Transcript Overheads

PRACTITIONERS’ FORUM
SESSION 29
JIM BRIDGEMAN
UNIVERSITY OF CONNECTICUT
APPROVAL CODE LAH209140129
SEPT 14, 2001
VALUATION ACTUARY
SYMPOSIUM
1
STOCHASTIC
INTEREST SCENARIOS
• WHY DO IT?
• HOW?
• WHATEVER DOES IT MEAN?
SEPT 14, 2001
VALUATION ACTUARY
SYMPOSIUM
2
THE COMPANY
• $3 BILLION RESERVES
• $1.5 BILLION PREMIUM
• VERY RAPIDLY GROWING
SEPT 14, 2001
VALUATION ACTUARY
SYMPOSIUM
3
THE ENVIRONMENT
• US DOM / ONLY TAIWAN BUSINESS
• TAIWAN RESERVES OK FOR STATE
• OPINION STILL REQUIRED
SEPT 14, 2001
VALUATION ACTUARY
SYMPOSIUM
4
PRODUCTS
• TRADITIONAL LIFE INSURANCE
• HIGH CASH VALUE FORMS
• 25% PREM IN HIGH MARGIN RIDERS
SEPT 14, 2001
VALUATION ACTUARY
SYMPOSIUM
5
INVESTMENTS
• NO CURRENCY MISMATCHING
• FEW LONG DURATIONS AVAILABLE
• CDs, FLOATING RATE MORTGAGES,
SOME MEDIUM TERM BONDS
SEPT 14, 2001
VALUATION ACTUARY
SYMPOSIUM
6
DURATION MISMATCH
• NOT VERY COMPLICATED
• BEGAN TO FAIL SOME DOWN SCENs
• WHAT’S “MODERATELY ADVERSE” ?
SEPT 14, 2001
VALUATION ACTUARY
SYMPOSIUM
7
THINK FIRST
• PROBLEMS: POP-DOWN & DECLINE
• OK: DOWN-UP
• SO “DOWN FOREVER” IS THE ISSUE
SEPT 14, 2001
VALUATION ACTUARY
SYMPOSIUM
8
CLEARLY
• “FOREVER” MORE THAN MODERATE
• DOWN-UP LESS THAN ADVERSE
• DETERMINISTIC SENSITIVITY TESTS
IN BETWEEN
SEPT 14, 2001
VALUATION ACTUARY
SYMPOSIUM
9
NOT SO CLEAR
• WHERE TO DRAW THE LINE?
– WOULD STOCHASTIC INTEREST RATES
HELP?
• ONLY AS GOOD AS ASSUMPTIONS
– WHAT WOULD MAKE YOU BELIEVE?
– WHAT DO THEY MEAN?
– MOST DON’T EVEN LOOK REAL OR
EVEN LIKE HISTORICAL
SEPT 14, 2001
VALUATION ACTUARY
SYMPOSIUM
10
BASIC APPROACH
• 2-FACTOR PROPRIETARY MODEL
• DRIVEN BY Q/Q VAR AND MEAN REV
• JUDGE RESULTING INT RATES:
– DISTRIBUTIONS: at points in time
– SCENARIOS: across time
SEPT 14, 2001
VALUATION ACTUARY
SYMPOSIUM
11
STUDENTS TRIED
Q/Q TOO STABLE
RATES TOO TIGHT FOR TOO LONG
SEPT 14, 2001
VALUATION ACTUARY
SYMPOSIUM
12
ACTUARY TRIED
TOO FEW EXTREMAL SCENARIOS
TOO MANY ZIG-ZAGS
SEPT 14, 2001
VALUATION ACTUARY
SYMPOSIUM
13
FINALLY USED
SEPT 14, 2001
VALUATION ACTUARY
SYMPOSIUM
14
REVERSION TARGET
JUMPS RANDOMLY
• GAMMA JUMPING TIMES
• LOGNORMAL LANDING PLACES
• ISSUE: WHAT’S THE RIGHT MEAN?
SEPT 14, 2001
VALUATION ACTUARY
SYMPOSIUM
15
PARAMETER FITTING
THE MEAN REVERTING LOGNORMAL 1ST
• Q/Q VOLATILITY & MEAN REV
– JOINTLY FIT (TRIAL & ERROR)
• TO HISTORICAL Q/Q & STABILIZED
RATES WITHIN A 5 YR HORIZON
SEPT 14, 2001
VALUATION ACTUARY
SYMPOSIUM
16
PARAMETER FITTING
TARGET JUMP TO RECREATE HISTORICAL
INTEREST RATE DISTRIBUTION
• GAMMA MEAN 20 MODE 10 - trial&error
• MEAN LANDING - to fit recent history
• LANDING VARIANCE - to fit long history
SEPT 14, 2001
VALUATION ACTUARY
SYMPOSIUM
17
THE RESULT
• STILL ONLY A STRESS TEST
– NOT A FORECAST MODEL
• BUT LOOKS MORE LIKE THE WORLD
• (FAT TAILS) BUT REASONABLE VAR
• Subsequently amended to: “Broad
Shoulders”
• BETTER THAN 90TH PERCENTILE OK
SEPT 14, 2001
VALUATION ACTUARY
SYMPOSIUM
18
THIS YEAR’S ISSUE
• WHAT PERCENTILE DEFINES
“MODERATELY ADVERSE”?
SEPT 14, 2001
VALUATION ACTUARY
SYMPOSIUM
19