Corporate Finance Commons^™

Life Insurer Risk-Based Capital: An Option Pricing Approach, Samuel H. Cox, Arthur M.B. Hogan

Journal of Actuarial Practice (1993–2006)

This paper uses an option pricing framework to estimate life insurer risk-based capital. Stock market data and statutory asset and liability data are used to calculate the implied level of statutory risk-based capital for each of 18 insurers. We calculate the level of risk-based capital required to avoid subsidy from the guaranty fund. Our results suggest that less capital is required than that required under the New York actuarial risk-based capital formula. Firm rankings, however, are similar under both methods, although the methods are not directly comparable. We also determine the level of capital required if the subsidy provided to …

Model Year Rating For Automobile Liability And Injury Coverages, Leonard T. Guarini, Edward P. Lotkowski

Journal of Actuarial Practice (1993–2006)

This paper is intended to stimulate further research and discussion on the validity and utility of model year rating for personal automobile coverages other than physical damage. Using data from a single insurer and some elementary statistical techniques, we provide evidence supporting model year as a classification variable for automobile liability and injury coverages.

Actuarial Conservatism: Not In Public Sector Defined Benefit Pension Plans, Brian A. Jones

Journal of Actuarial Practice (1993–2006)

Most actuaries tend to be conservative, and most, including this writer, probably would be happy to be so categorized. But actuarial conservatism may not be the best rule in defined benefit public sector pension plans. This paper argues that it is not appropriate for actuaries to employ conservatism assumptions in such public sector plans.

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 …

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.

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.

Recent Canadian Human Rights Decisions Having An Impact On Gender-Based Risk Classification Systems, Robert L. Brown

Journal of Actuarial Practice (1993–2006)

With the passage of the Canadian Charter of Rights and Freedoms on April 17, 1982, all previous court precedents using gender in risk classification systems became obsolete. Three cases involving issues of discrimination in the use of age and gender now clarify the position of the Canadian judiciary. Based on the decisions in these three cases, this paper presents arguments that can be used in any jurisdiction to defend successfully the use of gender in a property /casualty risk classification system.

Discussion Of Robert L. Brown's "Recent Canadian Human Rights Decisions Having An Impact On Gender-Based Risk Classification Systems", Patrick Butler

Journal of Actuarial Practice (1993–2006)

This commentary examines the political and economic influence of demographic groups on rationales for granting exemption from laws prohibiting classification by age or sex, as evidenced in the cases discussed by Robert L. Brown. Age is less subject than sex to manipulation for group advantage. In Professor Brown's discussion of auto insurance cases, only the influence of group dominance can explain:

• Selective focus on young drivers;

• Indifference to ongoing overcharging of adult women signaled by undisputed 2:1 ratios of cost-related averages; and

• Avoidance of effective ways to evaluate miles of exposure to risk.

Contrary to Professor Brown's …

Obtaining A Life Table For Spinal Cord Injury Patients Using Information Theory, Patrick L. Brockett, Yun Song

Journal of Actuarial Practice (1993–2006)

We present a mortality table adjustment method based on a constrained information theoretic methodology. The objective is to adjust a standard mortality table to reflect a particular known characteristic of the population while remaining as close as possible to a given standard table. To illustrate these techniques, the medical results concerning survival of spinal cord injury patients are incorporated into a standard table to obtain a mortality table pertinent for paraplegic and quadriplegic individuals. The desired adjusted mortality table can be used by actuaries for special purposes such as wrongful injury damage award compensation calculations and determining life insurance premium …

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.

Journal Of Actuarial Practice, Volume 3, No.1, 1995, Colin Ramsay , Editor

Journal of Actuarial Practice (1993–2006)

ARTICLES

Life Insurer Risk-Based Capital: An Option Pricing Approach • Samuel H. Cox and Arthur M.s. Hogan

Surveillance of Life Insurer Solvency: A Comparison of Stock and The Multiple Scenario Cash Flow Financial Stress Tests • Ronald W. Spahr and Paul L. Gronewolier

HIV, AIDS, Markov Processes, and Health and Disability Insurance • Steven Haberman

Obtaining a Life Table for Spinal Cord Injury Patients Using Information Theory • Patrick L. Brockett and Yun Song

Simulation of Investment Returns for a Money Purchase Fund • M. Zaki Khorasanee

Decision Making Under Conflicting Criteria In Pension Valuations: An Expected Utility Model • …

No. 124 1994 November

International Journal for Business Education

SIEC Historical Documents

Earnings Manipulation: A Report By Robert Lavine On The Business Ethics Research Of Kenneth Rosenzweig And Marilyn Fischer, Kenneth Yale Rosenzweig, Marilyn Fischer

Accounting Faculty Publications

This column by Robert LaVine in the Chartered Accountants Journal of New Zealand reports on the research of University of Dayton professors Kenneth Rosenzweig and Marilyn Fischer, "Is Managing Earnings Ethically Acceptable? Surveys Show Age and Seniority Affect Attitudes on Earnings Management," >>> published in the journal Management Accounting.

Report Earnings Accurately, Kenneth Yale Rosenzweig, Marilyn Fischer

Accounting Faculty Publications

As authors of the March article, “Is Managing Earnings Ethically Acceptable?,” we wish to thank Alfred M. King for his letter in the April issue questioning some of the contentions in our article. In a time when corruption seems to be rampant in many aspects of our national life, it is important for accountants to discuss openly what are their ethical responsibilities, and what are the limits to those responsibilities. The credibility of accounting numbers is vital to our success as a profession and as individual accountants. There will be no demand for accounting service if accounting information is not …

No. 123 1994 April

International Journal for Business Education

SIEC Historical Documents

Is Managing Earnings Ethically Acceptable? Surveys Show Age And Seniority Affect Attitudes On Earnings Management, Kenneth Yale Rosenzweig, Marilyn Fischer

Accounting Faculty Publications

Is managing earnings through accounting methods ethically acceptable? That's the question we recently asked a sample group of management accountants. The response to the survey was enlightening. Our survey was designed as a follow-up and extension of the research done by Bruns and Merchant and published in Management Accounting in August 1990. They found that managers disagreed considerably on whether earnings management is ethically acceptable. They also found that in general the respondents thought manipulating earnings via operating decisions was more ethically acceptable than manipulation by accounting methods. Bruns and Merchant were disturbed by these findings. They were concerned that …

Managing The Costs And Risks Of Housing Finance: A New Role For Actuaries, Anthony Asher

Journal of Actuarial Practice (1993–2006)

Housing finance is a nontraditional field where actuarial expertise could be applied fruitfully. The development of mortgage instruments requires the application of financial mathematics, while the evaluation and management of the financial risks to which borrowers and lenders are exposed require a knowledge of insurance principles. This paper splits the financial costs of home ownership into several components: those that arise from inflation, risk, administration, and the residual real interest charge. The risk component further is partitioned into life contingencies, economic contingencies, and various moral hazards. This analysis provides a basis for future financial innovation, highlights where government intervention may …

Journal Of Actuarial Practice, Volume 2, No.2, 1994, Colin Ramsay , Editor

Journal of Actuarial Practice (1993–2006)

ARTICLES

Disenrollment Patterns of Elderly in Managed Care and Fee for Service • Kenneth G. Manton, H. Dennis Tolley, Robert Newcomer, James C. Vertrees, and Charlene Harrington

Modeling Insurance Cash Flows for Universal Life Policies • Robert E. Hoyt

Modal Premium Factors in Ordinary Life Insurance • James B. Ross and Criss G. Woodruff

Predicting Automobile Insurance Multi-Regional Base Pure Premiums • Edward Nissan and Iskandar S. Hamwi

A Statistical Approach to IBNR Reserves • Bradford S. Gile

Safety First and Ambiguity • Lawrence A. Berger and Howard Kunreuther

Discussion of Robert L. Brown's "Tax Assistance to Qualified Retirement Savings …

Health Insurance Reform And Its Effects On The Small Employer Market: A Review Of H.R. 3626, Anthony P. Hammond

Journal of Actuarial Practice (1993–2006)

This paper provides a detailed analysis of H.R. 3626, a bill that is intended to improve employers' and employees' access to health care. H.R. 3626 attempts to accomplish this through the use of guaranteed availability, community rating, and generous standard benefits. A migration model is used to analyze the impact of H.R. 3626. Using this model, it is shown that while improving the availability and affordability of health insurance, its rating restrictions increase premiums disproportionately for the majority of small employers. In addition, H.R. 3626 increases the number of uninsured small employers.

The Markov Chain Interest Rate Scenario Generator Revisited, Sarah L.M. Christiansen

Journal of Actuarial Practice (1993–2006)

This paper furthers the development of the Markov chain interest rate generator. Though the basic technique remains essentially unchanged, there are still many significant changes to the model. For example: (i) the long (key) rates are now are generated by a mean reversionary process; (ii) the number of shapes is increased from seven to 11; (iii) the limitation of changing by only two shape codes per year is removed; and (iv) the random walk matrix that determines the shapes is revised to be more realistic. An algorithm is developed to determine the shape code of the original yield curve, thus …

An Introduction To Individual Disability Income Insurance, Mark J. Chartier

Journal of Actuarial Practice (1993–2006)

There are several actuarial software packages purporting to calculate expected benefit cash flows on disability income insurance policies. To the author's knowledge, however, there is no published text that explains how to perform these calculations. This paper is intended to fill this gap in the literature. It describes some of the more common techniques for pricing disability income insurance. Those techniques for which claim costs can be used and those for which the pricing actuary must project cash flows are identified.

Tax Assistance To Qualified Retirement Savings Plans: Deferral Or Waiver?, Robert L. Brown

Journal of Actuarial Practice (1993–2006)

There exist significant tax incentives for retirement savings plans in Canada and the United States. Qualified employer and employee contributions, within limits, are tax deductible to the employer and nontaxable to the employee. Also, investment income is not taxed until taken. On the other hand, monies received from funds having such tax incentives are taxable in full as income to the recipient when taken. This paper analyzes the two tax advantages of qualified retirement savings plans: the tax deductibility of contributions and the nontaxation of investment income until it has been distributed. The algebraic analysis shows that the deductibility of …

"Tax Assistance To Qualified Retirement Savings Plans: Deferral Or Waiver": Author's Reply To Previous The Discussion*, Robert L. Brown

Journal of Actuarial Practice (1993–2006)

No abstract provided.

Safety First And Ambiguity, Lawrence A. Berger, Howard Kunreuther

Journal of Actuarial Practice (1993–2006)

There is considerable empirical evidence suggesting that ambiguity (i.e., parameter risk) impacts pricing decisions by actuaries and underwriters and their desire to provide coverage. Stone proposed a safety first model of choice that provides a possible explanation for this behavior. This paper analyzes Stone's proposed stability and survival constraints and compares the results with those predicted by expected utility theory. The analysis is motivated by insurers' increasing reluctance to provide coverage for certain specific risks such as earthquake damage insurance where the probability of loss is ambiguous. We show that such behavior is consistent with safety first but is difficult …

Reconciling Two Rate Level Indications: A Chain Rule Approach, Cheng-Sheng Peter Wu

Journal of Actuarial Practice (1993–2006)

The problem considered is that of reconciling two rate level indications that are based on several common factors, but have been made at different review periods. A popular approach to this problem is the so-called sequential replacement method, which calculates the impact of each individual factor. Unfortunately, this method has a serious deficiency: the estimated impact of a factor depends upon the order of the replacement. To counteract this defect, a new approach, called the chain rule approach, is developed. Using this approach, an explicit formula is given for calculating the impact and the marginal impact of each factor.

Modal Premium Factors In Ordinary Life Insurance, James B. Ross, Criss G. Woodruff

Journal of Actuarial Practice (1993–2006)

For ordinary life policyholders who want to pay more frequently than annually, insurers construct schedules of modal premium factors that reflect additional charges for the costs of collection, forgone interest, and premiums uncollected or refunded in the year of death. Competition within the industry forces convergence of such schedules. On the other hand, if such factors for a given company reflect its own experience (in expense, interest, mortality, and persistency), the differences between companies will force schedules apart. Analysis of a large group of life insurers over the 1972-1982-1992 period shows that modal premium factors are dustered closely, that they …

Cost Containment In Workers' Compensation: Evaluating Medical Fee Schedules, David L. Durbin, Barry I. Llewellyn

Journal of Actuarial Practice (1993–2006)

Medical expenditures in workers' compensation programs have been subjected to few cost containment strategies. As workers' compensation costs have escalated, however, increasing attention is being given to the role of medical fee schedules in containing the prices of medical services. To this end, we develop a model for estimating the potential cost savings from implementing medical fee schedules. A market basket of medical services received by injured workers is constructed. This basket is used to estimate the parameters of the model. In addition, the basket is used to determine the impact of imposing a fee schedule linked to usual and …

Predicting Automobile Insurance Multi-Regional Base Pure Premiums, Edward Nissan, Iskandar S. Hamwi

Journal of Actuarial Practice (1993–2006)

Multi-regional insurance base premiums are customarily computed by a top-down method where national or state projections are adjusted to reflect regional differences. This paper proposes a methodology for a bottom-up projection. A weighing scheme that minimizes the variance of the estimator is suggested as a criterion to establish an overall multi-regional rate.

Modeling Insurance Cash Flows For Universal Life Policies, Robert E. Hoyt

Journal of Actuarial Practice (1993–2006)

This paper develops a methodology that can be used by insurers to construct predictive models for their own insurance cash flows. The insurance cash flow components evaluated include premium flows, policy loans, and cash value surrenders. Also, the paper evaluates several hypotheses in the insurance literature that attempt to explain insurance cash flows. Though the results are theoretically consistent, they produce some interesting contrasts to findings of similar studies for whole life policies. For example, these results confirm that: (i) the credited rate strategy is important to policy performance; (ii) the emergency fund hypothesis appears to apply to policy loan …

A Statistical Approach To Ibnr Reserves, Bradford S. Gile

Journal of Actuarial Practice (1993–2006)

This paper develops a three dimensional statistical approach to the estimation of the mean and the standard deviation of pure incurred but not reported (IBNR) reserves. This means that the time of occurrence, the reporting lag, and the claim severity are separately modeled. It is assumed that, beyond any fixed time t, the claim number development process is Poisson and that the severity of loss depends on the length of the reporting lag. Two key assumptions are made to simplify the estimation of model parameters: for a given reporting lag, (i) the conditional mean of the claim size is a …