Session Information
CAS Seminar on Reinsurance 2009
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Call Papers Session 1
Description
Moderator:
Gary Blumsohn, Chief Actuary, Arch Reinsurance Company
Unstable Loss Development Factors
Most actuaries learn loss development on the job and pick up whatever techniques are being used by those around them. The authors circulated a somewhat-unstable loss triangle and got development factor selections from 51 actuaries. The paper describes the wide range of results and the wide range of approaches taken by these 51 actuaries.
In presenting the paper, the authors will discuss the results of the survey, make some comments on the various approaches taken by the participants, as well as discussing the implications of this survey for actuarial education and for the “science” in actuarial work.
Presenters:
Gary Blumsohn, Chief Actuary, Arch Reinsurance Company
Michael Laufer, Transatlantic Reinsurance Company
An Analysis of the Market Price of Cat Bonds
In this paper, we describe the market clearing price of cat bonds by modeling cat bond spreads as a linear function of the bonds' expected loss. This relationship between spread and expected loss, however, differs by cat peril and geographic zone; each unique combination of peril and zone includes its own “price line” with a different intercept and slope. We also present an approach which combines these individual models into one unified model. Whether using individual models or a combined model, the parameters change over time as market conditions change. We hypothesize that the key parameters in the linear models relate to two main drivers of price: required rate of return on capital and uncertainty of the expected loss. These two factors provide a road map for identifying situations that are most suitable for reinsurance versus cat bonds and vice versa. We also note that the factor relating to uncertainty of the expected loss may help explain the broader issue of the “credit spread puzzle”, which appears in the corporate bond market.
Using the proposed linear models, we can compare the market clearing price functions for cat bonds for various perils and zones, how they compare and contrast to each other, and how they change over time. Such models help us understand the drivers of the price of cat risk and help us describe how prices have behaved in the past and, potentially, how they may behave in the future.
Presenter:
Neil Bodoff, Senior Vice President, Willis Re, Inc.
Gary Blumsohn, Chief Actuary, Arch Reinsurance Company
Unstable Loss Development Factors
Most actuaries learn loss development on the job and pick up whatever techniques are being used by those around them. The authors circulated a somewhat-unstable loss triangle and got development factor selections from 51 actuaries. The paper describes the wide range of results and the wide range of approaches taken by these 51 actuaries.
In presenting the paper, the authors will discuss the results of the survey, make some comments on the various approaches taken by the participants, as well as discussing the implications of this survey for actuarial education and for the “science” in actuarial work.
Presenters:
Gary Blumsohn, Chief Actuary, Arch Reinsurance Company
Michael Laufer, Transatlantic Reinsurance Company
An Analysis of the Market Price of Cat Bonds
In this paper, we describe the market clearing price of cat bonds by modeling cat bond spreads as a linear function of the bonds' expected loss. This relationship between spread and expected loss, however, differs by cat peril and geographic zone; each unique combination of peril and zone includes its own “price line” with a different intercept and slope. We also present an approach which combines these individual models into one unified model. Whether using individual models or a combined model, the parameters change over time as market conditions change. We hypothesize that the key parameters in the linear models relate to two main drivers of price: required rate of return on capital and uncertainty of the expected loss. These two factors provide a road map for identifying situations that are most suitable for reinsurance versus cat bonds and vice versa. We also note that the factor relating to uncertainty of the expected loss may help explain the broader issue of the “credit spread puzzle”, which appears in the corporate bond market.
Using the proposed linear models, we can compare the market clearing price functions for cat bonds for various perils and zones, how they compare and contrast to each other, and how they change over time. Such models help us understand the drivers of the price of cat risk and help us describe how prices have behaved in the past and, potentially, how they may behave in the future.
Presenter:
Neil Bodoff, Senior Vice President, Willis Re, Inc.
Audio (MP3) download
