On quantitative risk measures of life settlement investments (pdf, 72kb)
Life Settlement market provides life insurance policyholders an opportunity to realize the values embedded in their policies. It offers liquidity to policyholder and at the same time it creates a new asset class for investors seeking uncorrelated risks. The market has been growing rapidly in recent years. In this paper, we will provide a few summary quantitative risk measures for investing in life settlement policies. It is obvious that the risk to the investor reduces as the portfolio size increases. But in this work, we will focus on measures that relate only to individual policy purchases, the percent change in value among 50% mortality hair cut, the ratio of standard deviation to value, and the percent change in value assuming 15% Cost of Insurance (COI) increases. There are many factors underlying the above mentioned three risk measures. In this work, we will define a new indicator, the premium cost ratio. We will see that this new indicator is one of the key drivers for all three risk measures. We conclude that by investing in those policies with smaller premium cost ratio, the investor will have a better risk return profile of the portfolio, and reduce the risk while maintaining the desired return.
keywords: life settlement, securitization, risk management
reference: Shamita Dutta Gupta (2008). On quantitative risk measures of life settlement investments, Belgian Actuarial Bulletin 8(1), p. 1-4.
Mortality risk via affine stochastic intensities: calibration and empirical relevance (pdf, 372kb)
In this paper, we address the mortality risk of individuals and adopt parsimonious time-homogeneous affine processes for their mortality intensities.We calibrate the models to different generations in the UK population and investigate their empirical appropriateness. We find that, in spite of their simplicity, non mean reverting processes with deterministic part that increases exponentially - which generalize the Gompertz law - seem to be appropriate descriptors of human mortality. The proposed models prove to fulfill most of the properties that a good model for stochastic mortality should have. Empirical results show that the generalization is worth exploring. Indeed, the variability of number of deaths may increase considerably due to the randomness of the mortality intensity. We show that the models are suitable for mortality forecasting and mortality trend assessment.
keywords: stochastic mortality, affine processes, survival probability modeling, survival probability calibration
reference: Elisa Luciano and Elena Vigna (2008). Mortality risk via affine stochastic intensities: calibration and empirical relevance, Belgian Actuarial Bulletin 8(1), p. 5-16.
Cause-deleted life expectancy improvement in the presence of left and right censoring (pdf, 142kb)
In this paper, an extension of the Self-Consistent Competing-Risks (SC-CR) Algorithm will be developed to estimate the cause-deleted life expectancy (CDLE) improvement. The CDLE improvement, which is an important actuarial indicator, refers to the increase in life expectancy that results when a cause of death, such as AIDS or cancer, is eliminated as a potential cause of death. The novelty of the proposed method stems from the unique characteristics of the SC-CR Algorithm, in that the method is carried out in the presence of left and right censored data, can handle the contingency of masked observations, and is fully nonparametric. The paper concludes by applying the algorithm to a real cancer data set.
keywords: life expectancy, censoring, masking, SC-CR Algorithm, survival function
reference: Peter Adamic (2008). Cause-deleted life expectancy improvement in the presence of left and right censoring, Belgian Actuarial Bulletin 8(1), p. 17-21.
Construction d'une méthode spécifique d'indexation des contrats privés d'assurance maladie (pdf, 211kb)
An insurance company might be obliged to modify the contractual terms of a health insurance, especially its tariff. This may explain why, in recent years, premiums have substantially increased in Belgium. According to the new Belgian legislation, a collection of indices have to be created to allow for an automatic update in the amount of a premium. Many approaches can be considered to build such indices. This article suggests and explains an original methodology of premium indexation based on objective and representative parameters.
keywords: health insurance, medical index, actuarial fairness
reference: Pierre Devolder and Benoît-Laurent Yerna (2008). Construction d'une méthode spécifique d'indexation des contrats privés d'assurance maladie, Belgian Actuarial Bulletin 8(1), p. 22-36.
An overview on solvency supervision, regulations and prediction of insolvency (pdf, 196kb)
This paper presents an overview of solvency supervision, including the effects on the solvency position of insurance companies, the objectives of solvency regulations and the role of government for protecting the public in case of insolvency. It also presents the efforts of the European Union (EU) to reform the existing regulatory system of Solvency I and create a new system of Solvency II. Statistical methodologies such as discriminant analysis (DA), logistic regression (LR) and multinomial logistic regression (MLR) have been used for predicting financial distress of insurance companies based on balance sheets and other financial characteristics. An application of the above statistical methodologies could provide a better insight to the future of merged companies. Regression techniques have also been applied to estimate the relationship between some important ratios with other financial characteristics. The estimated regression line can be considered as the industry equation (norm) and can be used to identify insurance companies that deviate substantially from this estimated relationship. Through our study we consider the case of the insurance system of Greece.
keywords: Solvency II, statistical methodologies
reference: Georgios Pitselis (2008). An overview on solvency supervision, regulations and prediction of insolvency, Belgian Actuarial Bulletin 8(1), p. 37-53.
A critical note on MCEV calculations used in the life insurance industry (pdf, 131kb)
Since the beginning of the development of the so-called embedded value methodology, actuaries have been using the present value of future profits as yardstick when valuing life insurance activities. However, using profits as a fundamental input is subject to criticism because profits are no actual cash flows. In an attempt to create more transparency and robustness the CFO forum (2008) has set a definition for market consistent embedded value (MCEV). Nevertheless, this definition refers again to the present value of future profits. In this note we show that such a definition is misleading and, instead of creating more transparency, it could end up in creating more confusion.
keywords: embedded value, MCEV, fair value, cash flow projections, business valuation, profits, cash flows
reference: Fabian Suarez and Steven Vanduffel (2008). A critical note on MCEV calculations used in the life insurance industry, Belgian Actuarial Bulletin 8(1), p. 54-59.