Finance and Financial Management Commons^™

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.

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.

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.

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.

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.

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 …

Do Option Markets Substitute For Stock Markets?, Tom Arnold, Gayle Erwin, Lance Nail, Terry D. Nixon

Finance Faculty Publications

Using a sample of cash tender offers occurring between 1993 and 2002, we find evidence that the options market has become the preferred venue for traders attempting to profit on anticipated announcements. Options offer advantages relative to stocks. Traders gain leverage by trading in options and multiple options contracts on an individual stock. The results of our study indicate that a substitution effect does exist. Abnormal volume in the option market replaces abnormal volume in the stock market prior to cash tender offer announcements, and this abnormal option volume precedes abnormal stock volume for targets with or without traded options.

Corporate Governance, Public Accounting Firm And Multinational Corporation: The Us Sox Act Perspective, Marc Massoud, Eunsup Daniel Shim

WCBT Faculty Publications

The purpose of this paper is to review US corporate governance systems and to highlight the mandated roles of audit committee and external auditor within the SOX Act. In addition, it discusses requirements and implications of the SOX Act for the foreign accounting firms and multinational corporations. Finally this paper provides a perspective on improvement of corporate governance and financial integrity. In order to regain trust from the financial market, the SOX Act mandates (1) to improve auditor’s independence by reducing conflicts of interest; (2) to increase corporate financial reporting responsibility by requiring a CEO or a CFO certify accuracy …

Essays On Currency Risk Management, Nehad Elsawaf

Theses and Dissertations in Business Administration

In recent years a growing number of corporations have committed considerable resources to risk management, indicating the potential for risk management to protect and increase firm value. One can argue that most prior attempts to directly link the value of the firm to its hedging strategies are rather scant. Moreover, several questions with regards to firms' risk management activities remain unanswered. This study consists of two essays dealing with a series of questions regarding corporate risk management in modern U.S. multinational corporations.

In the first essay we first, test the valuation effects of currency hedging policies of firms around extraordinary …

China Financial Research: A Review And Synthesis, Kam C. Chan, Hung-Gay Fung Dr., Samanta Thapa

GFCB Working Paper Series

We review the financial research on China as a transitional economy over the past fifteen years or so. This review sheds light on several important issues that are pertinent for an emerging financial market - how regulation can affect the prices of different financial assets; how and why markets are segmented; corporate governance effects between major and minor shareholders in an emerging market; the importance of a bank-based financial system; interactions between the financial market and the goods market; how market participants can complete the market; and how an emerging financial market emulates established markets and evolves over time. Many …

The Performance Of Value And Growth Portfolios In East Asia Before The Asian Financial Crisis, David K. Ding, Jia-Leng Chua, Thomas A. Fetherston

Research Collection Lee Kong Chian School Of Business

We examine value and growth portfolios in seven East Asian countries just before the onslaught of the 1997 Asian Financial Crisis. The value premiums in these countries, except in Indonesia, Taiwan, and Thailand, are found to be mainly positive. After controlling for firm size, risk, liquidity, and growth potential, we find higher returns among value stocks with a small firm size and low growth potential in Hong Kong and Malaysia. In Japan and Singapore, higher returns are found in growth portfolios with a small firm size and low growth potential. Growth stocks in Taiwan with a small firm size, and …

Modeling Clusters Of Extreme Losses, Beatriz Vaz De Melo Mendes, Juliana Sa Freire De Lima

Journal of Actuarial Practice (1993–2006)

We model extreme losses from an excess of loss reinsurance contract under the assumption of the existence of a subordinated process generating sequences of large claims. We characterize clusters of extreme losses and aggregate the excess losses within clusters. The number of clusters is modeled using the usual discrete probability models, and the severity of the sum of excesses within clusters is modeled using a flexible extension of the generalized Pareto distribution. We illustrate the methodology using a Danish fire insurance claims data set. Maximum likelihood point estimates and bootstrap confidence intervals are obtained for the parameters and statistical premium. …

A Primer On Duration, Convexity, And Immunization, Leslaw Gajek, Krzysztof Ostaszewski, Hans-Joachim Zwiesler

Journal of Actuarial Practice (1993–2006)

The concepts of duration, convexity, and immunization are fundamental tools of asset-liability management. This paper provides a theoretical and practical overview of the concepts, largely missing in the existing literature on the subject, and fills some holes in the body of research on the subject. We not present new research, but rather we provide a new presentation of the underlying theory, which we believe to be of value in the new North American actuarial education system.

Optimal Dividend Strategies: Some Economic Interpretations For The Constant Barrier Case, Maite Marmol, M. Merce Claramunt, Antonio Alegre

Journal of Actuarial Practice (1993–2006)

We consider the surplus process of a non-life insurance portfolio with a dividend component represented by a constant dividend barrier strategy. The optimal dividend barrier is known when individual claim amounts follow an exponential distribution. This result for the optimal dividend barrier is used to develop combinations of the levels of the insurer's initial surplus and of the barrier which, under certain economic and financial criteria, can be regarded as optimal.

A New Hybrid Defined Benefit Plan Design, Wayne E. Dydo

Journal of Actuarial Practice (1993–2006)

Traditional defined benefit plans can be difficult to understand and complex to administer. Hybrid plans (cash balance and pension equity) arose in part to address the former issue, but at a price of greater administrative and litigation risk. I introduce a design for defined benefit pension plans that is easy to communicate to participants, allows for accrual patterns that closely replicate those of the two most common forms of hybrid pension plans, and avoids the controversial nondiscrimination issues that currently trouble sponsors of hybrid plans. The design defines the benefit as a fixed percentage of pay payable over a period …

Risk-Based Regulatory Capital For Insurers: A Case Study, Christian Sutherland-Wong, Michael Sherris

Journal of Actuarial Practice (1993–2006)

We study the issues in determining regulatory capital requirements using advanced modeling by assessing and comparing capital requirements under the two alternative approaches. A dynamic financial analysis (DFA) model is used for this case study. These issues are of current international interest as regulators, insurers, and actuaries face the significant issues involved with the introduction of risk-based capital for insurers.

Reputation Pricing: A Model For Valuing Future Life Insurance Policies, Rami Yosef

Journal of Actuarial Practice (1993–2006)

The reputation of a life insurer is used to develop a model for determining the value of future life insurance policies. An M / G / 00 process is used to describe the sales and terminations (due to death or maturity) of future policies. The intensity of the arrival process is assumed to depend on the company's reputation. Explicit expressions are derived for the actuarial reserves and expected profits of these future policies.

On The Pricing Of Top And Drop Excess Of Loss Covers, Jean-Francois Walhin, Michel Denuit

Journal of Actuarial Practice (1993–2006)

A top and drop cover is a treaty that can be found on the retrocession market. It offers capacity that can be used either to protect a top layer or a working layer. The former is called a "top" and the latter is called a "drop." Using the traditional collective risk model, we demonstrate the use of a multivariate version of Panjer's algorithm to price this cover. We also compare the premium obtained within the exact model with the premiums obtained either with the Frechet bounds or with the wrong assumption of independence.

Journal Of Actuarial Practice - Volume 12 (2005) - 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 ○ …

An Application Of Control Theory To The Individual Aggregate Cost Method, Alexandros A. Zimbidis, Steven Haberman

Journal of Actuarial Practice (1993–2006)

The paper investigates the individual aggregate cost method (also known as the individual spread-gain method), which is normally applicable in small pension funds or fully contributory schemes, using a control theoretical framework. We construct the difference equations describing the mechanisms of the respective funding method and then calculate the optimal control path of the contribution rate assuming (first) a stochastic and (second) a deterministic pattern for the future investment rates of return. For the first case, the optimal solution is achieved through a linear approximation and using stochastic optimization techniques. It is proved that the contribution rate is (optimally) controlled …

Modeling Insurance Loss Data: The Log-Eig Distribution, Uditha Balasooriya, Chan Kee Low, Adrian Y.W. Wong

Journal of Actuarial Practice (1993–2006)

The log-EIG distribution was recently introduced to the probability literature. It has positive support and a moderately long tail, and is closer to the lognormal than to the gamma or Weibull distributions. Our simulations show that data generated from a log-EIG distribution cannot be adequately described by lognormal, gamma, or Weibull distributions. The log-EIG distribution is a worthwhile candidate for modeling insurance claims (loss) data or lifetime data. Examples of fitting the log-EIG to published insurance claims data are given.

A Modern Approach To Modeling Insurances On Two Lives, Maria Bilikova, Graham Luffrum

Journal of Actuarial Practice (1993–2006)

The analysis of life insurance contracts on two lives using the traditional deterministic approach has been an important part of actuarial education for the past fifty years or more. Recently there has been a shift from this deterministic approach to one using a more modern stochastic approach involving the future lifetime random variable. In this paper we will look at the problem using multiple-state models. In our view this approach allows a deeper analysis than either the traditional or the random future lifetime ones.

Ultimate Ruin Probability For A Time-Series Risk Model With Dependent Classes Of Insurance Business, Lai Mei Wan, Kam Chuen Yuen, Wai Keung Li

Journal of Actuarial Practice (1993–2006)

We consider a discrete-time risk model with m (m ~ 2) dependent classes of insurance business. The claim processes of these m classes are assumed to follow a multivariate autoregressive time-series model of order 1. Given this claims model, we explore the probability of ultimate ruin assuming exponentially bounded claims. As an example, we use simulations to study the case where there are two business and the underlying losses are of two types: bivariate exponential and bivariate gamma claim distributions.

Journal Of Actuarial Practice, Volume 12, 2005, Colin Ramsay , Editor

Journal of Actuarial Practice (1993–2006)

ARTICLES

Risk-Based Regulatory Capital for Insurers: A Case Study • Christian Sutherland-Wong and Michael Sherris 5

A New Hybrid Defined Benefit Plan Design • Wayne E. Dydo . 47

A Primer on Duration, Convexity, and Immunization • Leslaw Gajek, Krzysztof Ostaszewski, and Hans-Joachim Zwiesler 59

Modeling Clusters of Extreme Losses • Beatriz Vaz de Melo Mendes and Juliana Sa Freire de Lima 83

Modeling Insurance Loss Data: The Log-EIG Distribution • Uditha Balasooriya, Chan Kee Low, and Adrian Y W Wong 101

A Modern Approach to Modeling Insurances on Two Lives • Maria Bilikova and Graham Luffrum 127

On the …

Using The Wacc To Value Real Options, Tom Arnold, Timothy Falcon Crack

Finance Faculty Publications

We present a real option valuation using the weighted average cost of capital (WACC). This is an alternative to risk-neutral real option valuation. Using the WACC involves a marginal increase in mathematical complexity, but it is easy to implement in a spreadsheet, and it is easy to present to management. Our analysis reveals, however, that because the real option valuation is immune to choices of admissible discount rates (as per Arnold and Crack 2003a), the critical issue is correct estimation of volatility, not choice of discount rate. We also point out that the natural and conservative tendency to overestimate risk …

Prospect Theory, Analyst Forecast, And Stock Returns, David K. Ding, Charlie Charoenwong, Raymond Seetoh

Research Collection Lee Kong Chian School Of Business

This paper documents how prospect theory can be used to explain stock returns and analysts' forecast behavior. Positive earnings surprises are associated with increases in abnormal returns but negative earnings surprises have only a limited negative impact on returns. We find that analysts display asymmetric behavior towards positive and negative earnings growth. Analysts' forecasts are found to be accurate during periods of positive earnings growth, but overly optimistic during periods of negative earnings growth. Our findings have implications for the structuring of investment products, as well as the role of market timing in their introduction.

Investing In Hedge Funds: Risks, Returns And Performance Measurement, Francis Koh, Winston T. H. Koh, David K. C. Lee, Kok Fai Phoon

Research Collection Lee Kong Chian School Of Business

Hedge funds are collective investment vehicles that are often established with a special legal status that allows their investment managers a free hand to use derivatives, short sell, and exploit leverage to raise returns and cushion risk. We review various issues relating to the investment in hedge funds, which have become popular with high net-worth individuals and institutional investors, as well as discuss their empirical risk and return profiles. The concerns regarding the empirical measurements are highlighted, and meaningful analytical methods are proposed to provide greater risk transparency in performance reporting. We also discuss the development of the hedge fund …

Membership On Editorial Boards And Rankings Of Schools With International Business Orientation, Kam C. Chan, Hung-Gay Fung Dr., Pikki Lai

GFCB Working Paper Series

Using four-year data (1990, 1994, 1998, and 2002), we have provided a ranking of schools with international business (IB) orientation based on the membership on editorial boards of 30 leading international business journals. Participation on editorial boards of quality journals is highly selective, and should provide a quality indication of the schools. Both quality unadjusted and adjusted board membership based ranking are calculated in this study. Several interesting findings are worth noting. First, U.S. schools play a significant leadership role among the leading IB programs. Second, the findings of this study also show the major contribution of non-U.S. schools, which …

How Do Institutional Investors Trade, Paul G. J. O'Connell, Melvyn Teo

Research Collection Lee Kong Chian School Of Business

Using a novel and detailed custody trades dataset, this paper analyzes the trading behavior of institutions. Extant studies have examined the effects of past performance on trading by retail investors, day traders, and futures floor traders. Yet very little work has been done on institutions. We find that unlike other investors, institutions take on more risk following an increase in net profit and loss. However, the responses to a gain and loss are highly asymmetric. Institutions aggressively reduce risk in the wake of losses, but only mildly increase risk in the wake of gains. This asymmetry is more pronounced for …