to exist in 15 of 21 industries. Both industry and firm‐level value effects are identified; however, the firm‐level effect is the more prominent of the two. Further, the value effect is shown to be strongest in value industries and weakest in growth industries. Finally, we show evidence consistent with the claim that the value premium is due to investors requiring higher returns from firms in distressed conditions.

Applying Altman's Z-Score In The Classroom, Tom Arnold, John H. Earl Jr.

Finance Faculty Publications

Altman's Z-score is introduced in an Excel framework to produce a quick calculation of the Z-score with actual financial data available through the Internet. The lesson plan developed is easily introduced with topics covering ratio analysis, financial risk, bond rating changes, and bankruptcy. Given the wide use of the Z-score in practice to evaluate credit risk (or bankruptcy risk), the lesson plan produces a skill set that is very marketable.

Adding Depth To The Discussion Of Capital Budgeting Techniques, Tom Arnold, Terry D. Nixon

Finance Faculty Publications

The subject of capital budgeting generally encompasses a significant percentage of any beginning finance course with net present value (NPV) often receiving the most attention. Even after this substantial time allotment, critical assumptions and comparisons of the different techniques (such as payback period, discounted payback period, NPV and IRR) are frequently glossed over due to time constraints. Consequently, the goal of this paper is to present these non-NPV techniques in a manner that allows the beginning finance student to expeditiously see the intuition, inherent assumptions, and any connection with the more popular NPV calculation. A small portion of this paper …

Estimation Of Large Insurance Losses: A Case Study, Tine Buch-Kromann

Journal of Actuarial Practice (1993-2006)

This paper demonstrates an approach to analyzing liability data recently developed by a Danish insurance company. The approach is based on a Champernowne distribution, which is corrected with a non-parametric estimator. The correction estimator is obtained by transforming the data set with the estimated modified Champernowne cdf and then estimating the density of the transformed data set by using the classical kernel density estimator. Our approach is illustrated by applying it to an actual data set.

Solvency Of Life Insurance Companies: Methodological Issues, Rosa Cocozza, Emilia Di Lorenzo

Journal of Actuarial Practice (1993-2006)

The paper deals with solvency assessment for life insurance business; some methodological issues concerning the solvency of life insurance companies, particularly connected to the investment risk, are suggested. Considerations about the technical equilibrium of an insurance portfolio and the financial regulation lead to a dynamic system involving risk measure and solvency assessment. The formal model is applied to a life annuity cohort in a stochastic context in order to exemplify the potential of the model, especially referred to the need to frame solvency assessment in a dynamic perspective.

A Note On The Instability Of The Unprojected Individual Level Premium Cost Method, Pierre Devolder, Valerie Goffin

Journal of Actuarial Practice (1993-2006)

We compare the unit credit and the unprojected individual level premium cost methods in a continuous time environment and show that the latter may produce unstable contribution rates in a dynamic environment. Specifically, assuming there are no unfunded liabilities, we prove that the unprojected individual premium cost method may produce non-bounded contributions if benefits change too close to the normal retirement age.

Consistent Assumptions For Modeling Credit Loss Correlations, Jan Dhaene, Marc J. Goovaerts, Robert Koch, Ruben Olieslagers, Olivier Romijn, Steven Vanduffel

Journal of Actuarial Practice (1993-2006)

We consider a single period portfolio of n dependent credit risks that are subject to default during the period. We show that using stochastic loss given default random variables in conjunction with default correlations can give rise to an inconsistent set of assumptions for estimating the variance of the portfolio loss. Two sets of consistent assumptions are provided, which it turns out, also provide bounds on the variance of the portfolio's loss. An example of an inconsistent set of assumptions is given.

On Some Risk-Adjusted Tail-Based Premium Calculation Principles, Edward Furman, Zinoviy Landsman

Journal of Actuarial Practice (1993-2006)

This paper explores two tail-based premium calculation principles, the tail standard deviation (TSD) premium and the tail conditional expectation (TCE) premium, in their risk-adjusted and unadjusted forms. They are risk-adjusted using so-called distortion functions. We prove that the proportional hazard (PH) risk-adjusted TCE premium is larger than the unadjusted TCE premium. Additionally, given a risk distribution with location and scale parameters, we prove that the PH risk-adjusted TCE premium reduces to the unadjusted TSD premium.

Bayesian Analysis Of A Health Insurance Model, Helio S. Migon, Edison M.O. Penna

Journal of Actuarial Practice (1993-2006)

We consider the problem of determining health insurance premiums based on past information on size of loss, number of losses, and size of population at risk. The size of loss and the number of losses are treated as mutually independent random variables. The number of losses is assumed to follow a Poisson process, and the loss sizes are independent and identically distributed non-negative random variables, and the population at risk is assumed to follow a non-linear growth model. An expression for the premium is obtained through maximization of the insurer's expected utility under a Bayesian model. The parameter estimation process …

Bayesian Analysis Of Insurance Losses Using The Buhlmann-Straub Credibility Model, Abraham J. Van Der Merwe, Kobus N. Bekker

Journal of Actuarial Practice (1993-2006)

We propose a Bayesian analysis to develop credibility estimates of the well known Biihlmann-Straub model. We describe simple numerical methods to obtain exact posterior distributions and predictive densities under this model. These distributions are obtained through Monte Carlo simulations that generate independent samples from the joint posterior distribution. Our methods are therefore preferable to methods such as Gibbs sampling, which generates dependent samples from the joint distribution. The methods discussed also can be extended to more complicated credibility models.

Journal Of Actuarial Practice, Volume 13, 2006, Colin Ramsay , Editor

Journal of Actuarial Practice (1993-2006)

ARTICLES

Bivariate Archimedean Copula Models for Censored Data in Non-Life Insurance • Michel Denuit, Dana Purcaru, and Ingrid Van Keilegom 5

Bayesian Analysis of Insurance Losses Using the Biihlmann-Straub Credibility Model • Abraham J. van der Merwe and Kobus N Bekker . 33

Bayesian Analysis of a Health Insurance Model • Helio S. Migon and Edison M. O. Penna 61

Solvency of Life Insurance Companies: Methodological Issues • Rosa Cocozza and Emilia Di Lorenzo . 81

Pricing Insurance Policies with a Distribution-Free Financial Pricing Model • Min-Ming Wen . 103

A Note on the Instability of the Unprojected Individual Level …

Analysis Of An Insurance Risk Model With Thinning Dependence And Common Shock, Lai Mei Wan, Kam Chuen Yuen, Wai Keung Li

Journal of Actuarial Practice (1993-2006)

We consider a continuous-time insurance risk model with m dependent classes of business with dependent claim number processes due to thinning dependence and a common shock. The impact of the dependence is studied via the adjustment coefficient. The case m = 2 is investigated analytically for exponential claim distributions and via simulation for non-exponential claim distributions.

Journal Of Actuarial Practice - Volume 13 (2006) - Contents And Masthead

Journal of Actuarial Practice (1993-2006)

Contents

Editorial Policy: Topics suitable for this journal include AIDS, annuity products, asset-liability matching, cash-flow testing, casualty rate making, credibility theory, credit insurance, disability insurance, expense analysis, experience studies, FASB issues, financial reporting, group insurance, health insurance, individual risk taking, insurance regulations, international issues, investments, liability insurance, loss reserves, marketing, pensions, pricing issues, product development, reinsurance, reserving issues, risk-based capital, risk theory, social insurance, solvency issues, taxation, valuation issues, and workers' compensation

Review Process

Editor - Colin Ramsay, University of Nebraska

Associate Editors: Robert Brown, University of Waterloo ○ Cecil Bykerk, Mutual of Omaha ○ Ruy Cardoso, Actuarial Frameworks ○ …

Spatial Distribution Of Frequency And Severity Of Water Claims In California, Gurbhag Singh, Max Tang, Don Mcneill, Lyn Hunstad

Journal of Actuarial Practice (1993-2006)

We examine the frequency and severity of water loss claims for homeowners insurance across the state of California for the experience years 2000, 2001, and 2002. The spatial distribution patterns of frequencies and severities are mapped and analyzed at the zip code level. The maps reveal the pockets of high frequencies and severities. The information provided in this paper will assist actuaries and policy makers in their quest to set accurate rates for homeowners insurance.

Pricing Insurance Policies With A Distribution-Free Financial Pricing Model, Min-Ming Wen

Journal of Actuarial Practice (1993-2006)

The highly skewed and heavy tailed distributions used to model insurance losses (claims) raise a concern about the validity of the applications of the capital asset pricing model (CAPM) to insurance pricing when market risks are essential. This paper provides an alternative pricing model, called the Rubinstein-Leland model, which can be used to price insurance contracts. The Rubinstein-Leland model has a distribution-free feature that can fully capture the asymmetry embedded in insurance losses. Thus, this model is better able to derive fair prices for insurance policies than is the CAPM.

Bivariate Archimedean Copula Models For Censored Data In Non-Life Insurance, Michel Denuit, Oana Purcaru, Ingrid Van Keilegom

Journal of Actuarial Practice (1993-2006)

We describe a methodology based on Archimedean copulas for analyzing nonlife insurance data with censoring present. Specifically, we propose a graphical selection procedure for the nonparametric estimation of the generator. An actual loss-ALAE data set is used for the numerical illustrations and for comparisons of our approach to a few others.