Investment Research by pub14358

VIEWS: 14 PAGES: 11

More Info
									Investment
Presentation Example

 2003 CAS Research Working Party:
 Executive Level Decision Making using DFA

 Michael R. Larsen, FCAS, MAAA
Goals of Study
 Review Reinvestment Options

 Measure Results using Simulation Model
  Results
     Risk as Average Loss in Surplus in Worst 1%
      of Cases over Five Years
     Return as Average Increase in Policy Holder
      Surplus at End of Five Years



                   2003 CAS Research Working Party   2
Change in Reinvestment
Allocation
                                       Reinvestment Strategy



                     100%       2%
                                0%                   2%                    2%        2%

                                                    15%                    15%
                     90%                                                             20%


                     80%                            10%

                                54%                                        25%
                     70%
                                                                                     30%
                     60%

                                                    44%
                     50%
                                                                           29%
                     40%                                                             24%

                     30%
                                44%
                     20%
                                                    29%                    29%
                                                                                     24%
                     10%


                      0%
                            Option A            Option B            Option C     Option D
Cash                          2%                  2%                      2%       2%
Common Stock Unaffiliated     0%                  15%                 15%          20%
Unaffiliated Bonds            0%                  10%                 25%          30%
Municipal                     54%                 44%                 29%          24%
U.S. Govt Bond                44%                 29%                 29%          24%




                                        2003 CAS Research Working Party                     3
DFA Flow
                  Starting Policy Holder                    Corporate Elements
Work Comp            Surplus 40,000
Grow 5% a year
                                                            Reinsurance      Investment


Multi_Peril                                                 Capital Mix        Taxes
Grow 5% a year
                       Financial
                       Calculator

                                                  Analyze
                                                  Results

                 Financial Results

                  Simulated over                                   Measures of
                    Five Years                                     •Risk
                                                                   •Return     Change in Policy
                                                                                Holder Surplus
                          2003 CAS Research Working Party                                     4
Model / Assumptions

                            Assume Underwriting Operations Not Affected
Assumption                  • Ability to take rate changes not driven by investment results
 s Behind                   • Growth rates in exposure does not change
Simulation


                               Investment Scenario
                               • Long run average interest rate of 4%
                               • Starting interest rate of 4%


             Investment Models
             • Short term interest rate model is a mean reversion model
             • Long term rates are a function of short term rates
             • Stock returns modeled as a function of short term rates and interest rate changes
             • Stable relationship between bond and equity market



                            2003 CAS Research Working Party                              5
Policyholder Surplus Change
by Reinvestment Option
                                             Option A                                                                                      Option B
               0.4                                                                      1                    0.4                                                                    1

              0.36                                                                                          0.36

              0.32                                                                      0.8                 0.32                                                                    0.8

              0.28                                                                                          0.28

              0.24                                                                      0.6                 0.24                                                                    0.6
Probability




                                                                                              Probability
               0.2                                                                                           0.2

              0.16                                                                      0.4                 0.16                                                                    0.4

              0.12                                                                                          0.12

              0.08                                                                      0.2                 0.08                                                                    0.2

              0.04                                                                                          0.04

                0                                                                       0                     0                                                                     0
                     -40   -30   -20   -10            0         10   20     30    40                               -40   -30   -20   -10             0         10   20   30   40
                                                                                       Mil                                                                                         Mil


                                                pdf       cdf                                                                                  pdf       cdf




                                             Option C                                                                                       Option D
               0.4                                                                      1                    0.4                                                                    1

              0.36                                                                                          0.36

              0.32                                                                      0.8                 0.32                                                                    0.8

              0.28                                                                                          0.28

              0.24                                                                      0.6                 0.24                                                                    0.6
Probability




                                                                                              Probability
               0.2                                                                                           0.2

              0.16                                                                      0.4                 0.16                                                                    0.4

              0.12                                                                                          0.12

              0.08                                                                      0.2                 0.08                                                                    0.2

              0.04                                                                                          0.04

                0                                                                       0                     0                                                                     0
                     -40   -30   -20   -10            0         10   20     30    40                               -40   -30   -20   -10             0         10   20   30   40
                                                                                       Mil                                                                                         Mil


                                                pdf       cdf                                                                                  pdf       cdf



                                                                          2003 CAS Research Working Party                                                                                 6
 Surplus Change Over Time by
 Investment Option
                                        Option A                                                                         Option B
                                  (10 - 90 percentiles)                                                            (10 - 90 percentiles)

            20.0                                                                             20.0
Thousands




                                                                                 Thousands
            15.0                                                                             15.0



            10.0                                                                             10.0



             5.0                                                                              5.0



             0.0                                                                              0.0
                    2004   2005               2006        2007       2008                            2004   2005               2006        2007   2008

             -5.0                                                                             -5.0



            -10.0                                                                            -10.0




                                        Option C                                                                         Option D
                                  (10 - 90 percentiles)                                                            (10 - 90 percentiles)

            20.0                                                                             20.0
Thousands




                                                                                 Thousands
            15.0                                                                             15.0



            10.0                                                                             10.0



             5.0                                                                              5.0



             0.0                                                                              0.0
                    2004   2005               2006        2007       2008                            2004   2005               2006        2007   2008

             -5.0                                                                             -5.0



            -10.0                                                                            -10.0




                                                                 2003 CAS Research Working Party                                                         7
                          Investment Option Comparison
                                                                         Risk-Reward

                                   20
                       Thousands




                                   19

                                   18                                 Option D Highest
                                                                      Return Less Risk
                                   17
Average Surplus Gain




                                   16
                                                                                                                         Option A
                                   15                                                                                    Option B
                                                                                                                         Option C
                                   14                                                                                    Option D

                                   13

                                   12

                                   11

                                   10
                                        10   11   12   13        14        15          16        17   18   19       20
                                                                                                            Thousands

                                                            Average Surplus Loss in Worst Case


                                                                 2003 CAS Research Working Party                                8
Investment Option Summary
    Option        Return                       Risk


      A             12.6                       17.2


      B             13.6                       17.0


      C             13.8                       17.0


      D             14.2                       16.9



             2003 CAS Research Working Party          9
Conclusion
 Reviewed four Reinvestment Options

 Option D gives Best Gain in Surplus with
  Less Additional Risk




                 2003 CAS Research Working Party   10
Questions
 Questions on Presentation?

 Questions on Working Party Process?

 Suggestions for New Working Parties?




                2003 CAS Research Working Party   11

								
To top