Reinsurance and Solvency Capital: Mitigating Insurance Companies’ Ruin Probability

ABSTRACT Context: insurance companies are important to society, since they guarantee financial protection to individuals from property losses, in addition to fostering the capital market through the allocation of guarantee assets. Thus, it is essential to evaluate the instruments that guarantee their long-term financial solvency. Among them are the adoption of reinsurance treaties, the sizing of the solvency capital, and the actuarial modeling of risk processes, which allow the measurement of the ruin probability. Objective: estimate the ruin probability in risk processes with the adoption of reinsurance contracts (quota share and excess of loss), compared to scenarios without such treaties. Methods: the Cramér-Lundberg process was simulated using the Monte Carlo method, adjusting several probabilistic distributions to the severity of the compound Poisson process, which is calibrated with a set of 3,917,863 real microdata, from 30 insurance lines of business. Results: it was found that, although each branch presents particularities in the claim severity, the correct choice of reinsurance (proportional or not) implies the reduction of the ruin probability for a fixed solvency capital. Conclusion: the appropriate choice of the reinsurance contract, especially when there is evidence of high kurtosis in the claim values, intensifies the exponential decline in the relationship between the solvency capital and the ruin probability.

Resseguro e Capital de Solvência: Atenuantes da Probabilidade de Ruína de Seguradoras

ABSTRACT Context: insurance companies are important to society, since they guarantee financial protection to individuals from property losses, in addition to fostering the capital market through the allocation of guarantee assets. Thus, it is essential to evaluate the instruments that guarantee their long-term financial solvency. Among them are the adoption of reinsurance treaties, the sizing of the solvency capital, and the actuarial modeling of risk processes, which allow the measurement of the ruin probability. Objective: estimate the ruin probability in risk processes with the adoption of reinsurance contracts (quota share and excess of loss), compared to scenarios without such treaties. Methods: the Cramér-Lundberg process was simulated using the Monte Carlo method, adjusting several probabilistic distributions to the severity of the compound Poisson process, which is calibrated with a set of 3,917,863 real microdata, from 30 insurance lines of business. Results: it was found that, although each branch presents particularities in the claim severity, the correct choice of reinsurance (proportional or not) implies the reduction of the ruin probability for a fixed solvency capital. Conclusion: the appropriate choice of the reinsurance contract, especially when there is evidence of high kurtosis in the claim values, intensifies the exponential decline in the relationship between the solvency capital and the ruin probability.

Dealing with unpredictable risk - The influence of external factors on information systems development and implementations

<p>Organisations and especially Government departments develop information systems for their own specific needs, due to this Government departments invests a great deal in information systems development and implementation projects. The intention is to save on cost and develop information systems according to their needs and requirements. Unfortunately such projects are vulnerable and subject to a range of risks. This case study identifies the risk factors involved in information systems development and implementation projects and the risk processes that are in place to mitigate against those risk factors. Furthermore the case study investigates an information systems development and implementation project where four legacy systems were to be merged into one newly developed system. The project was interrupted when an organisational merger resulted in the loss of key members of the governance board and the project team, either through redundancy or being allocated other responsibilities within the organisation. This exposed the project to unpredictable risk which caused the project to head down the path of possible failure. The case study outlines the project plan, what actually happened and what according to the interviewed participants happened during the project. It is clear that the risk management processes wasn't followed and that wrongful decisions were made during the organisational merger. Unpredictable risks as a result of the merger and the decision to continue the project required a strong governance board, proper project management, proper risk management and the execution of the risk management processes. The lack of governance and project management had a huge impact on the project while the loss of expertise and knowledge added to the risk profile which resulted in further complications to the project. It’s during these situation that a strong governance board and proper project management is needed to make those critical decisions and steer the project towards success.</p>

Dealing with unpredictable risk - The influence of external factors on information systems development and implementations

<p>Organisations and especially Government departments develop information systems for their own specific needs, due to this Government departments invests a great deal in information systems development and implementation projects. The intention is to save on cost and develop information systems according to their needs and requirements. Unfortunately such projects are vulnerable and subject to a range of risks. This case study identifies the risk factors involved in information systems development and implementation projects and the risk processes that are in place to mitigate against those risk factors. Furthermore the case study investigates an information systems development and implementation project where four legacy systems were to be merged into one newly developed system. The project was interrupted when an organisational merger resulted in the loss of key members of the governance board and the project team, either through redundancy or being allocated other responsibilities within the organisation. This exposed the project to unpredictable risk which caused the project to head down the path of possible failure. The case study outlines the project plan, what actually happened and what according to the interviewed participants happened during the project. It is clear that the risk management processes wasn't followed and that wrongful decisions were made during the organisational merger. Unpredictable risks as a result of the merger and the decision to continue the project required a strong governance board, proper project management, proper risk management and the execution of the risk management processes. The lack of governance and project management had a huge impact on the project while the loss of expertise and knowledge added to the risk profile which resulted in further complications to the project. It’s during these situation that a strong governance board and proper project management is needed to make those critical decisions and steer the project towards success.</p>

A New Semi-Quantitative Process Safety Assessment Method and Its Application for Fluorochemical Industry

Traditional hazard and operability analysis (HAZOP) is one of the most widely applied methods for process safety management in process enterprises. Due to its principles based on the conservative and qualitative judgment, it often leads to too conservative risk identification results for the fluorine chemical industry usually with high-risk processes to keep the continuity of production. Most of improved quantitative and semi-quantitative methods are based on the layer of protection analysis (LOPA) to resolve the over-conservative problem of traditional HAZOP with the database of LOPA. However, the improved model, taking LOPA as the main line and HAZOP only as the provider of scenarios and influencing factors, is limited to the fact that LOPA can only analyze complete and independent protection layers (IPLs). Therefore, in order to realize the quantitative or semi-quantitative analysis of disaster causes and consequences, a new semi-quantitative HAZOP method takes HAZOP as the main line to integrate LOPA, F&EI (fire and explosion index) for quantitatively calculating the reduction factors, probability on failure demand (PFD) of general protection layers (GPLs) and PFD of IPLs. With the case comparison of fluorine chemical industry, it is proved that this new method can effectively improve the problem that traditional HAZOP are too conservative in complex scenarios.

How Much We Gain by Surplus-Dependent Premiums—Asymptotic Analysis of Ruin Probability

In this paper, we generate boundary value problems for ruin probabilities of surplus-dependent premium risk processes, under a renewal case scenario, Erlang (2) claim arrivals, and a hypoexponential claims scenario, Erlang (2) claim sizes. Applying the approximation theory of solutions of linear ordinary differential equations, we derive the asymptotics of the ruin probabilities when the initial reserve tends to infinity. When considering premiums that are linearly dependent on reserves, representing, for instance, returns on risk-free investments of the insurance capital, we firstly derive explicit solutions of the ordinary differential equations under considerations, in terms of special mathematical functions and integrals, from which we can further determine their asymptotics. This allows us to recover the ruin probabilities obtained for general premiums dependent on reserves. We compare them with the asymptotics of the equivalent ruin probabilities when the premium rate is fixed over time, to measure the gain generated by this additional mechanism of binding the premium rates with the amount of reserve owned by the insurance company.

Application of failure mode and effects analysis (FMEA) to improve medication safety in the dispensing process – a study at a teaching hospital, Sri Lanka

Background Failure mode and effects analysis (FMEA) is a prospective, team based, structured process used to identify system failures of high risk processes before they occur. Medication dispensing is a risky process that should be analysed for its inherent risks using FMEA. The objective of this study was to identify possible failure modes, their effects, and causes in the dispensing process of a selected tertiary care hospital using FMEA. Methods Two independent teams (Team A and Team B) of pharmacists conducted the FMEA for two months in the Department of Pharmacy of a selected teaching hospital, Colombo, Sri Lanka. Each team had five meetings of two hours each, where the dispensing process and sub processes were mapped, and possible failure modes, their effects, and causes, were identified. A score for potential severity (S), frequency (F) and detectability (D) was assigned for each failure mode. Risk Priority Numbers (RPNs) were calculated (RPN=SxFxD), and identified failure modes were prioritised. Results Team A identified 48 failure modes while Team B identified 42. Among all 90 failure modes, 69 were common to both teams. Team A prioritised 36 failure modes, while Team B prioritised 30 failure modes for corrective action using the scores. Both teams identified overcrowded dispensing counters as a cause for 57 failure modes. Redesigning of dispensing tables, dispensing labels, the dispensing and medication re-packing processes, and establishing a patient counseling unit, were the major suggestions for correction. Conclusion FMEA was successfully used to identify and prioritise possible failure modes of the dispensing process through the active involvement of pharmacists.

Large Deviations for a Class of Multivariate Heavy-Tailed Risk Processes Used in Insurance and Finance

Modern risk modelling approaches deal with vectors of multiple components. The components could be, for example, returns of financial instruments or losses within an insurance portfolio concerning different lines of business. One of the main problems is to decide if there is any type of dependence between the components of the vector and, if so, what type of dependence structure should be used for accurate modelling. We study a class of heavy-tailed multivariate random vectors under a non-parametric shape constraint on the tail decay rate. This class contains, for instance, elliptical distributions whose tail is in the intermediate heavy-tailed regime, which includes Weibull and lognormal type tails. The study derives asymptotic approximations for tail events of random walks. Consequently, a full large deviations principle is obtained under, essentially, minimal assumptions. As an application, an optimisation method for a large class of Quota Share (QS) risk sharing schemes used in insurance and finance is obtained.

Modeling Study on Risk Identification in the Process of Anti-Crisis Enterprise Management

The study provides solutions for the scientific task related to the improvement of theoretical and development of methodological and applied principles, and the identification and evaluation of risks and threats as factors of anti-crisis management of the enterprises. Based on the developed concept of quantitative risk analysis, we constructed a fuzzy hierarchical model, which gives the possibility to get the estimates: risk factors; specific types of threats in the framework of a process; risk processes, identified in the anti-crisis management; and the integrative risk of anti-crisis management. Furthermore, the proposed model makes it possible to identify the threats that are the risks of the highest (catastrophe) layer. The fuzzy hierarchical model construction process includes the determination of linguistic variables, term-varieties, and universal sets for quantitative evaluation of figures and risks, the establishment of parameters of the membership functions for indicators and risks, the formation of fuzzy knowledge bases, the construction of a fuzzy hierarchical model in the MATLAB environment, the evaluation of adequacy of model based on the learning sample, the correction of a model, and the adoption of a resolution regarding its final variant. The use of the model in the anti-crisis enterprise management will provide the anti-crisis team with the possibility to give early warning of all negative factors, give their quantitative evaluation, and take them into account in the course of making managerial decisions.