INSURANCE VALUATION: A TWO-STEP GENERALISED REGRESSION APPROACH

Current approaches to fair valuation in insurance often follow a two-step approach, combining quadratic hedging with application of a risk measure on the residual liability, to obtain a cost-of-capital margin. In such approaches, the preferences represented by the regulatory risk measure are not reflected in the hedging process. We address this issue by an alternative two-step hedging procedure, based on generalised regression arguments, which leads to portfolios that are neutral with respect to a risk measure, such as Value-at-Risk or the expectile. First, a portfolio of traded assets aimed at replicating the liability is determined by local quadratic hedging. Second, the residual liability is hedged using an alternative objective function. The risk margin is then defined as the cost of the capital required to hedge the residual liability. In the case quantile regression is used in the second step, yearly solvency constraints are naturally satisfied; furthermore, the portfolio is a risk minimiser among all hedging portfolios that satisfy such constraints. We present a neural network algorithm for the valuation and hedging of insurance liabilities based on a backward iterations scheme. The algorithm is fairly general and easily applicable, as it only requires simulated paths of risk drivers.

GEOGRAPHICAL DIVERSIFICATION AND LONGEVITY RISK MITIGATION IN ANNUITY PORTFOLIOS

ABSTRACT This paper provides a method to assess the risk relief deriving from a foreign expansion by a life insurance company. We build a parsimonious continuous-time model for longevity risk that captures the dependence across different ages in domestic versus foreign populations. We calibrate the model to portray the case of a UK annuity portfolio expanding internationally toward Italian policyholders. The longevity risk diversification benefits of an international expansion are sizable, in particular when interest rates are low. The benefits are judged based on traditional measures, such as the Risk Margin or volatility reduction, and on a novel measure, the Diversification Index.

Issues of risk margin computation under Solvency II regulatory regime

The paper deals with the issues of risk margin computation as an element of technical provisions of Insurers under the Solvency II regulatory regime. Due to a lack of regulatory method for the capital cost, in combination with the low interest rates, the risk margin is set too high and variable, which primarily affects life insurance companies. The paper includes particular proposals for overcoming or mitigating the problem of too high and rate-sensitive risk margin. The proposed solutions include both modifications to the existing capital cost method and abandonment and the replacement of this method by other risk margin computation methods.

Measurement of Longevity Risk of Life Annuity Based on C-ROSS Framework

This paper constructs a model to measure longevity risk and explains the reasons for restricting the supply of annuity products in life insurance companies. According to the Lee–Carter Model and the VaR-based stochastic simulation, it can be found that the risk margin of the first type of longevity risk for ignoring the improvement of mortality rate is about 7%, and the risk margin of the second type of longevity risk for underestimating mortality improvement is about 7%. Therefore, the insurer needs to use cohort life table pricing premium and gradually prepares longevity risk capital during the insurance period.

Loss Reserving Estimation With Correlated Run-Off Triangles in a Quantile Longitudinal Model

In this paper, we consider a loss reserving model for a general insurance portfolio consisting of a number of correlated run-off triangles that can be embedded within the quantile regression model for longitudinal data. The model proposes a combination of the between- and within-subportfolios (run-off triangles) estimating functions for regression parameter estimation, which take into account the correlation and variation of the run-off triangles. The proposed method is robust to the error correlation structure, improves the efficiency of parameter estimators, and is useful for the estimation of the reserve risk margin and value at risk (VaR) in actuarial and finance applications.

A review of the risk margin – Solvency II and beyond

For life insurers in the United Kingdom (UK), the risk margin is one of the most controversial aspects of the Solvency II regime which came into force in 2016. The risk margin is the difference between the technical provisions and the best estimate liabilities. The technical provisions are intended to be market-consistent, and so are defined as the amount required to be paid to transfer the business to another undertaking. In practice, the technical provisions cannot be directly calculated, and so the risk margin must be determined using a proxy method; the method chosen for Solvency II is known as the cost-of-capital method. Following the implementation of Solvency II, the risk margin came under considerable criticism for being too large and too sensitive to interest rate movements. These criticisms are particularly valid for annuity business in the UK – such business is of great significance to the system for retirement provision. A further criticism is that mitigation of the impact of the risk margin has led to an increase in reinsurance of longevity risks, particularly to overseas reinsurers. This criticism has led to political interest, and the risk margin was a major element of the Treasury Committee inquiry into EU Insurance Regulation. The working party was set up in response to this criticism. Our brief is to consider both the overall purpose of the risk margin for life insurers and solutions to the current problems, having regard to the possibility of post-Brexit flexibility. We have concluded that a risk margin in some form is necessary, although its size depends on the level of security desired, and so is primarily a political question. We have reviewed possible alternatives to the current risk margin, both within the existing cost-of-capital methodology and considering a wide range of alternatives. We believe that requirements for the risk margin will depend on future circumstances, in particular relating to Brexit, and we have identified a number of possible changes to methodology which should be considered, depending on circumstances.

A review of the risk margin – Solvency II and beyond report by the Risk Margin Working Party - Abstract of the London Discussion

This abstract relates to the following paper: Pelkiewicz, A., Ahmed, S., Fulcher, P., Johnson, K., Reynolds, S., Schneider, R. & Scott, A. (2020) A review of the risk margin – Solvency II and beyond. British Actuarial Journal, 25, E1. doi:10.1017/S135732172000001X.

Implementasi Manajemen Resiko Syariah Dalam Koperasi Syariah

The existence of sharia risk management is to guarantee the existence of a Sharia Cooperative in the long run. With sharia risk management, it is expected to be able to provide guidance for the Sharia / Baitul Maal Wa Tamwil Cooperative in implementing sharia risk management in its business operations, especially for cooperatives that are engaged in sharia financial services or known as Sharia Credit and Financing Cooperatives (KSPPS) . In any business activity it has the potential to risk. Risk is defined as uncertainty caused by changes. There are various kinds of risks in the operations of sharia cooperatives such as financing risk, liquidity risk, margin, organization, solvency, operational, capital, legal risk and compliance with sharia principles. Risk management is done so that the risk can be minimized to a minimum, so that plans and targets that have been planned can be realized so as to produce benefit. In the implementation of risk management in Islamic cooperatives can combine SWOT analysis, prudential concept with 5C and Maqosid Syariah. In principle, every business activity has a risk, but we can minimize the risk to the lowest point if we do it in the right way and according to sharia.

Study on the Optimization of Hydrate Management Strategies in Deepwater Gas Well Testing Operations

Low temperature and high pressure conditions favor the formation of gas clathrate hydrates which is undesirable during oil and gas industries operation. The management of hydrate formation and plugging risk is essential for the flow assurance in the oil and gas production. This study aims to show how hydrate management in the deepwater gas well testing operations in the South China Sea can be optimized. To prevent the plugging of hydrate, three hydrate management strategies are investigated. The first method, injecting thermodynamic hydrate inhibitor (THI) is the most commonly used method to prevent hydrate formation. THI tracking is utilized to obtain the distribution of mono ethylene glycol (MEG) along the pipeline. The optimal dosage of MEG is calculated through further analysis. The second method, hydrate slurry flow technology is applied to the gas well. Pressure drop ratio (PDR) is defined to denote the hydrate blockage risk margin. The third method is the kinetic hydrate inhibitor (KHI) injection. The delayed effect of KHI on the hydrate formation induction time ensures that hydrates do not form in the pipe. This method is effective in reducing the injection amount of inhibitor. The problems of the three hydrate management strategies which should be paid attention to in industrial application are analyzed. This work promotes the understanding of hydrate management strategies and provides guidance for hydrate management optimization in oil and gas industry.