Riskmanagement2012 2014readinglist

Reading List
Risk Management
Journal articles
2012-2014
Institute and Faculty of Actuaries
May 2015
CompiledbyIFoALibraryService
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Articles in this reading list and on the IFoA online catalogue are from the following journals and magazines:
The Actuary (UK)

Anales del Instituto de Actuarios Espaoles (Epoca 3a)
Annals of Actuarial Science (UK)
Applied Mathematical Finance
Australian Journal of Actuarial Practice
British Actuarial Journal (BAJ) (UK)
Bulletin dActuariat Franais (France)
European Actuarial Journal (Austria, Belgium, France, Germany, Greece, Hungary, Italy, Poland,
Portugal, Slovenia, and Switzerland)
The European Actuary
Geneva Papers on Risk and Insurance: Issues and Practice
Insurance: Mathematics and Economics
International Social Security Review
Journal of Risk and Insurance
Journal of Risk and Uncertainty
Journal of the Royal Statistical Society (Series A) (selectively indexed)
North American Actuarial Journal
Risk Management and Insurance Review
Scandinavian Actuarial Journal
South African Actuarial Journal
Variance (Casualty Actuarial Society)
Article references listed may have generic URL links to the journals online publication archive or DOI (Digital
Object Identifier) permanent links to the article published online.
Members of the Institute and Faculty of Actuaries can access full text of the articles after login either through
the IFoA website or to the Athens portal to online resources that the IFoA library services subscribes to for
members. Please contact libraries@actuaries.org.uk to request an Athens account and login, citing your IFoA
member number.
THE ACTUARY
O'Brien, Christopher D (2012). Actuaries as CROs?. Staple Inn Actuarial Society, - 1 pages. [RKN: 74927]
The Actuary (2012) January/February : 26.
Chris O'Brien considers how the chief risk officer's remit varies and what role actuaries have in risk management
Internet URL: http://www.theactuary.com/archive/2012/
Cook, Paul; Rajoo, Meera (2012). A free lunch...from the EU?. Staple Inn Actuarial Society, - 2 pages. [RKN: 74929]
The Actuary (2012) January/February : 30-31.
Solvency II offers a real incentive for diversifying risk, but is it quite the bonus it appears to be? Paul Cook and Meera Rajoo
investigate
Smith, Andrew (2012). Book Review : Systems of frequency curves. Staple Inn Actuarial Society, - 1 pages. [RKN: 74924]
Andrew Smith reviews Systems of frequency curves by WP Elderton and NL Johnson
Klumpes, Paul (2012). Counting the cost of enterprise risk management. Staple Inn Actuarial Society, - 2 pages. [RKN: 74939]
The Actuary (2012) March : 30-31.
Paul Klumpes looks at the accountant's perspective of managing risk
Schneider, Richard (2012). Embedding and Solvency II : Know your model. [RKN: 45937]
The Actuary (2012) April
Richard Schneider discusses the importance of understanding and communicating model limitations to ensure effective risk
management within Solvency II and beyond.
Mohammed, Armoghan (2012). When black swans turn to grey. Staple Inn Actuarial Society, - 1 pages. [RKN: 73829]
The Actuary (2012) April : 20.
Armoghan Mohammed asks whether the reoccurrence of high-risk events signals a need to review risk planning
Curtis, Rob (2012). Global lockdown?. Staple Inn Actuarial Society, - 2 pages. [RKN: 73877]
The Actuary (2012) May : 28-29.
Rob Curtis takes a look at what the enforcement of recovery and resolution plans could mean for insurers.
Martinez, Cristina (2012). The two sides of a risky coin. Staple Inn Actuarial Society, - 1 pages. [RKN: 73977]
The Actuary (2012) June : 8.
A pragmatic partnership between actuarial approaches and risk management can benefit many businesses, says Cristina
Martinez
Reynolds, Neil (2012). Solvency II simulators: Back to the future?. Staple Inn Actuarial Society, - 1 pages. [RKN: 73978]
Can the use of simulators help us to explore and develop a level of understanding of the complexities of Solvency II, asks Neil
Reynolds
Purcell, Richard; Mee, Gareth (2012). Solvency II risk margin: To hedge or not to hedge. Staple Inn Actuarial Society, - 2 pages. [RKN:
73979]
The Actuary (2012) June : 22-23.
Richard Purcell and Gareth Mee consider how an insurer's Solvency II internal model definition could affect its decision to hedge
the risk margin.
Jobanputra, Deepak (2012). Delving into the unknown. Staple Inn Actuarial Society, - 1 pages. [RKN: 70758]
The Actuary (2012) July : 5.
Can we develop a fool-proof risk plan for every eventuality, asks Deepak Jobanputra.
Carswell, Wilson (2012). Living legacy. Staple Inn Actuarial Society, - 2 pages. [RKN: 70765]
The Actuary (2012) July : 24-25.
Dr Wilson Carswell looks at the causal link between the untimely death of Lawrence of Arabia and Periodic Payment Orders
(PPOs).
Ball, Matthew; Jing, Yi; Sullivan, Landon (2012). The next big thing. Staple Inn Actuarial Society, - 3 pages. [RKN: 70768]
The Actuary (2012) July : 30-32.
Matthew Ball, Yi Jing and Landon Sullivan examine why quantifying risks from mass torts has lagged behind natural catastrophe
modelling and how recent advances make it possible to prepare for the 'next asbestos'.
Gunnee, Ben (2012). Preparing for Basel III. Staple Inn Actuarial Society, - 1 pages. [RKN: 70725]
The Actuary (2012) August : 8.
Ben Gunnee says the new rules could push up costs and hit the operations of European pension funds using over-the-counter
derivatives
Chalk, Alan (2012). The world of software : And then there was R. [RKN: 45965]
The Actuary (2012) September
Alan Chalk uses R to visualise data in Google Earth.
Ulrich, Peter; Ordowich, Chris (2012). Modelling the 1-in-200 risks. [RKN: 45968]
The Actuary (2012) September
Peter Ulrich and Chris Ordowich outline how solvency capital requirements compare using RMS scenario-based models versus
the Solvency II standard formulas.
Jobanputra, Deepak (2012). Is it time to embrace risk?. Staple Inn Actuarial Society, - 1 pages. [RKN: 70678]
The Actuary (2012) September : 5.
We should see risk as a potential opportunity to define a solution, suggests Deepak Jobanputra
Scott, Philip (2012). A weather eye on risk strategy. Staple Inn Actuarial Society, - 1 pages. [RKN: 70683]
Climate change's influence on actuarial disciplines can help us to understand risk, suggests Philip Scott
Ellis, Philip; McMurrough, Eamonn (2012). Alert to black swan-song?. Staple Inn Actuarial Society, - 1 pages. [RKN: 70673]
Philip Ellis and Eamonn McMurrough say it is time for the industry to wake up to the frequency of catastrophe risk
Ingram, David; Thompson, Michael; Underwood, Alice (2012). Risky business. [RKN: 45970]
The Actuary (2012) October
David Ingram, Michael Thompson and Alice Underwood question why Insurers will never accept a single approach to ERM.
Anonymous (2012). Alert to black swan soapbox : Letter of the month. Staple Inn Actuarial Society, - 1 pages. [RKN: 70916]
The Actuary (2012) October : 6.
Queries the meaning of the use of the term 'black swan' events in the article published in the September Actuary Magazine.
Haldane, Andrew G; Nelson, Benjamin (2012). Staring into a black hole. Staple Inn Actuarial Society, - 2 pages. [RKN: 70905]
Andrew Haldane and Benjamin Nelson argue the need for a fundamental rethink of risk management tools and regulatory capital
requirements.
Cantle, Neil; Ingram, David (2012). Crash course. Staple Inn Actuarial Society, - 2 pages. [RKN: 70906]
Neil Cantle and David Ingram highlight the perils of modelling outcomes and show how to avert danger with systems thinking.
Fourie, Cobus; Latto, James (2012). An appetite for risk. [RKN: 45953]
The Actuary (2012) November
Cobus Fourie and James Latto examine risk appetite frameworks as part of the regulatory push for improved risk management
standards.
Baxter, Ralph (2012). The risk of managing risk. [RKN: 45954]
The Actuary (2012) November
Ralph Baxter highlights the importance of managing external data and how it is integral in maintaining operational best practice.
Chapman, Richard (2012). Railing against complacency : Letter of the month. Staple Inn Actuarial Society, - 1 pages. [RKN: 71165]
The Actuary (2012) December : 6.
Uses the example of the West Coast rail line procurement fiasco to highlight lack of actuarial influence in the area of risk
managment.
Wilson, Colin (2013). We are 'Railing against complacency' : Letter to the Editor. Staple Inn Actuarial Society, - 1 pages. [RKN: 71234]
Response to the suggestion that actuaries should be involved in projects such as the procurement of a West Coast rail franchise,
pointing out that they are.
Dequae, Marie Gemma (2013). Cyber reality: time to quantify risk. Staple Inn Actuarial Society, - 1 pages. [RKN: 71238]
A call for improved data to counter the growing threat to information security
Edwards, Matthew (2013). Book review : The blind spot. Staple Inn Actuarial Society, - 1 pages. [RKN: 71257]
Review of the book by William Byers
Bishop, John (2013). Powerful combination: long memory meets free thinking : Letter of the month. Staple Inn Actuarial Society, - 1
pages. [RKN: 71261]
The Actuary (2013) March : 6.
Appreciates the article by Faisal Zai in the January/February Actuary on finance theory and the management of financial risk
Smith, Andrew; Jakhria, Parit (2013). Model behaviour. Staple Inn Actuarial Society, - 2 pages. [RKN: 71264]
Stochastic models might help financial firms to understand risks, but do we forget the risk that the model itself fails?
Klumpes, Paul (2013). Worth the risk?. Staple Inn Actuarial Society, - 3 pages. [RKN: 71267]
Multinationals are having to face the reality of enterpise-wide risk management practices
Scott, Philip (2013). Stand and deliver. Staple Inn Actuarial Society, - 1 pages. [RKN: 71278]
The Actuary (2013) April : 7.
The cross practice initiatives put forward by the ERM committee
Edwards, Matthew (2013). Book review : Anti-fragile. Staple Inn Actuarial Society, - 1 pages. [RKN: 70492]
The Actuary (2013) May : 38.
Review of the book by Nassim Nicholas Taleb
Maguire, Jackie (2013). Priceless possessions. Staple Inn Actuarial Society, - 2 pages. [RKN: 70959]
Underestimating the value of intangible assets is a costly route to irreversible reputational damage
Porter, Tom (2013). Keeping the lights on. Staple Inn Actuarial Society, - 3 pages. [RKN: 70962]
Risks and opportunities in the UK electricity market
Ntelekos, Alex (2013). Bridging the gap. Staple Inn Actuarial Society, - 1 pages. [RKN: 70964]
Closer ties needed between actuaries and catastrophe modelling
Bielski, John (2013). Talking the same language. Staple Inn Actuarial Society, - 2 pages. [RKN: 74157]
The Actuary (2013) October : 24-25.
Good enterprise risk management needs everyone in an organisation to have a consensus on the subject. This is about much
more than producing a risk glossary. Its about developing a framework that improves the overall management of the business and
then linking this with the business model, says John Bielski.
Fulcher, Graham; Edwards, Matthew (2013). Behaviour under control. Staple Inn Actuarial Society, - 3 pages. [RKN: 74158]
The Actuary (2013) October : 26-28.
Has your ERM framework missed a fundamental risk type? Graham Fulcher and Matthew Edwards explore the issue.
Cantle, Neil (2013). All in the risk mix. Staple Inn Actuarial Society, - 3 pages. [RKN: 74149]
The Actuary (2013) December : 22-24.
Modern risk strategy is hard, primarily because modern business is complex. Neil Cantle looks at the 'Own Risk and Solvency
Assessment' that firms will be facing.
Smith, Andrew (2014). Book review: Risk management issues in insurance by Martin Bird and Tim Gordon. Staple Inn Actuarial Society,
- 1 pages. [RKN: 70698]
Robinson, Brian; Elliott, Martin (2014). Proxy models: The way of the future?. Staple Inn Actuarial Society, - 3 pages. [RKN: 70849]
The Actuary (2014) April : 25-27.
Business applications of proxy techniques
Chamunorwa, Kelvin (2014). Editorial: Beyond the numbers. Staple Inn Actuarial Society, - 1 pages. [RKN: 74351]
The costs of global violence
Iqbal, Icki (2014). Learners and learned : Letter to the Editor. Staple Inn Actuarial Society, - 1 pages. [RKN: 74354]
Reflection on the risk management landscape for the profession
Lewin, Chris (2014). Bridging the divide. Staple Inn Actuarial Society, - 1 pages. [RKN: 74359]
The Actuary (2014) September : 28-29.
Chris Lewin looks at the risk initiative (RAMP) between the actuarial and civil engineering professions
Institute and Faculty of Actuaries Model Risk Working Party (2014). Split personalities. Staple Inn Actuarial Society, - 2 pages. [RKN:
74327]
The IFoA's Model Risk Working Party reflects on the cultural aspects of model risk
Coburn, Andrew; Ruffle, Simon; Pryor, Louise (2014). Cyber catastrophe: how bad could it get?. Staple Inn Actuarial Society, - 2
pages. [RKN: 74328]
Andrew Coburn, Simon Ruffle and Louise Pryor are developing frameworks for cyber catastrophe analysis. They explain how
mapping the cyber economy enables risk modelling of systemically important IT providers
ANALES DEL INSTITUTO DE ACTUARIOS ESPAOLES (EPOCA 3A)
Costa Cor, Teresa; Boj del Val, Eva; Fortiana Gregori, Jos (2012). Bondad de ajuste y eleccin del punto de corte en regresin
logstica basada en distancias: aplicacin al problema de credit scoring. [RKN: 43702]
Anales del Instituto de Actuarios Espaoles (Epoca 3a) (2012) 18 : 19-40.
Article in Spanish
The goal of this paper is finding and evaluating criteria for choosing an adequate group assignation cut point from probabilities
predicted by the distance-based logistic regression model, with application to credit scoring problems. Goodness-of-fit is assessed
by means of the Kolmogorov-Smirnov and Gini index statistics, in concert with the ROC curve. Resulting misclassification
probabilities and error cost functions are evaluated. Applications to real datasets, namely two credit risk portfolios, illustrate the
procedure. Computations are performed with the dbstats package in the R environment.
Internet URL: http://www.actuarios.org/espa/web-nueva/publicaciones/anales/anales.htm
Casanovas Arb, Juan (2012). Capital requerido para el riesgo de suscripcin en el ramo de crdito. [RKN: 43703]
Article in Spanish
We are performing an analysis of the models to evaluate the Solvency Capital Requirement SCR applicable to underwriting
credit insurance risk. The simplicity and ease of calculation of the standard formula may entail extra capital regarding the use of an
internal model adapted to the risks of the entity. We present a compendium of five different options, or models, of the SCR
calculation of underwriting credit risk. Differences between those options are shown and certain aspects are discussed.
Suggestions for possible changes are included in order to reflect the reality of risk. Possible future lines of research are outlined
regarding the models. The treatment of catastrophic risk and the time horizon considered in Solvency II are addressed.
Rivas, Mara Victoria; Heras, Antonio; de la Pea Esteban, Victor (2013). Key contributions of own risk solvency assessment (ORSA)
to the improvement of the ERM of insurance companies: a practical and international vision. [RKN: 46591]
Article in English
EIOPA (European Insurance and Occupational Pensions Authority), NAIC (National Association of Insurance Commissioners- US
regulator) OSFI (Office of the Superintendent of Financial Institutions -Canadian regulator) and other regulators are working on a
new regulatory requirement called ORSA (Own Risk Solvency Assessment). ORSA is designed to improve the risk management,
reporting and assessment process of insurance companies, especially in the decision-making process with regard to the level of
solvency according to their risk exposure. In this presentation the differences and similarities between the jurisdictions are
described. The objective of the regulators is to improve the stability of the insurance sector establishing an adequate risk
management requirement that includes important aspects such as definition of the risk appetite, validation of the solvency
requirement using, for example a backtesting methodology, stress testing, scenarios projection and the inclusion of technique
such as reverse testing. In addition, the analysis of the main contributions of ORSA for the insurance companies is developed,
highlighting points such as stress, scenario projection and the back-testing process with the aim to accurately assess the solvency
capital requirement according to the situation of the company. Practical examples and real-life business cases will be provided to
illustrate the process.
Iturricastillo, Ivn; Iaki de la Pea, Joseba; Moreno, Rafael; Martinez, Eduardo Trigo (2014). Gestin del riesgo: inmunizacin
versus rplica de carteras. [RKN: 47084]
Article in Spanish
Risk management: immunization versus replicating portfolios This paper compares two methods that, in theory, allow the
generation of portfolios without risk. This comparison will take into account their effectiveness, advantages and disadvantages
when managing risk. These techniques are a critical part of the supply of risk management tools, and the actuary needs to have an
informed opinion on what possibilities, advantages and disadvantages that has each strategy.
Boj del Val, Eva; Costa Cor, Teresa; Fernndez, Juan Espejo (2014). Provisiones tcnicas por aos de calendario mediante el modelo
lineal generalizado. [RKN: 47085]
Article in Spanish
The Generalized Linear Model (GLM) is a stochastic model with application to the claim reserving problem. The GLM has as a
particular case the deterministic Chain-Ladder (CL) method, and allows calculating prediction errors. These errors help us to
incorporate solvency margins with a statistical sense, which is an important objective in Solvency II. In this work we study the
formulas for the calendar year reserves, from which we can make calculations in a financial environment. Accompanying the study
we include a RExcel application which calculates actual values for different scenarios, using analytical formulas or predictive
distributions.
ANNALS OF ACTUARIAL SCIENCE
Dwonczyk, Dean (2013). Book review: Enterprise risk management: today's leading research and best practices for tomorrow's
executives, by John Fraser and Betty J Simkins Betty J (John Wiley, 2010). Institute and Faculty of Actuaries; Cambridge University Press,
- 2 pages. [RKN: 74033]
Annals of Actuarial Science (2013) 7(1) : 149-150.
Review: Enterprise Risk Management: Today's Leading Research and Best Practices for Tomorrow's Executives, Fraser John,
Simkins Betty J., John Wiley & Sons, 2010, 577pp. (hardback), 70.00. ISBN: 978-0-470-49908-5
DOI: http://dx.doi.org/10.1017/S1748499512000206 (access via Athens login http://www.openathens.net/)
Jarvis, Robert (2013). Book review: Stress testing for financial institutions: applications, regulations and techniques, edited by Daneil
Rsch and Harald Scheule (Risk Books, 2008). Institute and Faculty of Actuaries; Cambridge University Press, - 2 pages. [RKN: 74034]
Review: Stress Testing for Financial Institutions: Applications, Regulations and Techniques, edited by Rsch Daniel, Scheule
Harald, Risk Books, 2008, 457pp. 99.00. ISBN: 978-1-906348-11-3
Hathi, Ameet (2013). Book review: The Solvency II handbook: developing ERM frameworks in insurance and reinsurance companies,
edited by Cruz Marcelo (Risk Books, 2009). Institute and Faculty of Actuaries; Cambridge University Press, - 2 pages. [RKN: 74035]
Review: The Solvency II Handbook, Developing ERM Frameworks in Insurance and Reinsurance Companies, edited by Cruz
Marcelo, Risk Books, 2009, 614pp. (paperback), 145.00. ISBN: 978-1-906348-19-9
Parekh, Aditi (2013). Book review: Managing business risk: a practical guide to protecting your business, 8th edition, edited by Jonathan
Reuvid (Kogan Page, 2012). Institute and Faculty of Actuaries; Cambridge University Press, - 3 pages. [RKN: 74036]
Review: Managing Business Risk: a practical guide to protecting your business, edited by Reuvid Jonathan, Kogan Page Ltd; 8th
edition (2012), 274pp., 50.00 (US$99.00). ISBN: 9780749462826
DOI: http://dx.doi.org/10.1017/S174849951200022X (access via Athens login http://www.openathens.net/)
Malyon, Brett (2013). Book review: Executive's guide to Solvency II, by David Buckham David, Jason Wahl and Stuart Rose (John Wiley
& Sons, 2011). Institute and Faculty of Actuaries; Cambridge University Press, - 2 pages. [RKN: 74037]
Review: Executive's Guide to Solvency II,by David Buckham David, Jason Wahl and Stuart Rose, John Wiley & Sons, 2011,
194pp. (hardback), 65.00. ISBN: 978-0-470-54572-0
Kelliher, Patrick (2013). Book review: Financial enterprise risk management, by Paul Sweeting (Cambridge University Press, 2011).
Institute and Faculty of Actuaries; Cambridge University Press, - 3 pages. [RKN: 74040]
Review: Financial Enterprise Risk Management, Sweeting Paul, Cambridge University Press, 2011, 562pp. (hardback), 70.00.
ISBN9780521111645
Penman, Alan (2013). Book review: Quantitative operational risk models, Catalina Bolanc, Montserrat Guilln, Jim Gustafsson and Jens
Nielsen Jens Perch (Chapman & Hall/CRC, 2012). Institute and Faculty of Actuaries; Cambridge University Press, - 2 pages. [RKN:
74041]
Review: Quantitative Operational Risk Models, Bolanc Catalina, Guilln Montserrat, Gustafsson Jim, and Nielsen Jens Perch,
Chapman & Hall/CRC Finance series, 2012, 209pp. (hardback), 44.99. ISBN9781439895924
APPLIED MATHEMATICAL FINANCE

Katsuki, Yuta; Matsumoto, Koichi (2014). Tail VaR measures in a multi-period setting. [RKN: 47106]
Applied Mathematical Finance (2014) 21(3) : 270-297.
Available via Athens: Taylor & Francis Online
This paper studies a coherent acceptability measure which is a negative coherent risk measure, in a multi-period model. When a
coherent acceptability measure changes according to new information in the market, a time consistency plays an important role.
The usual strong time consistency gives too severe a multi-period Tail Value at Risk (Tail VaR) from a practical viewpoint. We
study a weak type of time consistency and propose new multi-period Tail VaR measures.
DOI: http://dx.doi.org/10.1080/1350486X.2013.851449 (access via Athens login http://www.openathens.net/)/
ASTIN BULLETIN
Kling, Alexander; Ru, Jochen; Schilling, Katja (2014). Risk analysis of annuity conversion options in a stochastic mortality
environment. [RKN: 74212]
ASTIN Bulletin (2014) 44 (2) : 197-236.
While extensive literature exists on the valuation and risk management of financial guarantees embedded in insurance contracts,
both the corresponding longevity guarantees and interactions between financial and longevity guarantees are often ignored. The
present paper provides a framework for a joint analysis of financial and longevity guarantees, and applies this framework to
different annuity conversion options in deferred unit-linked annuities. In particular, we analyze and compare different versions of
so-called guaranteed annuity options and guaranteed minimum income benefits with respect to the value of the option and the
resulting risk for the insurer. Furthermore, we examine whether and to what extent an insurance company is able to reduce the risk
by typical risk management strategies. The analysis is based on a combined stochastic model for both financial market and future
survival probabilities. We show that different annuity conversion options have significantly different option values, and that
different risk management strategies lead to a significantly different risk for the insurance company.
Internet URL: http://www.openathens.net/
Robert, Christian Y; Therond, Pierre-E (2014). Distortion risk measures, ambiguity aversion and optimal effort. [RKN: 74214]
ASTIN Bulletin (2014) 44 (2) : 277-302.
We consider the class of concave distortion risk measures to study how choice is influenced by the decision-maker's attitude to
risk and provide comparative statics results. We also assume ambiguity about the probability distribution of the risk and consider
a framework la Klibanoff, Marinacci and Mukerji (2005; A smooth model of decision making under ambiguity. Econometrica, 73,
18491892) to study the value of information that resolves ambiguity. We show that this value increases with greater ambiguity,
with greater ambiguity aversion, and in some cases with greater risk aversion. Finally, we examine whether a more risk-averse
and a more ambiguity-averse individual will invest in more effort to shift his initial risk distribution to a better target distribution.
AUSTRALIAN JOURNAL OF ACTUARIAL PRACTICE
Evans, John; Royer, Carol (2014). A survey of human capital risk management in Australian insurers. [RKN: 46755]
Australian Journal of Actuarial Practice (2014) 1 : 77-80.
Available online
Human capital risk permeates all other risks in a financial institution as was evidenced by the global financial crisis and
subsequent events, but anecdotal evidence suggests this overriding risk was not well understood. The authors applied for and
were successful in obtaining a grant from the Actuaries Institute to survey Australian insurers as to how they identified and
managed human capital risk. Discussions were held with 8 major insurers, a representative of the Actuaries Institute Risk
Management Practice Committee and a representative of the prudential regulator, APRA. The general types of questions asked
are set out in Appendix A. The project identified that, while some aspects of human capital risk such as human resource
management and occupational health and safety compliance, were well understood, the most important result of this survey was
the identification that the linkages between human capital risks and other institutional risks was not well understood, which is why
events like the Libor and fixed interest scandal in the UK could easily recur with significant reputational damage for the institution
involved.
Internet URL: http://www.actuaries.asn.au/knowledge-bank/australian-journal-of-actuarial-practice
BRITISH ACTUARIAL JOURNAL (BAJ)

Telford, Peter (2012). Developments in the management of annuity business : Abstract of the London discussion - addendum. - 2 pages.
[RKN: 73960]
BAJ (2012) 17(1) : 256-257.
Institute of Actuaries, 22 March 2010.
Orros, G C; Smith, J (2012). Enterprise risk management for health insurance from an actuarial perspective. - 56 pages. [RKN: 70180]
BAJ (2012) 17(2) : 259-314.
This paper focuses on Enterprise Risk Management (ERM) and strategic business management for health insurance companies
in our world of unknown unknowns and the emergence of unexpected risks over time. It illustrates how Chief Risk Officers
(CROs) can focus on risk and opportunity management through an ERM framework, and thereby balance risks against
opportunities, whilst being resilient against unknown unknowns and their emergence over time as known unknowns and known
knowns. The paper has been designed to meet the broad requirements of health insurers that would like to implement an ERM
framework for the effective risk management of their health insurance lines of business. Risk management for health insurers in
the context of Solvency II and broader European Commission regulatory requirements is also discussed. The authors discuss how
insurers can develop and apply risk management to build resilience in the face of the storms and shocks that may lie ahead.
Orros, G C (2012). Enterprise risk management for health insurance from an actuarial perspective : Abstract of the London discussion. 16 pages. [RKN: 70181]
BAJ (2012) 17(2) : 315-330.
London discussion, 18 January 2011.
Kemp, M H D; Patel, C C (2012). Entity-wide risk management for pension funds. - 64 pages. [RKN: 70185]
BAJ (2012) 17(2) : 331-394, 395-412, 413-434.
This paper explores the application of ERM-style techniques to pension funds. It uses the term entity-wide risk management
rather than enterprise risk management, even though both have the same acronym (ERM), because many pension funds do not
view themselves as business enterprises as such. Some of the techniques that business enterprises have for managing risk (e.g.
raising new capital from shareholders or branching into new business areas if existing ones have unattractive risk-reward
characteristics) may not be open to many pension funds. The paper argues that the holistic approach to risk management (and
governance) that is a hallmark of ERM is as appropriate to pension funds as it is to any other type of entity. This is the case
whether the fund is defined benefit or defined contribution in nature, or a hybrid. It is also the case whether the entity is deemed
to be the fund itself, the sponsor or the two combined. Indeed, there are aspects of pension arrangements, such as the relationship
between the fund and its sponsor, that lend added impetus to the use of ERM-style techniques in practical pension fund
management.
Kemp, M H D (2012). Entity-wide risk management for pension funds : Abstract of the Edinburgh discussion. - 18 pages. [RKN: 70186]
BAJ (2012) 17(2) : 395-412.
Edinburgh discussion, 21 February 2011
Kemp, M H D (2012). Entity-wide risk management for pension funds : Abstract of the London discussion. - 22 pages. [RKN: 70195]
BAJ (2012) 17(2) : 413-434.
London discussion, 28 February 2011
Kelliher, P O J; Wilmot, D; Vij, J; Klumpes, P J M (2013). A common risk classification system for the Actuarial Profession. - 31 pages.
[RKN: 70928]
BAJ (2013) 18(1) : 91-121.
Risk terminology varies from organisation to organisation, and actuaries working in different organisations may use different terms
to refer to the same risk, or use the same nomenclature for completely different risks. This paper sets out a classification system
developed by the Risk Classification Working Party for the Profession that can be used as a common reference point for
discussing risk. Actuaries will not be required to use this system, but it is hoped that common terminology will reduce the possibility
of confusion in discussing risks.
Kelliher, Patrick (2013). A common risk classification system for the Actuarial Profession : Abstract of the London discussion. - 23 pages.
[RKN: 70929]
BAJ (2013) 18(1) : 122-144.
Kelliher, Patrick (2013). A common risk classification system for the Actuarial Profession : Abstract of the Edinburgh discussion. - 18
pages. [RKN: 70930]
BAJ (2013) 18(1) : 145-162.
Allan, Neil; Cantle, Neil; Godfrey, Patrick; Yin, Yun (2013). A review of the use of complex systems applied to risk appetite and
emerging risks in ERM practice : Recommendations for practical tools to help risk professionals tackle the problems of risk appetite and
emerging risk. - 72 pages. [RKN: 70931]
BAJ (2013) 18(1) : 163-234.
The Management Board of the UK Actuarial Profession has identified enterprise risk management (ERM) as an area of growth,
particularly within the financial sector. It is an area which offers opportunities for actuaries, working with other disciplines, to move
out of their traditional sectors of employment, with the skill set required fitting well with an actuary's training and practical focus.
Members of the Profession also highlighted ERM as one of the two main areas where they wanted the Profession to focus their
research efforts in the membership survey in 2009. Consequentially the Management Board allocated funds to support research
projects in ERM in 20102011 and has worked with the ERM Practice Area Committee to identify the topics that they feel most
suited to external research where the outputs will have a broad strategic value to the financial services sector.
DOI: http://dx.doi.org/10.1017/S135732171300030X (access via Athens login http://www.openathens.net/)
Cantle, Neil (2013). A review of the use of complex systems applied to risk appetite and emerging risks in ERM practice : Abstract of the
London discussion. - 22 pages. [RKN: 70932]
BAJ (2013) 18(1) : 235-256.
Cantle, Neil (2013). A review of the use of complex systems applied to risk appetite and emerging risks in ERM practice : Abstract of the
Edinburgh discussion. - 13 pages. [RKN: 70933]
BAJ (2013) 18(1) : 257-269.
Klumpes, Paul; Kumar, Abhishek; Dubey, Ravi (2014). Investigating risk reporting practices in the global insurance industry. - London:
Institute and Faculty of Actuaries, - 36 pages. [RKN: 46108]
BAJ (2014) 19(3) : 692-727.
Paper presented on 23 September 2013, London, and 18 November 2013, Edinburgh
This paper investigates incentives and disincentives for risk reporting practices by global insurance companies. We examine
various arguments for and against risk reporting, whether voluntary or compliance in nature. An important issue is whether
reporting is dominated by shareholder, regulatory or managerial incentives. We evaluate whether current reporting practices are
consistent with either political visibility, cultural effects, or idiosyncratic managerial incentives. Our empirical analysis is based on
(1) a content analysis of disclosures contained in annual reports of a sample of European, Asian and US global top 25 insurers
between 2006 and 2012 and (2) a survey of internal business reporting practices. We re-characterise a disclosure index from prior
research to examine the relation between the extent of risk disclosure and various managerial, agency and other characteristics.
We predict that the extent and nature of risk disclosures depends on cultural imperatives and managerial incentives.
Hursey, Christopher; Cocke, Matthew; Hannibal, Cassandra; Jakhria, Parit; MacIntyre, Iain; Modisett, Matthew C (2014). (2015).
Heavy models, light models and proxy models : A working paper by the Proxy Model Working Party : Abstract of the London discussion.
2014. [RKN: 47160]
BAJ (2015) 20(1) : 147-166.
Sessional research paper presented in London, 24 February 2014
The use of proxy models within the insurance sector has grown considerably in recent years, particularly in the area of capital
management. This growth has been largely driven by the increased demands of a changing regulatory and risk management
landscape set against the inability of traditional modelling techniques to keep up. This paper takes a look at some of the types of
proxy model available to practitioners, suggesting a basic framework for replicating formula type proxies into which many current
proxy models fit. Within this framework, and drawing heavily on recurring themes of complexity, accuracy and, in particular, use of
the model, the options available in the design and implementation of a model are discussed as well as the potential impact of the
choices made. Finally, four specific proxy models are discussed in greater detail, two of which are the subject of a case study. This
leads to a key result concerning the distinction between risk scenario accuracy and risk distribution accuracy the key driver for risk
capital estimation.
Internet URL:
http://www.actuaries.org.uk/research-and-resources/documents/heavy-models-light-models-and-proxy-models-working-paper
BULLETIN FRANAIS D'ACTUARIAT
Underwood, Alice; Ingram, David (2012). The ERM rainbow: working paper. [RKN: 43711]
Bulletin Franais d'Actuariat (2012) 12 (no. 24) : 5-14.
Internet URL: http://www.institutdesactuaires.com/bfa/
Aouizerate, Jean-Marc (2012). Cration d'un indicateur de niveau de garantie en frais de sant. [RKN: 43712]
Article in French
This paper proposes a synthetic indicator that estimates the level of additional health guarantees for each medical expenses item.
It presents the major advantage to compare, in a homogeneous way, guarantees expressed on different bases (B.R., real costs,
P.M.S.S., euro...). It can be estimate only by observing the medical consumption without needing to read the guarantees tables.
Other advantage, this process can be massively deployed on a large panel of contracts. This index represents the artificial cover
rate of a guarantee applied to the medical consumption of the entire customer's portfolio. Its value measuring the performance
guarantees sits between 0% and 100% (100% being the complete coverage of the spending). It has a large field of applications:
pricing, benchmark, technical piloting, portfolio control...
Karam, Elias; Planchet, Frdric (2013). Estimation errors and SCR calculation. [RKN: 46665]
Article in English
The risk of not accurately estimating the amount of future losses is an essential issue in risk measurements. Sources of estimation
risk include errors in estimation of parameters which can affect directly the VaR precision. Estimation risk in itself is related to
operational risk in a way that the losses are arising from estimation errors. In this working paper, we are interested in measuring
the error induced on the SCR by the estimation error of the parameters.
Gatumel, Mathieu; Lemoyne de Forges, Sabine (2013). Understanding and monitoring reinsurance counterparty risk. [RKN: 46667]
Article in English
Since 2008, catastrophic losses and financial turmoil have deeply shaken the insurance and reinsurance industries. Severe
difficulties encountered by sector leaders like AIG and Swiss Re have shed light on the potential fragility of the players, and have
increased attention on the subject of reinsurance counterparty risk. This corresponds to the exposure of an insurance company to
reinsurer failure and is difficult to assess due to a scarcity of reliable measures. It has long been considered as largely
auto-regulated by the insurance market. The impact of reinsurance credit on an insurers balance sheet, market complexity and
lack of coordinated responses among states begs questions concerning the role of control and regulation. In this article, we
address the current state of reinsurance counterparty risk and existing means by which to measure it. We then discuss the impact
of market discipline on this risk and point out the importance of control within the reinsurance industry. We particularly look at the
key role of regulation in providing better risk measurement tools to assist in assessing the importance of reinsurance counterparty
risk on insurance levels and the systematic development of risk management tools.
Tomas, Julien (2014). Gestion des risques naturels et changement climatique: les challenges des actuaires. [RKN: 47205]
Article in French
Cette note dresse un bref tat des lieux des risques climatiques et de leur volution potentielle pour le secteur de l'assurance. Elle
aborde dans premier temps les changements climatiques observs ainsi que le large ventail des projections climatiques
disponibles et les consquences possibles sur les phnomnes mtorologiques extrmes la lumire des conclusions
prsentes dans le cinquime rapport d'valuation (AR5) du Groupe d'Experts Intergouvernemental sur l'Evolution du Climat et
des dernires recherches scientifiques. Dans un deuxime temps, le processus de lacisation des catastrophes naturelles, qui a
permis de passer des modles religieux aux explications rationnelles, durant le 17me et 18me sicle, est brivement
dvelopp, avant de dtailler la modlisation des risques de catastrophes naturelles. Ces techniques, l'origine dveloppes par
les climatologues, sont de plus en plus employes par l'industrie de l'assurance. Enfin, les dfis et rle du secteur de l'assurance
face au changement climatique sont couverts. Les impacts du point de vue de l'assurance sont traits. Ces risques sont aggravs
par la concordance du changement climatique avec l'volution des tendances dmographiques et socio-conomiques. La
sollicitation des assureurs se fait de plus en plus forte, et dans le mme temps, les catastrophes mtorologiques et climatiques
deviennent difficilement assurable. Un changement de paradigme du secteur de l'assurance est ncessaire au cours des
prochaines dcennies pour faire face aux effets directs et indirects contestant sa rentabilit et son modle commercial. Ce travail
a t support par la Chaire d'excellence Generali "Actuariat responsable: gestion des risques naturels et changements
climatiques". Les vues exprimes dans ce document sont de la responsabilit de l'auteur et ne refltent pas ncessairement
celles de Generali.
EUROPEAN ACTUARIAL JOURNAL
Constantinescu, Corina; Maume-Deschamps, Vronique; Norberg, Ragnar (2012). Risk processes with dependence and premium
adjusted to solvency targets. [RKN: 44838]
European Actuarial Journal (2012) 2(1) July : 1-20.
Available via Athens: Springer -- Published online, July 2012
This paper considers risk processes with various forms of dependence between waiting times and claim amounts. The standing
assumption is that the increments of the claims process possess exponential moments so that variations of the Lundberg upper
bound for the probability of ruin are in reach. The traditional point of view in ruin theory is reversed: rather than studying the
probability of ruin as a function of the initial reserve under fixed premium, the problem is to adjust the premium dynamically so as
to obtain a given ruin probability (solvency requirement) for a fixed initial reserve (the financial capacity of the insurer). This
programme is carried through in various models for the claims process, ranging from Cox processes with i.i.d. claim amounts, to
conditional renewal (Sparre Andersen) processes.
DOI: http://dx.doi.org/10.1007/s13385-012-0046-4 (access via Athens login http://www.openathens.net/)
Lveill, Ghislain (2012). Bivariate compound renewal sums with discounted claims. [RKN: 44851]
European Actuarial Journal (2012) 2(2) December : 273-288.
Available via Athens: Springer -- Published online, December 2012
Recursive moments, joint moments, moments generating functions, distribution functions, stop-loss premiums and risk measures
have been found for the univariate compound renewal sums with discounted claims, for a constant force of real interest. More
recently, moments and joint moments have also been found when the force of interest is stochastic. In this paper, we extend some
of the preceding results to the bivariate compound renewal sums with discounted claims by first presenting a lemma that gives the
conditional joint distribution of the occurrence times of the claims given the number of claims of each type up to time t, result that
will be used to get the second moment, the first joint moment and other quantities related to our bivariate risk process.
Ben Salah, Zied; Morales, Manuel (2012). Lvy systems and the time value of ruin for Markov additive processes. [RKN: 44852]
European Actuarial Journal (2012) 2(2) December : 289-317.
Available via Athens: Springer -- Published online, December 2012
In this paper we study the ruin problem for an insurance risk process driven by a spectrally-positive Markov additive process.
Particular attention is given to the family of spectrally-positive Markov-modulated Lvy processes. We give an expression for the
expected discounted penalty function by extending results available in the literature. In particular, we generalize some results in E
Biffis and A Kyprianou (Insurance Mathematics & Economics 46:8591, 2010) to a more general setting provided by the theory of
Markov additive processes. This natural extension is possible thanks to the concept of Lvy systems that allows us to generalize
well-known results for Lvy processes to a larger family of Markov additive processes. We also discuss how more compact
expressions for the expected discounted penalty function can be obtained using the notion of scale matrix of a Markov additive
process.
Cossette, Hlne; Mailhot, Mlina; Marceau, tienne; Mesfioui, Mhamed (2013). Bivariate lower and upper orthant value-at-risk.
[RKN: 46570]
10
European Actuarial Journal (2013) 3(2) : 321-357.

Available via Athens: Springer
Value-at-risk (VaR) is an important risk measure widely used in actuarial science and quantitative risk management. Embrechts
and Puccetti (2006a) [Embrechts P., Puccetti G. (2006), Bounds for functions of multivariate risks, Journal of Multivariate Analysis
97(2):526-547] have introduced the multivariate lower and upper orthant VaR. The practical applications of these risk measures is
very promising, especially in actuarial science and quantitative risk management. Our objective is to study in details the
multivariate lower and upper orthant VaR in the bivariate setting, their properties and their applications. In particular, new
characterizations of the bivariate lower and upper orthant VaR and desirable properties are given, such as translation invariance,
positive homogeneity and comonotonic additivity. Lower and upper confidence regions for random vectors are developed and
used to provide new results on the convexity conditions and to suggest capital allocation techniques. We provide bounds on
functions of random pairs and derive interesting relations with existing results. We motivate the use of the bivariate lower and
upper ortant VaR for risk allocation, to represent bivariate ruin probabilities and for risk comparison. Practical illustrations and
examples of the results are presented throughout the article.
DOI: http://dx.doi.org/10.1007/s13385-013-0079-3 (access via Athens login http://www.openathens.net/)/
Thonhauser, Stefan (2013). Optimal investment under transaction costs for an insurer. [RKN: 46571]
We deal with the problem of minimizing the probability of ruin of an insurer by optimal investment of parts of the surplus in the
financial market, modeled by geometric Brownian motion. In a diffusion framework the classical solution to this problem is to hold
a constant amount of money in stocks, which in practice means continuous adaption of the investment position. In this paper, we
introduce both proportional and fixed transaction costs, which leads to a more realistic scenario. In mathematical terms, the
problem is now of impulse control type. Its solution is characterized and calculated by iteration of associated optimal stopping
problems. Finally some numerical examples illustrate the resulting optimal investment policy and its deviation from the optimal
investment behaviour without transaction costs.
Ben Salah, Zied (2014). On a generalization of the expected discounted penalty function to include deficits at and beyond ruin. [RKN:
46810]
In this paper we propose an extended concept of the expected discounted penalty function (EDPF) that takes into account new
ruin-related random variables. In the well-known EDPF introduced in seminal papers by HU Gerber and ESW Shiu (Insurance:
Mathematics & Economics (1997) 21:129-137; North American Actuarial Journal (1998) 2(1):48-78) and HU Gerber and B Landry
(Insurance: Mathemtics & Economics (1998) 22:263-276), we consider the expectation of a sequence of discounted penalty
functions of new record minima reached by a claim of the risk process after ruin (and before recovery). Inspired by results of M
Huzak et al. (Annals of Applied Probability (2004) 14(3):1378-1397) and developments in fluctuation theory for spectrally negative
Lvy processes, we provide a characterization for this extended EDPF in a setting involving a cumulative claims modeled by a
subordinator, and Brownian perturbation. We illustrate how the extended EDPF can be used to compute the expected discounted
value of capital injections for the Brownian perturbed risk model.
Pigeon, Mathieu; De Frahan, Bruno Henry; Denuit, Michel (2014). Evaluation of the EU proposed farm income stabilisation tool by
skew normal linear mixed models. [RKN: 46959]
The European Commission has introduced new risk management tools in the rural development pillar 2 of the Common
Agricultural Policy. One of them consists in providing co-financing support to mutual funds compensating farmers who experience
a severe drop in their income. This paper analyses this income stabilisation tool for a region in Belgium by means of a skew normal
linear mixed model. Relying on the farm accountancy data network, this analysis focuses on estimating the probability that such a
fund would need to intervene and, in that case, the expected amount of each farm income compensation. The predictive
distribution of future incomes given past revenues trajectory is derived and used for evaluation purposes. Particular attention is
paid to additional requirements that could be imposed to the income stabilisation tool.
THE EUROPEAN ACTUARY
Breen, Jeroen (2014). Learning to love volatility. [RKN: 47013]
The European Actuary (2014) 5(1) October : 8-9.
In a world that constantly throws big, unexpected events our way, we must learn to benefit from disorder. (Nassim Nicholas
Taleb). This was the headline of the Wall Street Journal in November 2012 and as far as that is concerned today's world has not
changed at all. Our environment is changing at an exponential rate. Matters which were regarded as certainties previously, are
now uncertain. Risks of which we had no knowledge yesterday, are significant today. The development of big data ensures that we
will know even more. However, what are we going to do with all that data? How are we going to use this knowledge in our models?
Will we still require models in the future?
Internet URL: http://www.the-european-actuary.org
11
FINANCIAL ANALYSTS JOURNAL

Cuffe, Stacy L; Goldberg, Lisa R (2012). Allocating assets in climates of extreme risk : A new paradigm for stress testing portfolios.
[RKN: 45655]
Financial Analysts Journal (2012) 68(2) : 85-107.
The authors extended the standard paradigm for portfolio stress testing in two ways. First, they introduced a toolkit that enables
investors to envision and administer extreme scenarios. The risk model is integral to the stress test. They demonstrated the
substantial impact of using historical and hypothetical covariance matrices in scenario construction. Second, they used a
scenario-constrained optimization to incorporate the output of a portfolio stress test directly into an investment decision.
DOI: http://dx.doi.org/10.2469/faj.v68.n2.3 (access via Athens login http://www.openathens.net/)
GENEVA PAPERS ON RISK AND INSURANCE
Carter, Richard B; Power, Mark L (2012). Reputational signals and capital acquisition when insurance companies go public. [RKN:
43635]
Geneva Papers on Risk and Insurance (2012) 37(3) : 485-508.
Available via Athens: Palgrave MacMillan
We analyse reputational signals and decisions surrounding capital acquisition by examining 76 insurance firms going public from
1996 to 2006. We first explore the relationship between proxies for insurance firm reputation and initial public offering (IPO)
underwriter reputation. In general, we find that more reputable underwriters market IPOs of more reputable insurersinsurers that
are less risky, more likely to be life insurers and that have higher franchise value. These results suggest that underwriter and
insurer reputations are aligned and send consistent signals. Second, we show that the market requires a higher return from
riskier/less reputable insurers when they go public. When we compare the performance of our insurance company sample to a
matched sample of non-insurance firms, we find that the greater reputational transparency of insurers allows the market to do a
better job of determining future performance. Last, we conclude by showing empirically that franchise value and the reputational
posture of the insurance firms are positively related. These results contribute to the growing body of knowledge on reputational
risk management and should enhance capital acquisition strategies of insurance company managers.
DOI: http://dx.doi.org/10.1057/gpp.2012.26 (access via Athens login http://www.openathens.net/)
Schltter, Sebastian; Grndl, Helmut (2012). Who benefits from building insurance groups? A welfare analysis of optimal group capital
management. [RKN: 43638]
This paper compares the shareholder-value-maximising capital structure and pricing policy of insurance groups against that of
stand-alone insurers. Groups can utilise intra-group risk diversification by means of capital and risk transfer instruments. We show
that using these instruments enables the group to offer insurance with less default risk and at lower premiums than is optimal for
stand-alone insurers. We also take into account that shareholders of groups could find it more difficult to prevent inefficient
overinvestment or cross-subsidisation, which we model by higher dead-weight costs of carrying capital. The trade-off between risk
diversification on the one hand and higher dead-weight costs on the other can result in group-building being beneficial for
shareholders but detrimental for policyholders.
DOI: http://dx.doi.org/10.1057/gpp.2012.29 (access via Athens login http://www.openathens.net/)
Courbage, Christophe; Mahul, Olivier (2013). Promoting better understanding on sustainable disaster risk management strategies :
Editorial. [RKN: 46084]
Geneva Papers on Risk and Insurance (2013) 38 (3) : 401-405.
DOI: http://dx.doi.org/10.1057/gpp.2013.20 (access via Athens login http://www.openathens.net/)/
Chang, Chun Ping; Berdiev, Aziz N (2013). Natural disasters, political risk and insurance market development. [RKN: 46085]
Geneva Papers on Risk and Insurance (2013) 38 (3) : 406448.
We examine the relationship between natural disasters, political risk and insurance market development in a panel of 39 countries
over the period 19842009 using a dynamic panel two-step system generalised method of moments model. We provide evidence
that the incidences of natural disasters and deaths caused by natural disasters lead to greater total insurance, as well as life
insurance and non-life insurance consumption. We also find that countries with lower levels of political risk experience higher
insurance consumption. The incidences of natural disasters and deaths attributable to natural disasters contribute to insurance
market development under the tenure of a government with lower levels of political risk. We therefore emphasise that natural
disasters, political risk and their interaction effects are important determinants of insurance market development.
Takao, Atsushi; Yoshizawa, Takuya; Hsu, Shuofen; Yamasaki, Takashi (2013). The effect of the great east Japan earthquake on the
stock prices of non-life insurance companies. [RKN: 46086]
The Great East Japan Earthquake of 11 March 2011 incurred huge damages for Japan. This paper investigates how this
earthquake influenced the value of Japanese insurance companies, especially non-life insurance companies. Our findings are as
follows. (1) The stock prices of insurance companies decreased right after the earthquake. The spread of this decrease was less
for the stock prices of non-life insurance companies than for those of life insurance companies. (2) The more capital buffer a
non-life insurance company had, the higher the stock return. (3) The Earthquake Insurance System on Dwelling Risks in Japan not
only indemnifies seismic losses but also functions as a Japanese stock market stabiliser.
12
Jaffee, Dwight; Russell, Thomas (2013). The welfare economics of catastrophe losses and insurance. [RKN: 46087]
This paper uses the tools of welfare economics to analyse the appropriate mix of private sector and government responses to
catastrophic events. In particular, we examine the appropriate roles of post-disaster government aid, private insurance and
mitigation activities. The analysis focuses on the distinction between the ex ante and ex post welfare criteria, as well as incentive
issues such as may arise from the Samaritan's dilemma. A key factor is that individuals maintain differing subjective beliefs
concerning the probability or magnitude of the catastrophic event. The analysis applies to insurance markets certain concepts that
are now also being developed in the finance literature to examine the efficiency of naked credit default swaps and other
instruments that are in essence side bets among agents with heterogeneous beliefs. We conclude that ex post welfare economics
provides fundamental insights that have not been previously integrated into the discussions concerning the losses created by
catastrophic events, including a potential role for mandatory insurance.
Xu, Xian; Mo, Jiawei (2013). The impact of disaster relief on economic growth: evidence from China. [RKN: 46088]
In this paper we construct a simple two-period equilibrium model for analysing the impact of post-disaster transfer payments on
economic growth. This model can be used to show that direct payment of disaster relief funds may aggravate rather than mitigate
the negative impact of disasters on the economy. The substitution effect of direct transfer payment depresses post-disaster labour
supply and hence economic growth. This conclusion from the theoretical model is tested using Chinese provincial panel data and
applying generalised method of moments (GMM) system estimation. The empirical analysis largely confirms the theoretical
predictions. In China, post-disaster transfer payments are indeed found to exacerbate the negative impact of disasters on
economic growth. Therefore, we suggest that relief should be oriented to create work incentive in order to avoid its depressing
effect on economic growth.
Ou-Yang, Chieh; Kunreuther, Howard C; Michel-Kerjan, Erwann (2013). An economic analysis of climate adaptations to hurricane risk
in St. Lucia. [RKN: 46089]
We introduce a catastrophic risk model that captures the cumulative impact of climate change on future expected losses from
hurricane risk. The annual growth rates of expected losses due to change in climate patterns (or climate change factor) are
estimated based upon historical storm activities in the Atlantic Basin and catastrophe modelling. The percentiles of the climate
change factor are then used to measure expected hurricane losses in the Caribbean Island of St. Lucia. We also undertake
benefit-cost analyses on four adaptation measures for homes in St. Lucia and determine when those are cost-effective for different
time horizons and discount rates with and without climate change. Adaptation makes an enormous difference and can offset
additional losses even with a high climate change factor by making houses much more resilient. Enforcing these protection
measures will be critical.
Reynaud, Arnaud; Aubert, Ccile; Nguyen, Manh-Hung (2013). Living with floods : protective behaviours and risk perception of
Vietnamese households. [RKN: 46090]
We empirically investigate the determinants of household flood protective strategies and risk perception using data from a
household-level survey conducted in spring 2012 in Vietnam. Our empirical analysis shows that some flood protective behaviours
of Vietnamese households are driven by the perception of flood risks, a result consistent with the Protection Motivation Theory
(PMT). Our results also suggest that both perceived probabilities and perceived consequences of floods are related to some
cognitive processes included in the PMT. Lastly, we document the important role played by public flood management policies in
shaping individual flood risk perception and protective behaviours.
Braun, Alexander; Mller, Katja; Schmeiser, Hato (2013). What drives insurers demand for cat bond investments? : evidence from a
pan-European survey. [RKN: 46091]
Although catastrophe bonds are continuing to gain importance in today's risk transfer and capital markets, little is known about the
decision-making processes that drive the demand for this aspiring asset class. In the article at hand, we focus on one segment of
the investor community. Our research goal is to identify major determinants of the cat bond investment decision of insurance and
reinsurance companies. For this purpose, we have conducted a comprehensive survey among senior executives in the European
insurance industry. Evaluating the resulting data set by means of exploratory factor analysis and logistic regression methodology,
we are able to show that the expertise and experience with regard to cat bonds, the perceived fit of the instrument with the
prevailing asset and liability management strategy, as well as the applicable regulatory regime are significant drivers of an
insurer's propensity to invest. These statistical findings are supported by further qualitative survey results and additional
information from structured interviews with the managers of four large dedicated cat bond funds.
Turvey, Calum G; Gao, Xin; Nie, Rong; Wang, Linping; Kong, Rong (2013). Subjective risks, objective risks and the crop insurance
problem in rural China. [RKN: 46092]
China's infant crop insurance industry faces two, not mutually exclusive, challenges. The first challenge is operational and arises
from the lack of historical crop yield data at the farm household or village level. The second problem relates to a possible
disconnect between objective measures of historical yields that is required for actuarial pricing in the supply of insurance and the
subjective perceptions of future risk that is required to establish demand. This may require a substantial subsidy from the Chinese
government in order to encourage participation. This paper examines both issues, including the form of subsidy, through use of
13
the beta-PERT distribution. The PERT distribution has the advantage of defining proximal (second best) distributions based on
farmers recall of historical low, high and typical yields to cover objective risk measures, and subjective distributions through
projections of low, high and most likely future yields. Direct elicitations of objective and subjective PERT parameters from 730
farmers in Shaanxi were collected in the fall of 2010. We find that 82.3 per cent of farm households have perceptions that their
pro-forma corn yields in 2011 would be higher than their historical memory, while 71.63 per cent perceived the distribution of risks
in 2011 to be lower than the historical average. In addition, we find that when we regress farmers interest in crop insurance it is the
skewness of subjective risk that matters, and perception of downside risk is largely dictated by perceived mean and standard
deviation. As a result we argue that the need for subsidising crop insurance premiums is a consequence of the dissonance
between subjective and historical risks.
Jobst, Andreas A (2014). Systemic risk in the insurance sector: a review of current assessment approaches. [RKN: 46878]
The following article reviews the recent regulatory efforts in defining systemic risk in the insurance sector and the designation of
systemically important insurers. Although current evidence suggests that core insurance activities are unlikely to cause or
propagate systemic risk, the characteristics and business models of insurance firms vary by country and might require a more
nuanced examination, with a particular focus on non-traditional and/or non-insurance activities. The article also includes the
assessment of identified vulnerabilities from liquidity risk in the context of the Bermuda market, which provides valuable insights
into systemic risk analysis in the domestic context of an insurance market dominated by non-life underwriting.
Outreville, Jean-Franois (2014). The meaning of risk? Insights from the Geneva Risk and Insurance Review. [RKN: 46951]
The Geneva Association and European Group of Risk and Insurance Economists, through publications like the Geneva Risk and
Insurance Review, serve as a catalyst for progress in the understanding of risk and insurance matters. The purpose of this paper
is to review and summarise some of the papers published in 2012 and 2013 that could help us to understand what risk is and the
implications for the insurance industry. Although the idea of risk may be difficult to conceptualise, risk is of considerable
importance for the functioning of all economies and economic agents. Risk aversion, adverse selection, asymmetric information
and the performance of insurance markets are important issues that are regularly discussed in the review. These issues are of
particular relevance for insurers and the proper functioning of insurance markets.
GENEVA RISK AND INSURANCE REVIEW
Chiu, W Henry (2012). Risk aversion, downside risk aversion and paying for stochastic improvements. - 27 pages. [RKN: 74940]
Geneva Risk and Insurance Review (2012) 37 (1) : 1-26.
This paper considers the relationship between risk preferences and the willingness to pay for stochastic improvements. We show
that if the stochastic improvement satisfies a double-crossing condition, then a decision maker with utility v is willing to pay more
than a decision maker with utility u, if v is both more risk averse and less downside risk averse than u. As the condition always
holds in the case of self-protection, the result implies novel characterizations of individuals willingness to pay to reduce the
probability of loss. By establishing a general result on the correspondence between an individual's willingness to pay, and his
optimal purchase of stochastic improvement when there is a given relationship between stochastic improvements and the amount
paid for them, we further show that all results on the willingness to pay can be applied directly to characterize the conditions under
which a more risk averse individual will optimally choose to buy more stochastic improvement. Generalizations of existing results
on optimal choice of self-protection can be obtained as corollaries.
Bourles, Renaud; Henriet, Dominique (2012). Risk-sharing contracts with asymmetric information. - 30 pages. [RKN: 74941]
We examine how risk-sharing is impacted by asymmetric information on the probability distribution of wealth. We define the
optimal incentive compatible agreements in a two-agent model with two levels of wealth. When there is complete information on
the probability of the different outcomes, the resulting allocation satisfies the mutuality principle (which states that everyone's final
wealth depends only upon the aggregate wealth of the economy). This is no longer true when agents have private information
regarding their probability distribution of wealth. Asymmetry of information (i) makes ex-post equal sharing unsustainable between
two low-risk agents, and (ii) induces exchanges when agents have the same realization of wealth.
Thomann, Christian; Pascalau, Razvan; von der Schulenburg, J Mattias Graf (2012). Corporate management of highly dynamic risks
: Evidence from the demand for terrorism insurance in Germany. - 26 pages. [RKN: 74942]
This paper investigates a corporation's risk management response to highly dynamic risks. Using a unique data set on the
German terrorist insurance market, the paper tests whether corporate risk managers have a clear understanding of the probability
distribution of highly dynamic risks or if risk managers learn from severe losses and base their decisions upon day-to-day
experience. The paper further investigates whether risk managers become more confident in their risk management decisions
over time. For this purpose, we apply Viscusi's prospective reference theory to a corporate context. We find that firms learn from
single events when making their risk management decisions, and that risk managers become more confident with their risk
management decisions over time.
Hardelin, Julien; Lemoyne de Forges, Sabine (2012). Raising capital in an insurance oligopoly market. - 26 pages. [RKN: 74943]
We consider an oligopoly market where firms offer insurance coverage against a risk characterised by aggregate uncertainty.
Firms behave as if they were risk averse for a standard reason of costly external finance. The model consists in a two-stage game
where firms choose their internal capital level at stage one and compete on price at stage two. We characterise the subgame
perfect Nash equilibria of this game and focus attention on the strategic impact of insurers capital choice. We discuss the model
with regard to the insurance industry specificities and regulation.
14
Tan, Ken Seng; Weng, Chengguo (2012). Enhancing insurer value using reinsurance and value-at-risk criterion. - 32 pages. [RKN:
74944]
The quest for optimal reinsurance design has remained an interesting problem among insurers, reinsurers, and academicians. An
appropriate use of reinsurance could reduce the underwriting risk of an insurer and thereby enhance its value. This paper
complements the existing research on optimal reinsurance by proposing another model for the determination of the optimal
reinsurance design. The problem is formulated as a constrained optimization problem with the objective of minimizing the
value-at-risk of the net risk of the insurer while subjecting to a profitability constraint. The proposed optimal reinsurance model,
therefore, has the advantage of exploiting the classical tradeoff between risk and reward. Under the additional assumptions that
the reinsurance premium is determined by the expectation premium principle and the ceded loss function is confined to a class of
increasing and convex functions, explicit solutions are derived. Depending on the risk measure's level of confidence, the safety
loading for the reinsurance premium, and the expected profit guaranteed for the insurer, we establish conditions for the existence
of reinsurance. When it is optimal to cede the insurer's risk, the optimal reinsurance design could be in the form of pure stop-loss
reinsurance, quota-share reinsurance, or a combination of stop-loss and quota-share reinsurance.
Eeckhoudt, Louis (2012). Beyond risk aversion: Why, how and what's next? : EGRIE Keynote Address. - 15 pages. [RKN: 70260]
Risk attitudes other than risk aversion (e.g. prudence and temperance) are becoming important both in theoretical and empirical
work. While the literature has mainly focused its attention on the intensity of such risk attitudes (e.g. the concepts of absolute
prudence and absolute temperance), I consider here an alternative approach related to the direction of these attitudes (i.e. the
sign of the successive derivatives of the utility function).
Bienvenue, Alexis; Rullire, Didier (2012). Iterative adjustment of survival functions by composed probability distortion. - 24 pages.
[RKN: 70261]
We introduce a parametric class of composite probability distortions that can be combined to converge to a target survival
function. These distortions respect analytic invertibility and stability, which are shown to be relevant in many actuarial fields. We
study the asymptotic impact of such distortions on hazard rates. The paper provides an estimation methodology, including hints for
initialisation. Some applications to survival data bring results for catastrophic event impact modelling. We also obtain accurate
parametric representations of the mortality trend over years. Finally, we suggest a prospective mortality simulation model that
comes naturally from the above analysis.
Eling, Martin; Schmit, Joan T (2012). Is there market discipline in the European insurance industry? : An analysis of the German
insurance market. - 28 pages. [RKN: 70262]
Economists often argue in favour of market discipline as a means to distribute resources effectively and efficiently. These same
arguments likely influence decision-makers as they incorporate market discipline as the third pillar of Solvency II, the European
insurance regulatory scheme currently being implemented. Success for Solvency II, then, is dependent in part on the strength of
influence found in market discipline. Our research indicates that the German insurance market demonstrates the existence of
such discipline, although the actual effect appears smaller than previously found in the U.S. insurance market. Solvency II,
therefore, seems to be following an appropriate path, although further research is needed to evaluate whether or not
enhancements to market discipline within the European market are warranted.
DOI: http://dx.doi.org/10.1057/grir.2011.8 (access via Athens login http://www.openathens.net/)
Doherty, Neil (2013). Risk and the endogenous economist : Some comparisons of the treatment of risk in physics and economics. - 22
pages. [RKN: 71228]
This is a talk, rather than a research or survey paper. Very little of what I say will be original, but I wish to stimulate discussion on
a set of issues that arise from the nature of risk and that I consider problematic to our profession. The paper is not exhaustive of
references and many of my arguments have been treated elsewhere. However, I suspect few will have approached the issues
from the same starting point and assembled them in the same way.
Ligon, James A; Thistle, Paul D (2013). Background risk in the Principal-Agent Model. - 12 pages. [RKN: 74133]
We examine the effect of background risk in the standard two-state, two-action principal-agent model. We analyse situations
where the background risk is environmental (always present) and where the background risk is contractual (only present if the
contract is accepted). With contractual background risk, expected wages always rise and the incentive scheme is flatter if the
agent's preferences satisfy weak decreasing absolute risk aversion. With environmental background risk, the optimal incentive
scheme becomes flatter if the agent is weakly prudent. We provide conditions under which the environmental background risk
decreases the agent's expected wage.
Schroyen, Fred (2013). Attitudes towards income risk in the presence of quantity constraints. - 27 pages. [RKN: 74136]
Considering a consumer with standard preferences, I trace out how quantity constraints on markets impact on relative risk
aversion and prudence. I first show how this impact decomposes into a local curvature effect and an endogenously changing risk
aversion/prudence effect. Next, I calibrate both effects on relative risk aversion and prudence, using estimates on household
demand for durables and labour supply. The calibrations show that commitments to durable goods have large effects on attitudes
towards risk. And while small wedges between realised and desired levels of labour supply have only moderate effects, becoming
full time unemployed on a 60 per cent unemployment benefit significantly raises risk aversion and prudence.
Grafton, Quentin; Kompas, Tom; Long, Ngo Van (2014). Increase in risk and its effects on welfare and optimal policies in a dynamic
setting : The case of global pollution. - 25 pages. [RKN: 74397]
This paper studies the effects of an increase in risk on welfare and optimal policies in a stochastic dynamic model of global
pollution. In a first step, we focus on the case of a single decision maker, and make use of an approach pioneered by Kimball
(2014) for studying the impact of a marginal change in risk in optimal stochastic control models. Using a simple model with only
one state variable and one control variable, we show how the optimal carbon tax responds to an increase in risk. It is found that the
15
third derivative of the decay function of the stock of pollution may play a decisive role. In a second step, we investigate the extent
to which Kimballs approach may be extended to the case of stochastic dynamic games. We show how strategic interactions
complicate the task of evaluating the effects of an increase in risk. Interestingly, in a dynamic model of the tragedy of the
commons, we find that an increase in risk can increase welfare even though all agents are risk averse. The reason is that higher
risk can cause agents to be more conservative, and this mitigates the tragedy of the commons.
Dionne, Georges; Rothschild, Casey G (2014). Economic effects of risk classification bans. - 38 pages. [RKN: 74456]
Risk classification refers to the use of observable characteristics by insurers to group individuals with similar expected claims, to
compute the corresponding premiums, and thereby to reduce asymmetric information. Permitting risk classification may reduce
informational asymmetry-induced adverse selection and improve insurance market efficiency. It may also have undesirable equity
consequences and undermine the implicit insurance against reclassification risk, which legislated restrictions on risk classification
could provide. We use a canonical insurance market screening model to survey and to extend the risk classification literature. We
provide a unified framework for analysing the economic consequences of legalised vs banned risk classification, both in
static-information environments and in environments in which additional information can be learned, by either side of the market,
through potentially costly tests.
INSURANCE: MATHEMATICS & ECONOMICS

van Gulick, Gerwald; de Waegenaere, Anja; Norde, Henk (2012). Excess based allocation of risk capital. [RKN: 44987]
Insurance: Mathematics & Economics (2012) 50 (1) : 26-42.
Available via Athens: ScienceDirect
In this paper we propose a new rule to allocate risk capital to portfolios or divisions within a firm. Specifically, we determine the
capital allocation that minimizes the excesses of sets of portfolios in a lexicographical sense. The excess of a set of portfolios is
defined as the expected loss of that set of portfolios in excess of the amount of risk capital allocated to them. The underlying idea
is that large excesses are undesirable, and therefore the goal is to determine the allocation for which the largest excess is as small
as possible. We show that this allocation rule yields a unique allocation, and that it satisfies some desirable properties. We also
show that the allocation can be determined by solving a series of linear programming problems.
DOI: http://dx.doi.org/10.1016/j.insmatheco.2011.09.003 (access via Athens login http://www.openathens.net/)
Christiansen, Marcus C; Denuit, Michel M; Lazar, Dorina (2012). The Solvency II square-root formula for systematic biometric risk.
[RKN: 45599]
In this paper, we develop a model supporting the so-called square-root formula used in Solvency II to aggregate the modular life
SCR. Describing the insurance policy by a Markov jump process, we can obtain expressions similar to the square-root formula in
Solvency II by means of limited expansions around the best estimate. Numerical illustrations are given, based on German
population data. Even if the square-root formula can be supported by theoretical considerations, it is shown that the QIS
correlation matrix is highly questionable.
Internet URL: http://www.openathens.net
Dickson, David C M (2012). The joint distribution of the time to ruin and the number of claims until ruin in the classical risk model. [RKN:
45636]
We use probabilistic arguments to derive an expression for the joint density of the time to ruin and the number of claims until ruin
in the classical risk model. From this we obtain a general expression for the probability function of the number of claims until ruin.
We also consider the moments of the number of claims until ruin and illustrate our results in the case of exponentially distributed
individual claims. Finally, we briefly discuss joint distributions involving the surplus prior to ruin and deficit at ruin.
Huang, Rachel J (2012). Ambiguity aversion, higher-order risk attitude and optimal effort. [RKN: 45637]
In this paper, we examine whether a more ambiguity-averse individual will invest in more effort to shift her initial starting wealth
distribution toward a better target distribution. We assume that the individual has ambiguous beliefs regarding two target (starting)
distributions and that one distribution is preferred to the other. We find that an increase in ambiguity aversion will decrease
(increase) the optimal effort when the cost of effort is non-monetary. When the cost of effort is monetary, the effect depends on
whether the individual would make more effort when the target (starting) distribution is the preferred distribution than the target
(starting) distributions, the inferior one. We further characterize the individuals higher-order risk preferences to examine the
sufficient conditions.
Mao, Tiantian; Hu, Taizhong (2012). Characterization of left-monotone risk aversion in the RDEU model. [RKN: 45644]
We extend the characterization of the left-monotone risk aversion developed by Ryan (2006) to the case of unbounded random
variables. The notion of weak convergence is insufficient for such an extension. It requires the solution of a host of delicate
convergence problems. To this end, some further intrinsic properties of the location independent risk order are investigated. The
characterization of the right-monotone risk aversion for unbounded random variables is also mentioned. Moreover, we remove the
gap in the proof of the main result in Ryan (2006).
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Guerra, Manuel; Centeno, M L (2012). Are quantile risk measures suitable for risk-transfer decisions?. [RKN: 45648]
Although controversial from the theoretical point of view, quantile risk measures are widely used by institutions and regulators. In
this paper, we use a unified approach to find the optimal treaties for an agent who seeks to minimize one of these measures,
assuming premium calculation principles of various types. We show that the use of measures like Value at Risk or Conditional Tail
Expectation as optimization criteria for insurance or reinsurance leads to treaties that are not enforceable and/or are clearly bad
for the cedent. We argue that this is one further argument against the use of quantile risk measures, at least for the purpose of
risk-transfer decisions.
Denuit, Michel; Dhaene, Jan (2012). Convex order and comonotonic conditional mean risk sharing. [RKN: 44785]
Insurance: Mathematics & Economics (2012) 51(2) : 265-270.
Using a standard reduction argument based on conditional expectations, this paper argues that risk sharing is always beneficial
(with respect to convex order or second degree stochastic dominance) provided the risk-averse agents share the total losses
appropriately (whatever the distribution of the losses, their correlation structure and individual degrees of risk aversion).
Specifically, all agents hand their individual losses over to a pool and each of them is liable for the conditional expectation of his
own loss given the total loss of the pool. We call this risk sharing mechanism the conditional mean risk sharing. If all the conditional
expectations involved are non-decreasing functions of the total loss then the conditional mean risk sharing is shown to be
Pareto-optimal. Explicit expressions for the individual contributions to the pool are derived in some special cases of interest:
independent and identically distributed losses, comonotonic losses, and mutually exclusive losses. In particular, conditions under
which this payment rule leads to a comonotonic risk sharing are examined.
Villegas, Andrs M; Medaglia, Andrs L; Zuluaga, Luis F (2012). Computing bounds on the expected payoff of Alternative Risk
Transfer products. [RKN: 44786]
The demand for integrated risk management solutions and the need for new sources of capital have led to the development of
innovative risk management products that mix the characteristics of traditional insurance and financial products. Such products,
usually referred as Alternative Risk Transfer (ART) products include: (re)insurance contracts that bundle several risks under a
single policy; multi-trigger products where the payment of benefits depends upon the occurrence of several events; and insurance
linked securities that place insurance risks in the capital market. Pricing of these complex products usually requires tailor-made
complex valuation methods that combine derivative pricing and actuarial science techniques for each product, as well as strong
distributional assumptions on the ARTs underlying risk factors. We present here an alternative methodology to compute bounds
on the price of ART products when there is limited information on the distribution of the underlying risk factors. In particular, we
develop a general optimization-based method that computes upper and lower price bounds for different ART products using
market data and possibly expert information about the underlying risk factors. These bounds are useful when the structure of the
product is too complex to develop analytical or simulation valuation methods, or when the scarcity of data makes it difficult to make
strong distributional assumptions on the risk factors. We illustrate our results by computing bounds on the price of a floating
retention insurance contract, and a catastrophe equity put (CatEPut) option.
Belzunce, Felix; Pinar, Jos F; Ruiz, Jose M; Sordo, Miguel A (2012). Comparison of risks based on the expected proportional
shortfall. [RKN: 44788]
In this paper, we consider a new criterion to compare risks based on the notion of expected proportional shortfall. This criterion is
useful for comparing risks of different nature and does not depend on the base currency. We study its relationships with other
criteria and provide some characterizations that highlight the role of this new criterion in the context of comparisons of risks.
Mao, Tiantian; Hu, Taizhong (2012). Second-order properties of the Haezendonck-Goovaerts risk measure for extreme risks. [RKN:
44792]
The HaezendonckGoovaerts risk measure is based on the premium calculation principle induced by an Orlicz norm, which is
defined via an increasing and convex Young function and a parameter q[symbol](0,1) representing the confidence level. In this
paper, we first reestablish the first-order expansions of the Haezendonck-Goovaerts risk measure for extreme risks with a power
Young function in Q Tang and F Yang (2012) [On the Haezendonck-Goovaerts risk measure for extreme risks, Insurance:
Mathematics and Economics, 50 (2012), pp. 217227] in terms of the tail quantile function. Second, we are interested in the
calculation of the second-order expansions of the Haezendonck-Goovaerts risk measure as q[symbol]1. We only consider the
case in which the risk variable belongs to the max-domain of attraction of an extreme value distribution.
17
Feng, Runhuan; Volkmer, Hans W (2012). Modeling credit value adjustment with downgrade-triggered termination clause using a ruin
theoretic approach. [RKN: 44800]
Downgrade-triggered termination clause is a recent innovation in credit risk management to control counterparty credit risk. It
allows one party of an over-the-counter derivative to close off its position at marked-to-market price when the other partys credit
rating downgrades to an agreed alarming level. Although the default risk is significantly reduced, the non-defaulting party may still
suffer losses in case that the other party defaults without triggering the termination clause prior to default. At the heart of the
valuation of credit risk adjustment (CVA) is the computation of the probability of default. We employ techniques from ruin theory
and complex analysis to provide solutions for probabilities of default, which in turn lead to very efficient and accurate algorithms for
computing CVA. The underlying risk model in question is an extension of the commercially available KMVMerton model and
hence can be easily implemented. We provide a hypothetical example of CVA computation for an interest-rate swap with
downgrade-triggered termination clause. The paper also contributes to ruin theory by presenting some new results on finite-time
ruin probabilities in a jump-diffusion risk model.
Lin, Jianxi (2012). Second order asymptotics for ruin probabilities in a renewal risk model with heavy-tailed claims. [RKN: 44861]
In this paper, we establish the second order asymptotics of ruin probabilities of a renewal risk model under the condition that the
equilibrium distribution of claim sizes belongs to a rather general heavy-tailed distribution subclassthe class of second order
subexponential distributions with finite mean. What is more, this requirement is proved to be necessary. Furthermore, a rather
general sufficient condition on the claim size distribution itself is presented. Moreover, an extension to the case of random walk is
also included.
Mao, Tiantian; Lv, Wenhua; Hu, Taizhong (2012). Second-order expansions of the risk concentration based on CTE [Conditional Tail
Expectation]. [RKN: 44864]
The quantification of diversification benefits due to risk aggregation has received more attention in the recent literature. In this
paper, we establish second-order expansions of the risk concentration based on the risk measure of conditional tail expectation
[CTE] for a portfolio of n independent and identically distributed loss random variables. The key tools are the theory of
second-order regular variation and the theory of second-order subexponentiality. Some examples are given.
Lu, ZhiYi; Liu, LePing; Meng, LiLi (2012). Optimal insurance under multiple sources of risk with positive dependence. [RKN: 44866]
In this paper we try to derive an optimal insurance treaty when the insured faces multiple sources of risk. We show that the
deductible insurance is optimal when the insurable and uninsurable risks are positively dependent or independent within the
expected utility framework. A necessary condition of optimal deductible is given under some mild conditions. We compare our
model with the classical one without background risk. Furthermore, the shifts of optimal deductible and expected utility by
modifications of the dependence structure and the marginal are analyzed.
Hua, Lei; Joe, Harry (2012). Tail comonotonicity: properties, constructions, and asymptotic additivity of risk measures. [RKN: 44869]
We investigate properties of a version of tail comonotonicity that can be applied to absolutely continuous distributions, and give
several methods for constructions of multivariate distributions with tail comonotonicity or strongest tail dependence. Archimedean
copulas as mixtures of powers, and scale mixtures of a non-negative random vector with the mixing distribution having slowly
varying tails, lead to a tail comonotonic dependence structure. For random variables that are in the maximum domain of attraction
of either Frchet or Gumbel, we prove the asymptotic additivity property of Value at Risk and Conditional Tail Expectation.
Kume, Alfred; Hashorva, Enkelejd (2012). Calculation of Bayes premium for conditional elliptical risks. [RKN: 43681]
In this paper the authors discuss the calculation of the Bayes premium for conditionally elliptical multivariate risks. In our
framework the prior distribution is allowed to be very general requiring only that its probability density function satisfies some
smoothness conditions. Based on the previous results of Landsman and Nelehov (2008) [Z. Landsman, J. Nelehov (2008),
Steins lemma for elliptical random vectors, Journal of Multivariate Analysis, 99, 912-927] and Hamada and Valdez (2008) [M.
Hamada, E.A. Valdez (2008), CAPM and option pricing with elliptically contoured distributions, Journal of Risk & Insurance, 75,
387-409], the authors show in this paper that for conditionally multivariate elliptical risks the calculation of the Bayes premium is
closely related to the Brown identity and the celebrated Steins lemma.
I
18
vanovs, Jevgenijs (2013). A note on killing with applications in risk theory. [RKN: 45606]
It is often natural to consider defective or killed stochastic processes. Various observations continue to hold true for this wider
class of processes yielding more general results in a transparent way without additional effort. We illustrate this point with an
example from risk theory by showing that the ruin probability for a defective risk process can be seen as a triple transform of
various quantities of interest on the event of ruin. In particular, this observation is used to identify the triple transform in a simple
way when either claims or interarrivals are exponential. We also show how to extend these results to modulated risk processes,
where exponential distributions are replaced by phase-type distributions. In addition, we review and streamline some basic exit
identities for defective Lvy and Markov additive processes.
Boyer, M Martin; Stentoft, Lars (2013). If we can simulate it, we can insure it: an application to longevity risk management. [RKN: 45607]
This paper proposes a unified framework for measuring and managing longevity risk. Specifically, we develop a flexible framework
for valuing survivor derivatives like forwards, and swaps, as well as options both of European and American style. Our framework
is essentially independent of the assumed underlying dynamics and the choice of method for risk neutralization and relies only on
the ability to simulate from the risk neutral process. We provide an application to derivatives on the survivor index when the
underlying dynamics are from a Lee-Carter model. Our results show that taking the optionality into consideration is important from
a pricing perspective.
Avanzi, Benjamin; Cheung, Eric C K; Wong, Bernard; Woo, Jae-Kyung (2013). On a periodic dividend barrier strategy in the dual
model with continuous monitoring of solvency. [RKN: 43691]
We consider the dual model, which is appropriate for modeling the surplus of companies with deterministic expenses and
stochastic gains, such as pharmaceutical, petroleum or commission-based companies. Dividend strategies for this model that can
be found in the literature include the barrier strategy (e.g., Avanzi et al., 2007 [B Avanzi, H U Gerber, E S W Shiu (2007), Optimal
dividends in the dual model, Insurance: Mathematics and Economics, 41(1): 111123]) and the threshold strategy (e.g., Cheung,
2008) [E C K Cheung (2008), Discussion on A Badescu and D Landriaults Recursive calculation of the dividend moments in a
multi-threshold risk model, North American Actuarial Journal, 12(3): 336340] where dividend decisions are made continuously.
While in practice the financial position of a company is typically monitored frequently, dividend decisions are only made
periodically along with the publication of its books. In this paper, we introduce a dividend barrier strategy whereby dividend
decisions are made only periodically, but still allow ruin to occur at any time (as soon as the surplus is exhausted). This is in
contrast to Albrecher et al. (2011a) [H Albrecher, E C K Cheung and S Thonhauser (2011), Randomized observation periods for
the compound Poisson risk model: dividends, ASTIN Bulletin, 41(2): 645672], who introduced periodic dividend payments in the
Cramr-Lundberg surplus model, albeit with periodic ruin opportunities as well. Under the assumption that the time intervals
between dividend decisions are distributed, we derive integro-differential equations for the Laplace transform of the time to ruin
and the expected present value of dividends until ruin. These are then solved with the help of probabilistic arguments. We also
provide a recursive algorithm to compute these quantities. Finally, some numerical studies are presented, which aim at illustrating
how our assumptions about dividend payments and ruin occurrence compare with those of the classical barrier strategy.
Shen, Yang; Siu, Tak Kuen (2013). Longevity bond pricing under stochastic interest rate and mortality with regime-switching. [RKN:
43692]
We develop a flexible model to value longevity bonds which incorporates several important sources of risk, namely, interest rate
risk, mortality risk and the risk due to structural changes in economic and environmental conditions. In particular, Markov,
regime-switching, jump-diffusion models are used to describe stochastic movements of short-term interest rate and force of
mortality. These models capture jumps in short rate and mortality rate and the impacts of economic and environmental
fundamentals on their movements over time. Using the concept of stochastic flows, we derive an exponential affine form of the
longevity bond price in the proposed joint stochastic interest rate and mortality models. In particular, a representation for the
exponential affine form of the longevity bond price is obtained in terms of fundamental matrix solutions of linear, matrix-valued,
ordinary differential equations.
Li, Shuanming; Lu, Yi (2013). On the generalized Gerber-Shiu function for surplus processes with interest. [RKN: 43694]
Please access article online to view mathematical notation shown in the abstract.
In this paper, we study the generalized expected discounted penalty (Gerber-Shiu) function in a risk process with credit and debit
interests. We define Tu,z to be the first time that the surplus process drops below a certain level z from the initial surplus u(>z). The
time of ruin and the time of absolute ruin are special cases of this stopping time. The generalized GerberShiu function is defined
on three random variables: the first time that the surplus drops below z from u, Tu,z, the surplus prior to Tu,z, and the amount by
which the surplus is below z. An explicit expression for the Gerber-Shiu function when u=z is obtained when the credit and debit
interest rates are equal, and explicit results for the Gerber-Shiu function under exponential claims are then obtained. Using these
results, we investigate the probability that the surplus reaches an upper level without dropping below a lower level and the
distribution of the maximum severity of ruin. [This abstract contains mathematical notation.]
19
Barrieu, Pauline; Louberg, Henri (2013). Reinsurance and securitisation of life insurance risk: the impact of regulatory constraints.
[RKN: 43695]
Large systematic risks, such as those arising from natural catastrophes, climatic changes and uncertain trends in longevity
increases, have risen in prominence at a societal level and, more particularly, have become a highly relevant issue for the
insurance industry. Against this background, the combination of reinsurance and capital market solutions (insurance-linked
securities) has received an increasing interest. In this paper, we develop a general model of optimal risk-sharing among three
representative agents an insurer, a reinsurer and a financial investor, making a distinction between systematic and idiosyncratic
risks. We focus on the impact of regulation on risk transfer, by differentiating reinsurance and securitisation in terms of their impact
on reserve requirements. Our results show that different regulatory prescriptions will lead to quite different results in terms of
global risk-sharing.
Chen, Zhiping; Li, Gang; Guo, Ju-e (2013). Optimal investment policy in the time consistent mean-variance formulation. [RKN: 43696]
As a necessary requirement for multi-period risk measure, time consistency can be examined from two aspects: dynamic risk
measure and optimal investment policy. In this paper, we first study the relationship between the time consistency of dynamic risk
measure and the time consistency of optimal investment policy and obtain the following conclusions: if the dynamic risk mapping
is time consistent and monotone, then the corresponding optimal investment policy satisfies the time consistency requirements;
however, if the dynamic risk mapping is time consistent but not monotone, then the time consistency requirements of an optimal
investment policy will no longer be satisfied. Since the variance operator does not satisfy the smoothing property, the optimal
investment policy derived from the existing multi-period meanvariance model is not time consistent. To overcome this
shortcoming, we propose the notation of a separable expected conditional mapping and then construct a time consistent dynamic
meanvariance model. We prove that the optimal investment policy derived from our model is time consistent. Moreover, for two
cases with or without a riskless asset, we obtain the time consistent analytical optimal investment policy and the meanvariance
efficient frontier of the new model with the self-financing constraint. Finally, numerical results illustrate the flexibility and superiority
of our multi-period meanvariance model and the optimal investment policy over those in the literature.
Madan, Dilip B; Schoutens, Wim (2013). Systemic risk trade-offs and option prices. [RKN: 43973]
Two new indices for financial diversity are proposed. The first is aggregative and evaluates distance from a single factor driving
returns. The second evaluates how fast correlation with a stock rises as the stock falls. Both measures are here risk neutral. The
CRI [correlation response index] is also compared with coVaR [conditional value at risk]. These measures are negatively related
and so focus attention on different aspects of systemic risk. Unlike the coVaR focused on expected losses the CRI measures the
risks of increased correlation and lack of diversity in activities. The CRI also declined consistently for AIG and LEH prior to their
bankruptcies indicating that the market was active in decorrelating itself from these firms.
Alemany, Ramn; Bolanc, Catalina; Guilln, Montserrat (2013). A nonparametric approach to calculating value-at-risk. [RKN: 43976]
A method to estimate an extreme quantile that requires no distributional assumptions is presented. The approach is based on
transformed kernel estimation of the cumulative distribution function (cdf). The proposed method consists of a double
transformation kernel estimation. We derive optimal bandwidth selection methods that have a direct expression for the smoothing
parameter. The bandwidth can accommodate to the given quantile level. The procedure is useful for large data sets and improves
quantile estimation compared to other methods in heavy tailed distributions. Implementation is straightforward and R programs
are available.
Yang, Yang; Hashorva, Enkelejd (2013). Extremes and products of multivariate AC-product risks. [RKN: 43981]
With motivation from Tang et al. (2011) [Q Tang, R Vernic, Z Yuan, The finite-time ruin probability in the presence of dependent
extremal insurance and financial risks. 2011], in this paper we consider a tractable multivariate risk structure which includes the
Sarmanov dependence structure as a special case. We derive several asymptotic results for both the sum and the product of such
risk and then present three applications related to actuarial mathematics.
Belles-Sampera, Jaume; Merig, Jos M; Guilln, Montserrat; Santolino, Miguel (2013). The connection between distortion risk
measures and ordered weighted averaging operators. [RKN: 43990]
Distortion risk measures summarize the risk of a loss distribution by means of a single value. In fuzzy systems, the Ordered
Weighted Averaging (OWA) and Weighted Ordered Weighted Averaging (WOWA) operators are used to aggregate a large
number of fuzzy rules into a single value. We show that these concepts can be derived from the Choquet integral, and then the
mathematical relationship between distortion risk measures and the OWA and WOWA operators for discrete and finite random
variables is presented. This connection offers a new interpretation of distortion risk measures and, in particular, Value-at-Risk and
Tail Value-at-Risk can be understood from an aggregation operator perspective. The theoretical results are illustrated in an
example and the degree of orness concept is discussed.
Chuang, O-Chia; Eeckhoudt, Louis; Huang, Rachel J; Tzeng, Larry Y (2013). Risky targets and effort. [RKN: 43956]
When decision makers invest in effort to reach their targets, they face multiple sources of risk: first the risk of failure and second
the noise that surrounds either the target or the initial situation. In this paper, we examine how effort is adjusted to account for
changes in this risky environment.
20
Yin, Chuancun; Wen, Yuzhen (2013). An extension of Paulsen-Gjessings risk model with stochastic return on investments. [RKN:
43957]
We consider in this paper a general two-sided jump-diffusion risk model that allows for risky investments as well as for correlation
between the two Brownian motions driving insurance risk and investment return. We first introduce the model and then find the
integro-differential equations satisfied by the GerberShiu functions as well as the expected discounted penalty functions at ruin
caused by a claim or by oscillation. We also study the dividend problem for the threshold and barrier strategies, the moments and
moment-generating function of the total discounted dividends until ruin are discussed. Some examples are given for special
cases.
Dickson, David C M; Li, Shuanming (2013). The distributions of the time to reach a given level and the duration of negative surplus in the
Erlang(2) risk model. [RKN: 43959]
We study the distributions of [1] the first time that the surplus reaches a given level and [2] the duration of negative surplus in a
Sparre Andersen risk process with the inter-claim times being Erlang(2) distributed. These distributions can be obtained through
the inversion of Laplace transforms using the inversion relationship for the Erlang(2) risk model given by Dickson and Li (2010). [D
C M Dickson; S. Li, Finite time ruin problems for the Erlang(2) risk model, Insurance: Mathematics & Economics (2010) 46: 12-18]
Hao, Xuemiao; Li, Xuan; Shimizu, Yasutaka (2013). Finite-time survival probability and credit default swaps pricing under geometric
Lvy markets. [RKN: 46602]
We study the first-passage time over a fixed threshold for a pure-jump subordinator with negative drift. We obtain a closed-form
formula for its survival function in terms of marginal density functions of the subordinator. We then use this formula to calculate
finite-time survival probabilities in a structural model for credit risk, and thus obtain a closed-form pricing formula for a single-name
credit default swap (CDS). This pricing formula is well calibrated on market CDS quotes. In particular, it explains why the par CDS
credit spread is not negligible when the maturity becomes short.
DOI: http://dx.doi.org/10.1016/j.insmatheco.2013.04.003 (access via Athens login http://www.openathens.net/)/
Zhang, Zhimin; Yang, Hailiang (2013). Nonparametric estimate of the ruin probability in a pure-jump Lvy risk model. [RKN: 46603]
In this paper, we propose a nonparametric estimator of ruin probability in a Lvy risk model. The aggregate claims process
X={Xt,=0}X={Xt,=0} is modeled by a pure-jump Lvy process. Assume that high-frequency observed data on XX are available.
The estimator is constructed based on the Pollaczek-Khinchin formula and Fourier transform. Risk bounds as well as a
data-driven cut-off selection methodology are presented. Simulation studies are also given to show the finite sample performance
of our estimator.
Blackburn, Craig; Sherris, Michael (2013). Consistent dynamic affine mortality models for longevity risk applications. [RKN: 46606]
This paper proposes and calibrates a consistent multi-factor affine term structure mortality model for longevity risk applications.
We show that this model is appropriate for fitting historical mortality rates. Without traded mortality instruments the choice of
risk-neutral measure is not unique and we fit it to observed historical mortality rates in our framework. We show that the
risk-neutral parameters can be calibrated and are relatively insensitive of the historical period chosen. Importantly, the framework
provides consistent future survival curves with the same parametric form as the initial curve in the risk-neutral measure. The
multiple risk factors allow for applications in pricing and more general risk management problems. A state-space representation is
used to estimate parameters for the model with the Kalman filter. A measurement error variance is included for each age to
capture the effect of sample population size. Swedish mortality data is used to assess 2- and 3-factor implementations of the
model. A 3-factor model specification is shown to provide a good fit to the observed survival curves, especially for older ages.
Bootstrapping is used to derive parameter estimate distributions and residual analysis is used to confirm model fit. We use the
Heath-Jarrow-Morton forward rate framework to verify consistency and to simulate cohort survivor curves under the risk-neutral
measure.
Cheung, Eric C K; Feng, Runhuan (2013). A unified analysis of claim costs up to ruin in a Markovian arrival risk model. [RKN: 46609]
Available via Athens: ScienceDirect -- Refer to online abstract for correct algebraic notation.
An insurance risk model where claims follow a Markovian arrival process (MArP) is considered in this paper. It is shown that the
expected present value of total operating costs up to default HH, as a generalization of the classical Gerber-Shiu function,
contains more non-trivial quantities than those covered in Cai et al. (2009) [J Cai, R Feng, GE Willmot (2009), On the total
discounted operating costs up to default and its applications, Advances in Applied Probability, 41 (2) (2009): 495-522], such as all
moments of the discounted claim costs until ruin. However, it does not appear that the Gerber-Shiu function [Phi] with a
generalized penalty function which additionally depends on the surplus level immediately after the second last claim before ruin
(Cheung et al., 2010a) [ECK Cheung, D Landriault, GE Willmot, J-K Woo, Gerber-Shiu analysis with a generalized penalty
function, Scandinavian Actuarial Journal, 2010(3) (2010): 185-199] is contained in HH. This motivates us to investigate an even
more general function ZZ from which both HH and [Phi] can be retrieved as special cases. Using a matrix version of Dickson-Hipp
operator (Feng, 2009b) [R Feng, A matrix operator approach to the analysis of ruin-related quantities in the phase-type renewal
risk model, Schweizerische Aktuarvereinigung Mitteilungen, 2009 (1-2) (2009): 71-87], it is shown that ZZ satisfies a Markov
renewal equation and hence admits a general solution. Applications to other related problems such as the matrix scale function,
the minimum and maximum surplus levels before ruin are given as well. [This abstract contains mathematical notation.]
21
Qu, Zhihui; Chen, Yu (2013). Approximations of the tail probability of the product of dependent extremal random variables and
applications. [RKN: 46614]
Available via Athens: ScienceDirect -- Refer to online abstract for correct algebraic notation
In this paper, we investigate the tail probability of the product X i=1nYi, where (X,Y1,,Yn)(X,Y1,,Yn) follows a multivariate
Sarmanov distribution. An explicit asymptotic formula is established for the tail probability of the product when XX belongs to the
Frchet, Gumbel, or Weibull max-domain of attraction. As applications, we consider a discrete-time risk model with dependent
insurance and financial risks, and obtain the asymptotic behavior for the (in)finite-time ruin probabilities. [This abstract contains
mathematical notation.]
Di Bernardino, Elena; Rullire, Didier (2013). Distortions of multivariate distribution functions and associated level curves: applications
in multivariate risk theory. [RKN: 46616]
In this paper, we propose a parametric model for multivariate distributions. The model is based on distortion functions, i.e. some
transformations of a multivariate distribution which permit to generate new families of multivariate distribution functions. We derive
some properties of considered distortions. A suitable proximity indicator between level curves is introduced in order to evaluate the
quality of candidate distortion parameters. Using this proximity indicator and properties of distorted level curves, we give a specific
estimation procedure. The estimation algorithm is mainly relying on straightforward univariate optimizations, and we finally get
parametric representations of both multivariate distribution functions and associated level curves. Our results are motivated by
applications in multivariate risk theory. The methodology is illustrated on simulated and real examples.
Guilln, Montserrat; Sarabia, Jos Mara; Prieto, Faustino (2013). Simple risk measure calculations for sums of positive random
variables. [RKN: 46623]
Closed-form expressions for basic risk measures, such as value-at-risk and tail value-at-risk, are given for a family of statistical
distributions that are specially suitable for right-skewed positive random variables. This is useful for risk aggregation in many
insurance and financial applications that model positive losses, where the Gaussian assumption is not valid. Our results provide a
direct and flexible parametric approach to multivariate risk quantification, for sums of correlated positive loss distributions, that can
be readily implemented in a spreadsheet.
Cheung, Ka Chun; Lo, Ambrose (2013). Characterizations of counter-monotonicity and upper comonotonicity by (tail) convex order.
[RKN: 46637]
In this paper, we characterize counter-monotonic and upper comonotonic random vectors by the optimality of the sum of their
components in the senses of the convex order and tail convex order respectively. In the first part, we extend the characterization
of comonotonicity by Cheung (2010) [K C Cheung (2010), Characterizing a comonotonic random vector by the distribution of the
sum of its components, Insurance: Mathematics and Economics 47 (2010): 130-136] and show that the sum of two random
variables is minimal with respect to the convex order if and only if they are counter-monotonic. Three simple and illuminating
proofs are provided. In the second part, we investigate upper comonotonicity by means of the tail convex order. By establishing
some useful properties of this relatively new stochastic order, we prove that an upper comonotonic random vector must give rise to
the maximal tail convex sum, thereby completing the gap in Nam et al. (2011)s characterization [H S Nam, Q Tang, F Yang
(2011), Characterization of upper comonotonicity via tail convex order, Insurance: Mathematics and Economics 48 (2011):
368-373]. The relationship between the tail convex order and risk measures along with conditions under which the additivity of risk
measures is sufficient for upper comonotonicity is also explored.
Cheung, Eric C K (2013). Moments of discounted aggregate claim costs until ruin in a Sparre Andersen risk model with general interclaim
times. [RKN: 46638]
In the context of a Sparre Andersen risk model with arbitrary interclaim time distribution, the moments of discounted aggregate
claim costs until ruin are studied. Our analysis relies on a novel generalization of the so-called discounted density which further
involves a moment-based component. More specifically, while the usual discounted density contains a discount factor with respect
to the time of ruin, we propose to incorporate powers of the sum until ruin of the discounted (and possibly transformed) claims into
the density. Probabilistic arguments are applied to derive defective renewal equations satisfied by the moments of discounted
aggregate claim costs until ruin. Detailed examples concerning the discounted aggregate claims and the number of claims until
ruin are studied upon assumption on the claim severities. Numerical illustrations are also given at the end.
22
Vatamidou, E; Adan, I J B F; Vlasiou, M; Zwart, B (2013). Corrected phase-type approximations of heavy-tailed risk models using
perturbation analysis. [RKN: 46640]
Numerical evaluation of performance measures in heavy-tailed risk models is an important and challenging problem. In this paper,
we construct very accurate approximations of such performance measures that provide small absolute and relative errors.
Motivated by statistical analysis, we assume that the claim sizes are a mixture of a phase-type and a heavy-tailed distribution and
with the aid of perturbation analysis we derive a series expansion for the performance measure under consideration. Our
proposed approximations consist of the first two terms of this series expansion, where the first term is a phase-type approximation
of our measure. We refer to our approximations collectively as corrected phase-type approximations. We show that the corrected
phase-type approximations exhibit a nice behavior both in finite and infinite time horizon, and we check their accuracy through
numerical experiments.
Pichler, Alois (2013). The natural Banach space for version independent risk measures. [RKN: 46643]
Available via Athens: ScienceDirect -- Refer to online abstract for correct notation
Risk measures, or coherent measures of risk, are often considered on the space [L8], and important theorems on risk measures
build on that space. Other risk measures, among them the most important risk measure the Average Value-at-Risk are well
defined on the larger space [L1] and this seems to be the natural domain space for this risk measure. Spectral risk measures
constitute a further class of risk measures of central importance, and they are often considered on some [Lp] space. But in many
situations this is possibly unnatural, because any [Lp] with [p>p0], say, is suitable to define the spectral risk measure as well. In
addition to that, risk measures have also been considered on Orlicz and Zygmund spaces. So it remains for discussion and
clarification, what the natural domain to consider a risk measure is? This paper introduces a norm, which is built from the risk
measure, and a new Banach space, which carries the risk measure in a natural way. It is often strictly larger than its original
domain and obeys the key property that the risk measure is finite valued and continuous on that space in an elementary and
natural way. [This abstract contains mathematical notation.]
Gzyl, Henryk; Novi-Inverardi, Pier-Luigi; Tagliani, Aldo (2013). Determination of the probability of ultimate ruin by maximum entropy
applied to fractional moments. [RKN: 46647]
In this work we present two different numerical methods to determine the probability of ultimate ruin as a function of the initial
surplus. Both methods use moments obtained from the PollaczekKinchine identity for the Laplace transform of the probability of
ultimate ruin. One method uses fractional moments combined with the maximum entropy method and the other is a probabilistic
approach that uses integer moments directly to approximate the density.
Griffin, Philip S; Maller, Ross A; Roberts, Dale (2013). Finite time ruin probabilities for tempered stable insurance risk processes. [RKN:
46649]
We study the probability of ruin before time t for the family of tempered stable Lvy insurance risk processes, which includes the
spectrally positive inverse Gaussian processes. Numerical approximations of the ruin time distribution are derived via the Laplace
transform of the asymptotic ruin time distribution, for which we have an explicit expression. These are benchmarked against
simulations based on importance sampling using stable processes. Theoretical consequences of the asymptotic formulae indicate
that some care is needed in the choice of parameters to avoid exponential growth (in time) of the ruin probabilities in these models.
This, in particular, applies to the inverse Gaussian process when the safety loading is less than one.
Rassoul, Abdelaziz (2013). Kernel-type estimator of the conditional tail expectation for a heavy-tailed distribution. [RKN: 46704]
In this paper, we are interested in the generalization and improvement of the estimator of the conditional tail expectation (CTE) for
a heavy-tailed distribution when the second moment is infinite. It is well known that classical estimators of the CTE are seriously
biased under the second-order regular variation framework. To reduce the bias, many authors proposed the use of so-called
second-order reduced bias estimators for both first-order and second-order tail parameters. In this work, we have generalized a
kernel-type estimator, and we present a number of results on its distributional behavior and compare its performance with the
performance of other estimators.
Yin, Chuancun; Wen, Yuzhen (2013). Optimal dividend problem with a terminal value for spectrally positive Lvy processes. [RKN:
46711]
In this paper we consider a modified version of the classical optimal dividend problem taking into account both expected dividends
and the time value of ruin. We assume that the risk process is modeled by a general spectrally positive Lvy process before
dividends are deducted. Using the fluctuation theory of spectrally positive Lvy processes we give an explicit expression of the
value function of a barrier strategy. Subsequently we show that a barrier strategy is the optimal strategy among all admissible
ones. Our work is motivated by the recent work of Bayraktar, Kyprianou and Yamazaki (2013a). [E Bayraktar, A Kyprianou, K
Yamazaki, On optimal dividends in the dual model, Astin Bulletin (2013) 43(3): 359-372]
23
Dutang, Christophe; Lefvre, Claude; Loisel, Stphane (2013). On an asymptotic rule A+B/u for ultimate ruin probabilities under
dependence by mixing. [RKN: 46712]
Available via Athens: ScienceDirect -- See online abstract for correct notation
The purpose of this paper is to point out that an asymptotic rule [A+B/u] for the ultimate ruin probability applies to a wide class of
dependent risk processes, in continuous or discrete time. That dependence is incorporated through a mixing model in the
individual claim amount distributions. Several special mixing distributions are examined in detail and some close-form formulas
are derived. Claim tail distributions and the dependence structure are also investigated. [This abstract contains mathematical
notation.]
Cheung, Ka Chun; Lo, Ambrose (2013). General lower bounds on convex functionals of aggregate sums. [RKN: 46779]
The determination of the dependence structure giving rise to the minimal convex sum in a general Frchet space is a practical, yet
challenging problem in quantitative risk management. In this article, we consider the closely related problem of finding lower
bounds on three kinds of convex functionals, namely, convex expectations, Tail Value-at-Risk and the Haezendonck-Goovaerts
risk measure, of a sum of random variables with arbitrary distributions. The sharpness of the lower bounds on the first two types of
convex functionals is characterized via the extreme negative dependence structure of mutual exclusivity. Compared to existing
results in the literature, our new lower bounds enjoy the advantages of generality and analytic tractability.
Afonso, Lourdes B; Cardoso, Rui M R; Egdio dos Reis, Alfredo D (2013). Dividend problems in the dual risk model. [RKN: 46781]
We consider the compound Poisson dual risk model, dual to the well known classical risk model for insurance applications, where
premiums are regarded as costs and claims are viewed as profits. The surplus can be interpreted as a venture capital like the
capital of an economic activity involved in research and development. Like most authors, we consider an upper dividend barrier so
that we model the gains of the capital and its return to the capital holders.
By establishing a proper and crucial connection between the two models we show and explain clearly the dividends process
dynamics for the dual risk model, properties for different random quantities involved as well as their relations. Using our innovative
approach we derive some already known results and go further by finding several new ones. We study different ruin and dividend
probabilities, such as the calculation of the probability of a dividend, distribution of the number of dividends, expected and amount
of dividends as well as the time of getting a dividend.
We obtain integro-differential equations for some of the above results and also Laplace transforms. From there we can get
analytical results for cases where solutions and/or inversions are possible, in other cases we may only get numerical ones. We
present examples under the two cases.
Yang, Chen; Sendova, Kristina P (2014). The ruin time under the Sparre-Andersen dual model. [RKN: 46785]
Insurance: Mathematics & Economics (2014) 54 : 28-40.
In this paper, we study the Sparre-Andersen dual risk model in which the times between positive gains are independently and
identically distributed and have a generalized Erlang-nn distribution. An important difference between this model and some other
models such as the Erlang-nn dual risk model is that the roots to the generalized Lundbergs equation are not necessarily distinct.
Hence, we derive an explicit expression for the Laplace transform of the ruin time, which involves multiple roots. Also, we apply our
approach for obtaining the expected discounted dividends when the threshold-dividend strategy discussed by Ng (2009) [A. Ng,
On a dual model with a dividend threshold, Insurance: Mathematics and Economics (2009) 44(2): 315-324] is implemented under
the Sparre-Andersen model with Erlang-nn distribution of the inter-event times. In particular, we derive an explicit form of the
expected discounted dividends when jump sizes are exponential.
Bellini, Fabio; Klarm, Bernhard; Mller, Alfred; Gianin, Emanuela Rosazza (2014). Generalized quantiles as risk measures. [RKN:
46786]
See online abstract for correct notation used.
In the statistical and actuarial literature several generalizations of quantiles have been considered, by means of the minimization
of a suitable asymmetric loss function. All these generalized quantiles share the important property of elicitability , which has
received a lot of attention recently since it corresponds to the existence of a natural backtesting methodology. In this paper we
investigate the case of MM-quantiles as the minimizers of an asymmetric convex loss function, in contrast to Orlicz quantiles that
have been considered in Bellini and Rosazza Gianin (2012) [F. Bellini, E. Rosazza Gianin, Haezendonck-Goovaerts risk
measures and Orlicz quantiles, Insurance: Mathematics & Economics (2012), 51: 107-114]. We discuss their properties as risk
measures and point out the connection with the zero utility premium principle and with shortfall risk measures introduced by
Fllmer and Schied (2002) [H. Fllmer, A. Schied, Convex measures of risk and trading constraints, Finance and Stochastics
(2002) 6: 429-447]. In particular, we show that the only MM-quantiles that are coherent risk measures are the expectiles ,
introduced by Newey and Powell (1987) [W. Newey, J. Powell, Asymmetric least squares estimation and testing, Econometrica
(1987) 55: 819-847] as the minimizers of an asymmetric quadratic loss function. We provide their dual and Kusuoka
representations and discuss their relationship with CVaR. We analyze their asymptotic properties for a 1a 1 and show that for very
heavy tailed distributions expectiles are more conservative than the usual quantiles. Finally, we show their robustness in the sense
of lipschitzianity with respect to the Wasserstein metric.
24
Cheung, Ka Chun; Dhaene, Jan; Lo, Ambrose; Tang, Qihe (2014). Reducing risk by merging counter-monotonic risks. [RKN: 46788]
In this article, we show that some important implications concerning comonotonic couples and corresponding convex order
relations for their sums cannot be translated to counter-monotonicity in general. In a financial context, it amounts to saying that
merging counter-monotonic positions does not necessarily reduce the overall level of risk. We propose a simple necessary and
sufficient condition for such a merge to be effective. Natural interpretations and various characterizations of this condition are
given. As applications, we develop cancelation laws for convex order and identify desirable structural properties of insurance
indemnities that make an insurance contract universally marketable, in the sense that it is appealing to both the policyholder and
the insurer.
Bernard, Carole; Jiang, Xiao; Wang, Ruodu (2014). Risk aggregation with dependence uncertainty. [RKN: 46792]
Risk aggregation with dependence uncertainty refers to the sum of individual risks with known marginal distributions and
unspecified dependence structure. We introduce the admissible risk class to study risk aggregation with dependence uncertainty.
The admissible risk class has some nice properties such as robustness, convexity, permutation invariance and affine invariance.
We then derive a new convex ordering lower bound over this class and give a sufficient condition for this lower bound to be sharp
in the case of identical marginal distributions. The results are used to identify extreme scenarios and calculate bounds on
Value-at-Risk as well as on convex and coherent risk measures and other quantities of interest in finance and insurance.
Numerical illustrations are provided for different settings and commonly-used distributions of risks.
Cheung, Ka Chun; Rong, Yian; Yam, S C P (2014). Borchs Theorem from the perspective of comonotonicity. [RKN: 46796]
This short note revisits the classical Theorem of Borch on the characterization of Pareto optimal risk exchange treaties under the
expected utility paradigm. Our objective is to approach the optimal risk exchange problem by a new method, which is based on a
Breeden-Litzenberger type integral representation formula for increasing convex functions and the theory of comonotonicity. Our
method allows us to derive Borchs characterization without using Kuhn-Tucker theory, and also without the need of assuming that
all utility functions are continuously differentiable everywhere. We demonstrate that our approach can be used effectively to solve
the Pareto optimal risk-sharing problem with a positivity constraint being imposed on the admissible allocations when the
aggregate risk is positive.
Liu, Jingchen; Woo, Jae-Kyung (2014). Asymptotic analysis of risk quantities conditional on ruin for multidimensional heavy-tailed
random walks. [RKN: 46811]
In this paper we consider a multidimensional renewal risk model with regularly varying claims. This model may be used to describe
the surplus of an insurance company possessing several lines of business where a large claim possibly puts multiple lines in a
risky condition. Conditional on the occurrence of ruin, we develop asymptotic approximations for the average accumulated
number of claims leading the process to a rare set, and the expected total amount of shortfalls to this set in finite and infinite
horizons. Furthermore, for the continuous time case, asymptotic results regarding the total occupation time of the process in a rare
set and time-integrated amount of shortfalls to a rare set are obtained.
Ahn, Jae Youn; Shyamalkumar, Nariankadu D (2014). Asymptotic theory for the empirical Haezendonck-Goovaerts risk measure.
[RKN: 46818]
Haezendonck-Goovaerts risk measures is a recently introduced class of risk measures which includes, as its minimal member, the
Tail Value-at-Risk (T-VaR) T-VaR arguably the most popular risk measure in global insurance regulation. In applications often
one has to estimate the risk measure given a random sample from an unknown distribution. The distribution could either be truly
unknown or could be the distribution of a complex function of economic and idiosyncratic variables with the complexity of the
function rendering indeterminable its distribution. Hence statistical procedures for the estimation of Haezendonck-Goovaerts risk
measures are a key requirement for their use in practice. A natural estimator of the Haezendonck-Goovaerts risk measure is the
Haezendonck-Goovaerts risk measure of the empirical distribution, but its statistical properties have not yet been explored in
detail. The main goal of this article is to both establish the strong consistency of this estimator and to derive weak convergence
limits for this estimator. We also conduct a simulation study to lend insight into the sample sizes required for these asymptotic
limits to take hold.
Schmidt, Klaus D (2014). On inequalities for moments and the covariance of monotone functions. [RKN: 46819]
See online abstract for correct formula notation
Intuition based on the usual interpretation of the covariance of two random variables suggests that the inequality [cov[f(X),
g(X)]=0] should hold for any random variable XX and any two increasing functions ff and gg. The inequality holds indeed, but a
proof is hard to find in the literature. In this paper we provide an elementary proof of a more general inequality for moments and we
present several applications in actuarial mathematics. [This abstract contains mathematical notation.]
25
Cheung, Ka Chun; Lo, Ambrose (2014). Characterizing mutual exclusivity as the strongest negative multivariate dependence structure.
[RKN: 46827]
Mutual exclusivity is an extreme negative dependence structure that was first proposed and studied in Dhaene and Denuit (1999)
[J. Dhaene, M. Denuit, The safest dependence structure among risks, Insurance: Mathematics & Economics (1999) 25: 11-21] in
the context of insurance risks. In this article, we revisit this notion and present versatile characterizations of mutually exclusive
random vectors via their pairwise counter-monotonic behaviour, minimal convex sum property, distributional representation and
the characteristic function of the sum of their components. These characterizations highlight the role of mutual exclusivity in
generalizing counter-monotonicity as the strongest negative dependence structure in a multi-dimensional setting.
Loisel, Stphane; Trufin, Julien (2014). Properties of a risk measure derived from the expected area in red. [RKN: 46828]
This paper studies a new risk measure derived from the expected area in red introduced in Loisel (2005) [S. Loisel, Differentiation
of some functionals of risk processes, and optimal reserve allocation, Journal of Applied Probability (2005) 42(2): 379-392].
Specifically, we derive various properties of a risk measure defined as the smallest initial capital needed to ensure that the
expected time-integrated negative part of the risk process on a fixed time interval [0,T][0,T] (TT can be infinite) is less than a given
predetermined risk limit. We also investigate the optimal risk limit allocation: given a risk limit set at a company level for the sum of
the expected areas in red of all lines, we determine the way(s) to allocate this risk limit to the subsequent business lines in order to
minimize the overall capital needs. [This abstract contains mathematical notation.]
Cai, Jun; Wei, Wei (2014). Some new notions of dependence with applications in optimal allocation problems. [RKN: 46829]
Dependence structures of multiple risks play an important role in optimal allocation problems for insurance, quantitative risk
management, and finance. However, in many existing studies on these problems, risks or losses are often assumed to be
independent or comonotonic or exchangeable. In this paper, we propose several new notions of dependence to model dependent
risks and give their characterizations through the probability measures or distributions of the risks or through the expectations of
the transformed risks. These characterizations are related to the properties of arrangement increasing functions and the proposed
notions of dependence incorporate many typical dependence structures studied in the literature for optimal allocation problems.
We also develop the properties of these dependence structures. We illustrate the applications of these notions in the optimal
allocation problems of deductibles and policy limits and in capital reserves problems. These applications extend many existing
researches to more general dependent risks.
Klein, Nadja; Denuit, Michel; Lang, Stefan; Kneib, Thomas (2014). Nonlife ratemaking and risk management with Bayesian
generalized additive models for location, scale, and shape. [RKN: 46831]
Generalized additive models for location, scale and, shape define a flexible, semi-parametric class of regression models for
analyzing insurance data in which the exponential family assumption for the response is relaxed. This approach allows the actuary
to include risk factors not only in the mean but also in other key parameters governing the claiming behavior, like the degree of
residual heterogeneity or the no-claim probability. In this broader setting, the Negative Binomial regression with cell-specific
heterogeneity and the zero-inflated Poisson regression with cell-specific additional probability mass at zero are applied to model
claim frequencies. New models for claim severities that can be applied either per claim or aggregated per year are also presented.
Bayesian inference is based on efficient Markov chain Monte Carlo simulation techniques and allows for the simultaneous
estimation of linear effects as well as of possible nonlinear effects, spatial variations and interactions between risk factors within
the data set. To illustrate the relevance of this approach, a detailed case study is proposed based on the Belgian motor insurance
portfolio studied in Denuit and Lang (2004) [M. Denuit, S. Lang, Nonlife ratemaking with Bayesian GAMs, Insurance: Mathematics
& Economics (2004) 35: 627-647].
Li, Hao; Melnikov, Alexander V (2014). Polynomial extensions of distributions and their applications in actuarial and financial modeling.
[RKN: 46832]
The paper deals with orthogonal polynomials as a useful technique which can be attracted to actuarial and financial modeling. We
use Pearsons differential equation as a way for orthogonal polynomials construction and solution. The generalized Rodrigues
formula is used for this goal. Deriving the weight function of the differential equation, we use it as a basic distribution density of
variables like financial asset returns or insurance claim sizes. In this general setting, we derive explicit formulas for option prices
as well as for insurance premiums. The numerical analysis shows that our new models provide a better fit than some previous
actuarial and financial models.
Ballestra, Luca Vincenzo; Pacelli, Graziella (2014). Valuing risky debt: a new model combining structural information with the
reduced-form approach. [RKN: 46833]
A new model of credit risk is proposed in which the intensity of default is described by an additional stochastic differential equation
coupled with the process of the obligors asset value. Such an approach allows us to incorporate structural information as well as
to capture the effect of external factors (e.g. macroeconomic factors) in a both parsimonious and economically consistent way.
From the practical standpoint, the proposed model offers great flexibility and allows us to obtain credit spread curves of many
different shapes, including double humped term structures. Furthermore, an approximate closed-form solution is derived, which is
accurate, easy to implement, and allows for an efficient calibration to realized credit spreads. Numerical experiments are
presented showing that the novel approach provides a very satisfactory fitting to market data and outperforms the model
developed by Madan and Unal (2000) [D.B. Madan, H. Unal, A two-factor hazard rate model for pricing risky debt and the term
structure of credit spreads, Journal of Financial Quantitative Analysis (2000) 35: 43-65].
26
Cousin, Areski; Di Bernardino, Elena (2014). On multivariate extensions of conditional-tail-expectation. [RKN: 46834]
In this paper, we introduce two alternative extensions of the classical univariate Conditional-Tail-Expectation (CTE) in a
multivariate setting. The two proposed multivariate CTEs are vector-valued measures with the same dimension as the underlying
risk portfolio. As for the multivariate Value-at-Risk measures introduced by Cousin and Di Bernardino (2013) [A. Cousin, E. Di
Bernardino, On multivariate extensions of value-at-risk, Journal of Multivariate Analysis (2013) 119: 32-46], the lower-orthant CTE
(resp. the upper-orthant CTE) is constructed from level sets of multivariate distribution functions (resp. of multivariate survival
distribution functions). Contrary to allocation measures or systemic risk measures, these measures are also suitable for
multivariate risk problems where risks are heterogeneous in nature and cannot be aggregated together. Several properties have
been derived. In particular, we show that the proposed multivariate CTE-s satisfy natural extensions of the positive homogeneity
property, the translation invariance property and the comonotonic additivity property. Comparison between univariate risk
measures and components of multivariate CTE is provided. We also analyze how these measures are impacted by a change in
marginal distributions, by a change in dependence structure and by a change in risk level. Sub-additivity of the proposed
multivariate CTE-s is provided under the assumption that all components of the random vectors are independent. Illustrations are
given in the class of Archimedean copulas.
Malinovskii, Vsevolod K (2014). Improved asymptotic upper bounds on the ruin capital in the Lundberg model of risk. [RKN: 46837]
This paper deals with ruin capital [ua,t(c| ,)ua,t(c| ,)] in the classical Lundberg model of risk. It is defined as the initial capital
needed to keep the probability of ruin within finite time tt equal to a predefined value aa. Considered as a decreasing function of
premium rate cc, the ruin capital is shown to be convex (i.e., concave downward) for [c> /c> /] and tt sufficiently large. This
observation is used to construct explicit upper bounds on the ruin capital. [This abstract contains mathematical notation.]
Zaks, Yaniv; Tsanakas, Andreas (2014). Optimal capital allocation in a hierarchical corporate structure. [RKN: 46843]
We consider capital allocation in a hierarchical corporate structure where stakeholders at two organizational levels (e.g., board
members vs line managers) may have conflicting objectives, preferences, and beliefs about risk. Capital allocation is considered
as the solution to an optimization problem whereby a quadratic deviation measure between individual losses (at both levels) and
allocated capital amounts is minimized. Thus, this paper generalizes the framework of Dhaene et al. (2012) [J. Dhaene, A.
Tsanakas, E.A. Valdez, S. Vanduffel, Optimal capital allocation principles, Journal of Risk and Insurance (2012) 79(1): 1-28], by
allowing potentially diverging risk preferences in a hierarchical structure. An explicit unique solution to this optimization problem is
given. In several examples, it is shown how the optimal capital allocation achieves a compromise between conflicting views of risk
within the organization
Fu, Luyang; Ng, Cheuk-Yin Andrew (2014). Asymptotics for the ruin probability of a time-dependent renewal risk model with geometric
Lvy process investment returns and dominatedly-varying-tailed claims. [RKN: 46846]
Consider a continuous-time renewal risk model, in which the claim sizes and inter-arrival times form a sequence of independent
and identically distributed random pairs, with each pair obeying a dependence structure. Suppose that the surplus is invested in a
portfolio whose return follows a Lvy process. When the claim-size distribution is dominatedly-varying tailed, asymptotic estimates
for the finite- and infinite-horizon ruin probabilities are obtained.
Hashorva, Enkelejd; Ling, Chengxiu; Peng, Zuoxiang (2014). Second-order tail asymptotics of deflated risks. [RKN: 46847]
Random deflation of risk models is an interesting topic for both theoretical and practical actuarial problems. In this paper, we
investigate second-order tail asymptotics of the deflated risk X=RSX=RS under the assumptions of second-order regular variation
on the survival functions of the risk RR and the deflator SS. Our findings are applied to derive second-order expansions of
Value-at-Risk. Further we investigate the estimation of small tail probability for deflated risks and then discuss the asymptotics of
the aggregated deflated risk. [This abstract contains mathematical notation.]
Barth, Andrea; Moreno Bromberg, Santiago (2014). Optimal risk and liquidity management with costly refinancing opportunities. [RKN:
46919]
In this paper we study risk and liquidity management decisions within an insurance firm. Risk management corresponds to
decisions regarding proportional reinsurance, whereas liquidity management has two components: distribution of dividends and
costly equity issuance. Contingent on whether proportional or fixed costs of reinvestment are considered, singular stochastic
control or stochastic impulse control techniques are used to seek strategies that maximize the firm value. We find that, in a
proportional-costs setting, the optimal strategies are always mixed in terms of risk management and refinancing. In contrast, when
fixed issuance costs are too high relative to the firms profitability, optimal management does not involve refinancing. We provide
analytical specifications of the optimal strategies, as well as a qualitative analysis of the interaction between refinancing and risk
management.
27
Dutang, Christophe; Goegebeur, Yuri; Guillou, Armelle (2014). Robust and bias-corrected estimation of the coefficient of tail
dependence. [RKN: 46920]
We introduce a robust and asymptotically unbiased estimator for the coefficient of tail dependence in multivariate extreme value
statistics. The estimator is obtained by fitting a second order model to the data by means of the minimum density power
divergence criterion. The asymptotic properties of the estimator are investigated. The efficiency of our methodology is illustrated
on a small simulation study and by a real dataset from the actuarial context.
Li, Lujun; Yuen, K C; Yang, Jingping (2014). Distorted Mix Method for constructing copulas with tail dependence. [RKN: 46923]
This paper introduces a method for constructing copula functions by combining the ideas of distortion and convex sum, named
Distorted Mix Method. The method mixes different copulas with distorted margins to construct new copula functions, and it
enables us to model the dependence structure of risks by handling the central and tail parts separately. By applying the method we
can modify the tail dependence of a given copula to any desired level measured by tail dependence function and tail dependence
coefficients of marginal distributions. As an application, a tight bound for asymptotic Value-at-Risk of order statistics is obtained by
using the method. An empirical study shows that copulas constructed by this method fit the empirical data of SPX 500 Index and
FTSE 100 Index very well in both central and tail parts.
You, Yinping; Li, Xiaohu (2014). Optimal capital allocations to interdependent actuarial risks. [RKN: 46925]
This paper further studies the capital allocation concerning mutually interdependent random risks. In the context of exchangeable
random risks, we establish that risk-averse insurers incline to evenly distribute the total capital among multiple risks. For
risk-averse insurers with decreasing convex loss functions, we prove that more capital should be allocated to the risk with the
larger reversed hazard rate when risks are coupled by an Archimedean copula. Also, sufficient conditions are developed to
exclude the worst capital allocations for random risks with some specific Archimedean copulas.
Wang, Min (2014). Capital allocation based on the Tail Covariance Premium Adjusted. [RKN: 46927]
The current Solvency II process makes risk capital allocation to different business lines more and more important. This paper
considers two business lines with the exponential loss distributions linked by a Farlie-Gumbel-Morgenstern (FGM) copula,
modelling the dependence between them. As an allocation principle we use the Tail Covariance Premium Adjusted and obtain
expressions for the allocation to the two business lines.
Karabey, Ugur; Kleinow, Torsten; Cairns, Andrew J G (2014). Factor risk quantification in annuity models. [RKN: 47018]
Calculation of risk contributions of sub-portfolios to total portfolio risk is essential for risk management in insurance companies.
Thanks to risk capital allocation methods and linearity of the loss model, sub-portfolio (or position) contributions can be calculated
efficiently. However, factor risk contribution theory in non-linear loss models has received little interest. Our concern is the
determination of factor risk contributions to total portfolio risk where portfolio risk is a non-linear function of factor risks. We employ
different approximations in order to convert the non-linear loss model into a linear one. We illustrate the theory on an annuity
portfolio where the main factor risks are interest-rate risk and mortality risk.
Bolanc, Catalina; Bahraoui, Zuhair; Arts, Manuel (2014). Quantifying the risk using copulae with nonparametric marginals. [RKN:
47019]
We show that copulae and kernel estimation can be mixed to estimate the risk of an economic loss. We analyze the properties of
the Sarmanov copula. We find that the maximum pseudo-likelihood estimation of the dependence parameter associated with the
copula with double transformed kernel estimation to estimate marginal cumulative distribution functions is a useful method for
approximating the risk of extreme dependent losses when we have large data sets. We use a bivariate sample of losses from a
real database of auto insurance claims.
Zou, Bin; Cadenillas, Abel (2014). Optimal investment and risk control policies for an insurer: expected utility maximization. [RKN:
47020]
Motivated by the AIG bailout case in the financial crisis of 2007-2008, we consider an insurer who wants to maximize his/her
expected utility of terminal wealth by selecting optimal investment and risk control strategies. The insurers risk process is modeled
by a jump-diffusion process and is negatively correlated with the capital gains in the financial market. We obtain explicit solutions
of optimal strategies for various utility functions.
Coqueret, Guillaume (2014). Second order risk aggregation with the Bernstein copula. [RKN: 47029]
We analyze the tail of the sum of two random variables when the dependence structure is driven by the Bernstein family of
copulas. We consider exponential and Pareto distributions as marginals. We show that the first term in the asymptotic behavior of
the sum is not driven by the dependence structure when a Pareto random variable is involved. Consequences on the
Value-at-Risk are derived and examples are discussed.
Zou, Bin; Cadenillas, Abel (2014). Explicit solutions of optimal consumption, investment and insurance problems with regime switching.
[RKN: 47030]
28
We consider an investor who wants to select his optimal consumption, investment and insurance policies. Motivated by new
insurance products, we allow not only the financial market but also the insurable loss to depend on the regime of the economy.
The objective of the investor is to maximize his expected total discounted utility of consumption over an infinite time horizon. For
the case of hyperbolic absolute risk aversion (HARA) utility functions, we obtain the first explicit solutions for simultaneous optimal
consumption, investment, and insurance problems when there is regime switching. We determine that the optimal insurance
contract is either no-insurance or deductible insurance, and calculate when it is optimal to buy insurance. The optimal policy
depends strongly on the regime of the economy. Through an economic analysis, we calculate the advantage of buying insurance.
Yang, Haizhong; Li, Jinzhu (2014). Asymptotic finite-time ruin probability for a bidimensional renewal risk model with constant interest
force and dependent subexponential claims. [RKN: 47033]
This paper considers a bidimensional renewal risk model with constant interest force and dependent subexponential claims.
Under the assumption that the claim size vectors form a sequence of independent and identically distributed random vectors
following a common bivariate Farlie-Gumbel-Morgenstern distribution, we derive for the finite-time ruin probability an explicit
asymptotic formula.
Chiarella, Carl; Da Fonseca, Jos; Grasselli, Martino (2014). Pricing range notes within Wishart affine models. [RKN: 47034]
We provide analytic pricing formulas for Fixed and Floating Range Accrual Notes within the multifactor Wishart affine framework
which extends significantly the standard affine model. Using estimates for three short rate models, two of which are based on the
Wishart process whilst the third one belongs to the standard affine framework, we price these structured products using the FFT
methodology. Thanks to the Wishart tractability the hedge ratios are also easily computed. As the models are estimated on the
same dataset, our results illustrate how the fit discrepancies (meaning differences in the likelihood functions) between models
translate in terms of derivatives pricing errors, and we show that the models can produce different price evolutions for the Range
Accrual Notes. The differences can be substantial and underline the importance of model risk both from a static and a dynamic
perspective. These results are confirmed by an analysis performed at the hedge ratios level.
Lee, Wing Yan; Willmot, Gordon E (2014). On the moments of the time to ruin in dependent Sparre Andersen models with emphasis on
Coxian interclaim times. [RKN: 47051]
The structural properties of the moments of the time to ruin are studied in dependent Sparre Andersen models. The moments of
the time to ruin may be viewed as generalized versions of the Gerber-Shiu function. It is shown that structural properties of the
Gerber-Shiu function hold also for the moments of the time to ruin. In particular, the moments continue to satisfy defective renewal
equations. These properties are discussed in detail in the model of Willmot and Woo (2012) [G.E. Willmot, J.-K. Woo, On the
analysis of a general class of dependent risk processes, Insurance Mathematics and Economics (2012) 51: 134-141], which has
Coxian interclaim times and arbitrary time-dependent claim sizes. Structural quantities needed to determine the moments of the
time to ruin are specified under this model. Numerical examples illustrating the methodology are presented.
Feng, Runhuan; Shimizu, Yasutaka (2014). Potential measures for spectrally negative Markov additive processes with applications in
ruin theory. [RKN: 47052]
The Markov additive process (MAP) has become an increasingly popular modeling tool in the applied probability literature. In
many applications, quantities of interest are represented as functionals of MAPs and potential measures, also known as resolvent
measures, have played a key role in the representations of explicit solutions to these functionals. In this paper, closed-form
solutions to potential measures for spectrally negative MAPs are found using a novel approach based on algebraic operations of
matrix operators. This approach also provides a connection between results from fluctuation theoretic techniques and those from
classical differential equation techniques. In the end, the paper presents a number of applications to ruin-related quantities as well
as verification of known results concerning exit problems.
Gijbels, Irne; Herrmann, Klaus (2014). On the distribution of sums of random variables with copula-induced dependence. [RKN: 47053]
See abstract online for mathematical notation
We investigate distributional properties of the sum of 'd' possibly unbounded random variables. The joint distribution of the random
vector is formulated by means of an absolutely continuous copula, allowing for a variety of different dependence structures
between the summands. The obtained expression for the distribution of the sum features a separation property into marginal and
dependence structure contributions typical for copula approaches. Along the same lines we obtain the formulation of a conditional
expectation closely related to the expected shortfall common in actuarial and financial literature. We further exploit the separation
to introduce new numerical algorithms to compute the distribution and quantile function, as well as this conditional expectation. A
comparison with the most common competitors shows that the discussed Path Integration algorithm is the most suitable method
for computing these quantities. In our example, we apply the theory to compute Value-at-Risk forecasts for a trivariate portfolio of
index returns.
29
Eling, Martin (2014). Fitting asset returns to skewed distributions: are the skew-normal and skew-student good models?. [RKN: 47054]
Vernic (2006), Bolanc et al. (2008), and Eling (2012) identify the skew-normal and skew-student as promising models for
describing actuarial loss data. In this paper, we change the focus from the liability to the asset side and ask whether these
distributions are also useful for analyzing the investment returns of insurance companies. To answer this question, we fit various
parametric distributions to capital market data which has been used to describe the investment set of insurance companies. Our
results show that the skew-student is an especially promising distribution for modeling asset returns such as those of stocks,
bonds, money market instruments, and hedge funds. Combining the results of Vernic (2006), Bolanc et al. (2008), Eling (2012),
and this paper, it appears that the skew-student is a promising actuarial tool since it describes both sides of the insurers balance
sheet reasonably well. R. Vernic (2006), Multivariate skew-normal distributions with applications in insurance, Insurance
Mathematics and Economics (2006) 38: 413-426; C. Bolanc, M. Guillen, E. Pelican, R. Vernic (2008), Skewed bivariate models
and nonparametric estimation for the CTE risk measure, Insurance Mathematics and Economics (2008) 43(3): 386-393; M. Eling
(2012), Fitting insurance claims to skewed distributions: are the skew-normal and skew-student good models? Insurance
Mathematics and Economics (2012) 51: 239-248.
Avram, Florin; Pistorius, Martijn (2014). On matrix exponential approximations of ruin probabilities for the classic and Brownian
perturbed Cramr-Lundberg processes. [RKN: 47055]
Pad rational approximations are a very convenient approximation tool, due to the easiness of obtaining them, as solutions of
linear systems. Not surprisingly, many matrix exponential approximations used in applied probability are particular cases of the
first and second order admissible Pad approximations of a Laplace transform, where admissible stands for nonnegative in the
case of a density, and for nonincreasing in the case of a ccdf (survival function). Our first contribution below is the observation that
for Cramr-Lundberg processes and Brownian perturbed Cramr-Lundberg processes there are three distinct rational
approximations of the Pollaczek-Khinchine transform, corresponding to approximating (a) the claims transform, (b) the stationary
excess transform, and (c) the aggregate loss transform. A second contribution is providing three new always admissible second
order approximations for the ruin probabilities of the Cramr-Lundberg process with Brownian perturbation, one of which reduces
in the absence of perturbation to De Vylders approximation. Our third contribution is a method for comparing the resulting
approximations, based on the concept of largest weak-admissibility interval of the compounding/traffic intensity parameter ' '.
Choi, Michael C H; Cheung, Eric C K (2014). On the expected discounted dividends in the Cramr-Lundberg risk model with more
frequent ruin monitoring than dividend decisions. [RKN: 47062]
In this paper, we further extend the insurance risk model in Albrecher et al. (2011b), who proposed to only intervene in the
compound Poisson risk process at the discrete time points View the MathML source {Lk}k=08 where the event of ruin is checked
and dividend decisions are made. In practice, an insurance company typically balances its books (and monitors its solvency) more
frequently than deciding on dividend payments. This motivates us to propose a generalization in which ruin is monitored at View
the MathML source{Lk}k=08 whereas dividend decisions are only made at View the MathML source {Ljk}k=08 for some positive
integer jj. Assuming that the intervals between the time points View the MathML source {Lk}k=08 are Erlang(nn) distributed, the
Erlangization technique (e.g. Asmussen et al., 2002) allows us to model the more realistic situation with the books balanced e.g.
monthly and dividend decisions made e.g. quarterly or semi-annually. Under a dividend barrier strategy with the above
randomized interventions, we derive the expected discounted dividends paid until ruin. Numerical examples about dividend
maximization with respect to the barrier bb and/or the value of j are given.
Pantelous, Athanasios A; Yang, Lin (2014). Robust LMI stability, stabilization and [H8] control for premium pricing models with
uncertainties into a stochastic discrete-time framework. [RKN: 47063]
The premium pricing process and the reserve stability under uncertainty are very challenging issues in the insurance industry. In
practice, a premium which is sufficient enough to cover the expected claims and to keep stable the derived reserves is always
required. This paper proposes a premium pricing model for General (Non-Life) Insurance products, which implements a negative
feedback mechanism for the known reserves with time-varying, bounded delays. The model is developed into a stochastic,
discrete-time framework and norm-bounded parameter uncertainties have been also incorporated. Thus, the stability, the
stabilization and the robust [H8] control for the reserve process are investigated using Linear Matrix Inequality (LMI) criteria. For
the robust [H8] control, attention will be focused on the design of a state feedback controller such that the resulting closed-loop
system is robustly stochastically stable with disturbance attenuation level y>0. Numerical examples and figures illustrate the main
findings of the paper.
Zhang, Zhimin; Yang, Hailiang (2014). Nonparametric estimation for the ruin probability in a Lvy risk model under low-frequency
observation. [RKN: 47066]
In this paper, we propose a nonparametric estimator for the ruin probability in a spectrally negative Lvy risk model based on
low-frequency observation. The estimator is constructed via the Fourier transform of the ruin probability. The convergence rates of
the estimator are studied for large sample size. Some simulation results are also given to show the performance of the proposed
method when the sample size is finite.
Sun, Ying; Wei, Li (2014). The finite-time ruin probability with heavy-tailed and dependent insurance and financial risks. [RKN: 47067]
Consider a discrete-time insurance risk model in which the insurer makes both risk-free and risky investments. Assume that the
one-period insurance and financial risks form a sequence of independent and identically distributed copies of a random pair (X,Y)
30
with dependent components. When the product XY is heavy tailed, under a mild restriction on the dependence structure of (X,Y),
we establish for the finite-time ruin probability an asymptotic formula, which coincides with the long-standing one in the literature.
Various important special cases are presented, showing that our work generalizes and unifies some of recent ones.
Malinovskii, Vsevolod K; Kosova, Ksenia O (2014). Simulation analysis of ruin capital in Sparre Andersens model of risk. [RKN: 47068]
Ruin capital is a function of premium rate set to render the probability of ruin within finite time equal to a given value. The analytical
studies of this function in the classical Lundberg model of risk with exponential claim sizes done in Malinovskii (2014) [V.K.
Malinovskii (2014), Improved asymptotic upper bounds on ruin capital in Lundberg model of risk, Insurance Mathematics and
Economics (2014) 55: 301-309] have shown that the ruin capitals shape is surprisingly simple. This work presents the results of
related simulation studies. They are focused on the question whether this shape remains similar in Sparre Andersens model of
risk.
Spreeuw, Jaap (2014). Archimedean copulas derived from utility functions. [RKN: 47071]
The inverse of the (additive) generator of an Archimedean copula is a strictly decreasing and convex function, while utility
functions (applying to risk averse decision makers) are nondecreasing and concave. This provides a basis for deriving an inverse
generator of an Archimedean copula from a utility function. If we derive the inverse of the generator from the utility function, there
is a link between the magnitude of measures of risk attitude (like the very common Arrow-Pratt coefficient of absolute risk
aversion) and the strength of dependence featured by the corresponding Archimedean copula. Some new copula families are
derived, and their properties are discussed. A numerical example about modeling dependence of coupled lives is included.
Denuit, Michel; Liu, Liqun; Meyer, Jack (2014). A separation theorem for the weak s-convex orders. [RKN: 47075]
The present paper extends to higher degrees the well-known separation theorem decomposing a shift in the increasing convex
order into a combination of a shift in the usual stochastic order followed by another shift in the convex order. An application in
decision making under risk is provided to illustrate the interest of the result.
Tan, Chong It; Li, Jackie; Li, Johnny Siu-Hang; Balasooriya, Uditha (2014). Parametric mortality indexes: from index construction to
hedging strategies. [RKN: 47076]
In this paper, we investigate the construction of mortality indexes using the time-varying parameters in common stochastic
mortality models. We first study how existing models can be adapted to satisfy the new-data-invariant property, a property that is
required to ensure the resulting mortality indexes are tractable by market participants. Among the collection of adapted models,
we find that the adapted Model M7 (the Cairns-Blake-Dowd model with cohort and quadratic age effects) is the most suitable
model for constructing mortality indexes. One basis of this conclusion is that the adapted model M7 gives the best fitting and
forecasting performance when applied to data over the age range of 4090 for various populations. Another basis is that the three
time-varying parameters in it are highly interpretable and rich in information content. Based on the three indexes created from this
model, one can write a standardized mortality derivative called K-forward, which can be used to hedge longevity risk exposures.
Another contribution of this paper is a method called key K-duration that permits one to calibrate a longevity hedge formed by
K-forward contracts. Our numerical illustrations indicate that a K-forward hedge has a potential to outperform a q-forward hedge in
terms of the number of hedging instruments required.
Tang, Qihe; Yang, Fan (2014). Extreme value analysis of the Haezendonck-Goovaerts risk measure with a general Young function.
[RKN: 47078]
For a risk variable XX and a normalized Young function f(), the Haezendonck-Goovaerts risk measure for X at level q (0,1) is
defined as Hq[X]=infx R(x+h), where h solves the equation E[f((X-x)+/h)]=1-q if Pr(X>x)>0 or is 0 otherwise. In a recent work, we
implemented an asymptotic analysis for Hq[X] with a power Young function for the Frchet, Weibull and Gumbel cases separately.
A key point of the implementation was that hh can be explicitly solved for fixed x and q, which gave rise to the possibility to express
Hq[X] in terms of x and q. For a general Young function, however, this does not work anymore and the problem becomes a lot
harder. In the present paper, we extend the asymptotic analysis for Hq[X] to the case with a general Young function and we
establish a unified approach for the three extreme value cases. In doing so, we overcome several technical difficulties mainly due
to the intricate relationship between the working variables x, h and q.
Yang, Jianping; Zhuang, Weiwei; Hu, Taizhong (2014). Lp-metric under the location-independent risk ordering of random variables.
[RKN: 47079]
The Lp-metric h,p(X) between the survival function F of a random variable X and its distortion F is a characteristic of the variability
of X. In this paper, it is shown that if a random variable X is larger than another random variable Y in the location-independent risk
order or in the excess wealth order, then h,p(X)= h,p(Y) whenever p (0,1] and the distortion function h is convex or concave. An
alternative and simple proof of the corresponding known result in the literature for the dispersive order is given. Some applications
are also presented.
31
Zhang, Huiming; Liu, Yunxiao; Li, Bo (2014). Notes on discrete compound Poisson model with applications to risk theory. [RKN: 47080]
Probability generating function (p.g.f.) is a powerful tool to study discrete compound Poisson (DCP) distribution. By applying
inverse Fourier transform of p.g.f., it is convenient to numerically calculate probability density and do parameter estimation. As an
application to finance and insurance, we firstly show that in the generalized CreditRisk+ model, the default loss of each debtor and
the total default of all debtors are both approximately equal to a DCP distribution, and we give Le Cams error bound between the
total default and a DCP distribution. Next, we consider geometric Brownian motion with DCP jumps and derive its rrth moment. We
establish the surplus process of the difference of two DCP distributions, and numerically compute the tail probability. Furthermore,
we define the discrete pseudo compound Poisson (DPCP) distribution and give the characterizations and examples of DPCP
distribution, including the strictly decreasing discrete distribution and the zero-inflated discrete distribution with P(X=0)>0.5.
JOURNAL OF ASSET MANAGEMENT
Scherer, Bernd (2012). Risk parity in US futures markets : Invited editorial. Palgrave Macmillan, [RKN: 45745]
Journal of Asset Management (2012) 13 (3) : 155-161.
Risk parity allocates identical percentage contribution to risk to each individual asset. In the absence of established theoretical
foundations, investors and product suppliers attribute the strong historical performance of risk parity portfolios to better
diversification. This is an ill-founded belief. For US futures data I show that risk parity is not about diversification, but about higher
return expectations for leveraged low-risk bonds. Although this is consistent with leverage aversion, it is incompatible with
consumption-based asset pricing. In contrast to past work, I use futures data instead of diversified equity and bond indices. This
allows concerns raised earlier about the availability of historic implementation costs or the historic price of leverage to be
sidestepped.
Saxena, Anureet; Martin, Chris; Stubbs, Robert A (2013). Constraints in quantitative strategies: an alignment perspective. [RKN:
46632]
Journal of Asset Management (2013) 14(5) : 278-292.
The practical issues that arise due to the interaction between three principal players in any quantitative strategy, namely, the alpha
model, the risk model and the constraints are collectively referred to as Factor Alignment Problems (FAP). While the role of
misaligned alpha factors in causing FAP is relatively easy to understand, incorporating the impact of constraints entails
considerable analytical complexity that most consultants and researchers find difficult to fathom. We argue that simply aligning
alpha and risk factors is insufficient in handling FAP. We demonstrate that the typical symptoms of FAP are present in optimal
portfolios generated by using completely aligned alpha and risk models. In addition, we provide theoretical guidance to clarify the
role of constraints in influencing FAP and illustrate how the Alpha Alignment Factor methodology can handle misalignment
resulting from constraints, analytical complexities notwithstanding.
DOI: http://dx.doi.org/10.1057/jam.2013.20 (access via Athens login http://www.openathens.net/)
Du, Ding; Denning, Karen Craft; Zhao, XiaoBing (2014). Market states and momentum in sector exchange-traded funds. [RKN: 46929]
We provide a clean out-of-sample test of momentum effects by focusing on a new sample period and a new set of test assets.
More specifically, we examine market states and momentum in sector exchange-traded funds (ETFs) in the post-2000 period. Our
results suggest that there is no momentum in sector ETFs, and that momentum does not depend on market states in the recent
decade. Our findings have important theoretical as well as practical implications. In terms of theoretical implications, models
attempting to explain momentum now have a higher hurdle to meet in that these models need to explain why momentum does not
seem to exist in the recent decade. In terms of practical implications, our findings suggest that in capital budgeting, portfolio
evaluation, investment and risk analysis decisions, caution should be exercised in using the models that take into account
momentum effects.
Estrada, Javier (2014). Rethinking risk. [RKN: 46930]
Volatility is the most widely used measure of risk but its relevance is questionable in many settings. For long-term investors,
short-term volatility is a nuisance they just have to live with and disregard as much as possible. Tail risks, however, are critical
because, although rare by definition, they have a large impact on terminal wealth. Using a comprehensive sample that spans over
19 countries and 110 years, this article argues that when 1, 5 or 10 per cent tail risks strike, stocks offer long-term investors better
downside protection than bonds in the form of a higher terminal wealth. In fact, stocks offer both a higher upside potential and
better downside protection than bonds, even when tail risks strike. Hence, their higher volatility essentially is higher upside risk;
that is, uncertainty about how much better, not how much worse, long-term investors are expected to fare with stocks rather than
with bonds.
32
JOURNAL OF RISK AND INSURANCE

Ai, Jing; Brockett, Patrick L; Cooper, William W; Golden, Linda L (2012). Enterprise Risk Management through strategic allocation of
capital. - 28 pages. [RKN: 73846]
Journal of Risk and Insurance (2012) 79 (1) : 29-56.
Available via Athens: Wiley Online Library
This article presents a conceptual framework for operationalizing strategic enterprise risk management (ERM) in a general firm.
We employ a risk-constrained optimization approach to study the capital allocation decisions under ERM. Given the decision
maker's risk appetite, the problem of holistically managing enterprise-wide hazard, financial, operational, and real project risks is
treated by maximizing the expected total return on capital, while trading off risks simultaneously in Value-at-Risk type of
constraints. This approach explicitly quantifies the concepts of risk appetite and risk prioritization in light of the firm's default and
financial distress avoidance reflected in its target credit rating. Our framework also allows the firm to consider a multiperiod
planning horizon so that changing business environments can be accounted for. We illustrate the implementation of the framework
through a numerical example. As an initial conceptual advancement, our formulation is capable of facilitating more general ERM
modeling within a consistent strategic framework, where idiosyncratic variations of firms and different modeling assumptions can
be accommodated. Managerial implications are also discussed.
DOI: http://dx.doi.org/10.1111/j.1539-6975.2010.01403.x (access via Athens login http://www.openathens.net/)
Cheng, Jiang; Weiss, Mary A (2012). The role of RBC, hurricane exposure, bond portfolio duration, and macroeconomic and
industry-wide factors in propertyliability insolvency prediction. - 28 pages. [RKN: 70414]
This research analyzes the performance of the risk-based capital (RBC) ratio and other variables in predicting insolvencies in the
propertyliability insurance industry during the period 19942008. The results indicate that the accuracy of the RBC ratio in
predicting insolvencies is inconsistent over time and that some previously tested financial ratios that are part of the FAST system
do not always reliably predict insurer insolvency. In addition, the insolvency propensity is found to be significantly related to an
insurer's hurricane prone area exposure, changes in interest rates, the industry-wide combined ratio, and the industry-wide
Herfindahl index of premiums written.
Leverty, J Tyler; Grace, Martin F (2012). Dupes or incompetents? An examination of management's impact on firm distress. - 33 pages.
[RKN: 70415]
This article examines whether managers impact firm performance. We conservatively define managerial ability as the manager's
capacity to deploy the firm's resources. We verify the validity of our metric using a managerfirm matched panel data set that
allows us to track managers (CEOs) across different firms over time. We find managerial ability is inversely related to the amount
of time a firm spends in distress, the likelihood of a firm's failure, and the cost of failure. These results suggest that the managers
of failed firms are less skilled than their counterparts. But even within failed firms there is heterogeneity in the talents of managers.
Rowell, David; Connelly, Luke B (2012). A history of the term moral hazard. - 25 pages. [RKN: 71067]
Available from Athens: Wiley Online Library
The term moral hazard when interpreted literally has a strong rhetorical tone, which has been used by stakeholders to influence
public attitudes to insurance. In contrast, economists have treated moral hazard as an idiom that has little, if anything, to do with
morality. This article traces the genesis of moral hazard, by identifying salient changes in economic thought, which are identified
within the medieval theological and probability literatures. The focus then shifts to compare and contrast the predominantly,
normative conception of moral hazard found within the insurance-industry literature with the largely positive interpretations found
within the economic literature.
Jones, Robert A; Prignon, Christophe (2013). Derivatives clearing, default risk, and insurance. - 28 pages. [RKN: 74029]
Using daily data on margins and variation margins for all clearing members of the Chicago Mercantile Exchange, we analyze the
clearing house exposure to the risk of default by clearing members. We find that the major source of default risk for a clearing
member is proprietary trading rather than trading by customers. Additionally, we show that extreme losses suffered by important
clearing firms tend to cluster, which raises systemic risk concerns. Finally, we discuss how private insurance could be used to
cover the loss from defaults by clearing members.
Galeotti, Marcello; Grtler, Marc; Winkelvos, Christine (2013). Accuracy of premium calculation models for cat bondsan empirical
analysis. - 21 pages. [RKN: 74030]
CAT bonds are of significant importance in the field of alternative risk transfer. Because the market of CAT bonds is not complete,
the application of an appropriate pricing model is of high relevance. We apply different premium calculation models to compare
them with regard to their predictive power. Without taking the financial crisis into account, a version of the Wang transformation
model and the linear model are the most accurate ones. In contrast, under consideration of the financial crisis, all analyzed models
are approximately equivalent. Furthermore, we find that CAT bond specific information does not improve out-of-sample results.
33
Chang, Carolyn W; Chang, Jack S K; Wen, Min-Ming (2014). Optimum hurricane futures hedge in a warming environment: a risk
return jump-diffusion approach. - 19 pages. [RKN: 74525]
We develop an optimum riskreturn hurricane hedge model in a doubly stochastic jump-diffusion economy. The model's concave
riskreturn trade-off dictates that a higher correlation between hurricane power and insurer's loss, a smaller variable hedging cost,
and a larger market risk premium result in a less costly but more effective hedge. The resulting hedge ratio comprises of a positive
diffusion, a positive jump, and a negative hedging cost component. Numerical results show that hedging hurricane jump risks is
most crucial with jump volatility being the dominant factor, and the faster the warming the more pronounced the jump effects.
Cheung, K C; Sung, K C J; Yam, S C P (2014). Risk-minimizing reinsurance protection for multivariate risks. - 18 pages. [RKN: 74526]
In this article, we study the problem of optimal reinsurance policy for multivariate risks whose quantitative analysis in the realm of
general law-invariant convex risk measures, to the best of our knowledge, is still absent in the literature. In reality, it is often difficult
to determine the actual dependence structure of these risks. Instead of assuming any particular dependence structure, we
propose the minimax optimal reinsurance decision formulation in which the worst case scenario is first identified, then we proceed
to establish that the stop-loss reinsurances are optimal in the sense that they minimize a general law-invariant convex risk
measure of the total retained risk. By using minimax theorem, explicit form of and sufficient condition for ordering the optimal
deductibles are also obtained.
Dutta, Kabir K; Babbel, David F (2014). Scenario analysis in the measurement of operational risk capital: a change of measure
approach. - 32 pages. [RKN: 74529]
Journal of Risk and Insurance (2014) 81 (2) : 303334.
At large financial institutions, operational risk is gaining the same importance as market and credit risk in the capital calculation.
Although scenario analysis is an important tool for financial risk measurement, its use in the measurement of operational risk
capital has been arbitrary and often inaccurate. We propose a method that combines scenario analysis with historical loss data.
Using the Change of Measure approach, we evaluate the impact of each scenario on the total estimate of operational risk capital.
The method can be used in stress-testing, what-if assessment for scenario analysis, and Loss Given Default estimates used in
credit evaluations.
Rsch, Daniel; Scheule, Harald (2014). Forecasting mortgage securitization risk under systematic risk and parameter uncertainty. - 24
pages. [RKN: 74539]
The global financial crisis exposed financial institutions to severe unexpected losses in relation to mortgage securitizations and
derivatives. This article finds that risk models such as ratings are exposed to a large degree of systematic risk and parameter
uncertainty. An out-of-sample forecasting exercise of the financial crisis shows that a simple approach addressing both issues is
able to produce ranges for risk measures consistent with realized losses. This explains how financial markets were taken by
surprise in relation to realized losses.
Chen, Hua; Cummins, J David; Viswanathan, Krupa S; Weiss, Mary A (2014). Systemic risk and the interconnectedness between
banks and insurers: an econometric analysis. - 30 pages. [RKN: 74541]
This article uses daily market value data on credit default swap spreads and intraday stock prices to measure systemic risk in the
insurance sector. Using the systemic risk measure, we examine the interconnectedness between banks and insurers with
Granger causality tests. Based on linear and nonlinear causality tests, we find evidence of significant bidirectional causality
between insurers and banks. However, after correcting for conditional heteroskedasticity, the impact of banks on insurers is
stronger and of longer duration than the impact of insurers on banks. Stress tests confirm that banks create significant systemic
risk for insurers but not vice versa.
Eling, Martin; Marek, Sebastian D (2014). Corporate governance and risk taking: evidence from the U.K. and German insurance
markets. - 30 pages. [RKN: 74542]
We analyze the impact of factors related to corporate governance (i.e., compensation, monitoring, and ownership structure) on
risk taking in the insurance industry. We measure asset, product, and financial risk in insurance companies and employ a
structural equation model in which corporate governance is modeled as a latent factor. Based on this model, we present empirical
evidence on the link between corporate governance and risk taking, considering insurers from two large European insurance
markets. Higher levels of compensation, increased monitoring (more independent boards with more meetings), and more
blockholders are associated with lower risk taking. Our empirical results provide justification for including factors related to
corporate governance in insurance regulation.
Gatzert, Nadine; Kolb, Andreas (2014). Risk measurement and management of operational risk in insurance companies from an
enterprise perspective. - 26 pages. [RKN: 74537]
Operational risk can substantially impact an insurer's risk situation and is now increasingly in the focus of insurance companies,
especially due to new European risk-based regulatory framework Solvency II. The aim of this article is to model and examine the
effects of operational risk on fair premiums and solvency capital requirements under Solvency II. In particular, three different
approaches of deriving solvency capital requirements are analyzed: the Solvency II standard model, a partial internal model, and
a full internal model. This analysis is not only of relevance for Solvency II, but also regarding an insurer's Own Risk and Solvency
Assessment (ORSA) that is not only planned in Solvency II, but also by the NAIC in the United States. The analysis emphasizes
that diversification plays a central role and that operational risk measurement and management is highly relevant for insurers and
should be integrated in an enterprise risk management framework.
34
JOURNAL OF RISK AND UNCERTAINTY

Chew, Soo Hong; Ebstein, Richard P; Zhong, Songfa (2012). Ambiguity aversion and familiarity bias : Evidence from behavioral and
gene association studies. Springer, [RKN: 45591]
Journal of Risk and Uncertainty (2012) 44 (1) : 1-18.
It is increasingly recognized that decision making under uncertainty depends not only on probabilities, but also on psychological
factors such as ambiguity and familiarity. Using 325 Beijing subjects, we conduct a neurogenetic study of ambiguity aversion and
familiarity bias in an incentivized laboratory setting. For ambiguity aversion, 49.4% of the subjects choose to bet on the 5050
deck despite the unknown deck paying 20% more. For familiarity bias, 39.6% choose the bet on Beijings temperature rather than
the corresponding bet with Tokyo even though the latter pays 20% more. We genotype subjects for anxiety-related candidate
genes and find a serotonin transporter polymorphism being associated with familiarity bias, but not ambiguity aversion, while the
dopamine D5 receptor gene and estrogen receptor beta gene are associated with ambiguity aversion only among female subjects.
Our findings contribute to understanding of decision making under uncertainty beyond revealed preference.
Viscusi, W Kip; Huber, Joel (2012). Reference-dependent valuations of risk: Why willingness-to-accept exceeds willingness-to-pay.
Springer, [RKN: 45592]
The gap between willingness-to-pay (WTP) and willingness-to-accept (WTA) benefit values typifies situations in which reference
pointsand direction of movement from reference pointsare consequential. Why WTA-WTP discrepancies arise is not well
understood. We generalize models of reference dependence to identify separate reference dependence effects for increases and
decreases in environmental health risk probabilities, for increases and decreases in costs, and reference dependence effects
embodying the interaction of two changes. We estimate separate reference dependence effects for the four possible cost and
health risk change combinations using data from our choice-based experiment for a nationally representative sample of 4,745
households. The WTA-WTP gap is due largely to the reference dependence effects related to costs. Standard models of reference
dependence are not consistent with the results, as there is an interactive effect. Estimated income effects are under a penny and
thus cannot account for higher values of WTA relative to WTP.
Linde, Jona; Sonnemans, Joep (2012). Social comparison and risky choices. Springer, [RKN: 45593]
Theories (and experiments) on decision making under risk typically ignore (and exclude) a social context. We explore whether this
omission is detrimental. To do so we experimentally investigate the simplest possible situation with both social comparison and
risk: participants choose between two lotteries while a referent faces a fixed payoff. Participants are more risk averse when they
can earn at most as much as their referent (loss situation) than when they are ensured they will earn at least as much as their
referent (gain situation). Prospect theory with a social reference point would predict the exact opposite behavior. These results
show that straightforward extensions of existing theories to allow for social comparison do not provide accurate predictions.
DeAngelo, Gregory; Charness, Gary (2012). Deterrence, expected cost, uncertainty and voting: Experimental evidence. Springer,
[RKN: 45594]
We conduct laboratory experiments to investigate the effects of deterrence mechanisms under controlled conditions. The effect of
the expected cost of punishment of an individuals decision to engage in a proscribed activity and the effect of uncertainty on an
individuals decision to commit a violation are very difficult to isolate in field data. We use a roadway speeding framing and find that
(a) individuals respond considerably to increases in the expected cost of speeding, (b) uncertainty about the enforcement regime
yields a significant reduction in violations committed, and (c) people are much more likely to speed when the punishment regime
for which they voted is implemented. Our results have important implications for a behavioral theory of deterrence under
uncertainty.
Poinas, Franois; Rosaz, Julie; Roussillon, Batrice (2012). Updating beliefs with imperfect signals: Experimental evidence. Springer,
- 23 pages. [RKN: 73972]
We conduct an experiment on individual choice under risk in which we study belief updating when an agent receives a signal that
restricts the number of possible states of the world. Subjects observe a sample drawn from an urn and form initial beliefs about the
urns composition. We then elicit how beliefs are modified after subjects receive a signal that restricts the set of the possible urns
from which the observed sample could have been drawn. We find that this type of signal increases the frequency of correct
assessments and that prediction accuracy is higher for lower levels of risk. We also show that prediction accuracy is higher after
invalidating signals (i.e. signals that contradict the initial belief). This pattern is explained by the lower level of risk associated with
invalidating signals. Finally, we find evidence for a lack of persistence of choices under high risk.
Meyer, Jack; Liu, Liqun (2012). Decreasing absolute risk aversion, prudence and increased downside risk aversion. Springer, - 18
pages. [RKN: 73973]
Downside risk increases have previously been characterized as changes preferred by all decision makers u(x) with u'''(x) > 0. For
risk averse decision makers, u'''(x) > 0 also defines prudence. This paper finds that downside risk increases can also be
characterized as changes preferred by all decision makers displaying decreasing absolute risk aversion (DARA) since those
changes involve random variables that have equal means. Building on these findings, the paper proposes using more
decreasingly absolute risk averse or more prudent as alternative definitions of increased downside risk aversion. These
alternative definitions generate a transitive ordering, while the existing definition based on a transformation function with a positive
third derivative does not. Other properties of the new definitions of increased downside risk aversion are also presented.
35
Meyer, Robert J (2012). Failing to learn from experience about catastrophes : The case of hurricane preparedness. Springer, [RKN:
45854]
This paper explores the question of whether there are inherent limits to our ability to learn from experience about the value of
protection against low-probability, high-consequence, events. Findings are reported from two controlled experiments in which
participants have a monetary incentive to learn from experience making investments to protect against hurricane risks. A central
finding is that investments display a short-term forgetting effect consistent with the use of reinforcement learning rules, where a
significant driver of investments in a given period is whether storm losses were incurred in the precious period. Given the relative
rarity of such losses, this reinforcement process produces a mean investment level below that which would be optimal for most
storm threats. Investments are also found to be insensitive to the censoring effect of protection itself, implying that the size of
experienced lossesrather than losses that are avoidedis the primary driver of investment decisions.
Kleindorfer, Paul R; Kunreuther, Howard C; Ou-Yang, Chieh (2012). Single-year and multi-year insurance policies in a competitive
market. Springer, [RKN: 45855]
This paper examines the demand and supply of annual and multi-year insurance contracts with respect to protection against a
catastrophic risk in a competitive market. Insurers who offer annual policies can cancel policies at the end of each year and
change the premium in the following year. Multi-year insurance has a fixed annual price for each year and no cancellations are
permitted at the end of any given year. Homeowners are identical with respect to their exposure to the hazard. Each homeowner
determines whether or not to purchase an annual or multi-year contract so as to maximize her expected utility. The competitive
equilibrium consists of a set of prices where homeowners who are not very risk averse decide to be uninsured. Other individuals
demand either single-year or multi-year policies depending on their degree of risk aversion and the premiums charged by insurers
for each type of policy.
Carlsson, Fredrik; Daruvala, Dinky; Jaldell, Henrik (2012). Do administrators have the same priorities for risk reductions as the general
public?. Springer, [RKN: 45856]
A stated preference survey was used to investigate the potential discrepancy between the priorities of public administrators and
the general public regarding risk reductions. Both groups of respondents were asked to assume the role of a public policy-maker
and choose between different public safety projects. We investigate differences in three areas: (i) large vs. small accidents, (ii)
actual vs. subjective risk, and (iii) the trade-off between avoiding fatalities and serious injuries for different age groups and
accidents. We find only minor differences between the responses of administrators and the general public, the most important of
which is the difference in priorities between reducing the risk of many small or one large accident. In this area the most common
response from the general public is that they prefer avoiding many small accidents rather than one large accident while among the
administrators there is almost an equal split between the two options.
Friedson, Andrew I; Kniesner, Thomas J (2012). Losers and losers: Some demographics of medical malpractice tort reforms. Springer,
[RKN: 45873]
Journal of Risk and Uncertainty (2012) 45(2)
Our research examines how recent reforms have affected a key aspect of patients' implicit insurance present in medical
malpractice torts. Specifically, we estimate how non-economic damages caps affected pre-trial settlement speed and settlement
amounts. Maximum entropy (most likely) quantile regressions emphasize that the post-reform settlement effects most informative
for policy evaluation differ greatly from OLS (mean) estimates and clarify the conclusion emerging. In particualr, the effect of the
tort reform here can best be thought of as a 25% tax on the asset value of settlements that exempts settlements involving infants.
The social welfare effects of tort reform are less clear than the asset reduction effects due to likely health state dependent utility.
Schmidt, Ulrich; Zank, Horst (2012). A genuine foundation for prospect theory. Springer, - 17 pages. [RKN: 70232]
In most models of (cumulative) prospect theory, reference dependence of preferences is imposed beforehand and the location of
the reference point is determined exogenously. This paper presents principles that provide critical tests and foundations for
prospect theory preferences without assuming reference-dependent preferences a priori. Instead, reference dependence is
derived from behavior and the reference point arises endogenously.
Schmidt, Ulrich; Zank, Horst (2012). A genuine foundation for prospect theory. Springer, [RKN: 45872]
Journal of Risk and Uncertainty (2012) 45(2) : 97-113.
In most models of (cumulative) prospect theory, reference dependence of preferences is imposed beforehand and the location of
the reference point is determined exogenously. This paper presents principles that provide critical tests and foundations for
prospect theory preferences without assuming reference-dependent preferences a priori. Instead, reference dependence is
derived from behaviour and the reference point arises endogenously.
Riddel, Mary (2012). Comparing risk preferences over financial and environmental lotteries. Springer, - 23 pages. [RKN: 70238]
This paper investigates whether preferences over environmental risks are best modeled using probability-weighted utility
functions or can be reasonably approximated by expected utility (EU) or subjective EU models as is typically assumed. I elicit risk
attitudes in the financial and environmental domains using multiple-price list experiment. I examine how subjects behavioral,
attitudinal, and demographic characteristics affect their probability weighting functions first for financial risks, then for oil-spill risks.
I find that most subjects tend to overweight extreme positive outcomes relative to expected utility in both the environmental and
financial domains. Subjects are more likely to overemphasize low probability, extreme environmental outcomes than low
probability, extreme financial outcomes, leading subjects to offer more support for mitigating environmental gambles than financial
gambles with the same odds and equivalent outcomes. I conclude that EU models are likely to underestimate subjects willingness
to pay for environmental cleanup programs or policies with uncertain outcomes.
36
von Gaudecker, Hans-Martin; van Soest, Arthur; Wengstrm, Erik (2012). Experts in experiments. Springer, - 32 pages. [RKN:
70249]
An ever increasing number of experiments attempts to elicit risk preferences of a population of interest with the aim of calibrating
parameters used in economic models.We are concerned with two types of selection effects, which may affect the external validity
of standard experiments: Sampling from a narrowly defined population of students (experimenter-induced selection) and
self-selection due to non-response or incomplete response of participants in a random sample from a broad population. We find
that both types of selection lead to a sample of experts: Participants perform significantly better than the general population, in the
sense of fewer violations of revealed preference conditions. Self-selection within a broad population does not seem to matter for
average preferences. In contrast, sampling from a student population leads to lower estimates of average risk aversion and loss
aversion
von Gaudecker, Hans-Martin; van Soest, Arthur; Wengstrm, Erik (2012). Experts in experiments. How selection matters for
estimated distributions of risk preferences. Springer, [RKN: 45875]
An ever-increasing number of experiments attempts to elicit risk preferences of a population of interest with the aim of calibrating
parameters used in economic models. We are concerned with two types of selection effects, which may affect the external validity
of standard experiments: Sampling from a narrowly defined population of students ("experimenter-induced selection") and
self-selection due to non-response or incomplete response of participants in a random sample from a broad population. We find
that both types of selection lead to a sample of experts: Participants perform significantly better than the general population, in the
sense of fewer violations of revealed preference conditions. Self-selection within a broad population does not seem to matter for
average preferences. In contrast, sampling from a student population leads to lower estimates of average risk aversion and loss
aversion parameters. Furthermore, it dramatically reduces the amount of heterogeneity in all parameters.
Butler, David; Isoni, Andrea; Loomes, Graham (2012). Testing the standard model of stochastic choice under risk. Springer, [RKN:
45900]
Models of stochastic choice are intended to capture the substantial amount of noise observed in decisions under risk. We present
an experimental test of one model, which many regard as the defaultthe Basic Fechner model. We consider one of the models
key assumptionsthat the noise around the subjective value of a risky option is independent of other features of the decision
problem. We find that this assumption is systematically violated. However the main patterns in our data can be accommodated by
a more recent variant of the Fechner model, or within the random preference framework.
Binmore, Ken; Stewart, Lisa; Voorhoeve, Alex (2012). How much ambiguity aversion? : Finding indifferences between Ellsberg's risky
and ambiguous bets. [RKN: 45901]
Experimental results on the Ellsberg paradox typically reveal behavior that is commonly interpreted as ambiguity aversion. The
experiments reported in the current paper find the objective probabilities for drawing a red ball that make subjects indifferent
between various risky and uncertain Ellsberg bets. They allow us to examine the predictive power of alternative principles of
choice under uncertainty, including the objective maximin and Hurwicz criteria, the sure-thing principle, and the principle of
insufficient reason. Contrary to our expectations, the principle of insufficient reason performed substantially better than rival
theories in our experiment, with ambiguity aversion appearing only as a secondary phenomenon.
Eichberger, Jurgen; Grant, Simon; Kelsey, David (2012). When is ambiguityattitude constant?. [RKN: 45902]
This paper studies how updating affects ambiguity attitude. In particular we focus on generalized Bayesian updating of the
JaffrayPhilippe sub-class of Choquet Expected Utility preferences. We find conditions for ambiguity attitude to be the same
before and after updating. A necessary and sufficient condition for ambiguity attitude to be unchanged when updated on an
arbitrary event is for the capacity to be neo-additive. We find a condition for updating on a given partition to preserve ambiguity
attitude. We relate this to necessary and sufficient conditions for dynamic consistency. Finally, we study whether ambiguity
increases or decreases after updating.
Eckel, Catherine C; Grossman, Philip J; Johnson, Cathleen A; Oliveria, Angela C M de; Rojas, Christian; Wilson, Rick K (2012).
School environment and risk preferences : Experimental evidence. [RKN: 45903]
Using a field experiment with high school students, we evaluate the development of risk preferences. Examining the impact of
school characteristics on preference development reveals both peer and quality effects. For the peer effect, individuals in schools
with a higher percentage of students on free or reduced lunches (hence a higher proportion of low-income peers with whom to
interact) are significantly more risk averse. For the quality effect, individuals in schools with smaller class sizes and a higher
percentage of educators with advanced degrees have higher, more moderate levels of risk aversion. We further discuss
economic, cognitive and emotional development theories of risk preferences. Data show demographic-related patterns: girls are
more risk averse on average, while taller and nonwhite individuals are more risk tolerant.
37
Charness, Gary; Karni, Edi; Levin, Dan (2013). Ambiguity attitudes and social interactions: An experimental investigation. Springer, - 25
pages. [RKN: 71217]
This paper reports the results of experiments testing prevalence of non-neutral ambiguity attitudes and how these attitudes
change as a result of interpersonal interactions. To address the first question we conducted experiments involving individual
choice between betting on ambiguous and unambiguous events of the subjects choice. We found that a large majority of subjects
display ambiguity neutral attitudes, many others display ambiguity incoherent attitudes, and few subjects display either
ambiguity-averse attitudes or ambiguity-seeking attitudes. To address the second question we designed a new experiment with a
built-in incentive to persuade. We found that interpersonal interactions without incentives to persuade have no effect on behaviour.
However, when incentives were introduced, the ambiguity neutral subjects were better able to persuade ambiguity seeking and
ambiguity incoherent subjects to adopt ambiguity neutral choice behaviour and, to a lesser extent, also ambiguity averse subjects.
Payne, John W; Sagara, Namika; Shu, Suzanne B; Appelt, Kirstin C; Johnson, Eric J (2013). Life expectancy as a constructed belief:
Evidence of a live-to or die-by framing effect. Springer, - 24 pages. [RKN: 71218]
Life expectations are essential inputs for many important personal decisions. We propose that longevity beliefs are responses
constructed at the time of judgment, subject to irrelevant task and context factors, and leading to predictable biases. Specifically,
we examine whether life expectancy is affected by the framing of expectations questions as either live-to or die-by, as well as by
factors that actually affect longevity such as age, gender, and self-reported health. We find that individuals in a live-to frame report
significantly higher chances of being alive at ages 55 through 95 than people in a corresponding die-by frame. Estimated mean life
expectancies across three studies and 2300 respondents were 7.38 to 9.17 years longer when solicited in a live-to frame. We are
additionally able to show how this framing works on a process level and how it affects preference for life annuities. Implications for
models of financial decision making are discussed.
Sloan, Frank A; Platt, Alyssa C; Chepke, Lindsey M; Blevins, Claire E (2013). Deterring domestic violence: Do criminal sanctions
reduce repeat offenses?. Springer, - 30 pages. [RKN: 71219]
This study presents an empirical analysis of domestic violence case resolution in North Carolina for the years 2004 to 2010. The
key hypothesis is that penalties at the level set for domestic violence crimes reduce recidivism (re-arrest on domestic violence
charges or conviction in 2 years following an index arrest). We use state court data for all domestic violence-related arrests.
Decisions to commit an act of domestic violence are based on a Bayesian process of updating subjective beliefs. Individuals have
prior beliefs about penalties for domestic violence based on actual practice in their areas. An individuals experience with an index
arrest leads to belief updating. To address endogeneity of case outcomes, we use an instrumental variables strategy based on
decisions of prosecutors and judges assigned to each index arrest in our sample. Contrary to our hypothesis, we find that
penalties, at least as set at the current levels, do not deter future arrests and convictions.
Conte, Anna; Hey, John D (2013). Assessing multiple prior models of behaviour under ambiguity. Springer, - 20 pages. [RKN: 71487]
The recent spate of theoretical models of behaviour under ambiguity can be partitioned into two sets: those involving multiple
priors and those not involving multiple priors. This paper provides an experimental investigation into the first set. Using an
appropriate experimental interface we examine the fitted and predictive power of the various theories. We first estimate
subject-by-subject, and then estimate and predict using a mixture model over the contending theories. The individual estimates
suggest that 24% of our 149 subjects have behaviour consistent with Expected Utility, 56% with the Smooth Model, 11% with
Rank Dependent Expected Utility and 9% with the Alpha Model; these figures are close to the mixing proportions obtained from
the mixture estimates where the respective posterior probabilities of each of them being of the various types are 25%, 50%, 20%
and 5%; and using the predictions 22%, 53%, 22% and 3%. The Smooth model appears the best.
Burghart, Daniel R; Glimcher, Paul W; Lazzaro, Stephanie C (2013). An expected utility maximizer walks into a bar.... Springer, [RKN:
46093]
We conducted field experiments at a bar to test whether blood alcohol concentration (BAC) correlates with violations of the
generalized axiom of revealed preference (GARP) and the independence axiom. We found that individuals with BACs well above
the legal limit for driving adhere to GARP and independence at rates similar to those who are sober. This finding led to the fielding
of a third experiment to explore how risk preferences might vary as a function of BAC. We found gender-specific effects: Men did
not exhibit variations in risk preferences across BACs. In contrast, women were more risk averse than men at low BACs but
exhibited increasing tolerance towards risks as BAC increased. Based on our estimates, men and womens risk preferences are
predicted to be identical at BACs nearly twice the legal limit for driving. We discuss the implications for policy-makers.
Seidl, Christian (2013). The St. Petersburg paradox at 300. [RKN: 46094]
Nicolas Bernoullis discovery in 1713 that games of hazard may have infinite expected value, later called the St. Petersburg
Paradox, initiated the development of expected utility in the following three centuries. An account of the origin and the solution
concepts proposed for the St. Petersburg Paradox is provided. DAlemberts ratio test is used for a uniform treatment of the
manifestations of the St. Petersburg Paradox and its solution proposals. It is also shown that a St. Petersburg Paradox can be
solved or regained by appropriate transformations of the winnings or their utilities on the one hand or the probabilities on the other.
This last feature is novel for the analysis of the St. Petersburg Paradox.
38
Miller, Nolan; Wagner, Alexander F; Zeckhauser, Richard J (2013). Solomonic separation: risk decisions as productivity indicators.
[RKN: 46095]
A principal provides budgets to agents (e.g., divisions of a firm or the principals children) whose expenditures provide her benefits,
either materially or because of altruism. Only agents know their potential to generate benefits. We prove that if the more
productive agents are also more risk-tolerant (as holds in the sample of individuals we surveyed), the principal can screen agents
and bolster target efficiency by offering a choice between a nonrandom budget and a two-outcome risky budget. When, at very low
allocations, the ratio of the more risk-averse types marginal utility to that of the other type is unbounded above (e.g., as with
CRRA), the first-best is approached.A biblical opening enlivens the analysis.
Taylor, Matthew P (2013). Bias and brains: risk aversion and cognitive ability across real and hypothetical settings. [RKN: 46096]
I collect data on subjects risk attitudes using real and hypothetical risky choices. I also measure their cognitive ability using the
cognitive reflective test (CRT). On average, measured risk preferences are not significantly different across real and hypothetical
settings. However, cognitive ability is inversely related to risk aversion when choices are hypothetical, but it is unrelated when the
choices are real. This interaction between cognitive ability and hypothetical setting is consistent with the notion that some
individuals, specifically higher-ability individuals, may treat hypothetical choices as puzzles, and provides one potential
explanation for why some studies find that subjects indicate that they are more tolerant of risk when they make hypothetical
choices than when they make real choices.
Olson, Mary K (2013). Eliminating the U.S. drug lag: Implications for drug safety. - 30 pages. [RKN: 76000]
An increase in new drugs first launched in the U.S. and shorter lags between first global drug launch and U.S. approval indicate
that the U.S. drug lag has declined. This paper examines the impact of these changes on drug safety using adverse drug reaction
data for FDA-approved drugs in 1990 to 2004. Results show two different effects. First, drugs having longer U.S. launch lags
(more foreign market experience) have fewer post approval drug risks compared to drugs with shorter launch lags. This result
implies that foreign market experience prior to U.S. entry provides information to help alleviate drug-related risks for U.S. patients.
Second, drugs that are first launched in the U.S. have fewer serious drug reactions compared to those that were first launched
abroad. This result is surprising, and may suggest that first U.S. drug launch signals information about unobserved application
quality, which translates into lower post approval drug risks.
Crosetto, Paolo; Filippin, Antonio (2013). The bomb risk elicitation task. - 36 pages. [RKN: 76001]
This paper presents the Bomb Risk Elicitation Task (BRET), an intuitive procedure aimed at measuring risk attitudes. Subjects
decide how many boxes to collect out of 100, one of which contains a bomb. Earnings increase linearly with the number of boxes
accumulated but are zero if the bomb is also collected. The BRET requires minimal numeracy skills, avoids truncation of the data,
allows the precise estimation of both risk aversion and risk seeking, and is not affected by the degree of loss aversion or by
violations of the Reduction Axiom. We validate the BRET, test its robustness in a large-scale experiment, and compare it to three
popular risk elicitation tasks. Choices react significantly only to increased stakes, and are sensible to wealth effects. Our
experiment rationalizes the gender gap that often characterizes choices under uncertainty by means of a higher loss rather than
risk aversion.
Gollier, Christian; Hammitt, James K; Treich, Nicolas (2013). Risk and choice: A research saga. Springer, - 17 pages. [RKN: 74076]
The economic theory of decision making under risk has seen remarkable advances over the 50 years since Pratts (1964)
characterization of risk aversion under expected utility. We review developments in three key areas to which Louis Eeckhoudt has
made significant contributions: (1) increases in risk and risk taking; (2) self-protection and risk aversion; and (3) higher (and lower)
order derivatives of utility. For each, we identify seminal papers, puzzles, and recent developments. The saga of research on
these topics reveals that important contributions were made long ago and yet significant gains in understanding continue to be
made. Recent advances often have roots in early results and researchers can profit by examining the old as well as the new
papers.
Noussair, Charles N; Trautmann, Stefan T; van de Kuilen, Gijs; Vellekoop, Nathanael (2013). Risk aversion and religion. Springer, 19 pages. [RKN: 74078]
We use a dataset for a demographically representative sample of the Dutch population that contains a revealed preference risk
attitude measure, as well as detailed information about participants religious background, to study three issues. First, we find
strong confirmatory evidence that more religious people, as measured by church membership or attendance, are more risk averse
with regard to financial risks. Second, we obtain some evidence that Protestants are more risk averse than Catholics in such tasks.
Third, our data suggest that the link between risk aversion and religion is driven by social aspects of church membership, rather
than by religious beliefs themselves.
Liu, Liqun; Meyer, Jack (2013). Normalized measures of concavity and Rosss strongly more risk averse order. Springer, - 14 pages.
[RKN: 74079]
The Arrow-Pratt (A-P) definitions of absolute and relative risk aversion dominate the discussion of risk aversion and defining more
risk averse. Ross (Econometrica 49:621663, 1981) notes, however, that being A-P more risk averse is not sufficient for
addressing many important comparative static questions. Consequently he introduces a new and stronger measure for
comparing two agents attitudes towards risk. Ross does not provide a corresponding measure of risk aversion. This paper
uses a normalized measure of concavity to characterize the Ross definition of strongly more risk averse on bounded intervals.
Other properties and uses of these normalized measures of concavity are also presented.
39
Jouini, Elys; Napp, Clotilde; Nocetti, Diego (2013). Economic consequences of Nth-degree risk increases and Nth-degree risk
attitudes. Springer, - 26 pages. [RKN: 74080]
We study comparative statics of Nth-degree risk increases within a large class of problems that involve bidimensional payoffs and
additive or multiplicative risks. We establish necessary and sufficient conditions for unambiguous impact of Nth-degree risk
increases on optimal decision making. We develop a simple and intuitive approach to interpret these conditions : novel notions of
directional Nth-degree risk aversion that are characterized via preferences over lotteries.
Abdellaoui, Mohammed; Bleichrodt, Han; lHaridon, Olivier (2013). Sign-dependence in intertemporal choice. Springer, - 29 pages.
[RKN: 74168]
Allowing for sign-dependence in discounting substantially improves the description of peoples time preferences. The deviations
from constant discounting that we observed were more pronounced for losses than for gains. Our data also suggest that the
discount function should be flexible enough to allow for increasing impatience. These findings challenge the current practice in
modeling intertemporal choice where sign-dependence is largely ignored and only decreasing impatience is allowed. Overall, the
sign-dependent model of Loewenstein and Prelec (1992) with the constant sensitivity discount function of Ebert and Prelec (2007)
provided the best fit to our data.
Cavagnaro, Daniel R; Pitt, Mark A; Gonzalez, Richard; Myung, Jay I (2013). Discriminating among probability weighting functions
using adaptive design optimization. Springer, - 35 pages. [RKN: 74169]
Probability weighting functions relate objective probabilities and their subjective weights, and play a central role in modeling
choices under risk within cumulative prospect theory. While several different parametric forms have been proposed, their
qualitative similarities make it challenging to discriminate among them empirically. In this paper, we use both simulation and
choice experiments to investigate the extent to which different parametric forms of the probability weighting function can be
discriminated using adaptive design optimization, a computer-based methodology that identifies and exploits model differences
for the purpose of model discrimination. The simulation experiments show that the correct (data-generating) form can be
conclusively discriminated from its competitors. The results of an empirical experiment reveal heterogeneity between participants
in terms of the functional form, with two models (Prelec-2, Linear-in-Log-Odds) emerging as the most common best-fitting models.
The findings shed light on assumptions underlying these models.
Wang, Yitong; Feng, Tianjun; Keller, L Robin (2013). A further exploration of the uncertainty effect. Springer, - 20 pages. [RKN: 74170]
Individual valuation of a binary lottery at values less than the lotterys worst outcome has been designated as the uncertainty
effect. Our paper aims to explore the boundary conditions of the uncertainty effect by investigating a plausible underlying process
and proposing two possible methods. First, we examine how providing an exogenous evaluation opportunity prior to judging the
value of the lottery affects individuals judgments, and find that first valuing the worst outcome and then the lottery eliminates the
uncertainty effect. Second, we explore whether introducing additional cognitive load dampens how far decision makers correct
their initial evaluations, and find that additional cognitive load is able to eliminate the uncertainty effect.
Hammitt, James K (2013). Admissible utility functions for health, longevity, and wealth: Integrating monetary and life-year measures.
Springer, - 15 pages. [RKN: 74171]
The value of reducing health and mortality risks is often measured using value per statistical life (VSL) or one of several life-year
measures (e.g., life years, quality-adjusted life years, disability-adjusted life years). I derive the utility function that is admissible
when preferences for health and longevity, conditional on wealth, are consistent with any life-year measure (LYM) and examine
the implications for marginal willingness to pay (WTP) for increases in health, longevity, and current-period survival probability. I
conclude that marginal WTP for any LYM is decreasing and that VSL is increasing in the LYM. These results imply that
cost-effectiveness analysis using a fixed monetary value per LYM is not consistent with economic welfare theory and that the
benefit of a health improvement cannot be calculated by multiplying the change in a LYM by a constant.
Kothiyal, Amit; Spinu, Vitalie; Wakker, Peter P (2014). An experimental test of prospect theory for predicting choice under ambiguity.
Springer, - 17 pages. [RKN: 73757]
Prospect theory is the most popular theory for predicting decisions under risk. This paper investigates its predictive power for
decisions under ambiguity, using its specification through the source method. We find that it outperforms its most popular
alternatives, including subjective expected utility, Choquet expected utility, and three multiple priors theories: maxmin expected
utility, maxmax expected utility, and a-maxmin expected utility.
Nebout, A; Dubois, D (2014). When Allais meets Ulysses: Dynamic axioms and the common ratio effect. Springer, - 31 pages. [RKN:
73758]
We report experimental findings about subjects behavior in dynamic decision problems involving multistage lotteries with different
timings of resolution of uncertainty. Our within-subject design allows us to study violations of the independence and dynamic
axioms: Dynamic Consistency, Consequentialism and Reduction of Compound Lotteries. We investigate the effects of changes in
probability and outcome levels on the pattern of choices observed in the Common Ratio Effect (CRE) and in the Reverse Common
Ratio Effect (RCRE) and on their dynamic counterparts. We find that the probability level plays an important role in violations of
Reduction of Compound Lottery and Dynamic Consistency and the outcomes levels in violations of Consequentialism. Moreover,
more than one quarter of our subjects satisfy the Independence axiom but violate two dynamic axioms. We thus suggest that there
is a greater dissociation that might have been expected between preferences captured by dynamic axioms and those observed
over single-stage lotteries.
40
Mirman, Leonard J; Santugini, Marc (2014). On risk aversion, classical demand theory, and KM preferences. Springer, - 16 pages.
[RKN: 73759]
Building on Kihlstrom and Mirman (Journal of Economic Theory, 8(3), 361388, 1974)s formulation of risk aversion in the case of
multidimensional utility functions, we study the effect of risk aversion on optimal behavior in a general consumers maximization
problem under uncertainty. We completely characterize the relationship between changes in risk aversion and classical demand
theory. We show that the effect of risk aversion on optimal behavior depends on the income and substitution effects. Moreover, the
effect of risk aversion is determined not by the riskiness of the risky good, but rather the riskiness of the utility gamble associated
with each decision.
Scholten, Marc; Read, Daniel (2014). Prospect theory and the forgotten fourfold pattern of risk preferences. Springer, - 17 pages.
[RKN: 73760]
Markowitz (Journal of Political Economy 60:151158, 1952) identified a fourfold pattern of risk preferences in outcome magnitude:
When outcomes are large, people are risk averse in gains and risk seeking in losses, but risk preferences reverse when the
outcomes are small, with people exhibiting risk seeking in gains and risk aversion in losses. This fourfold pattern was not
addressed by either version of prospect theory (Kahneman and Tversky Econometrica 47:363391, 1979; Tversky and
Kahneman Journal of Risk and Uncertainty 5:297323, 1992). We show how prospect theory can accommodate the pattern by
combining an overweighting of low probabilities with a decreasingly elastic value function. We then examine the performance of
prospect theory with two decreasingly elastic value functions: Prospect theory performs better, both quantitatively and
qualitatively, with a normalized logarithmic value function than with a normalized exponential value function. We discuss several
issues, and speculate about why Tversky and Kahneman did not address Markowitzs fourfold pattern.
Richter, Andreas; Schiller, Jorg; Schlesinger, Harris (2014). Behavioral insurance: Theory and experiments. Springer, - 12 pages.
[RKN: 73761]
Risk and insurance provides an illustrative set of decisions made in the presence of uncertainty. As behavioral models become
more integrated into economics and finance, many of their effects are illustrated quite well within insurance markets. Especially
noteworthy are the complementary roles of theory and experiments. This article reviews the interactive role of experiments and
theory in analyzing insurance demand from a behavioral perspective. We pay special attention to several models of
underinvestment in insurance or in other risk-mitigation markets.
Hoy, Michael; Richard, Peter; Richter, Andreas (2014). Take-up for genetic tests and ambiguity. Springer, - 23 pages. [RKN: 73763]
Under the expected utility hypothesis a costless genetic test has, at worst, zero private value. This happens if it does not affect
optimal decisions. If the genetic test facilitates better decision-making for at least one possible test outcome, then it has positive
private value. This theoretical result seems to contradict the fact that empirically observed take-up rates for genetic tests are
surprisingly low. We demonstrate that if individuals display ambiguity aversion, a costless genetic test that does not affect optimal
decisions is never taken. Furthermore, there is a trade-off between aversion against uncertainty of test results and utility gains
from better decision-making if optimal decisions depend on the level of information. The reason is that, from an ex-ante view, a
genetic test introduces uncertainty of probabilities which diminishes the value of information to an ambiguity-averse
decision-maker. Ambiguity aversion regarding test results thus provides an explanation for low take-up rates for genetic tests.
Tausch, Franziska; Potters, Jan; Riedl, Arno (2014). An experimental investigation of risk sharing and adverse selection. Springer, - 20
pages. [RKN: 73765]
Does adverse selection hamper the effectiveness of voluntary risk sharing? How do differences in risk profiles affect adverse
selection? We experimentally investigate individuals willingness to share risks with others. Across treatments we vary how risk
profiles differ between individuals. We find strong evidence for adverse selection if individuals risk profiles can be ranked
according to first-order stochastic dominance and only little evidence for adverse selection if risk profiles can only be ranked
according to mean-preserving spreads. We observe the same pattern also for anticipated adverse selection. These results
suggest that the degree to which adverse selection erodes voluntary risk sharing arrangements crucially depends on the form of
risk heterogeneity.
Kniesner, Thomas J; Viscusi, W Kip; Ziliak, James P (2014). Willingness to accept equals willingness to pay for labor market estimates
of the value of a statistical life. Springer, - 19 pages. [RKN: 74479]
Our research clarifies the conceptual linkages among willingness to pay for additional safety, willingness to accept less safety, and
the value of a statistical life (VSL). We present econometric estimates using panel data to analyze the VSL levels associated with
job changes that may affect the workers exposure to fatal injury risks. Our baseline VSL estimates are $7.7 million and $8.3
million (Y$2001). There is no statistically significant divergence between willingness-to-accept VSL estimates associated with
wage increases for greater risks and willingness-to-pay VSL estimates as reflected in wage changes for decreases in risk. Our
focal result contrasts with the literature documenting a considerable asymmetry in tradeoff rates for increases and decreases in
risk. An important implication for policy is that it is reasonable to use labor market estimates of VSL as a measure of the willingness
to pay for additional safety.
Andersen, Steffen; Fountain, John; Harrison, Glenn W; Rutstrm, E Elisabet (2014). Estimating subjective probabilities. Springer, 23 pages. [RKN: 74480]
Subjective probabilities play a central role in many economic decisions and act as an immediate confound of inferences about
behavior, unless controlled for. Several procedures to recover subjective probabilities have been proposed, but in order to recover
the correct latent probability one must either construct elicitation mechanisms that control for risk aversion, or construct elicitation
mechanisms which undertake calibrating adjustments to elicited reports. We illustrate how the joint estimation of risk attitudes
and subjective probabilities can provide the calibration adjustments that theory calls for. We illustrate this approach using data
from a controlled experiment with real monetary consequences to the subjects. This allows the observer to make inferences about
the latent subjective probability, under virtually any well-specified model of choice under subjective risk, while still employing
relatively simple elicitation mechanisms.
41
Ebert, Sebastian; Wiesen, Daniel (2014). Joint measurement of risk aversion, prudence, and temperance. Springer, - 22 pages. [RKN:
74481]
Risk aversion - but also the higher-order risk preferences of prudence and temperance - are fundamental concepts in the study of
economic decision making. We propose a method to jointly measure the intensity of risk aversion, prudence, and temperance. Our
theoretical approach is to define risk compensations of different orders, and in an experiment we elicit these compensations with
a price list technique. We find evidence for risk aversion, prudence, and temperance. These traits correlate within subjects. The
compensations elicited for prudence are significantly larger than those for risk aversion and temperance. In contrast to commonly
used utility functions, prospect theory can predict this behavioral pattern. In our experiment, risk-averse, risk-loving, and
risk-neutral subjects are prudent. This supports a recent theoretical observation that prudence may be a more universal trait than
previously realized.
Lewandowski, Michal (2014). Buying and selling price for risky lotteries and expected utility theory with gambling wealth. Springer, - 31
pages. [RKN: 74482]
I analyze two expected utility models which abandon the consequentialist assumption of terminal wealth positions. In the expected
utility of gambling wealth model, in which initial wealth is allowed to be small, I show that a large WTA/WTP gap is possible and the
(Rabin in Econometrica, 68(5), 12811292, 2000) paradox may be resolved. Within the same model the classical preference
reversal which allows arbitrage is not possible, whereas preference reversal (involving buying prices in place of selling prices),
which does not allow arbitrage, is possible. In the expected utility of wealth changes model, in which there is no initial wealth, I
show that both a WTA/WTP gap as well as the classical preference reversal are possible due to loss aversion, both in its general
as well as some specific forms.
Hey, John D; Pae, Noemi (2014). The explanatory and predictive power of non two-stage-probability theories of decision making under
ambiguity. Springer, - 29 pages. [RKN: 74483]
Representing ambiguity in the laboratory using a Bingo Blower (which is transparent and not manipulable) and asking the subjects
a series of allocation questions, we obtain data from which we can estimate by maximum likelihood methods (with explicit
assumptions about the errors made by the subjects) a significant subset of particular parameterisations of the empirically relevant
models of behaviour under ambiguity, and compare their relative explanatory and predictive abilities. Our results suggest that not
all recent models of behaviour represent a major improvement in explanatory and predictive power, particularly the more
theoretically sophisticated ones.
Ert, Eyal; Trautmann, Stefan T (2014). Sampling experience reverses preferences for ambiguity. Springer, - 12 pages. [RKN: 74484]
People often need to choose between alternatives with known probabilities (risk) and alternatives with unknown probabilities
(ambiguity). Such decisions are characterized by attitudes towards ambiguity, which are distinct from risk attitudes. Most studies
of ambiguity attitudes have focused on the static case of single choice, where decision makers typically prefer risky over
ambiguous prospects. However, in many situations, decision makers may be able to sample outcomes of an ambiguous
alternative, allowing for inferences about its probabilities. The current paper finds that such sampling experience reverses the
pattern of ambiguity attitude observed in the static case. This effect can only partly be explained by the updating of probabilistic
beliefs, suggesting a direct effect of sampling on attitudes toward ambiguity.
Carman, Katherine Grace; Kooreman, Peter (2014). Probability perceptions and preventive health care. Springer, - 29 pages. [RKN:
74485]
We study the effect of perceptions in comparison with more objective measures of risk on individuals decisions to decline or
accept risk reducing interventions such as flu shots, mammograms, and aspirin for the prevention of heart disease. In particular,
we elicit individuals subjective probabilities of risk, with and without the interventions, and compare these perceptions to
individually predicted risk based on epidemiological models. Respondents, especially women, appear to be aware of some of the
qualitative relationships between risk factors and probabilities. However, on average they have very poor perceptions of the
absolute probability levels as reported in the epidemiological literature. Perceptions of the level of risk are less accurate if a
respondent is female and has poor numeracy skills. We find that perceived probabilities significantly affect the subsequent take-up
rate of flu shots, mammograms, and aspirin, even after controlling for individually predicted risk using epidemiological models.
Ekins, W Gavin; Brooks, Andrew M; Berns, Gregory S (2014). The neural correlates of contractual risk and penalty framing. Springer,
- 16 pages. [RKN: 74488]
Standard economic theory treats contractual risk the same as risk experienced in a lottery, but the transfer of risk from principal to
agent may change the perception of risk. Previous experimental studies have shown that positive and negative framing affects
both gambles and incentive contracts. An agents perception of bonus and penalty framing in a contract can determine the extent
to which lottery risk and contractual risk are similar. We designed an experiment that tested the effect of bonus and penalty framed
contracts on behavior under an implicit chance of failure. Moreover, we used functional magnetic resonance imaging (fMRI) to
observe brain activity while participants viewed the contracts and purchased precautionary measures. We found that the dorsal
striatum was more active during a penalty frame than a bonus frame. The study suggests that risk experienced by agents in an
incentive contract is not comparable to risk experienced as a lottery.
Barreda-Tarrazona, Ivan; Jaramillo-Gutierrez, Ainhoa; Navarro-Martinez, Daniel; Sabater-Grande, Gerardo (2014). The role of
forgone opportunities in decision making under risk. Springer, - 22 pages. [RKN: 74490]
We present two experiments designed to study the role of forgone opportunities in decision making under risk. In the first one, we
face individuals with a dynamic environment in which their decisions, together with chance, determine their future options. We find
that previously faced opportunities influence subsequent choices in predictable ways. Having faced worse options in the past
significantly increases individuals risk aversion and having faced better options reduces it. These patterns are at odds with most
existing decision theories, including Expected Utility Theory and standard implementations of Prospect Theory, the dominant
models of economic decision making. In our second experiment, we present participants with a similar decision environment, but
42
in which the opportunities they face do not depend on their past choices. The effect of previously faced options on decision
behavior in this environment is considerably reduced. This shows that being responsible for forgoing opportunities is an important
factor in their influence on behavior, which underscores the relevance of emotions linked to counterfactual thinking, like regret or
satisfaction. These results highlight that theories formulated in cognitive terms are not enough to provide an adequate account of
the role of forgone opportunities in decision making under risk and uncertainty.
JOURNAL OF RISK MANAGEMENT IN FINANCIAL INSTITUTIONS
Koenig, David R (2012). The governance of risk : Guest editorial. Henry Stewart Publications, [RKN: 45688]
Journal of Risk Management in Financial Institutions (2012) 5(2) : 108-111.
Monks, Robert A G (2012). Risk and the shareholder. Henry Stewart Publications, [RKN: 45689]
The modern meaning of shareholder has morphed from an engaged owner to a passive provider of capital. Should rights afforded
to such passive capitalists be equal to those whose ownership engagement with a corporation is personal and direct? Without the
involvement of active and engaged shareholders, the entire corporate system lacks its energising foundation and a very significant
risk arises from the relative absence of the effective monitoring and supervising energy that those with ownership interests are
more likely to provide.
Breen, Erik; Clearfield, Andrew; Klimczak, Karol M (2012). ICGN corporate risk oversight guidelines : The role of the board and
institutional shareholders. Henry Stewart Publications, [RKN: 45690]
Oversight of risk has become a significant issue in the corporate governance debate following the failure of traditional institutions.
In the aftermath of the crisis, the International Corporate Governance Network (ICGN) developed the ICGN Corporate Risk
Oversight Guidelines to help institutional investors assess how effectively the boards of their portfolio companies carry out their
oversight function regarding financial and non-financial risk. The ICGN Guidelines reflect a consensus achieved during a year of
discussions between technical committee members, the sounding board and contributors of comment letters, who represented
various institutions and jurisdictions across the world. These debates have culminated in a document that discusses not only the
board and company process of risk management and risk oversight and disclosures concerning financial and non-financial risks,
but also the investors' responsibilities in oversight and their communication with the companies. The purpose of this paper is to
present the ICGN Guidelines with a commentary linking it to the current debate and developments in the corporate world.
McConnell, Patrick (2012). The governance of strategic risks in systemically important banks. Henry Stewart Publications, [RKN: 45691]
Among the many market weaknesses highlighted by the global financial crisis, the widespread failures of corporate governance
and risk management were identified by official inquiries as being critical. As a result, banking regulatory bodies have responded,
proposing long overdue principles of good corporate governance, in particular tightening up on the roles and responsibilities of
boards of directors. Strategic risk is arguably, because of the immense uncertainty in the global economy, the greatest risk facing
any firm, most especially systemically important banks (SIB); however, strategic risk management, or the management of the risks
to a firm's long-term corporate strategy, is not a well-developed discipline. The lack of maturity in the discipline stems, in part, from
a fundamental conflict of interest in that the board and management own a firm's strategy but they are at the same time also
responsible for implementing the strategy and managing the strategic risks. There is no independent review of the strategic risks
taken by many firms, which constitutes a serious deficiency in corporate governance. This paper considers the governance of
strategic risks, using Lehman Brothers as a case study, identifying areas of deficiency of governance of strategic risk in practice.
The paper also proposes some potential solutions to help address such governance problems.
Lukomnik, Jon (2012). Our inability to judge time frames. Henry Stewart Publications, [RKN: 45692]
Properly assessing time is fundamental to risk governance and risk management. However, two recent studies reveal systemic
weaknesses in how accurately future events are discounted. The first reveals that distant cash flows are over discounted and the
second suggests that self-defined time horizons are ineffective and ignored.
Bonollo, Michele; Neri, Massimiliano (2012). Data quality in banking : Regulatory requirements and best practices. Henry Stewart
Publications, [RKN: 45693]
Since the beginning of the financial crisis in 2007, the quality of risk data has become a subject of concern for risk managers in
banks and other financial institutions. In order to tackle this subject a four-step analysis is proposed. First, the issues associated
with risk data quality in the banking sector are examined, the main one being the silo organisation of risk data. Secondly, the paper
reviews the existing data quality regulations in the financial sector, summarising briefly the requirements in Basel II and in
Solvency II (the first regulation that provided formal requirements for data quality). Thirdly, a best practice proposal is made for
banks in a centralised approach to risk data, involving the integration of risk and finance data. Finally, the centralised data
approach is combined with a sensitivity technique in order to obtain more effective data quality strategies and indicators.
43
Rodriguez, Eduardo; Edwards, John S (2012). Transferring knowledge of risk management to the board of directors and executives.
Henry Stewart Publications, [RKN: 45694]
Enterprise risk management (ERM) and knowledge management (KM) both encompass top-down and bottom-up approaches
developing and embedding risk knowledge concepts and processes in strategy, policies, risk appetite definition, the
decision-making process and business processes. The capacity to transfer risk knowledge affects all stakeholders and
understanding of the risk knowledge about the enterprise's value is a key requirement in order to identify protection strategies for
business sustainability. There are various factors that affect this capacity for transferring and understanding. Previous work has
established that there is a difference between the influence of KM variables on risk control and on the perceived value of ERM.
Communication among groups appears as a significant variable in improving risk control but only as a weak factor in improving the
perceived value of ERM. The ERM mandate, however, requires for its implementation a clear understanding of risk management
(RM) policies, actions and results, and the use of the integral view of RM as a governance and compliance programme to support
the value-driven management of the organisation. Furthermore, ERM implementation demands better capabilities for unification of
the criteria of risk analysis, alignment of policies and protection guidelines across the organisation. These capabilities can be
affected by risk knowledge sharing between the RM group and the board of directors and other executives in the organisation.
This research presents an exploratory analysis of risk knowledge transfer variables used in risk management practice. A survey to
risk management executives from 65 firms in various industries was undertaken and 108 answers were analysed. Potential
relationships among the variables are investigated using descriptive statistics and multivariate statistical models. The level of
understanding of risk management policies and reports by the board is related to the quality of the flow of communication in the
firm and perceived level of integration of the risk policy in the business processes.
Bugalla, John; Kallman, James; Lindo, Steve; Narvaez, Kristina (2012). The new model of governance and risk management for
financial institutions. Henry Stewart Publications, [RKN: 45695]
The paper proposes a new model of governance and risk management consisting of four components: (i) board risk oversight
responsibilities, (ii) a board level risk committee, (iii) an executive risk committee and (iv) an individual with responsibility for overall
risk management. Some companies are subject to the DoddFrank Act and are forming a stand-alone risk committee; other
companies still have the option of adopting these best practices. The paper contends that the new model promotes greater risk
disclosure, the audit committee should complement the risk management committee, the board level risk committee should have
an independent member with extensive risk management experience, the board should develop a clear risk position, management
should form an executive risk committee, have a chief risk officer, create an internal risk intelligence function and, if these are
done, institutions will enjoy higher stock prices.
Koenig, David R (2012). The governance of value(s). Henry Stewart Publications, [RKN: 45696]
Based on excerpts from Governance Reimagined: Organizational Design, Risk and Value Creation, to be published by John Wiley
& Sons, May 2012, the author explores the relationship between value and the pursuit of values with a specific focus on the role
that resiliency plays in our ability to be successful in creating value. Psychological influences such as loss avoidance are greatly
underappreciated and forms of corporate governance like network governance can play an important role in minimising the impact
of these factors, along with enhancing the ability of organisations to create value.
Haldane, Andrew G (2012). On counterparty risk : Lead comment. Henry Stewart Publications, [RKN: 45706]
The financial crisis demonstrated the inadequacy of the management of counterparty credit risk and the vulnerability of financial
structures to counterparty concerns. Three possible solutions are proposed to mitigate such risks in the future: improved network
visibility to understand credit chains; the clearing of transactions centrally to improve transparency and reduce intra-financial
system debt; and building protection against counterparty default through higher capital and margining requirements.
Bocker, Klaus; Stamm, Roland (2012). Counterparty credit risk : News, views and open issues : Comment. Henry Stewart Publications,
[RKN: 45707]
Counterparty credit risk (CCR) is a central topic for any modern financial institution's risk management. In this paper we present a
personal selection of issues related to CCR measurement which we consider still unresolved or at least controversial. These
issues include credit value adjustment, exposure simulation, valuation in general and model risk.
Pykhtin, Michael (2012). General wrong-way risk and stress calibration of exposure. Henry Stewart Publications, [RKN: 45708]
A conceptually sound method of incorporating general wrong-way risk (WWR) into the asymptotic single risk factor (ASRF)
framework that underlies Basel capital rules is shown in the first part of this paper. An algorithm is presented that converts the
unconditional distribution of netting-set-level exposure generated by an arbitrary Monte Carlo simulation process to an exposure
at default (EAD) measure that consistently incorporates general WWR under the ASRF framework. The conversion is done at a
counterparty level via a simple closed-form function of a single parameter that controls the strength of general WWR. The second
part of the paper analyses the Basel III requirement that, in addition to normal calibration, banks credit exposure models must be
calibrated to a period of stress. Basel III justified the introduction of stress calibration by the need for capturing general WWR.
However, it is argued that stress calibration of exposure does not address general WWR adequately. Simple examples are used to
show that EADs obtained with stress calibration for a benign period will severely overstate not only the EAD seen in that benign
period, but also the EAD seen in the stressed period.
Rosen, Dan; Saunders, David (2012). CVA the wrong way. Henry Stewart Publications, [RKN: 45709]
The credit valuation adjustment (CVA) has become an integral part of accounting rules and Basel III. The case where the
counterparty exposure increases when its credit quality deteriorates is commonly referred as wrong-way risk (WWR). WWR can
have a significant impact on CVA, economic capital and collateralised exposures with margins. A robust method is presented to
calculate CVA with WWR that is intuitive, easy to implement and computationally efficient. The methodology effectively leverages
existing pre-computed exposures into a joint market and credit risk portfolio model, which allows the performance of multiple CVA
calculations for sensitivities, stress testing and value-at-risk (VaR). It further provides a model risk framework for assessing both
general and idiosyncratic WWR, and stress testing both the factors driving correlations as well as the strength of the correlations.
44
The approach is demonstrated through a practical example. While the impact of WWR at the counterparty level can be very
significant, the effect of general WWR at the portfolio level may not be as strong for well balanced, large portfolios of derivatives.
Furthermore, the standardised charge in Basel III can be significant even when compared against very conservative internal
models with WWR.
Arnsdorf, Matthias (2012). Quantification of central counterparty risk. Henry Stewart Publications, [RKN: 45710]
A clearing member of a central counterparty (CCP) is exposed to losses on their guarantee fund and initial margin contributions.
Such losses can be incurred whenever the CCP has insufficient funds to unwind the portfolio of a defaulting clearing member. This
does not necessarily require the default of the CCP itself. In this paper the aim is to quantify the risk a financial institution has when
facing a CCP. It is shown that a clearing member's CCP risk is given by a sum of exposures to each of the other clearing members.
This arises because of the implicit default insurance that each member has provided in the form of mutualised, loss sharing
collateral. The exposures are calculated by explicitly modelling the capital structure of a CCP as well as the loss distributions of the
individual member portfolios. An important consideration in designing the model is the limited transparency with respect to the
portfolio composition and collateral levels of individual clearing members. To overcome this the fact is leveraged that, for a typical
CCP, margin levels are risk based. In particular, the portfolio loss tail as a Pareto distribution is parameterised and this is
calibrated to the CCP defined probability of losses exceeding the posted initial margin levels. A key aspect of the model is that
wrong-way risk is explicitly taken into account, ie the fact that member defaults are more likely to occur in stressed market
conditions, as well as potential contagion between a member's default and the losses on his portfolio.
Grody, Allan D; Hughes, Peter J; Reininger, Daniel (2012). Legal and regulatory update : Global identification standards for
counterparties and other financial market participants. Henry Stewart Publications, [RKN: 45711]
Financial regulators are focused on observing systemic risk across enormously complex interconnected global financial
institutions. It is understood that without an ability to view the underlying positions and cash flows, valued in standard ways and
aggregated by counterparty through common identifiers, neither risk triggers nor risk exposures can be observed nor can systemic
threats be detected. It has been accepted by regulators that the very first pillar of global financial reform is a standard for
identifying the same financial market participant to each regulator in the same way. Getting agreement on a globally unique and
standardised legal entity identifier (the LEI) is the first step. This paper reports on past and current efforts to develop a global
identification system for such a purpose. The authors argue for a government/industry partnership in which governance is shared
and operating elements of the global identification system are compartmentalised for control, security and confidentiality
purposes. The paper demonstrates a proposed global identification system that satisfies all known elements of regulators'
requirements for the LEI and also lays the foundation for accommodating other attributes, such as business ownership
hierarchical structures and contract and instrument identification.
Krishna, Dilip (2012). Data aggregation and counterparty identification : Considerations for systemic risk analysis. Henry Stewart
Systemic risk analysis is now a topic of considerable interest the world over. It requires a combined analysis of the large
counterparties in the global economy along with the interactions they have with each other. The availability of a comprehensive
and quality dataset is important to systemic risk analysis. This paper discusses the kinds of data potentially required for systemic
risk analysis and provides insights into the desired components of a systemic risk information solution.
Singh, Manmohan (2012). Fallacy of moving the OTC derivatives market to CCPs : Comment. Henry Stewart Publications, [RKN: 45713]
Recent regulatory efforts, especially in the USA and Europe, are aimed at reducing moral hazard so that the next financial crisis is
not bailed out by tax payers. This paper suggests that the regulatory proposals may not remove systemic risk from
over-the-counter (OTC) derivatives but rather shift it from banks to central counterparties (CCPs). Furthermore, another taxpayer
bailout cannot be ruled out. This paper also suggests that a tax on the derivative liabilities of large banks would address the source
of the problem (ie under-collateralisation), and make the OTC derivatives market safer. We also show that, as a by-product, this
suggestion would lower CDS spreads in distressed sovereigns.
Murphy, David (2012). The systemic risks of OTC derivatives central clearing. Henry Stewart Publications, [RKN: 45714]
This paper examines the changes to systemic risk made by the introduction of over the counter derivatives central clearing. It
discusses both the reductions in exposure brought about by the introduction of central counterparties (CCPs) as buffers between
derivatives counterparties, and the risks posed by the potential for a CCP failure. In particular, this paper studies both the solvency
risks whereby a CCP might sustain sufficient losses to be unable to continue operations, and liquidity risks whereby the failure of
a CCP or one of its members may be caused by an inability to meet claims. Based on this analysis, possible mitigants are
suggested to the principal systemic risks posed by central clearing.
Milne, Alistair (2012). OTC central counterparty clearing : Myths and reality. Henry Stewart Publications, [RKN: 45715]
This paper discusses the costs and benefits of introducing central counterparty clearing (CCP) in over-the-counter (OTC)
derivative markets. It argues: (i) that the costs are not so large as some commentary has suggested, at least provided that
mandatory clearing is applied only to widely traded standardised contracts; (ii) that the key economic benefits of having CCP
clearing do not come from reduction of counterparty credit risk (firms are perfectly capable of doing this on their own) it is
instead improved oversight of market participants and the coordinated management of open positions following the failure of a
systemically important financial institution, ie the management of default in a systemic crisis; (iii) because these benefits are public
goods some policy intervention is appropriate to encourage a suitable level of adoption of CCP clearing; and finally (iv) that the
rule based approach to CCP clearing of OTC contracts required by DoddFrank has become diverted into an inappropriate focus
on the precise requirements for mandatory clearing. Instead a more flexible approach can achieve an appropriate balance
between reduced systemic financial risk and the compliance burden on firms.
45
Maguire, Frances; Bessis, Joel (2012). Editorial : FX : The clearing conundrum. Henry Stewart Publications, [RKN: 45845]
Mortimer-Lee, Paul (2012). The effects and risks of quantitative easing. Henry Stewart Publications, [RKN: 45846]
Quantitative easing (QE) comes in many forms, each tailored to the specific needs of the region in question. What they all have in
common, though, is that they are the result of the failure of conventional policy to deliver the outcomes policymakers want. There
are many risks associated with unconventional tools such as QE and a number of drawbacks. But central banks around the world
have taken risks with the future in a bid to avoid adverse consequences today or tomorrow. They hope that by the time QE draws
to an end, they, the markets, the financial system and the wider economy will be able to manage those risks effectively. Whether
they can remains to be seen.
Ulbrich, Jens; Lipponer, Alexander (2012). Is the build-up of TARGET2 balances a question of self-contained risk?. Henry Stewart
This paper argues that imbalances in the TARGET2 payment system are a symptom of the current financial crisis and not subject
to self-contained risk. Any risk for the Eurosystem ultimately arises from liquidity provision and not from the redistribution of
pre-existing liquidity. If the risk element is to be reduced, the extraordinary monetary policy measures of the Eurosystem will have
to be addressed and reversed as soon as possible. Especially in a monetary union of sovereign member states it cannot be the
task of an independent monetary policy to reallocate solvency risks among taxpayers across the currency area. Therefore, the role
of the Eurosystem in tackling the current crisis should not be overstretched. At the end of the day, it is up to the member countries
and not the central banks to resolve the crisis.
Fricke, Jens; Pauly, Ralf (2012). Evaluation of the Basel VaR-based market risk charge and proposals for a needed adjustment. Henry
Stewart Publications, [RKN: 45848]
This analysis shows that in high risk situations the Basel II guidelines fail in the attempt to cushion against large losses by higher
capital requirements. One of the factors causing this problem is that the built-in positive incentive of the penalty factor resulting
from the Basel backtesting is set too weak. Therefore, this paper proposes a new procedure for market risk regulation and it
demonstrates how this works with real time series. A comparison study shows that contrary to the existing Basel regulation the
proposition presented here has the intended quality as a built-in incentive for choosing a reliable forecasting model. By including
the expected shortfall as a further measure of risk this paper's concept yields a steeper increase of the penalty factor and as a
consequence a stronger effect of risk underestimation on the capital requirement. The recent proposal of the Basel Committee on
Banking Supervision may have the same weakness as the Basel II regulation because it is constructed in an analogous manner.
Jones, Brian W (2012). Commercial real estate stress testing in community banks: The low stress kind. Henry Stewart Publications,
[RKN: 45849]
Stress testing has been identified as the most effective method currently available for analysing concentrations in banking
portfolios. For community banks, stress testing does not need to be overly complex or involved. In today's constantly evolving
regulatory environment, community banks must understand the increasing risk inherent in their lending portfolio. Whether
commercial real estate (CRE) stress testing is performed on an internal basis or by a vendor it remains an important tool in
evaluating risk. The process itself brings important benefits in structuring of loan data and quantifying the portfolio's risks. This
article will present a framework for understanding and performing CRE stress testing in community banks that is gradative in
practice and, in some respects, goes beyond the standards adopted by regulators.
Siarka, Pawel (2012). Quality measures of scoring models. Henry Stewart Publications, [RKN: 45850]
One of the basic stages of constructing credit-scoring models is the assessment of their quality understood as the ability to
separate reliable and unreliable borrower population. This paper focuses on methods enabling the assessment of discrimination
quality, and presents the results of researches on the basis of empirical data. Apart from establishing the measure of
discrimination quality, this paper refers to the issue of the assessment of the stability of results obtained by setting a confidence
interval for the quality measure of the scoring model.
Grody, Allan D; Fernandes, Kiran J; Hughes, Peter J; Toms, J Steven (2013). Basel Committee's fundamental review of the trading
book : A commentary. Henry Stewart Publications, [RKN: 46064]
In July 2009, the Basel Committee on Banking Supervision (BCBS) issued revisions to the market risk framework. At the same
time, the BCBS initiated a fundamental review of the trading book. The review's intent was to evaluate comprehensively the overall
design of the market risk amendment of 2004 and the update of 2009 including an assessment of the risk-quantification
techniques adopted within Basel's internal models-based and standardised approaches. The resulting document provides
commentary on weaknesses identified in the prevailing Value-at-Risk (VaR) based capital adequacy regime, concluding that
shortcomings resulted in materially undercapitalised trading book exposures prior to the crisis. As a consequence of the review,
the BCBS is proposing that VaR be replaced by the Expected Shortfall methodology, thereby increasing the sensitivity of the risk
regime to accommodate extreme events or tail risk. Given the nature and extent of the weaknesses reported in their paper, the
wisdom of building on an evidently flawed regime in an incremental way is questionable. In this commentary on the BCBS's
proposals, the authors suggest that more fundamental revisions should be considered with a view to reinstating accounting in
place of financial modelling, as the foundation on which capital adequacy should be determined and administered.
46
Why markets do not trust Basel II internal ratings-based approach : What can be done about it?. Henry Stewart Publications, [RKN: 46065]
The Basel capital adequacy standard is in crisis. The cherished goal of a global level playing field has fallen by the wayside,
replaced by an over complicated regime that many of the world's most important banks have not adopted, while those that have
are facing outright rebellion from capital markets that no longer trust risk-weighted assets (RWAs). While some of the debate on
this topic is superficial and generates more heat than light, the further investors dig into the apparent inconsistencies in RWA
calculations the less confident they become. Faced with this, it is argued the Basel Committee has two options either try and
prove RWAs work or else dumb it down. The fear is that the committee's instinct is to focus only on the former, something that
might end up with the Basel framework becoming increasingly irrelevant.
Flynn, Gerald; Butler, Cormac (2013). Lessons for the Irish government on Basel II and accounting failures. Henry Stewart Publications,
[RKN: 46066]
This paper identifies misconceptions among bankers, risk managers, accountants and government officials on the importance of
operational risk (or more precisely regulatory risk) and its contribution to the 2007 banking crises. Attention is focused on Ireland
where a number of initiatives such as a bank guarantee system and the setting of a National Asset Management Agency (NAMA)
to buy troubled assets along with other schemes have failed to resolve the banking collapse that Ireland is still experiencing. The
role of the EU along with the European Central Bank and their contribution to the financial breakdown are examined along with
International Financial Reporting Standards (IFRS) and the Basel II and III rules. The paper concludes that initiatives such as the
IFRS along with flaws in the Basel II rules contributed to the crisis, the former because it disguised insolvency, the latter because
it interfered with the dynamics of supply and demand, creating an oversupply of cheap loans to certain sectors. Generous tax
breaks and increased government spending also played their part. As a result of the misunderstanding and regulations, the 2008
guarantee offered by the Irish Government to Irish banks was flawed in practice in the case of Ireland and the decision to set up a
bad bank was deeply defective. Intervention from the EU continues, the lack of consistency is now becoming more clear but there
remains the risk that if the Irish Government and EU fail to tackle the fault lines, Irish banks will continue to operate sub-optimally
with severe consequences for the Irish economy.
Guegan, Dominique; Hassani, Bertrand K (2013). Operational risk : A Basel II ++ step before Basel III. Henry Stewart Publications,
[RKN: 46067]
The Banking Committee on Banking Supervision recommended that operational risk should be quantified using the Basel matrix,
which enables the sorting of risk incidents. This paper analyses these incidents in depth and suggests strategies for carrying out
the supervisory guidelines proposed by the regulators, as follows. On the one hand, banks need to provide a univariate capital
charge for each cell of the Basel matrix. That requires constructing loss distribution functions (LDFs), which implies estimating a
frequency and a severity distribution. It is shown that the choice of the theoretical distributions to build the LDFs has a tremendous
impact on the capital charges, especially if extreme losses are not taken into account. On the other hand, banks also need to
provide a global capital charge corresponding to the whole matrix. The paper highlights that a lack of consideration or a poor
appreciation of the dependence structure may lead to incorrect capital charges. Finally, the paper finds two crucial points that
should be taken into account by regulators and risk managers: (1) The necessity of splitting information sets in two parts while
adjusting the severity distribution: the first covering small and medium losses, and the latter containing extreme losses (this point
implies problems of granularity as mentioned in the Basel II guidelines); (2) The choice of the risk measure, which provides the
capital amount. The paper concludes that the expected shortfall measure enables a better anticipation of large operational risk
incidents.
Brady, Shaun M; Markeloff, Richard (2013). Where is the system in systemic risk literature?. Henry Stewart Publications, [RKN: 46068]
An automated content analysis of a sample of 65 articles pertaining to the financial system that include the term Systemic Risk in
their title indicates that there is no consensus on how to define, identify and monitor systemic risk to the financial system. The
articles as a whole do not take a systems view in their analyses and proposals, indicating the discipline lacks a useful paradigm.
For example, the literature sample primarily addresses the individual system components and how they might be prevented from
jeopardising the financial system versus a more forward looking view of what changes to the overall system might make it more
resilient. Consequently, policy prescriptions or recommendations based on the existing literature may be too narrowly and
institutionally focused to capture the broader requirements necessary for ensuring the sustainability of the financial system. This
implies that there is a need for a cross-disciplinary group of regulatory, academic and industry stakeholders focused on supporting
the development of a systemic risk discipline. A brief survey of published approaches to modelling systemic risk in the financial
system adds depth to the automated content analysis and provides a small example of the ongoing debates.
Lindo, Steve (2013). Risk management infrastructure as a living organism. Henry Stewart Publications, [RKN: 46069]
Like any complex, intelligent, adaptive organism, a financial institution depends on the performance of its critical systems, of which
risk management is one. Just as the institution's health and longevity depend on the performance of these systems, they in turn
depend on the soundness of their infrastructure. This paper examines the essential elements of risk management infrastructure in
a financial institution using another complex, intelligent, adaptive organism as an analogy the human anatomy. The critical
elements of the human anatomy brain, skeleton, cardiovascular, muscular, nervous and immune systems all have their
counterparts in the infrastructure of a high-functioning risk management system. In addition to establishing this analogy, the paper
will translate the insights it provides to real-life contexts, using actual examples from the financial sector to highlight the
preservative effects of robust risk management infrastructure elements as well as the catastrophic effects of flawed ones.
N'Sougan, Yao Djifa; Soumare, Issouf (2013). Modelling sovereign default risk : Comparing models and capturing the impact of the
business cycle. Henry Stewart Publications, [RKN: 46070]
This paper compares two sovereign default risk models: the contingent claims analysis method and the ordered probit
econometric approach. The default indicators obtained from the two models are correlated with sovereign credit default swap
spreads and indicate that sovereign default risk is higher during economic recessions than during expansions.
47
Roy, Subarna (2013). Discounting long and uncertain workout recoveries for estimating loss given default. Henry Stewart Publications,
[RKN: 46071]
A key determinant of the loss given default within the Basel II framework is the discount factor used in discounting the recoveries,
especially when the workout period is long and uncertain. There is no agreement among practitioners and regulators on an
appropriate discount factor selection methodology quantitative techniques in this area have mostly focused on recoveries on
assets traded in the market. Recoveries done by banks on assets not traded in the market, which form a large share of their retail
exposures, have been relatively unexplored with respect to a suitable quantitative discounting technique. This paper proposes a
quantitative technique that could be easily applied by banks when their workout recoveries are long and uncertain. It also explores
the impact of systematic factors in deriving the discount factor. Further, the paper explores the properties of the proposed discount
factor and results from retail and corporate exposures of defaulted loans.
Wilson, Thomas C (2013). Risk management lessons learned from the financial crisis : one CRO's view. Henry Stewart Publications,
[RKN: 46055]
Journal of Risk Management in Financial Institutions (2013) 6(2)
This paper traces the development of risk management practices at large financial services firms before, during and after the
financial crisis of 2008 and the 2012 European sovereign debt crisis. It begins by outlining how enterprise risk management
provides the foundation for crisis management, leveraging quantitative and qualitative tools such as top risk assessment (TRA)
and own risk and solvency assessment (ORSA). While adequate for normal times, these practices need to be enhanced during
times of crisis. In the second section, the paper discusses improvements in two specific areas: first, improving scenario and impact
analysis and, secondly, achieving higher management impact through direct and contingent actions. The final section looks
forward, asking critically how risk management and especially risk culture need to be developed in anticipation of future crises.
Brinkhoff, Jeroen; Langfield, Sam; Mazzaferro, Francesco; Salleo, Carmello; Weeken, Olaf (2013). Risk management through the
lens of macroprudential policy. Henry Stewart Publications, [RKN: 46050]
Before the beginning of the crisis in 20078, regulation failed to cope with the complexities of modern finance and paid insufficient
attention to systemic risk. Similarly, risk managers in financial institutions tended to focus on risks in their financial institutions,
neglecting systemic risk. Regulators worldwide are now addressing these deficiencies. One important dimension of regulatory
reform is the creation of macroprudential authorities, such as the European Systemic Risk Board (ESRB), specifically tasked to
focus on systemic risk. To address such risks, the ESRB has issued recommendations that will influence the behaviour of financial
institutions. Work is ongoing to develop fully fledged macroprudential policies, which in combination with other regulation will help
prevent or mitigate future crises.
Koschyk, Hartmut (2013). Principles for dealing with financial stability risks. Henry Stewart Publications, [RKN: 46051]
Financial crises and their associated risks pose a major challenge to governments, in particular to Ministries of Finance. In dealing
with these risks, action is often characterised by critical international or European processes. However, considering the lessons
learned over the last years, a case could be made for a public sector approach to dealing with the risk of financial crises that builds
on five principles: (i) All relevant information should be available to the supervisory authorities; (ii) There needs to be
macro-prudential oversight; (iii) Rules must be in place that ensure consistent incentives so that the market's natural allocation
and monitoring roles achieve their full potential; (iv) The financial system should be sufficiently resilient; (v) Supervisory authorities
should be sufficiently vigorous and closely cooperating. The multi-layered nature of the approach is no substitute for quality in
each layer, ie highest importance is assigned to ensuring quality in each layer.
Hofmann, Daniel M; Maroney, John (2013). Supervisory challenges in the presence of systemic risk: The IAIS response to the current
financial crisis. Henry Stewart Publications, [RKN: 46052]
The current financial crisis has called for a reassessment of financial sector supervision. On top of the agenda is the identification
of those institutions whose failure could cause systemic cascade effects with adverse impacts for the whole financial system and
the real economy. These institutions will be subjected to higher capital requirement, intensified supervisory scrutiny and
pre-defined resolution regimes. The IAIS as the global standard setter for insurance supervision has taken up these challenges
and responded swiftly and comprehensively. The association developed the theoretical foundations to assess insurers in the
context of financial stability, the methodology to identify systemically important insurers with global reach, policy measures, to
appropriately deal with insurers deemed to be systemically relevant and a framework for macroprudential policy and surveillance.
In all areas the IAIS navigated in uncharted waters, developing methodologies, policies and frameworks from scratch, while
ensuring that the specifics of both the insurance business model and the insurance balance sheet were properly reflected. The
challenges must also be taken up by financial firms. Risk management will have to broaden its scope to capture the build-up of
system-wide risk that might endanger the viability of individual institutions.
Kawai, Yoshihiro; Windsor, Peter (2013). The globalisation of insurance : a supervisory response. Henry Stewart Publications, [RKN:
46053]
International insurance groups are significant participants in the global insurance markets and are increasing in importance.
Insurance supervision is more complex in the context of internationally active insurance groups (IAIGs). The IAIS is the
international standard setter for insurance supervision. It has launched the ComFrame Project in order to put in place a framework
for effective supervision of IAIGs. The ComFrame project will have implications for the risk management functions within IAIGs as
it will provide international standards for risk management within IAIGs and an expectation of enhanced interaction between
supervisors and CROs and others within group-wide risk management functions. The Development Phase of ComFrame will end
in 2013 with the Field Testing Phase beginning in 2014 and the IAIS aims to adopt ComFrame in 2018.
Bosworth, Ed; Rich, Tony (2013). From optimisation to resilience : the changing nature of the risk reward conversation as seen through
Westpac's capital and liquidity management policies. Henry Stewart Publications, [RKN: 46054]
This paper describes three insights into the use of risk-measurement models that further enhance the risk-management
processes at Westpac: (1) Optimisation opportunities apparently on offer from advanced Basel II models led to the formalisation of
a robust challenge process for risk models and the recognition that risk-model outcomes are best thought of as hypotheses that
48
should be continually tested; (2) The recognition that stress testing would not capture unknown unknowns strengthened
consideration of unquantifiable risks; (3) Finally, the experience from the global financial crisis that continual access to wholesale
funding markets could not be assumed deepened the understanding of the role risk models play in maintaining market confidence.
Each of these insights tilted the emphasis in discussions at Westpac about enhanced risk measurement from optimisation to
resilience.
Grody, Allan D (2013). Risk adjusting the culture of global finance. Henry Stewart Publications, [RKN: 46056]
The journey toward risk adjusting the financial system has begun in earnest. The pieces are being put in place: more resilient
capital adequacy standards; more appropriate risk measurement techniques; central counterparties for over-the-counter (OTC)
derivatives; new collateral and margin schemes; and the global identification coding system for financial market participants and
their traded products. When completed, a long journey for sure, there will be a final piece left to do, risk adjusting the culture of
global finance. That is certainly the most difficult of all as it effects people's attitudes and behaviour within newly evolving financial
regulations, industry structures and financial institutions. It starts with hiring the right people and then the way they are trained; it
proceeds with the mentoring they receive and the habits they are taught within a tempered view of performance and risk; and its
ends with a generational transfer of core principles from the seasoned to the young.
Koenitzer, Michael (2013). The World Economic Forum : a multistakeholder platform for engaging the financial services industry and its
role during the global economic crisis. Henry Stewart Publications, [RKN: 46057]
As the effects of the financial crisis continue to unfold, the world faces serious challenges to capital markets and the global
economy. As aggregate demand falls, there is still a significant risk of a global recession that will affect many sectors. The crisis
has demonstrated that efforts limited to specific institutions or jurisdictions are insufficient to address a problem that is global in
scope. It has also highlighted the need to improve risk management strategies at both the system-wide and institutional levels in
the financial services industry. Given the global nature of the financial and economic turmoil, new approaches and solutions are
required to restore confidence to markets and ensure an effective long-term response. Since the beginning of the crisis in 2008,
the World Economic Forum has through its unique multistakeholder platform of engaging businesses, governments and civil
society organised numerous initiatives aimed at dealing with the sources and implications of the crisis, as well as how to
mitigate the risk of a recurrence of the failures of the past. The aim of all these initiatives is to address the following question: What
can the financial services industry do to better monitor, manage and maintain the resilience of the financial system?
Lehmann, Axel P; Huber, Carin (2013). Risk management in a low-yield environment : consequences of the financial crisis. Henry
Stewart Publications, [RKN: 46058]
While the climax of the financial crisis is already five years ago, the financial industry, but also governments and economies, are
still struggling with its consequences. This paper highlights the lessons learned from the financial crisis from an insurance
industry's perspective and elaborates its implication for risk management to cope with the challenges ahead. Particularly, the
ongoing ultra-low yield environment presents some challenges for companies, savers and pensioners, investors, and insurers.
Skoglund, Jimmy; Erdman, Donald; Chen, Wei (2013). A mixed approach to risk aggregation using hierarchical copulas. Henry Stewart
Risk aggregation is the roll-up of low-level risks or sub-risks to higher levels. Risk management for banks or insurance institutions
involves risk measurement and risk control at the individual risk level, including market risk, credit risk and operational risks, and
also the aggregated risk of these individual risks. To determine the total enterprise risk for a financial institution, all risks must be
aggregated. An accurate estimation of the total risk is necessary to control and manage the risk. Risk aggregation is a challenge
because it requires an aggregated view of various levels of reporting risks, with differences in metrics and differences in data
sources, etc. It is especially complex to aggregate risk when the joint dependence between all the individual risks has to be
specified. Indeed, a common view of the dependence between all individual risks may not be available. It is well known that the
copula approach provides a way of isolating the marginal behaviour of individual risks from the description of their dependence
structure. Further, allowing a mixed approach to specify copula dependence between individual risks allows that risk dependence
to be specified step by step. That is, decomposed in partial sums, which are more easily understood. Mixed copula aggregation
does not fully specify the joint distribution but rather provides the minimum amount of information to determine the aggregate risk.
This approach allows users to specify different dependence characteristics as is needed and the model complexity can be
adjusted to the complexity required by the aggregation.
Araten, Michel (2013). Coping with inconsistencies in bank risk weighted assets. Henry Stewart Publications, - 10 pages. [RKN: 71361]
Journal of Risk Management in Financial Institutions (2013) 6 (3) : 219-228.
Industry participants, regulators and investors have raised concerns with the consistency of Basel risk-weighted asset (RWA)
assessments across banks that are critical to the determination of capital ratios. These issues have created misgivings as to
whether capital adequacy measures constructed by advanced internal rating based (AIRB) banks create level-playing field
problems and whether they can be relied upon. Solutions to narrow the differences among banks have been proposed, ranging
from imposing floors on certain parameters and calculations all the way to reverting to non-risk differentiated measures, such as
leverage ratios. In this paper the evidence associated with RWA consistency will be examined. Some of the underlying reasons
and sources of inconsistency will be evaluated along with the solutions proposed. The risks of moving away from risk-sensitive
regulatory capital will be described and recommendations for coping with these inconsistencies will be made.
49
McConnell, Patrick (2013). Strategic risk: the beanstalk syndrome. Henry Stewart Publications, - 22 pages. [RKN: 71371]
Growth can be good but can also be dangerous. When firms grow with superior products and services, then directors,
executives, staff, shareholders, customers, suppliers and the general economy benefit, but delivering on a growth strategy is
notoriously difficult, as such a strategy often involves committing all of the firm's resources to achieve growth targets. If such a
strategy succeeds, riches can follow but, if not, the outcome can be catastrophic. This paper looks at several examples of large
financial institutions that adopted some form of aggressive growth strategy only to have it blow up when the global financial crisis
(GFC) hit. All of the banks considered in this paper, in the author's opinion, had adopted strategies that were built on significantly
growing their balance sheets but they failed to manage the risks inherent in these strategies, in particular the need to manage their
leverage and their liquidity. Their boards and management were, this paper argues, bedazzled by a type of beanstalk syndrome,
where they believed they could, like the mythical Jack, plant some magic beans that would somehow grow into a constant supply
of profits. Prudence was abandoned as each firm discovered a golden goose that could seemingly produce profits forever. Unlike
Jack, however, the beanstalk came crashing down, killing not the giant but the bank itself. This paper argues that these cases
illustrate a lack of proper strategic risk management (SRM), or the proactive management of the risks to corporate strategies. It
further argues that regulators have a responsibility to ensure that boards of systemically important banks (SIBs) that adopt risky
strategies, put in place the necessary risk management policies to ensure that taxpayers do not have to bail the companies out
if/when the strategies fail.
Romano, Laura Capera; Gonzlez, Esteban Gmez; Quintero, Mariana Laverde; Mosquera, Miguel ngel Morales (2013).
Measuring systemic risk in the Colombian financial system: a systemic contingent claims approach. Henry Stewart Publications, - 27
pages. [RKN: 71369]
The financial crisis of the late 2000s underscored the importance of identifying systemically significant institutions and developing
mechanisms to internalise the externalities they create on the economy should they fail. Using monthly data for the period
between September 2001 and March 2011, bank-specific probabilities of default and expected losses given default are calculated.
Subsequently, the joint distribution of such expected losses is estimated and the aggregate cost of the implicit bailout option for the
government is quantified. Results suggest that even though systemic risk is currently not a major concern in the Colombian
banking system, quantifying these risks helps to enhance the supervisory and regulatory framework. Continuous monitoring of the
joint expected losses given default should assist in anticipating future stress scenarios and, as such, constitutes a powerful
macroprudential tool for policymakers.
Davies, Brandon (2013). How do boards address risk management and oversight?. Henry Stewart Publications, - 14 pages. [RKN:
71373]
This paper looks at the reporting that goes to the board and to regulators to inform them of the financial performance, balance
sheet and risk profile of a bank. The paper concludes that a far greater degree of integration and coherence between the different
reports is required to help the board execute its strategic responsibilities to shareholders and governance responsibilities to both
shareholders and regulators. The paper also looks at a number of risk issues that pose challenges to bank boards with
implications both for board composition and for the structure and remit of board committees.
McCormack, Peter; Sheen, Andrew (2013). Operational risk: Back on the agenda. Henry Stewart Publications, - 21 pages. [RKN: 71375]
This paper focuses on the role of operational risk in developing an effective enterprise wide risk management framework, and in
ensuring that the firm develops an effective risk culture that supports the business.
Richter, Thomas (2013). The new German law establishing criminal liability of banking and insurance executives for failures in risk
management. Henry Stewart Publications, - 11 pages. [RKN: 71377]
The German parliament recently approved a new law regarding individual criminal liability of banking and insurance executives,
which will take effect as of January 2014. Under the new so-called Ringfencing Act (Trennbankengesetz), specific duties and
responsibilities for risk management will be imposed on these executives. Failure to comply with these duties will be punishable by
a maximum of five years imprisonment if it causes a threat to the viability as a going concern of a bank, or insolvency or
over-indebtedness of an insurance company. This paper provides a description of the risk management duties and the
corresponding criminal penalties. It also discusses the regulatory background and provides an initial assessment of the likely
implications for risk management at German financial institutions.
Prokop, Jrg; Pfeifer, Dietmar (2013). How do you deal with operational risk? A survey of risk management practices in the German
insurance sector. Henry Stewart Publications, - 11 pages. [RKN: 71378]
This paper surveys the status quo of operational risk management in German insurance companies with respect to strategies
followed, processes implemented and instruments used. Moreover, it provides insights into incumbent risk managers' views on
current and future regulation of the risk management process. The findings contribute to current discussions regarding the
national implementation and interpretation of the European Solvency II directive by highlighting similarities and differences in
dealing with operational risk within the German insurance sector. In particular, the results may be useful to risk managers as a
point of reference when assessing the adequacy of their own company's risk management strategies, instruments and processes.
Bookstaber, Rick; Cetina, Jill; Feldberg, Greg; Flood, Mark; Glasserman, Paul (2014). Stress tests to promote financial stability:
Assessing progress and looking to the future. Henry Stewart Publications, - 10 pages. [RKN: 71382]
Stress testing, which has its roots in risk management, should be adapted to support financial stability monitoring and to
incorporate the interconnections and dynamics of the financial system. Since the 2008 financial crisis, bank supervisors have
honed their financial stability monitoring tools and significantly expanded the use of stress testing in the supervision of the largest
financial institutions. This paper describes areas in which further research could contribute to the development of best practices in
stress testing and how stress tests can be made more useful for macroprudential supervision. Both near-term and longer-term
objectives are discussed.
50
Oura, Hiroko; Schumacher, Liliana (2014). Macrofinancial stress testing: Incorporating systemic risk perspectives into a stress testing
framework. Henry Stewart Publications, - 12 pages. [RKN: 71309]
Since the global financial crisis, stress testing has received renewed attention. On one hand, pre-crisis stress tests yielded largely
benign results, which called into question the effectiveness of stress testing for detecting financial system-wide risks, namely
systemic risks. On the other hand, stress testing now has enhanced roles for crisis management and financial sector oversight. In
order to better shoulder these new roles, the stress testing framework should be improved, incorporating systemic risk
perspectives. This article proposes best practice principles for such a framework, building on the lessons from the crisis. The test
should be designed appropriately, including a clear understanding of the scope and objectives, knowledge of the key individual
financial institutions in the system, their business models and main channels of risk transmission, and right decision on the test's
perimeter and coverage. However, there will be limitations, regardless of refinements and improvements. One should therefore
always be cautious about using test results in isolation: a well-rounded risk assessment should use stress tests with other tools to
broaden the understanding of vulnerabilities.
Canabarro, Eduardo (2014). Stress test design. Henry Stewart Publications, - 10 pages. [RKN: 71381]
This paper offers thoughts and ideas on the implementation of a company-specific stress test programme and focuses on the
design of the stress test scenarios. In particular, it discusses the integration and coherence of the macroeconomic, market, credit,
counterparty and operational risk scenarios. Certain specific features are recommended to enhance the stress test of market,
counterparty and operational risks: the explicit consideration of the hedging and liquidity dynamics of trading portfolios, automated
reverse stress testing for identification of market risk vulnerabilities, simulation of dynamic hedging costs of credit valuation
adjustments (CVAs) and the averaging across different models to mitigate misspecification error and obtain more reliable
estimates of stressed operational losses. All the above is framed within the context of the Federal Reserve's Comprehensive
Capital Analysis and Review (CCAR) programme.
Hopper, Greg (2014). The art and science of stress testing. Henry Stewart Publications, - 10 pages. [RKN: 71308]
Although stress tests are intended to complement the use of risk management models such as value at risk (VaR) and potential
exposure models, sometimes these risk management models can be used to generate more empirically relevant stress tests. In
this article, four case studies are discussed in which it is illustrated how to use risk management models in the formulation of stress
tests. These examples also illustrate how risk management models may be used to formulate stress tests as well as quantify the
largest risks inherent in a firm's portfolio. The paper discusses how models might be used to calibrate a stress test of a financial
variable when there is very little empirical evidence on how the variable has behaved historically, and it also suggests how models
can be used to calibrate and formulate stress tests that include the mitigating effects of dynamic hedging, using a credit valuation
adjustment model as an example. The emphasis throughout is on the use of practical techniques that employ risk management
models already in use.
Smillie, Alan; Epperlein, Eduardo; Pandya, Triyog (2014). Use of stress scenarios in market risk economic capital. Henry Stewart
Publications, - 8 pages. [RKN: 71379]
Stress testing is increasingly being used to complement model-based estimates of risk, while stress value at risk (VaR) has been
introduced to the regulatory framework for market risk capital. Stress tests, by their nature, are somewhat ad hoc and difficult to
integrate with statistical measures of risk, such as VaR. This paper describes a method to combine in a consistent way stress
losses with the output of the VaR model, in order to build an economic capital model for market risk. The method is based on
existing components of firms' risk management systems, making it easy to implement, yet still exhibits many of the features (fat
tails, tail correlations) missed by a simple model-based approach. The performance of the proposed model is examined during two
market crises and it is shown that it outperforms both a purely statistical model and a purely stress test-based approach.
Rowe, David M (2014). The role of models in economics and risk management. Henry Stewart Publications, - 7 pages. [RKN: 71315]
This paper presents and updates a paper which was delivered at the 1982 annual convention of the (US) National Association of
Business Economists, and which transpired to be particularly prescient. An epilogue has been added to the original paper, in
which the author gives a contemporary perspective, and concludes that risk models can be extremely useful in the practice of risk
management.
Davies, Greg B; Brooks, Peter (2014). Risk tolerance: Essential, behavioural and misunderstood. Henry Stewart Publications, - 4 pages.
[RKN: 71311]
An understanding of an investor's risk tolerance is essential to determining investment suitability and yet there is no universally
agreed definition of what risk tolerance is. The authors discuss the need for a holistic approach to measuring risk tolerance that
provides a consistent framework for constructing efficient multi-asset allocation and ensuring a suitable aggregate level of risk and
return, given the investor's personality and financial circumstances. Risk tolerance is only stable when considered as a personality
trait, which can be measured effectively using holistic psychometric scales. Attempts to measure risk tolerance at lower levels of
granularity are unstable, they accentuate, rather than mitigate short-term behavioural distortions and cannot be meaningfully
aggregated to provide an overall level of risk that is appropriate given the investor's risk capacity. This implies that the recent move
towards mental accounting, goal-based, assessments of risk tolerance is misguided and exposes institutions to risks associated
with providing unsuitable advice.
Hillson, David; Sobehart, J R; Ursachi, Irina; Riedel, Frank (2014). Perspectives on risk management and behavioural finance. Henry
Stewart Publications, - 8 pages. [RKN: 71317]
The application of Behavioural Finance to Risk Management is still in its infancy and few models have evolved as to how to apply
the theories and research findings to practical day-to-day risk management problems. In fact, the very topic of this Special Issue
Is there a role for Behavioural Finance in Risk Management? is still a moot question. In addition to commissioning the papers in
this issue, the editors asked a number of respected figures in the wider risk management community to provide their insights on
the topic. In particular four thought-leaders were asked for their perspectives on two specific questions: (1) Should banks and
regulators include the findings of psychological/behavioural research in their risk management frameworks; and (2) In the light of
51
new UK legislation,1 should reckless behaviour be regulated? The responses of these experts are enlightening, but as David
Hillson notes the question is not whether behaviour should be considered in risk management but how? Hopefully the perceptive
answers will trigger debate among risk management professionals as to how the theories can be applied.
Dowling, Michael; Lucey, Brian M (2014). From hubris to nemesis: Irish banks, behavioural biases and the financial crisis. Henry
Stewart Publications, - 12 pages. [RKN: 71320]
The collapse of the Irish economy, still ongoing after 5 years, has its roots firmly in the banking sector. Lax risk management, aided
by poor board oversight and behavioural biases among senior executives, is now viewed as one of the primary causes of the
over-lending during the Celtic Tiger years that fuelled the excessive growth in credit and subsequent banking implosion,
eventually resulting in all Irish banks ending in state ownership. The causes of the Irish banking sector collapse are approached
from a behavioural perspective of the role of Boards of Directors in bank risk management and then proceed to explore the likely
presence of behavioural biases among senior executives in Irish banks. The Irish context provides a pertinent case study of what
can happen when hubris and associated behavioural biases take control of a bank's risk management strategy.
Neth, Hansjrg; Meder, Bjrn; Kothiyal, Amit; Gigerenzer, Gerd (2014). Homo Heuristicus in the financial world: From risk
management to managing uncertainty. Henry Stewart Publications, - 11 pages. [RKN: 71321]
What if anything can psychology and decision science contribute to risk management in financial institutions? The turmoils of
recent economic crises undermine the assumptions of classical economic models and threaten to dethrone Homo oeconomicus,
who aims to make decisions by weighing and integrating all available information. But rather than proposing to replace the rational
actor model with some notion of biased, fundamentally flawed and irrational agents, we advocate the alternative notion of Homo
heuristicus, who uses simple, but ecologically rational strategies to make sound and robust decisions. Based on the conceptual
distinction between risky and uncertain environments this paper presents theoretical and empirical evidence that boundedly
rational agents prefer simple heuristics over more flexible models. We provide examples of successful heuristics, explain when
and why heuristics work well, and illustrate these insights with a fast and frugal decision tree that helps to identify fragile banks. We
conclude that all members of the financial community will benefit from simpler and more transparent products and regulations.
Whitmore, Jean Czerlinski (2014). Anticipating market model failure: Competitive pressure and the mortgage backed securities market.
Henry Stewart Publications, - 8 pages. [RKN: 71312]
Market models that have worked well for years can suddenly fail dramatically, such as during the financial crisis of the late-2000s.
For example, models that assigned credit ratings to mortgage-backed securities (MBS) predicted relative default rates well for
decades. It was only in the late-2000s that these models under-predicted defaults by orders of magnitude. Why then? This paper
argues that high competitive pressure spurs market participants to change strategies, which can break models. Behavioural
research has demonstrated the powerful effect of competition on people's strategies. Indeed, it was in the mid-2000s that
competitive pressure spiked among mortgage originators and securitisers, as measured by indicators such as changing market
share. Originators and securitisers reacted with a variety of new strategies: creating new mortgage types like no-documentation
loans, improving the efficiency of back office processing of mortgages, reducing quality control and, in some cases, committing
fraud. Unfortunately, credit rating agencies, secure in their dominant market positions, had no spur to update their models to keep
up with the changes. Thus, risk managers could anticipate model failure by monitoring competitive pressure in the relevant
markets.
Van Deventer, Donald R; Zimmerman, Tom (2014). The impact of heuristics on the practice of risk management: The example of default
probabilities. Henry Stewart Publications, - 8 pages. [RKN: 71314]
Kahneman and Tversky's work has shown how individuals use heuristics when they face the difficult challenge of coming up with
probabilistic judgments. This paper describes some of their results and illustrate how they regularly impact risk management.
Behavioural biases, both on the part of the regulators and the regulated, can thwart the best-intended regulations and block their
effectiveness.
Sobehart, Jorge R (2014). Rumour has it: Modelling credibility, reputation and franchise risk. Henry Stewart Publications, - 13 pages.
[RKN: 71313]
For most institutions it takes years to acquire a good reputation and recognition, but it can take a single adverse event to destroy
a firm's reputation and franchise value completely and put the institution out of business. In financial matters, as in any other
aspects of life, people can have a variety of degrees of trust in the information they receive, which affects the probability they
assign to uncertain events and how they perceive credibility and reputation. Here the authors focus primarily on credibility using a
probabilistic behavioural approach that quantifies investors and customers trust in a given firm.
OBrien, Justin (2014). Singapore Sling: How coercion may cure the hangover in financial benchmark governance. Henry Stewart
The International Organization of Securities Commissions (IOSCO) has formalised a set of principles designed to restore
confidence in a range of systemically important financial benchmarks. The alacrity with which IOSCO has moved and its
endorsement by the Group of 20 Finance Ministers and Central Bank Governors (G20) is notable. It is far from clear, however,
whether the principles provide a basis for sustainable reform. This derives from diametrically conflicting views within IOSCO as to
whether benchmarks based on hypothetical submissions can be reformed or must be replaced by systems anchored in observed
transactions. As a consequence the principles paper over rather than resolve core ethical deficiencies exposed in a still
metastasising scandal. The paper examines how and why the IOSCO process has privileged symbolism over substance. It then
evaluates an alternative approach. The Monetary Authority of Singapore (MAS) has developed an innovative solution whereby
contributing banks to the Singapore Interbank Offered Rate (Sibor) are mandated to privilege the integrity of the benchmark over
individual institutional reputational or litigation risk. This regulatory re-engineering of risk management integrates rules, principles
and social norms to forge restraint. The paper concludes that this holistic approach, once calibrated to the political, economic and
cultural dimensions of specific markets, is more likely to embed ethical decision-making, reduce the risk of institutional corruption
and achieve socially beneficial outcomes.
52
Hornuf, Lars; Haas, Georg (2014). Regulating fraud in financial markets: Can behavioural designs prevent future criminal offences?.
Henry Stewart Publications, - 10 pages. [RKN: 71316]
This article explores the anatomy of three recent financial scandals and investigates how the legal system has responded to them.
Furthermore, it analyses whether behavioural designs can prevent future criminal offenses. The article comes to the conclusion
that the social as well as the physical environment can diminish the human propensity to commit a fraud. Moreover, misconduct
was often made attractive to fraudsters by means of external rewards. Reforming performance incentives might therefore be an
efficient measure to reduce deception in financial markets.
McConnell, Patrick (2014). Reckless endangerment: The failure of HBOS. Henry Stewart Publications, - 14 pages. [RKN: 71318]
In 2004, UK banking regulators reportedly told the Board of Halifax/Bank of Scotland (HBOS) that their chosen growth strategy
was an accident waiting to happen. Just four years later, the accident happened and HBOS collapsed under a mountain of debt,
requiring the injection of some 20bn of taxpayers' support. The UK parliamentary inquiry into the HBOS collapse labelled the
bank's strategy incompetent and reckless. This paper looks at the failure of HBOS using a behavioural finance perspective, in
particular considering the cognitive biases (such as over-confidence and groupthink) that may have led directors to underestimate
the seriousness of the bank's situation. In its final report, the UK parliamentary inquiry into banking standards recommended that
a new criminal offence be created to cover reckless behaviour by senior bankers. The paper considers how such reckless
behaviour might be detected and managed before (rather than after) it leads to bank failure.
Dietz, Thomas (2014). On the Single Supervisory Mechanism. Henry Stewart Publications, - 5 pages. [RKN: 71325]
With the so-called banking union, the EU is currently pursuing the most important project in terms of European integration since
the introduction of the euro in 1999. The centrepiece of the banking union is the Single Supervisory Mechanism (SSM), a
supranational banking supervisory body embedded into the organisational structure of the European Central Bank. If implemented
properly, the banking union could contribute significantly to breaking the banksovereign nexus within the euro area, to reconciling
control and liability with respect to cross-border banking supervision in the EU and to accomplishing the European internal market,
strengthening the competitiveness of large complex European banking groups. However, there are some shortcomings in the
legal and political construction chosen for the SSM, possibly reversing some of the desired positive effects.
Anonymous (2014). Systemic risk in central counterparty clearing houses. Henry Stewart Publications, - 5 pages. [RKN: 71327]
The DoddFrank Wall Street Reform and Consumer Protection Act's requirement to centrally clear over-the-counter derivatives
through the creation of central clearing counterparties (CCPs) is concentrating credit and market risk to an extent where CCPs are
too big to fail. This paper examines the systemic risk consequence of this concentration and makes certain recommendations for
its mitigation.
McCormack, Peter; Sheen, Andrew; Umande, Philip (2014). Managing operational risk: Moving towards the advanced measurement
approach. Henry Stewart Publications, - 18 pages. [RKN: 71324]
This paper focuses on the management of operational risk using scenario analysis, loss data, business environment internal
control factors and modelling approaches to get a better understanding of the firm's forward-looking risk profile, and, via scenario
analysis, the risks that pose the biggest threat to a firm's ability to meet its strategic objectives. The paper is a follow-up to a 2013
paper by McCormack and Sheen, entitled Operational risk: Back on the agenda (Journal of Risk Management in Financial
Institutions, Vol. 6, No. 4, pp. 366386) and illustrates issues to be considered when progressing from the standardised approach
to the advanced measurement approach.
Ozdemir, Bogie; Cubukgil, Evren; Xia, Huaxing (2014). Managing performance using a dual measure framework. Henry Stewart
One of the deficiencies highlighted by the recent financial crisis in value-at-risk (VaR) based capital requirements was a lack of
focus on more near-term sensitivities to market shocks. Many financial institutions were still able to meet their capital requirements
when they received government bailouts. Sensitivity particularly in earnings to risk drivers can have devastating impacts on
financial institutions at much lower confidence intervals than those used to calculate capital requirements. Market participants and
other counterparties can quickly lose confidence in institutions that are still relatively well capitalised but whose earnings have
been eroded by market loss events. This paper introduces a dual risk metric framework to manage the tail of a loss distribution and
addresses sensitivity to movements in market variables at lower confidence intervals. While the risk-adjusted return on capital
(RAROC) provides a valuable performance measurement metric and tail risk measures such as economic capital are useful inputs
in this metric, these extreme tail measures are not informative of the impact of more moderate, one in 10- or 20-year loss events,
on the expected income. A financial institution needs to manage these near-term risks in addition to tail risk driving its capital
needs. The latter can be managed through an earnings-at-risk (EaR) framework and the former through an economic capital
framework. This paper examines how to use these metrics simultaneously to allow a financial institution to set its risk appetite and
effectively manage both moderate and extreme risk exposures. The traditional RAROC metric is extended to also accommodate
the EaR appetite. This dual measure framework is demonstrated for a monoline company and a multiline company. The paper
then discusses how this limit framework can be used in a dynamic fashion for risk-adjusted return optimisation.
53
Bugalla, John; Kallman, James; Narvaez, Kristina (2014). Chief risk officers: The high wire act in the financial sector. Henry Stewart
This paper proposes that the financial crisis of 20082010 demonstrates the need for a robust enterprise-wide risk management
programme at financial institutions. Responding to the significant deficiencies that were found in risk management practices at
some larger financial institutions, the DoddFrank Wall Street Reform and Consumer Protection Act (DoddFrank) was enacted,
effective 21st July, 2010 by the 111th US Congress. DoddFrank Section 165 requires, among other requirements, that certain
financial institutions create independent board-level risk committees and practise enterprise-wide risk management. As required
by DoddFrank, The Board of Governors of the Federal Reserve proposed Regulation YY, which brings greater clarity and detail
to Section 165. This paper also proposes that, while Regulation YY provides for a sound structural foundation for the practice of
risk management at financial institutions, the regulation cannot prescribe the human interaction and constructive dialogue
between the chief executive officer, chief financial officer and chief risk officer with the board of directors required to prevent future
risk management failures. The paper concludes by proposing possible solutions to this governance issue.
Goldin, Ian (2014). The Butterfly Defect: Why globalisation creates systemic risks and what to do about it. Henry Stewart Publications, - 3
pages. [RKN: 71332]
Global interconnectedness can yield significant benefits, but can also create new systemic risks. In a globalised world, systemic
risk creates vulnerabilities such that a single node in a network has the capacity to disrupt the entire global system. Such
vulnerability was illustrated during the 2008 financial crisis, when the collapse of a single financial institution had reverberating
consequences across the world's financial system. Six policy steps are proposed to address systemic risk inherent in an
interconnected world.
Trudell, Christian (2014). Internal audits role in the risk assessment process at KeyCorp. Henry Stewart Publications, - 5 pages. [RKN:
71333]
With the recent (at the time of this writing) financial crisis and the continued focus on a strong risk management culture at
KeyCorp, the need to ensure that the lines of business (first line of defence), independent risk management (second line of
defence) and internal audit (third line of defence) utilise a common risk framework has been paramount. This was driven by the
desire for timely and accurate reporting to management and risk committees, as well as the Board of Directors. An opportunity to
leverage a common governance, risk and compliance (GRC) approach across the institution arose in 2011 as KeyCorp began to
leverage GRC software to implement the various risk related activities across the bank on a common platform. A variety of risk
assessment tools existed that spanned business units and risk disciplines. However, KeyCorp recognised the need for risk
convergence and a consistent approach to risk assessment. Over the next three years a plan was set in motion to implement a
number of modules in the new platform including risk and control self assessment (RCSA), findings and remediation tracking, risk
profiles, operational losses and others. From an internal audit perspective, the decision was made to re-evaluate the audit
universe and risk assessments with an aim towards a common framework with the first and second lines of defence. This
presented an array of opportunities and challenges. Additionally, Internal Audit recognised the need to utilise the company's new
GRC software for its audit projects, workpapers, risk assessments and findings documentation to further serve these efforts and
the journey towards risk convergence officially began.
NORTH AMERICAN ACTUARIAL JOURNAL
Lin, Yijia; Wen, Min-Ming; Yu. Jifeng (2012). Enterprise risk management: strategic antecedents, risk integration and performance.
Society of Actuaries, - 28 pages. [RKN: 73839]
North American Actuarial Journal (2012) 16 (1) : 1-28.
The current literature on the adoption of enterprise risk management (ERM) abstracts from the issue of its strategic context.
Accounting for the interplay between ERM and various individual risk management (IRM) practices, this paper presents a
theoretical basis to study the strategic determinants, risk integration, and value creation of ERM. We tested hypotheses with data
from the U.S. property and casualty insurance industry. Our results show that insurers with more reinsurance purchase and
greater geographic diversification are more likely to adopt ERM. After ERM initiation, the magnitude of certain IRM adjustments is
substantial. The market responds negatively to ERM adoption. ERM displays a strong negative correlation with firm value with a
discount of 5% (4%) in terms of Tobins Q (ROA)
Panning, William H (2013). Managing the invisible: identifying value-maximizing combinations of risk and capital. Society of Actuaries, 16 pages. [RKN: 74014]
This article demonstrates the linkageoften asserted but seldom describedbetween Enterprise Risk Management (ERM) and
maximizing a firm's value. I show that knowing a firm's aggregate risk exposure (via ERM), when combined with a valuation model
like the one presented here, can enable the firm's managers to identify and choose value-maximizing combinations of risk and
capital. Using value maximization as the criterion for choosing a firm's capital structure is quite distinct from rules of thumb that
CFOs often use for such decisions. The valuation model shows that increasing an insurer's surplus from an initially low level
typically increases the present value of future cash flows that take into account the probability of impairment from extreme losses.
In contrast to traditional literature on the risk of ruin, impairment here is taken to mean a loss of creditworthiness such that the
firm's business model is no longer sustainable, whether or not the firm is solvent. However, beyond a certain optimal level relative
to a firm's risk, further increases in surplus actually reduce a firm's value added measured in this fashion. Sensitivity analyses
presented here show how these conclusions are affected by changes in the values of crucial variables. In particular, the article
shows how managers can use this model to identify specific actions that their firm can take to increase its value added, and it
emphasizes the practical importance of making a firm's value both visible and manageable.
54
Boyer, M Martin; Nyce, Charles M (2013). An industrial organization theory of risk sharing. [RKN: 46581]
North American Actuarial Journal (2013) 17(4) : 283-296.
Examining the global reinsurance market, we propose a new theory of optimal risk sharing that finds its inspiration in the economic
theory of the firm. Our model offers a theoretical foundation for two empirical regularities that are observed in the reinsurance
market: (1) the choice of specific attachment (the deductible) and detachment points (the policy limits or the retrocession); and (2)
the vertical and horizontal tranching of reinsurance contracts. Using a two-factor cost model, we show how reinsurance should be
optimally layered (with attachment and detachment points) for a given book of business in order to minimize the cost and total
premium associated with catastrophic events.
DOI: http://dx.doi.org/10.1080/10920277.2013.839377 (access via Athens login http://www.openathens.net/)/
Ingram, David; Bush, Elijah (2013). Collective approaches to risk in business: an introduction to plural rationality theory. [RKN: 46582]
North American Actuarial Journal (2013) 17(4) : 297-305.
This article initiates a discussion regarding Plural Rationality Theory, which began to be used as a tool for understanding risk 40
years ago in the field of social anthropology. This theory is now widely applied and can provide a powerful paradigm to understand
group behaviors. The theory has only recently been utilized in business and finance, where it provides insights into perceptions of
risk and the dynamics of firms and markets. Plural Rationality Theory highlights four competing views of risk with corresponding
strategies applied in four distinct risk environments. We explain how these rival perspectives are evident on all levels, from roles
within organizations to macro level economics. The theory is introduced and the concepts are applied with business terms and
examples such as company strategy, where the theory has a particularly strong impact on risk management patterns. The
principles are also shown to have been evident in the run up to and the reactions after the 2008 financial crisis. Traditional risk
management is shown to align with only one of these four views of risk, and the consequences of that singular view are
discussed. Additional changes needed to make risk management more comprehensive, widely acceptable, and successful are
introduced.
Erhardt, Robert J; Smith, Richard L (2014). Weather derivative risk measures for extreme events. - 15 pages. [RKN: 74503]
We consider pricing weather derivatives for use as protection against weather extremes by using max-stable processes to
estimate risk measures. These derivatives are not currently traded on any open markets, but their use could help some institutions
manage weather risks from extreme events. The central challenge is to model the dependence of payments, which increases the
risk of holding multiple weather derivatives. The method described utilizes results from spatial statistics and extreme value theory
to first model extremes in the weather as a max-stable process, and then simulate payments for a general collection of weather
derivatives. As the joint likelihood function for max-stable processes is unavailable, we use two approaches: The first is based on
the composite likelihood, and the second is based on approximate Bayesian computing (ABC). Both capture the spatial
dependence of payments. To incorporate parameter uncertainty into the pricing model, we use bootstrapping with the composite
likelihood approach, while the ABC method naturally incorporates parameter uncertainty. We show that the additional risk from the
spatial dependence of payments can be quite substantial, and that the methods discussed can compute standard actuarial risk
measures in both a frequentist and Bayesian setting.
RISK MANAGEMENT AND INSURANCE REVIEW
Buck, Douglas; Elliott, Dwayne; Niehaus, Greg; Rives, Bill; Thomas, Laura (2012). Fuel risk management at American electric
power. - 22 pages. [RKN: 73818]
Risk Management and Insurance Review (2012) 15 (1) : 1-22.
The senior management team and board of directors at American Electric Power (AEP) have emphasized the importance of an
Enterprise Risk Management approach for dealing with the wide array of risk exposures that the firm faces. Senior management
has put in place a risk governance structure that facilitates the identification of major risk exposures, assesses their impact on the
firm's overall risk profile, and interacts the risk management process with the strategic planning process. Central to this structure is
the firm's Risk Executive Committee, which includes the senior leadership of the firm and the Enterprise Risk Oversight staff.
Members of the AEP Enterprise Risk Oversight group have just returned from a meeting of the Risk Executive Committee. The
discussion at the meeting focused on an event that recently came to the firm's attentionan unexpected disruption in the firm's
coal supply over the coming year due to necessary repairs in railroad facilities near the coal source. By the end of the week, the
Enterprise Risk Oversight group needs to communicate with the relevant teams within the organization as part of its effort to
identify the potential repercussions of the event for the enterprise. In addition, the Risk Executive Committee would like the groups
to identify other possible adverse events that could occur and steps that should be taken now in preparation.
Nielson, Norma L; Kitching, Brian (2012). Tabletop disaster exercise to enhance risk management education. - 12 pages. [RKN: 73819]
This article describes a disaster planning exercise undertaken by a University class of risk management students
Johnson, William G; Butler, Richard J; Baldwin, Marjorie L; Ct, Pierre (2012). Disability risk management and post-injury
employment of workers with back pain. - 21 pages. [RKN: 73820]
We analyze the outcomes of occupational back pain among four large employers that use one or more of the following disability
management practices: aggressive return to work, claims management, medical management, or time-limited job
accommodations. Outcomes measured at 6 and 12 months postonset include: duration of initial work absence and the probability
of returning to stable employment. Employment outcomes are better in firms with more proactive return-to-work policies than in
firms with more restrictive policies. We devise a statistical test for attrition bias and conclude that sample attrition does not
significantly alter our results.
55
Huang, Li-Ying; Ma, Yu-Luen; Pope, Nat (2012). Foreign ownership and non-life insurer efficiency in the Japanese marketplace. - 32
pages. [RKN: 73821]
Traditional shareholding patterns in Japan have experienced significant change beginning in the early 1990s. Since that time,
foreign institutional shareholding has increased significantly largely at the expense of domestic financial institution ownership. This
article examines whether these changes in ownership patterns share a relationship with insurer performance in the non-life
insurance market. Using data from 1992 to 2005, we assess performance in terms of efficiency measures using data envelopment
analyses (DEA) techniques. Our results show that higher levels of domestic financial institution ownership in Japan are associated
with insurer inefficiency. Relative to that relationship, the foreign ownershipinsurer efficiency relationship is found to be positive.
Additionally, we find that the disparity between those relationships has become more acute since 2001 when the Japanese
non-life insurance market experienced significant consolidation.
Monkiewicz, Marek (2012). Insurance protection funds in the European UnionQuo Vadis?. - 18 pages. [RKN: 73822]
Contrary to the development in other major insurance markets in the world only 13 out of 27 EU member states have introduced
until now some type of insurance protection funds (IPF). As a result around a third of the market is without any collective
protection. There is also a continuous debate since 2001 among the member states on the need for such a system at the
community level. The experiences of the latest financial crisis have raised new arguments for reorganizing the existing system to
avoid regulatory arbitrage and to strengthen consumer security. Even the prospective implementation of provisions strengthening
supervisory bodies, and the new solvency directive (so-called Solvency II) are not fail-safe solutions. This article is an attempt to
review the current situation as regards IPF in the EU and to discuss possible development scenarios.
Haley, Joseph D (2012). An insurance pricing game. - 12 pages. [RKN: 73824]
Understanding data and statistical distributions is a fundamental part of an undergraduate business student's education. The
insurance pricing game presented here gives the students a unique way to apply statistical analysis in the classroom. The game
requires decision making about risk with limited information. Specifically, the students must decide what premium to charge the
members of a hypothetical risk pool. The game provides teachers with a discussion platform for numerous aspects of insurer risk
pooling.
Eling, Martin (2012). What do we know about market discipline in insurance?. - 39 pages. [RKN: 70637]
The aim of this article is to summarize the knowledge on market discipline in insurance and other financial service sectors. Market
discipline can be defined as the ability of customers, investors, intermediaries (agents, brokers), and evaluators (analysts,
auditors, rating agencies) to monitor and influence a company's management. Looking at banking is especially interesting, since
market discipline in this field has been studied extensively. Based on existing knowledge, we develop a framework for researching
market discipline in insurance that includes its most important drivers and impediments. The results highlight a significant need for
continuing research. The findings are of relevance not only for European insurers and regulators, but for institutions outside
Europe.
Wagner, Jol; Zemp, Alexandra (2012). Comparison of stakeholder perspectives on current regulatory and reporting reforms. - 30
pages. [RKN: 70640]
In the European insurance industry, regulatory and reporting frameworks are currently subject to far-reaching reforms. We focus
on four of these frameworks, namely the Solvency II framework, insurance guaranty systems, the proposed IFRS 4 Phase II
international accounting standards, and Market Consistent Embedded Value reporting. We present these frameworks, analyze
them from the insurance company's management, investors, and policyholder perspectives, and compare them. Our analysis
implies that the four frameworks need to be considered jointly, due to various interrelations and interactions. We argue that a
coordinated introduction will be necessary to ensure that the regulatory burden is reduced and synergies can be utilized in the
event of all four frameworks being implemented as planned. Furthermore, we analyze the challenges of a holistic, comprehensive
approach to insurance reporting and regulation and its implementation in order to achieve the goals set by the frameworks.
Fritz, Guntram; Werther, Albin (2013). When black swans aren't : On better recognition, assessment, and forecasting of large scale,
large impact, and rare event change. - 23 pages. [RKN: 74007]
The article discusses professional best practice implications stemming from differing varieties of thinking about black swans. The
possibilities of rare event recognition in general, and the conforming limits on the forecasting art that arise from different views of
possibilities is addressed. In particular, assessing how different philosophical groundings partner with methodological and practice
implications to shape and limit practice possibilities is highlighted. Opportunities for securing comparative advantagesindividual,
organizational, and societalare revealed by introducing holistic methods for better recognizing, assessing, and managing
emerging large scale, large impact, rare events thought by most people to be unpredictable black swans. To achieve this, the
article uses mainstream model and analyst failure dynamics to develop a way to better recognize and time large scale, large
impact rare event emergence.
56
Eling, Martin (2013). Recent research developments affecting nonlife insuranceThe CAS Risk Premium Project 2011 Update. - 12
pages. [RKN: 74009]
This article summarizes the results of the 2011 Risk Premium Project (RPP) continual update. The aim of RPP is to review the
actuarial and finance literature on the theory and empirics of risk assessment for propertycasualty insurance. We find that
behavioral insurance and new instruments of alternative risk transfer are popular fields of research in nonlife insurance. Capital
allocation and enterprise risk management, too, are currently very important research topics. Moreover, the financial crisis has
stimulated new work on corporate governance and insurance.
Kerr, Dana A; Avila, Stephen M (2013). Personal lines risk management and insurance simulation game. - 24 pages. [RKN: 74012]
This article examines the use of a Personal Lines Risk Management and Insurance Simulation Game in an introductory risk
management and insurance (RMI) course. Business simulations and other case study teaching methods are a way to increase
student engagement in the classroom, which can translate into a greater likelihood of higher learning outcomes. Because no one
knows for sure what will happen in the future, there is a fundamental trade-off that influences all RMI decisions: incur a known cost
today in order to reduce risk in the future even though a loss may never materialize or refuse the immediate cost that would have
reduced risk even though a future loss event might still occur. It is difficult to convince students of the consequences of such
decisions because most realize that the individual likelihood of suffering an insurable loss is quite small. Students also fail to
understand the complexity of making these trade-off decisions multiple times in a given period for each different loss exposure
they face. A description of the purpose of the game, innovative features, Smith Family Case Study, game specifics, and objectives
and grading for the game have been provided. This article can be used as a step-by-step guide to implement this simulation in RMI
courses at other universities to increase student engagement and enhance student learning.
Blake, David; Boardman, Tom (2013). Spend more today safely : Using behavioral economics to improve retirement expenditure
decisions with speedometer plans. [RKN: 74005]
Risk Management and Insurance Review (2013) 16 (2)
This article examines how behavioral economics can be used to improve the spending decisions of retirees, using a
SPEEDOMETER (or Spending Optimally Throughout Retirement) retirement expenditure plan that employs defaults within a
choice architecture. The plan involves just four key behavioral nudges: (1) first, make a planideally by being auto-enrolled into
one or with the help of a financial adviser; (2) automatic phasing of annuitization, which is designed to tackle the aversion to large
irreversible transactions and losing control of assets, and so allows the greatest possible degree of flexibility in managing the
rundown of retirement assets; (3) capital protection in the form of money-back annuities that deals with loss aversion, that is, the
fear of losing your money if you die early; and (4) the slogan spend more today safely that utilizes hyperbolic discounting to
satisfy the human trait of wanting jam today, and to reinforce the idea that buying an annuity is a smart thing to do.
Medders, Lorilee A; Nyce, Charles M; Bradley Karl, J (2013). Market implications of public policy interventions: the case of Floridas
property insurance market. [RKN: 74006]
Risk Management and Insurance Review (2013) 16 (2)
This article asserts that the market for property insurance, particularly homeowners insurance, in the State of Florida is
experiencing failures, and that a combination of market problems, externalities, and interventions unique to Florida led to these
failures. The authors provide evidence of market failures in the form of undesirable market outcomes, both over time and in
comparison to other coastal states. Also, they provide a narrative description of the market events, problems, and policies
preceding these adverse market developments and link the narrative to the evidence. Recommendations for a return to risk-based
pricing and incentives for appropriate property mitigation are made.
Dionne, Georges (2013). Risk management: History, definition, and critique. - 20 pages. [RKN: 74081]
The study of risk management began after World War II. Risk management has long been associated with the use of market
insurance to protect individuals and companies from various losses associated with accidents. Other forms of risk management,
alternatives to market insurance, surfaced during the 1950s when market insurance was perceived as very costly and incomplete
for protection against pure risk. The use of derivatives as risk management instruments arose during the 1970s, and expanded
rapidly during the 1980s, as companies intensified their financial risk management. International risk regulation began in the
1980s, and financial firms developed internal risk management models and capital calculation formulas to hedge against
unanticipated risks and reduce regulatory capital. Concomitantly, governance of risk management became essential, integrated
risk management was introduced, and the chief risk officer positions were created. Nonetheless, these regulations, governance
rules, and risk management methods failed to prevent the financial crisis that began in 2007.
Scordis, Nicos A; Suzawa, Yoshihiko; Zwick, Astrid; Ruckner, Lucia (2014). Principles for sustainable insurance: risk management
and value. - 12 pages. [RKN: 74425]
Some of the largest global insurers are actively pursuing the recently enacted Principles for Sustainable Insurance (PSI). While
the concept of sustainability is often associated with a governance design that promotes stakeholder value, the PSI do not appear
to be a call for stakeholder-focused insurers. Rather, the PSI appear to be about internalizing tacit claims in the operations of
insurers. Conceptual and empirical literature on shareholder value maximization suggests that when an insurer honors its tacit
claims the value to shareholders increases. A key insight from practice is that a sincere pursuit of the PSI will expand the scope of
corporate risk management.
57
Roeschmann, Angela Zeier (2014). Risk culture: what it is and how it affects an insurer's risk management. - 20 pages. [RKN: 74426]
This article conceptualizes risk culture and sheds light on the role it plays in insurers risk management frameworks. The article
follows a cognitive, dynamic approach, arguing that risk culture is the product of organizational learning about what has or has not
worked for it in the past. Within their local context, the members of a group learn which of the typically centrally prescribed formal
risk management policies and procedures and which espoused risk philosophies actually work in practice in the sense of behavior
that is formally or informally encouraged or discouraged, rewarded or punished. While the formal risk management framework
defines which processes to use, which limits to obey, and which values to aspire to, it is the risk culture that defines which rules
and norms are perceived to be rational and important. The insurance literature commonly argues, and practice suggests, that it is
necessary to achieve consistency in order to effectively embed risk management. Nevertheless, inconsistent basic assumptions
at the deepest level of risk culture are a likely feature of local subgroups. However, what is rational and efficient to one subgroup
might be random and dangerous for the organization as a whole.
SCANDINAVIAN ACTUARIAL JOURNAL
Shimizu, Yasutaka (2012). Non-parametric estimation of the GerberShiu function for the WienerPoisson risk model. [RKN: 44881]
Scandinavian Actuarial Journal (2012) 1 : 56-69.
A non-parametric estimator of the GerberShiu function is proposed for a risk process with a compound Poisson claim process
plus a diffusion perturbation; the WienerPoisson risk model. The estimator is based on a regularized inversion of an
empirical-type estimator of the Laplace transform of the GerberShiu function. We show the weak consistency of the estimator in
the sense of an integrated squared error with the rate of convergence.
DOI: http://dx.doi.org/10.1080/03461238.2010.523515 (access via Athens login http://www.openathens.net/)
Dickson, David C M; Li, Shuanming (2012). Erlang risk models and finite time ruin problems. [RKN: 44884]
We consider the joint density of the time of ruin and deficit at ruin in the Erlang(n) risk model. We give a general formula for this
joint density and illustrate how the components of this formula can be found in the special case when n=2. We then show how the
formula can be implemented numerically for a general value of n. We also discuss how the ideas extend to the generalised
Erlang(n) risk model.
Barrieu, Pauline; Bensusan, Harry; El Karoui, Nicole; Hillairet Caroline; Loisel, Stphane; Ravanelli, Claudia; Salhi, Yahia (2012).
Understanding, modelling and managing longevity risk: key issues and main challenges. [RKN: 44885]
This article investigates the latest developments in longevity-risk modelling, and explores the key risk management challenges for
both the financial and insurance industries. The article discusses key definitions that are crucial for the enhancement of the way
longevity risk is understood, providing a global view of the practical issues for longevity-linked insurance and pension products that
have evolved concurrently with the steady increase in life expectancy since s. In addition, the article frames the recent and
forthcoming developments that are expected to action industry-wide changes as more effective regulation, designed to better
assess and efficiently manage inherited risks, is adopted. Simultaneously, the evolution of longevity is intensifying the need for
capital markets to be used to manage and transfer the risk through what are known as Insurance-Linked Securities (ILS). Thus,
the article will examine the emerging scenarios, and will finally highlight some important potential developments for longevity-risk
management from a financial perspective with reference to the most relevant modelling and pricing practices in banking industry.
Castaer, Anna; Claramunt, M Merc; Gathy, Maude; Lefvre, Claude; Mrmol, Maite (2013). Ruin problems for a discrete time risk
model with non-homogeneous conditions. [RKN: 44889]
This paper is concerned with a non-homogeneous discrete time risk model where premiums are fixed but non-uniform, and claim
amounts are independent but non-stationary. It allows one to account for the influence of inflation and interest and the effect of
variability in the claims. Our main purpose is to develop an algorithm for calculating the finite time ruin probabilities and the
associated ruin severity distributions. The ruin probabilities are shown to rely on an underlying algebraic structure of Appell type.
That property makes the computational method proposed quite simple and efficient. Its application is illustrated through some
numerical examples of ruin problems. The well known Lundberg bound for ultimate ruin probabilities is also reexamined within
such a non-homogeneous framework.
Cheung, Ka Chun; Vanduffel, Steven (2013). Bounds for sums of random variables when the marginal distributions and the variance of
the sum are given. [RKN: 44890]
In this paper, we establish several relations between convex order, variance order, and comonotonicity. In the first part, we extend
Cheung (2008b) [Cheung, K. C. (2008b). Characterization of comonotonicity using convex order. Insurance: Mathematics and
Economics 43, 403-406] to show that when the marginal distributions are fixed, a sum with maximal variance is in fact a
comonotonic sum. Thus the convex upper bound is achieved if and only if the marginal variables are comonotonic. Next, we study
the situation where besides the marginal distributions; the variance of the sum is also fixed. Intuitively one expects that adding this
information may lead to a bound that is sharper than the comonotonic upper bound. However, we show that such upper bound
does not even exist. Nevertheless, we can still identify a special dependence structure known as upper comonotonicity, in which
case the sum behaves like a convex largest sum in the upper tail. Finally, we investigate when the convex order is equivalent to
the weaker variance order. Throughout this paper, interpretations and significance of the results in terms of portfolio risks will be
emphasized.
58
Kuznetsov, Alexey; Morales, Manuel (2014). Computing the finite-time expected discounted penalty function for a family of Lvy risk
processes. [RKN: 46730]
Ever since the first introduction of the expected discounted penalty function (EDPF), it has been widely acknowledged that it
contains information that is relevant from a risk management perspective. Expressions for the EDPF are now available for a wide
range of models, in particular for a general class of Lvy risk processes. Yet, in order to capitalize on this potential for applications,
these expressions must be computationally tractable enough as to allow for the evaluation of associated risk measures such as
Value at Risk (VaR) or Conditional Value at Risk (CVaR). Most of the models studied so far offer few interesting examples for
which computation of the associated EDPF can be carried out to the last instances where evaluation of risk measures is possible.
Another drawback of existing examples is that the expressions are available for an infinite-time horizon EDPF only. Yet, realistic
applications would require the computation of an EDPF over a finite-time horizon. In this paper we address these two issues by
studying examples of risk processes for which numerical evaluation of the EDPF can be readily implemented. These examples are
based on the recently introduced meromorphic processes, including the beta and theta families of Lvy processes, whose
construction is tailor-made for computational ease. We provide expressions for the EDPF associated with these processes and we
discuss in detail how a finite-time horizon EDPF can be computed for these families. We also provide numerical examples for
different choices of parameters in order to illustrate how ruin-based risk measures can be computed for these families of Lvy risk
processes.
Cheung, Ka Chun; Sung, K C J; Yam, S C P; Yung, S P (2014). Optimal reinsurance under general law-invariant risk measures. [RKN:
46734]
In recent years, general risk measures play an important role in risk management in both finance and insurance industry. As a
consequence, there is an increasing number of research on optimal reinsurance decision problems using risk measures beyond
the classical expected utility framework. In this paper, we first show that the stop-loss reinsurance is an optimal contract under
law-invariant convex risk measures via a new simple geometric argument. A similar approach is then used to tackle the same
optimal reinsurance problem under Value at Risk and Conditional Tail Expectation; it is interesting to note that, instead of stop-loss
reinsurances, insurance layers serve as the optimal solution. These two results highlight that law-invariant convex risk measure is
better and more robust, in the sense that the corresponding optimal reinsurance still provides the protection coverage against
extreme loss irrespective to the potential increment of its probability of occurrence, to expected larger claim than Value at Risk and
Conditional Tail Expectation which are more commonly used. Several illustrative examples will be provided.
Chiu, Sung Nok; Yin, Chuancun (2014). On the complete monotonicity of the compound geometric convolution with applications in risk
theory. [RKN: 46736]
We prove that the complete monotonicity is preserved under mixed geometric compounding, and hence show that the ruin
probability, the Laplace transform of the ruin time, and the density of the tail of the joint distribution of ruin and the deficit at ruin in
the Sparre Andersen model are completely monotone if the claim size distribution has a completely monotone density.
Chadjiconstantinidis, Stathis; Vrontos, Spyridon (2014). On a renewal risk process with dependence under a
Farlie-Gumbel-Morgenstern copula. [RKN: 46737]
In this article, we consider an extension to the renewal or Sparre Andersen risk process by introducing a dependence structure
between the claim sizes and the interclaim times through a Farlie-Gumbel-Morgenstern copula proposed by Cossette et al. (2010)
[Hlne Cossette, Etienne Marceau, Fouad Marri (2010), Analysis of ruin measures for the classical compound Poisson risk
model with dependence, Scandinavian Actuarial Journal (2010) 3: 221-245] for the classical compound Poisson risk model. We
consider that the inter-arrival times follow the Erlang(n) distribution. By studying the roots of the generalised Lundberg equation,
the Laplace transform (LT) of the expected discounted penalty function is derived and a detailed analysis of the Gerber-Shiu
function is given when the initial surplus is zero. It is proved that this function satisfies a defective renewal equation and its solution
is given through the compound geometric tail representation of the LT of the time to ruin. Explicit expressions for the discounted
joint and marginal distribution functions of the surplus prior to the time of ruin and the deficit at the time of ruin are derived. Finally,
for exponential claim sizes explicit expressions and numerical examples for the ruin probability and the LT of the time to ruin are
given.
Masiello, Esterina (2014). On semiparametric estimation of ruin probabilities in the classical risk model. [RKN: 46746]
The ruin probability of an insurance company is a central topic in risk theory. We consider the classical Poisson risk model when
the claim size distribution and the Poisson arrival rate are unknown. Given a sample of inter-arrival times and corresponding
claims, we propose a semiparametric estimator of the ruin probability. We establish properties of strong consistency and
asymptotic normality of the estimator and study bootstrap confidence bands. Further, we present a simulation example in order to
investigate the finite sample properties of the proposed estimator.
59
Adamic, Peter; Caron, Sylvain (2014). SC-CR Algorithms with informative masking. [RKN: 46747]
In this article, we present a significant improvement to the Self-Consistent, Competing Risks (SC-CR) Algorithms that have been
published in the actuarial literature over the last several years. These algorithms were fairly flexible, admitting of any combination
of partially masked risks and interval-censored failure times. However, we wish to show here that the SC-CR Algorithm can be
further generalized to allow for each specific decrement to have its own distinct interval-censored range for any given individual
observation. We have chosen to refer to this dynamic as informative masking since additional information regarding the masking
sets will be allowed to be incorporated. The enhancements will be applied to both the double-censored as well as
interval-censored SC-CR Algorithms. Numerical examples that illustrate the usefulness of these enhancements will also be
furnished.
Landriault, David; Lee, Wing Yan; Willmot, Gordon E; Woo, Jae-Kyung (2014). A note on deficit analysis in dependency models
involving Coxian claim amounts. [RKN: 46886]
In this paper, we consider a fairly large class of dependent Sparre Andersen risk models where the claim sizes belong to the class
of Coxian distributions. We analyze the Gerber-Shiu discounted penalty function when the penalty function depends on the deficit
at ruin. We show that the system of equations needed to solve for this quantity is surprisingly simple. Various applications of this
result are also considered.
Vatamidou, E; Adan, I J B F; Vlasiou, M; Zwart, B (2014). On the accuracy of phase-type approximations of heavy-tailed risk models.
[RKN: 46891]
Numerical evaluation of ruin probabilities in the classical risk model is an important problem. If claim sizes are heavy-tailed, then
such evaluations are challenging. To overcome this, an attractive way is to approximate the claim sizes with a phase-type
distribution. What is not clear though is how many phases are enough in order to achieve a specific accuracy in the approximation
of the ruin probability. The goals of this paper are to investigate the number of phases required so that we can achieve a
pre-specified accuracy for the ruin probability and to provide error bounds. Also, in the special case of a completely monotone
claim size distribution we develop an algorithm to estimate the ruin probability by approximating the excess claim size distribution
with a hyperexponential one. Finally, we compare our approximation with the heavy traffic and heavy tail approximations.
Yener, Haluk (2014). Minimizing the lifetime ruin under borrowing and short-selling constraints. [RKN: 46892]
In this paper, the optimal investment strategies for minimizing the probability of lifetime ruin under borrowing and short-selling
constraints are found. The investment portfolio consists of multiple risky investments and a riskless investment. The investor
withdraws money from the portfolio at a constant rate proportional to the portfolio value. In order to find the results, an auxiliary
market is constructed, and the techniques of stochastic optimal control are used. Via this method, we show how the application of
stochastic optimal control is possible for minimizing the probability of lifetime ruin problem defined under an auxiliary market.
Fuchs, Sebastian (2014). Consistent loss prediction for a portfolio and its subportfolios. [RKN: 46893]
In the present paper, we consider a portfolio of risks consisting of two subportfolios, and we study the problem of whether or not
the predictors based on the subportfolios are consistent with those based on the full portfolio. We study this aggregation problem
for both the chain-ladder method and the additive method (or incremental loss ratio method). In the case of the chain-ladder
method we extend results of Ajne [Ajne, B. Additivity of chain-ladder projections. ASTIN Bulletin (1994) 24: 311-318] and Klemmt
[Klemmt, H. J. Separierung von Abwicklungsdreiecken nach Basisschden und Groschden. Bltter DGVFM (2005) 27: 49-58],
using the duality of the chain-ladder method applied to incremental losses; we also give a short proof for this duality, which was
first observed by Barnett, Zehnwirth & Dubossarky [Barnett, G., Zehnwirth, B. and Dubossarsky, E. When can accident years be
regarded as development years? Proceedings of the Casualty Actuarial Society (PCAS) (2005) 92: 239-256]. In the case of the
additive method the aggregation problem has not been studied before and its solution is surprisingly simple.
Liu, Jingzhen; Yiu, Ka-Fai Cedric; Siu, Tak Kuen (2014). Optimal investment of an insurer with regime-switching and risk constraint.
[RKN: 46894]
We investigate an optimal investment problem of an insurance company in the presence of risk constraint and regime-switching
using a game theoretic approach. A dynamic risk constraint is considered where we constrain the uncertainty aversion to the true
model for financial risk at a given level. We describe the surplus of an insurance company using a general jump process, namely,
a Markov-modulated random measure. The insurance company invests the surplus in a risky financial asset whose dynamics are
modeled by a regime-switching geometric Brownian motion. To incorporate model uncertainty, we consider a robust approach,
where a family of probability measures is cosidered and the insurance company maximizes the expected utility of terminal wealth
in the worst-case probability scenario. The optimal investment problem is then formulated as a constrained two-player, zero-sum,
stochastic differential game between the insurance company and the market. Different from the other works in the literature, our
technique is to transform the problem into a deterministic differential game first, in order to obtain the optimal strategy of the game
problem explicitly.
60
Gmez Dniz, Emilio; Caldern-Ojeda, Enrique (2014). Unconditional distributions obtained from conditional specification models with
applications in risk theory. [RKN: 46895]
Bivariate distributions, specified in terms of their conditional distributions, provide a powerful tool to obtain flexible distributions.
These distributions play an important role in specifying the conjugate prior in certain multi-parameter Bayesian settings. In this
paper, the conditional specification technique is applied to look for more flexible distributions than the traditional ones used in the
actuarial literature, as the Poisson, negative binomial and others. The new specification draws inferences about parameters of
interest in problems appearing in actuarial statistics. Two unconditional (discrete) distributions obtained are studied and used in
the collective risk model to compute the right-tail probability of the aggregate claim size distribution. Comparisons with the
compound Poisson and compound negative binomial are made.
Shimizu, Yasutaka (2014). Edgeworth type expansion of ruin probability under Lvy risk processes in the small loading asymptotics.
[RKN: 46896]
This paper presents an asymptotic expansion of the ultimate ruin probability under Lvy insurance risks as the loading factor tends
to zero. The expansion formula is obtained via the Edgeworth type expansion for compound geometric distributions. We give
higher-order expansion of the ruin probability, any order of which is available in explicit form, and discuss a certain type of validity
of the expansion. We shall also give applications to evaluation of the VaR-type risk measure due to ruin, and the scale function of
spectrally negative Lvy processes.
SOUTH AFRICAN ACTUARIAL JOURNAL
Martin, Marilyn; Hayes, Mark (2013). Operational risk management: practical implications for the South African insurance industry.
[RKN: 46586]
South African Actuarial Journal (2013) 13 : 39-95.
Like its European counterparts, the South African insurance industry is moving towards its own risk-based regulatory regime,
Solvency Assessment and Management (SAM). As a result greater focus is being placed on the appreciation of risks facing firms,
of which operational risk forms a significant part. This paper aims to review operational risks as they pertain to South African
insurers, both in internal risk-management practices and for the purposes of regulatory compliance. It presents principles and
initiatives that have the potential to assist insurers in their identification and management of operational risks. A framework for the
management of operational risk is discussed, as is the use of operational-loss data in this framework. Through an industry survey,
this paper assesses perceptions towards operational risk, as well as views on the SAM regulations for the calculation of
operational risk capital. Furthermore, high-level feasibility of an industry-wide operational-risk consortium database is studied.
DOI: http://dx.doi.org/10.4314/saaj.v13i1.3 (access via Athens login http://www.openathens.net/)
Internet URL: http://www.actuarialsociety.org.za/Professionalresources/SAActuarialJournal.aspx
VARIANCE
Fu, Luyang (2012). Optimal growth for P&C insurance companies. [RKN: 43610]
Variance (2012) 6(1) : 102-121.
Title: Optimal growth for P&C [property and casualty] insurance companies
It is generally well established that new business produces higher loss and expense ratios and lower retention ratios than renewal
business. Ironically, to add more new business, an insurer needs higher profitability in order to generate the additional capital
needed to support its exposure growth. Irrational growth is one of the of reasons for the insolvencies of property and casualty
insurance companies. This study presents a method to balance the opposing forces of growth and profitability. The proposed
method is straightforward and can be effectively employed by property and casualty insurers in their strategic planning process.
Internet URL: http://www.variancejournal.org/issues
Eling, Martin; Marek, Sebastian D (2012). Do underwriting cycles matter? An analysis based on dynamic financial analysis. [RKN:
43666]
Variance (2012) 6(2) : 131-142.
The aim of this paper is to analyze the impact of underwriting cycles on the risk and return of non-life insurance companies. We
integrate underwriting cycles in a dynamic financial analysis framework using a stochastic process, specifically, the
Ornstein-Uhlenbeck process, which is fitted to empirical data and used to analyze the impact of these cycles on risk and return.
We find that underwriting cycles have a substantial influence on risk and return measures. Our results have implications for
managers, regulators, and rating agencies that use such models in risk management, e.g., to determine risk-based capital
requirements.
Halliwell, Leigh Joseph (2014). The discrete Fourier Transform and cyclical overflow. [RKN: 47261]
Variance (2014) 8(1) : 73-79.
More casualty actuaries would employ the discrete Fourier transform (DFT) if they understood it better. In addition to the many fine
papers on the DFT, this paper might be regarded as just one more introduction. However, the topic uniquely explained herein is
how the DFT treats the probability of amounts that overflow its upper bound, a topic that others either have not noticed or have
deemed of little importance. The cyclical overflow originates in the modular arithmetic whereby the DFT evaluates characteristic
functions. To understand this is to attain a deeper understanding of the DFT, which may lead to its wider use.
61
Books and monograph papers on Risk Management acquired by the IFoA libraries
Ashcroft, Michael; Wilson, Graham (2014). Liquidity risk: a growing challenge in insurance. [slide presentation]. - London: Staple Inn
Actuarial Society, 2014. - 31 pages. [RKN: 46212]
Slides presented to Staple Inn Actuarial Society, 6 May 2014
Shelved at: Online only. Shelved at: Online only.
Internet URL: http://sias.org.uk/resources/papers/
Atkins, Derek; Fitzsimmons, Anthony; Parsons, Chris; Punter, Alan (2012). Roads to ruin: a study of major risk events: their origins,
impact and implications. - London: Airmic, 2012. - [3], 183, [1] pages. [RKN: 43527]
'A report by Cass Business School on behalf of Airmic sponsored by Crawford and Lockton' - t.p.
Shelved at: AZA/BYF/BYG/EEQ (Lon)
Biagini, Francesca (ed); Schlesinger, Harris (ed); Richter, Andreas (ed) (2013). Risk measures and attitudes. - EAA series. Berlin: Springer, 2013. - ix, 91 pages. [RKN: 43867]
European Actuarial Academy series - textbook
Shelved at: UHG (Lon)
Bird, Martin; Gordon, Tim (2013). Risk management issues in insurance : Trends in best practice. - London: Bloomsbury, 2013. - 183
pages. [RKN: 74392]
Shelved at: 519.287.
The financial crisis of 2008 had little impact on the insurance industry globally, unlike the solvency issues within other financial
sectors. This title looks at the major risk concerns within insurance and how the industry as a whole deals with potential threats to
its business in the short, medium, and long term. It will demystify how insurers cope with liquidity risk, counterparty risk, tail-event
risk (catastrophe), longevity risk, and the impact of climate change.
Bolviken, Erik (2014). Computation and modelling in insurance and finance. - International Series on Actuarial Science. - Cambridge:
Cambridge University Press, 2014. - xxvi, 685 pages. [RKN: 43877]
Shelved at: BU/EF/WK (Lon) Shelved at: 368.01.
Bulmer, J Richard; Keshani, Sameer; Marcuson, Alex (2013). Application of the actuarial function to general insurance companies :
Report of the Actuarial Function Working Party. - London: Institute and Faculty of Actuaries, 2013. - 43 pages. [RKN: 46109]
Paper presented to the Institute and Faculty of Actuaries on 4 November 2013, London
Shelved at: ifp 2013/11 (Lon)
Internet URL:
http://www.actuaries.org.uk/research-and-resources/documents/application-actuarial-function-general-insurance-companies
(slide presentation)
Camilli, Stephen J; Duncan, Ian; London, Richard L (2014). Models for quantifying risk. - 6th ed. - Winsted, Connecticut: Actex,
2014. - xiv, 524 pages. [RKN: 46235]
Library holds earlier editions
Shelved at: UG/VXK (Lon)
Canabarro, Eduardo (ed); Pykhtin, Michael (ed) (2014). Counterparty credit risk: measurement, pricing and regulation. - London:
Incisive Media; Risk Books, 2014. - xxii, 331 pages. [RKN: 43874]
Earlier publication: Counterparty credit risk: measurement, pricing and hedging, published 2008.
Shelved at: EEQ (Lon)
Chambers, Alvar; Penn, Emily; Rae, Dick (2012). OTC Derivatives - central clearing, discounting and other issues [slide presentation].
- Risk and Investment Conference 2012 Queens Hotel, Leeds, 27-29 June 2012. Institute of Actuaries and Faculty of Actuaries, 2012.
[RKN: 43760]
Shelved at: Online only.
Internet URL: http://www.actuaries.org.uk/research-and-resources/documents/a04-centralised-clearing-otc-derivatives
Chapman, Robert J (2014). The rules of project risk management : Implementation guidelines for major projects. Gower, 2014. - 264
pages. [RKN: 75583]
Shelved at: Online.
Internet URL: http://search.ebscohost.com/login.aspx?authtype=athens&profile=ehost&defaultdb=nlebk
Chappell, Christopher (2013). The executive guide to enterprise risk management : Linking strategy, risk and value creation. Palgrave
Macmillan, 2013. - 216 pages. [RKN: 75588]
Shelved at: Online.
Choudhry, Moorad; Wong, Max (2014). An introduction to Value-at-Risk. - 5th ed. - Hoboken NJ: John Wiley, 2014. - xxii, [2], 200
pages. [RKN: 46123]
With a contribution from Max Wong - t.p. [chapter 9] -- Foreword by Carol Alexander -- 1st edition originally published 1999.
62
Clark, Dominic; Kent, Jeremy; Morgan, Ed (2012). Dynamic management actions. - London: Staple Inn Actuarial Society, 2012. - 31
pages. [RKN: 43537]
Slide presentation to Staple Inn Actuarial Society, 6 March 2012
Shelved at: Online only. Shelved at: Online only.
Realistic modelling of dynamic management actions is critical to many areas of the financial management of a life insurance
company today. In our overview of this topic we will:
- explain what is meant by dynamic management actions (DMA) and what the main types of DMA are;
- introduce the areas in which DMA is important (e.g. Solvency II, MCEV, ALM etc);
- describe how DMA can be linked to real expected management behaviour (including considerations around concepts such as
the Use Test);
- illustrate how improved modelling of DMA can, under some circumstances, materially influence calculated results;
- show how understanding DMA and its interactions with dynamic policyholder behaviour can improve a companys Enterprise
Risk Management;
Internet URL: http://www.sias.org.uk/siaspapers/search/view%20paper?id=SIASPaperMar2012
http://sias.org.uk/resources/papers/
Clarke, Daniel; Adam, Bianca; Bazzurro, Paolo; Bevan, David; Dana, Julie; de Janvry, Alain; Hallegatte, Stphane; Mahul,
Olivier; Poulter, Richard; Teh, Tse-Ling; von Dahlen, Sebastian (2014). Impact appraisal for sovereign disaster risk financing and
insurance project, phase 1: overall methodology paper
. - London: Institute and Faculty of Actuaries, 2014. - 16 pages. [RKN: 46153]
Paper used to inform on sessional research event: 'Is financial protection against disasters worth it for developing countries?' A
panel discussion on how actuaries are helping to answer this question', held at the Institute and Faculty of Actuaries, 24 March
2014, chaired by Dermot Grenham, and Michel Noel (World Bank) with Daniel Clarke (World Bank) speaker for the paper.
Shelved at: ifp 2014/03. Shelved at: Online only.
The frequency and severity of humanitarian disasters will continue to grow in the coming years and at an accelerated pace.
Low-income countries and donors are becoming increasingly interested in sovereign disaster risk financing and insurance (DRFI)
as a way to increase financial resilience to disaster events. However, there is a need for better evidence to guide support in
sovereign DRFI programs, to maximise their impact and reduce the human and economic cost of disasters. This paper presents a
stylised overview of 15 technical background papers contributed to the first phase of a joint UK Department for International
Development, World Bank, and Global Facility for Disaster Reduction and Recovery project to improve the evidence base for
sovereign DRFI.
Internet URL: http://www.actuaries.org.uk/sites/all/files/documents/pdf/drfi-paper-13-03-14 0.pdf
Courbage, Christophe; Stahel, Walter R (2012). Extreme events and insurance: 2011 annus horribilis. - The Geneva Reports - Risk
and insurance research. Geneva Association, - 147 pages. [RKN: 74968]
(2012) 5
Shelved at: online only. Shelved at: online only.
A global and detailed picture of the major 2011 natural catastrophes and an analysis of the role and mechanisms of insurance in
managing climate risk and other extreme events. The report comprises nine essays by leading insurance academics,
economists and insurers that underline the significant importance of risk adaptation and management measures in developing
physical and economic resilience to natural catastrophes, including the important role of insurance in such mechanisms. It also
provides the implicit lessons learned from the catastrophes that will enable better risk assessment and adaptation to similar risks
in future.
Internet URL: http://www.genevaassociation.org/Home/Results.aspx?mode=free&keyword=geneva%20report
Eason, Scott; Foroughi, Gillian (2012). Is there a place in the UK mass market for a guaranteed pensions product? [slide presentation].
- Risk and Investment Conference 2012 Queens Hotel, Leeds, 27-29 June 2012. Institute of Actuaries and Faculty of Actuaries, 2012.
[RKN: 43743]
This paper presented the work of the Investment Products for Retirement Savings Working Party comprising Scott Eason, Gilliam
Foroughi, Paul Barker, John Harsant, David Hunter, Stuart Jarvis, Gareth Jones, Viktor Knava, Gary Martin, Peter Murphy, Karl
Murray, Jeev Muthulingam, Nnamdi Odozi, Tessa Page, Kingsley Washoma, Anthony Webb
Internet URL:
http://www.actuaries.org.uk/research-and-resources/documents/e03is-there-place-dc-mass-market-guaranteed-products
Fenton, Norman; Neil, Martin (2013). Risk assessment and decision analysis with Bayesian networks. - Boca Raton FL (USA); London:
Chapman & Hall/CRC, 2013. - xix, 503 pages. [RKN: 46224]
Shelved at: UGR/UHG (Lon)
Frees, Edward W; Derrig, Richard A; Meyers, Glenn (2014). Predictive modeling applications in actuarial science : Volume 1:
Predictive modeling techniques. - International Series on Actuarial Science. - Cambridge: Cambridge University Press, 2014. - xx,
543 pages. [RKN: 46177]
Shelved at: EM/TK ref (Lon) Shelved at: 368.01.
Girling, Philippa X (2013). Operational risk management: A complete guide to a successful operational risk framework. Wiley, 2013. 328 pages. [RKN: #77006]
Previous definitions of operational risk took the view that if the risk was not captured in market or credit risk programs, then it must
be operational. Today, a more concrete definition has been establishedthe most common of which can be found in the Basel II
regulations: "Operational risk is defined as the risk of loss resulting from inadequate or failed processes, people, and systems or
from external events." As operational risk management programs continue to grow in financial firms around the world, so does the
need for information on identifying and managing key operational risks, as well as implementing an effective operational risk
framework. Nobody is more familiar with this situation than author Philippa Girlingan operational risk expert, who was named
one of the "top 50 faces of operational risk" by Operational Risk and Regulation magazine. Now, in Operational Risk Management
, she shares her extensive experience in this field with you.
63
Gray, Roger J; Pitts, Susan M (2012). Risk modelling in general insurance: from principles to practice. - International Series on
Actuarial Science. - Cambridge: Cambridge University Press for the Institute of Actuaries and the Faculty of Actuaries, 2012. - xiv, 393
pages. [RKN: 45763]
Shelved at: BX/UHG (Lon) Shelved at: 368.01.
Knowledge of risk models and the assessment of risk is a fundamental part of the training of actuaries and all who are involved in
financial, pensions and insurance mathematics. This book provides students and others with a firm foundation in a wide range of
statistical and probabilistic methods for the modelling of risk, including short term risk modelling, model based pricing, risk sharing,
ruin theory and credibility.
Internet URL: http://lib.myilibrary.com/AthensLogin.aspx
Hull, John C (2012). Risk management and financial institutions. - Wiley Finance. - 3rd ed. - Hoboken NJ: John Wiley, 2012. - xxi, 643
pages. [RKN: 46122]
'Risk management and financial institutions + website' - cover title
Shelved at: EC/UHG (Lon)
Hull, John C (2015). Risk management and financial institutions. - Wiley Finance. - 4th ed. - Hoboken NJ: John Wiley & Sons, 2015.
- xxv, 714 pages. [RKN: 46260]
Shelved at: EC/UHG (Lon)
Hursey, Christopher; Cocke, Matthew; Hannibal, Cassandra; Jakhria, Parit; MacIntyre, Iain; Modisett, Matthew C (2014). Heavy
models, light models and proxy models : A working paper by the Proxy Model Working Party. - London: Institute and Faculty of
Actuaries, 2014. - 74 pages. [RKN: 46150]
Shelved at: ifp 2014/02. Shelved at: Online only.
capital estimation.
Internet URL:
Jones, Malcolm W (2012). Relative merits of synthetic versus cash instruments: efficient portfolio construction using cash-based and
derivatives instruments [slide presentation]. - Risk and Investment Conference 2012 Queens Hotel, Leeds, 27-29 June 2012. Institute
of Actuaries and Faculty of Actuaries, 2012. [RKN: 43741]
This paper presented the work of a working party comprising Malcom Jones, Clara Yan, Jeff Neale, MUnawer Shafi, Anurag
Goyal.
Internet URL:
http://www.actuaries.org.uk/research-and-resources/documents/b04-relative-merits-synthetic-versus-cash-investments
Kaiser, Thomas (ed); Merl, Petra (ed) (2014). Reputational risk management in financial institutions. - London: Incisive Media; Risk
Books, 2014. - xxiii, 336 pages. [RKN: 46204]
Shelved at: EC/AZM (Lon)
Kriele, Marcus; Wolf, Jochen (2012). Value-oriented risk management of insurance companies. - EAA series. - London: Springer,
2012. - 378 pages. [RKN: 74391]
Value- Oriented Risk Management of Insurance Companies focuses on risk capital, capital allocation, performance measurement
and value-oriented management. It also makes a connection to regulatory developments (for example, Solvency II). The reader
should have a basic knowledge of probability and familiarity with mathematical concepts. It is intended for working actuaries and
quantitative risk managers as well as actuarial students.
Lam, James (2014). Enterprise risk management: from incentives to controls. - 2nd ed. - Hoboken NJ: John Wiley, 2014. [RKN: 46133]
Shelved at: UHG/AA ref (Lon) UHG/AA (Lon) Shelved at: 519.287.
A fully revised second edition focused on the best practices of enterprise risk management. Since the first edition of Enterprise
Risk Management: From Incentives to Controls was published a decade ago, much has changed in the worlds of business and
finance. That's why James Lam has returned with a new edition of this essential guide. Written to reflect today's dynamic market
conditions, the Second Edition of Enterprise Risk Management: From Incentives to Controls clearly puts this discipline in
perspective.
Engaging and informative, it skillfully examines both the art as well as the science of effective enterprise risk management
practices. Along the way, it addresses the key concepts, processes, and tools underlying risk management, and lays out clear
strategies to manage what is often a highly complex issue. Offers in-depth insights, practical advice, and real-world case studies
that explore the various aspects of ERM Based on risk management expert James Lam's thirty years of experience in this field
Discusses how a company should strive for balance between risk and return.
Internet URL: http://lib.myilibrary.com/AthensLogin.aspx
http://search.ebscohost.com/login.aspx?authtype=athens&profile=ehost&defaultdb=nlebk
Lane, Morton (ed) (2012). Alternative (re)insurance strategies. - London: Incisive Media; Risk Books, 2012. - xxv, 571 pages. [RKN:
46192]
Shelved at: BXQ (Lon)
64
Louisot, Jean-Paul; Ketcham, Christopher (2014). ERM - Enterprise Risk Management: Issues and cases. John Wiley & Sons, 2014.
- 280 pages. [RKN: 75096]
Despite enterprise risk management's relative newness as a recognized business discipline, the marketplace is replete with
guides and references for ERM practitioners. Yet, until now, few case studies illustrating ERM in action have appeared in the
literature. One reason for this is that, until recently, there were many disparate, even conflicting definitions of what, exactly ERM is
and, more importantly, how organizations can use it to utmost advantage. With efforts underway, internationally, to mandate ERM
and to standardize ERM standards and practices, the need has never been greater for an authoritative resource offering risk
management professionals authoritative coverage of the full array of contemporary ERM issues and challenges. Written by two
recognized international thought leaders in the field, ERM-Enterprise Risk Management provides that and much more.
Miller, Michael B (2014). Mathematics and statistics for financial risk management. - Wiley Finance Series. - 2nd ed. - Hoboken NJ:
John Wiley, 2014. - xiii, 317 pages. [RKN: 46121]
Shelved at: UA/VA/EF (Lon)
Morjaria, Nirav (chair); Aggarwal, Ankur; Beck, Michael Bruce; Cann, Matthew; Ford, Tim; Georgescu, Dan; Smith, Andrew;
Taylor, Yvonne; Tsanakas, Andreas; Witts, Louise; Ye, Ivy (2015). Model risk: daring to open up the black box. - London: Institute
and Faculty of Actuaries, 2015. - 78 pages. [RKN: 46245]
Paper presented to IFoA, London, 23 March 2015 by the Model Risk Working Party
Shelved at: ifp 2015/03 (Lon) online.
With the increasing use of complex quantitative models in applications throughout the financial world, model risk has become a
major concern. Such risk is generated by the potential inaccuracy and inappropriate use of models in business applications, which
can lead to substantial financial losses and reputational damage. In this paper we deal with the management and measurement of
model risk. First, a model risk framework is developed, adapting concepts such as risk appetite, monitoring, and mitigation to the
particular case of model risk. The usefulness of such a framework for preventing losses associated with model risk is
demonstrated through case studies. Second, we investigate the ways in which different ways of using and perceiving models
within an organisation both lead to different model risks. We identify four distinct model cultures and argue that in conditions of
deep model uncertainty, each of those cultures makes a valuable contribution to model risk governance. Thus the space of
legitimate challenges to models is expanded, such that, in addition to a technical critique, operational and commercial concerns
are also addressed. Third, we discuss through the examples of proxy modelling, longevity risk and investment advice, common
methods and challenges for quantifying model risk. Difficulties arise in mapping model errors to actual financial impact. In the case
of irreducible model uncertainty, it is necessary to employ a variety of measurement approaches, based on statistical inference,
fitting multiple models, and stress and scenario analysis.
Internet URL:
http://www.actuaries.org.uk/research-and-resources/documents/sessional-paper-model-risk-daring-open-black-box
http://www.actuaries.org.uk/sites/all/files/documents/pdf/model-risk-working-party-paper.pdf
http://www.actuaries.org.uk/research-and-resources/documents/model-risk-sessional-powerpoint-presentation
Pfaff, Bernhard (2013). Financial risk modelling and portfolio optimization with R. John Wiley & Sons, 2013. - 376 pages. [RKN: 75100]
Introduces the latest techniques advocated for measuring financial market risk and portfolio optimization, and provides a plethora
of R code examples that enable the reader to replicate the results featured throughout the book. Financial Risk Modelling and
Portfolio Optimization with R: Demonstrates techniques in modelling financial risks and applying portfolio optimization
techniques as well as recent advances in the field. Introduces stylized facts, loss function and risk measures, conditional and
unconditional modelling of risk; extreme value theory, generalized hyperbolic distribution, volatility modelling and concepts for
capturing dependencies. Explores portfolio risk concepts and optimization with risk constraints. Enables the reader to replicate
the results in the book using R code. Is accompanied by a supporting website featuring examples and case studies in R.
Graduate and postgraduate students in finance, economics, risk management as well as practitioners in finance and portfolio
optimization will find this book beneficial. It also serves well as an accompanying text in computerlab classes and is therefore
suitable for selfstudy.
Reuvid, Jonathan (ed) (2013). Managing business risk: a practical guide to protecting your business. - 9th ed. - London: Kogan Page,
2013. - xxi, 229 pages. [RKN: 43878]
Shelved at: AZA (Lon)
Roberts, Richard (2012). Did anyone learn anything from the Equitable Life? Lessons and learning from financial crises. - London:
Kings College London, 2012. [RKN: 43542]
Internet URL: http://www.equitable.co.uk/media/32351/king's%20final%20report07092012final.pdf
Rozanov, Andrew; McRandal, Ryan (2015). Tail risk hedging. - London: Risk Books, 2015. - xix, 304 pages. [RKN: 46231]
Sharma, Sanjay (2014). Risk transparency. - Risk executive reports. - London: Incisive Media; Risk Books, 2014. - xi, 427 pages.
[RKN: 46191]
Silver, Nate (2012). The signal and the noise : The art and science of prediction. Penguin, 2012. - 534 pages. [RKN: 75789]
Every time we choose a route to work, decide whether to go on a second date, or set aside money for a rainy day, we are making
a prediction about the future. Yet from the financial crisis to ecological disasters, we routinely fail to foresee hugely significant
events, often at great cost to society. In The Signal and the Noise, the New York Times political forecaster Nate Silver, who
accurately predicted the results of every single state in the 2012 US election, reveals how we can all develop better foresight in an
uncertain world. From the stock market to the poker table, from earthquakes to the economy, he takes us on an enthralling
insider's tour of the high-stakes world of forecasting, showing how we can use information in a smarter way amid a noise of data and make better predictions in our own lives.
65
Smart, Andrew; Creelman, James (2013). Risk-based performance management: Integrating strategy and risk management. Palgrave
Macmillan, 2013. - 324 pages. [RKN: 74302]
Shelved at: Online.
A new model for management in a new time, this book introduces the Risk-Based Performance Management methodology. This
pioneering and practical framework enables senior management to understand, manage and control the risks facing their
organizations while exploiting emerging opportunities to gain and maintain competitive advantage. By establishing the wider
context of change within business, from the Credit Crunch, the upheaval of the Arab Spring, the uncertainty created by the
Euro-zone Crisis and the increasing global influence of social media, the authors explain how and why a revolution is taking place
in how organizations are structured, regulated and go to market. This results-focused guide to embedding risk management into
strategic and operational decision-making gives executive teams the tools to align their risk-taking to strategy, enabling them to
drive sustainable success while operating within appetite.
Streftaris, George (2014). The effect of model uncertainty on the pricing of critical illness insurance. [slide presentation]. - London:
Institute and Faculty of Actuaries, 2014. - 10 [slides] pages. [RKN: 46222]
Paper presented to IFoA, Edinburgh, 24 November 2014 -- Full paper for publication in Annals of Actuarial Science, with
co-investigators: E Dodd (Ozkok), H R Waters, A D Stott.
Critical Illness Insurance (CII) involves cover which pays out on the diagnosis of an illness which is deemed to be critical.
Estimation and graduation of CII claim rates has been challenging, partly due to the diagnosis of the insured event often being
unclear or not recorded. This introduces additional uncertainties in the evaluation of claim rates. In this project we have
addressed the issue of model and parameter uncertainty in claim rate estimation, when the date of diagnosis is missing, aiming at
obtaining graduated rates that can be applied to estimate the future cash flow of CI policies and determine insurers liability more
accurately. Better understanding of uncertainty in CII rate graduation and pricing is important for insurers, not least because of
future changes in the interpretation of the definition of an illness or advances in medical practice leading to more efficient
diagnosis and treatment.
Estimation of claim rates is addressed using a parametric Poisson model for the number of claims, which accounts for claims that
have not been settled by the end of the observation. This is achieved by considering probabilities of the distribution of the delay
period between diagnosis of insured illness and settlement of the corresponding claim. We have developed appropriate
generalised-linear-type models (including log-normal, Burr, generalised gamma and generalised beta) to investigate this delay,
using data supplied by the Continuous Mortality Investigation (1999-2005). The analysis includes various claim risk factors (e.g.
gender, benefit amount, policy duration etc) and is performed under a Bayesian framework, using Markov chain Monte Carlo
estimation techniques.
Based on this experience, our analysis suggests that estimates of the CDD are model-sensitive, but claim rates and pricing are
not. Under the best CDD fitting, the following risk factors are considered important for predictive purposes: policy duration, selling
office, benefit type, benefit amount, policy type and cause of claim.
Internet URL:
http://www.actuaries.org.uk/research-and-resources/documents/sessional-research-event-effect-model-uncertainty-pricing-critic
alhttp://www.actuaries.org.uk/sites/all/files/documents/pdf/streftarisifoasessional241114.pdf
Szylar, Christian (2014). Handbook of market risk. - Wiley handbooks in financial engineering and econometrics. John Wiley & Sons,
2014. - 432 pages. [RKN: 75101]
Understanding and investigating the impacts of market risk on the financial landscape is crucial in preventing crises. Written by a
hedge fund specialist, the Handbook of Market Risk is the comprehensive guide to the subject of market risk. Featuring a format
that is accessible and convenient, the handbook employs numerous examples to underscore the application of the material in a
realworld setting. The book starts by introducing the various methods to measure market risk while continuing to emphasize
stress testing, liquidity, and interest rate implications. Covering topics intrinsic to understanding and applying market risk, the
handbook features: An introduction to financial markets, valueatrisk, the Capital Asset Pricing Model, Arbitrage Pricing
Theory, stress testing and back testing and banks/Basel II/III. The Handbook of Market Risk is a musthave resource for
financial engineers, quantitative analysts, regulators, risk managers in investments banks, and largescale consultancy groups
advising banks on internal systems.
Tsanakas, Andreas; Smith, Andrew (2014). Quantitative approaches to model uncertainty. [slide presentation]. - London: Institute
and Faculty of Actuaries, 2014. - 42 [slides] pages. [RKN: 46196]
Paper presented to IFoA, London, 29 October 2014
Many areas of actuarial work require the use of models, but we seldom have solid grounds to believe that a chosen model is the
same, or even close, to the process that generated past observations. Prudence demands that we investigate possible
explanations, and consider carefully the business implications of using a model that may turn out to be wrong. Andreas Tsanakas
and Andrew Smith discuss Monte Carlo techniques for investigating the impact of model ambiguity. Focus is on VaR calculations
and the associated back-testing criterion for assessing the quality of estimation procedures. Approaches to incorporate such
uncertainty into decision-making are discussed, reflecting the need for: (i) practical adjustments to VaR estimates, (ii) a deeper
understanding of model uncertainty and (iii) formulating risk tolerance in relation to model mis-specification.
Internet URL: http://www.actuaries.org.uk/events/one-day/sessional-research-event-quantitative-approaches-model-uncertainty
http://www.actuaries.org.uk/sites/all/files/documents/pdf/presentation-notes-291014.pdf
Verma, Savita (ed); Krishnaswamy, Vijay (ed); Takigawa, Eric (ed); Schouten, Michael (ed) (2012). Managing illiquid assets:
perspectives and challenges. - London: Risk Books; Incisive Media, 2012. - xv, 483 pages. [RKN: 43859]
Edited by Eric Takigawa; contibuting editors Vijay Krishnaswamy, Michael Schouten and Savita Verma - cover
Shelved at: EE/ELAV (Lon)
Wright, Paul (2014). New directions for insurance: implications for financial stability. - Centre for the Study of Financial Innovation
publications; 115. - London: Centre for the Study of Financial Innovation (CSFI), 2014. - 45 pages. [RKN: 46199]
Shelved at: BU pam (Lon)
66
67
ADDED PAPERS TO MAY 2015

THE ACTUARY
Woolford, Graham (2015). Code of conduct. Staple Inn Actuarial Society, - 1 pages. [RKN: 47138]
The Actuary (2015) January (online) : 12-13.
Globally, increasing levels of corporate governance legislation are forcing companies to develop enterprise risk frameworks. But
behavioural issues can affect the way in which boards respond to the regulatory environment
Ledlie, Colin (2015). A mountain to climb. Staple Inn Actuarial Society, - 2 pages. [RKN: 75030]
The Actuary (2015) February : 30-31.
Much like his own hill walking adventures, Colin Ledlie outlines how the Financial Reporting Council's UK Corporate Governance
Code guidance is driven by cutting-edge thinking in enterprise risk management
Kelly, Scott (2015). Social unrest: A systemic risk. Staple Inn Actuarial Society, - 1 pages. [RKN: 75022]
With the help of social media, civil unrest is a risk that has profoundly changed in nature
ANNALS OF ACTUARIAL SCIENCE
Liu, Luyin; Cheung, Eric C K (2015). On a bivariate risk process with a dividend barrier strategy. [RKN: 47179]
In this paper, we study a continuous-time bivariate risk process in which each individual line of business implements a dividend
barrier strategy. The insurance portfolios of the two insurers are correlated as they are subject to common shocks that induce
dependent claims. To analyse the expected discounted dividends until the joint ruin time of the bivariate process (i.e. exit from the
positive quadrant), we propose a discrete-time counterpart of the model and apply a bivariate extension of the Dickson-Waters
discretisation with the use of a bivariate Panjer-type recursion. Detailed numerical examples under different dependencies via
common shocks, copulas and proportional reinsurance are discussed, and applications to optimal problems in reinsurance, capital
allocation and dividends are given. It is also illustrated that the optimal pair of dividend barriers maximising the dividend function is
dependent on the initial surplus levels. A modified type of dividend barrier strategy is proposed towards the end.
ASTIN BULLETIN
Rodrguez-Martnez, Eugenio V; Cardoso, Rui M R; Egdio dos Reis, Alfredo D (2015). Some advances on the erlang(n) dual risk
model. - 24 pages. [RKN: 74374]
ASTIN Bulletin (2015) 45 (1) : 127-150.
The dual risk model assumes that the surplus of a company decreases at a constant rate over time and grows by means of upward
jumps, which occur at random times and sizes. It is said to have applications to companies with economical activities involved in
research and development. This model is dual to the well-known Cramr-Lundberg risk model with applications to insurance. Most
existing results on the study of the dual model assume that the random waiting times between consecutive gains follow an
exponential distribution, as in the classical Cramr-Lundberg risk model. We generalize to other compound renewal risk models
where such waiting times are Erlang(n) distributed. Using the roots of the fundamental and the generalized Lundberg's equations,
we get expressions for the ruin probability and the Laplace transform of the time of ruin for an arbitrary single gain distribution.
Furthermore, we compute expected discounted dividends, as well as higher moments, when the individual common gains follow a
Phase-Type, PH(m), distribution. We also perform illustrations working some examples for some particular gain distributions and
obtain numerical results.
DOI: http://dx.doi.org/10.1017/asb.2014.19 (access via Athens login http://www.openathens.net/)/
Hashorva, Enkelejd; Ratovomirija, Gildas (2015). On Sarmanov mixed erlang risks in insurance applications. - 31 pages. [RKN: 74372]
ASTIN Bulletin (2015) 45 (1) : 175-205.
In this paper we consider an extension to the aggregation of the FGM mixed Erlang risks, proposed by Cossette et al. (2013
Insurance: Mathematics and Economics, 52, 560-572), in which we introduce the Sarmanov distribution to model the dependence
structure. For our framework, we demonstrate that the aggregated risk belongs to the class of Erlang mixtures. Following results
from S. C. K. Lee and X. S. Lin (2010 North American Actuarial Journal, 14(1) 107-130), G. E. Willmot and X. S. Lin (2011 Applied
Stochastic Models in Business and Industry, 27(1) 8-22), analytical expressions of the contribution of each individual risk to the
economic capital for the entire portfolio are derived under both the TVaR and the covariance capital allocation principle. By
analysing the commonly used dependence measures, we also show that the dependence structure is wide and flexible. Numerical
examples and simulation studies illustrate the tractability of our approach.
Zhou, Ming; Yuen, Kam C (2015). Portfolio selection by minimizing the present value of capital injection costs. - 32 pages. [RKN: 74371]
ASTIN Bulletin (2015) 45 (1) : 207-238.
This paper considers the portfolio selection and capital injection problem for a diffusion risk model within the classical
Black-Scholes financial market. It is assumed that the original surplus process of an insurance portfolio is described by a drifted
Brownian motion, and that the surplus can be invested in a risky asset and a risk-free asset. When the surplus hits zero, the
company can inject capital to keep the surplus positive. In addition, it is assumed that both fixed and proportional costs are
incurred upon each capital injection. Our objective is to minimize the expected value of the discounted capital injection costs by
controlling the investment policy and the capital injection policy. We first prove the continuity of the value function and a verification
theorem for the corresponding Hamilton-Jacobi-Bellman (HJB) equation. We then show that the optimal investment policy is a
solution to a terminal value problem of an ordinary differential equation. In particular, explicit solutions are derived in some special
cases and a series solution is obtained for the general case. Also, we propose a numerical method to solve the optimal investment
68
and capital injection policies. Finally, a numerical study is carried out to illustrate the effect of the model parameters on the optimal
policies.
Raducan, Anisoara Maria; Vernic, Raluca; Zbaganu, Gheorghita (2015). Recursive calculation of ruin probabilities at or before claim
instants for non-identically distributed claims. [RKN: 47291]
ASTIN Bulletin (2015) 45(2) : 421-443.
In this paper, we present recursive formulae for the ruin probability at or before a certain claim arrival instant for some particular
continuous time risk model. The claim number process underlying this risk model is a renewal process with either Erlang or a
mixture of exponentials inter-claim times (ICTs). The claim sizes (CSs) are independent and distributed in Erlang's family, i.e.,
they can have different parameters, which yields a non-homogeneous risk process. We present the corresponding recursive
algorithm used to evaluate the above mentioned ruin probability and we illustrate it on several numerical examples in which we
vary the model's parameters to assess the impact of the non-homogeneity on the resulting ruin probability.
Yang, Jingping; Chen, Zhijin; Wang, Fang; Wang, Ruodu (2015). Composite Bernstein copulas. [RKN: 47292]
ASTIN Bulletin (2015) 45(2) : 445-475.
Copula function has been widely used in insurance and finance for modeling inter-dependency between risks. Inspired by the
Bernstein copula put forward by Sancetta and Satchell (2004, Econometric Theory, 20, 535-562), we introduce a new class of
multivariate copulas, the composite Bernstein copula, generated from a composition of two copulas. This new class of copula
functions is able to capture tail dependence, and it has a reproduction property for the three important dependency structures:
comonotonicity, countermonotonicity and independence. We introduce an estimation procedure based on the empirical composite
Bernstein copula which incorporates both prior information and data into the estimation. Simulation studies and an empirical study
on financial data illustrate the advantages of the empirical composite Bernstein copula estimation method, especially in capturing
tail dependence.
BRITISH ACTUARIAL JOURNAL
Hursey, Christopher; Cocke, Matthew; Hannibal, Cassandra; Jakhria, Parit; MacIntyre, Iain; Modisett, Matthew C (2014). (2015).
Heavy models, light models and proxy models : A working paper by the Proxy Model Working Party : Abstract of the London discussion.
2014. [RKN: 47160]
BAJ (2015) 20(1) : 147-166.
capital estimation.
Internet URL:
THE EUROPEAN ACTUARY
Berkemeijer, Jos; Boon, Sander (2015). What's best for your company? Behavioral economic stress testing. [RKN: 47195]
The European Actuary (2015) 5(2) April : 13-14.
Models of financial institutions are at risk. For years now, captains of financial industries were able to rely on their financial risk and
investment models. But how robust are those models? Do they pass the test the current crisis has provided?
Internet URL: http://www.the-european-actuary.org
GENEVA RISK AND INSURANCE REVIEW
Schlesinger, Harris (2015). Lattices and lotteries in apportioning risk. - 14 pages. [RKN: 75008]
Although risk aversion has been used in economic models for over 275 years, the past few decades have shown how higher order
risk attitudes are also quite important. A behavioural approach to defining such risk attitudes was developed by Eeckhoudt and
Schlesinger, based on simple lottery preference. This article shows how the mathematics of lattice theory can be used to model
these lottery preferences. In addition to modelling a simple lattice structure, I show how such lattices can be extended in order to
develop a better understanding of higher order risk attitudes.
69
INSURANCE: MATHEMATICS & ECONOMICS

Fellingham, Gilbert W; Kottas, Athanasios; Hartman, Brian M (2015). Bayesian nonparametric predictive modeling of group health
claims. [RKN: 47208]
Models commonly employed to fit current claims data and predict future claims are often parametric and relatively inflexible. An
incorrect model assumption can cause model misspecification which leads to reduced profits at best and dangerous,
unanticipated risk exposure at worst. Even mixture models may not be sufficiently flexible to properly fit the data. Using a Bayesian
nonparametric model instead can dramatically improve claim predictions and consequently risk management decisions in group
health practices. The improvement is significant in both simulated and real data from a major health insurers medium-sized
groups. The nonparametric method outperforms a similar Bayesian parametric model, especially when predicting future claims for
new business (entire groups not in the previous years data). In our analysis, the nonparametric model outperforms the parametric
model in predicting costs of both renewal and new business. This is particularly important as healthcare costs rise around the
world.
Asimit, Alexandru V; Chen, Yiqing (2015). Asymptotic results for conditional measures of association of a random sum. [RKN: 47209]
Asymptotic results are obtained for several conditional measures of association. The chosen random variables are the first two
order statistics and the total sum within a random sum. Many of the results have confirmed the one-jump property of the risk
model. Non-trivial limits are obtained when the dependence among the first two order statistics is considered. Our results help in
understanding the extreme behaviour of well-known reinsurance treaties that involve only few large claims. Interestingly, the
Pearson product-moment correlation coefficient between the first two order statistics provides an alternative procedure to estimate
the tail index of the underlying distribution.
Dierkes, Thomas; Ortmann, Karl Michael (2015). On the efficient utilisation of duration. [RKN: 47211]
In this article we present a new approach to estimate the change of the present value of a given cashflow pattern caused by an
interest rate shift. Our approximation is based on analysing the evolution of the present value function through a linear differential
equation. The outcome is far more accurate than the standard approach achieved by a Taylor expansion. Furthermore, we derive
an approximation formula of second order that produces nearly accurate results. In particular, we prove that our method is
superior to any known alternative approximation formula based on duration. In order to demonstrate the power of this improved
approximation we apply it to coupon bonds, level annuities, and level perpetuities. We finally generalise the approach to a non-flat
term structure. As for applications in insurance, we estimate the change of the discounted value of future liabilities due to a
proportional shift in the set of capital accumulation factors. These findings are of particular importance to capital adequacy
calculations with respect to interest rate stress scenarios that are part of regulatory solvency requirements.
Li, Shi; Landriault, David; Lemieux, Christiane (2015). A risk model with varying premiums: its risk management implications. [RKN:
47212]
In this paper, we consider a risk model which allows the insurer to partially reflect the recent claim experience in the determination
of the next periods premium rate. In a ruin context, similar mechanisms to the one proposed in this paper have been studied by,
e.g., Tsai and Parker (2004) [Tsai, C., Parker, G., 2004. Ruin probabilities: classical versus credibility. In: NTU International
Conference on Finance, 2004], Afonso et al. (2009) [L B Afonso, A D Reis, H R Waters, Calculating continuous time ruin
probabilities for a large portfolio with varying premiums, ASTIN Bulletin 39 (2009): 117-136] and Loisel and Trufin (2013) [S Loisel,
J Trufin, Ultimate ruin probability in discrete time with Bhlmann credibility premium adjustments, Bulletin Franais dActuariat, 13
(2013): 73-102]. In our proposed risk model, we assume that the effective premium rate is determined based on the surplus
increments between successive random review times. When review times are distributed as a combination of exponentials and
claim arrivals follow a compound Poisson process, we derive a matrix-form defective renewal equation for the Gerber-Shiu
function, and provide an explicit expression for the discounted joint density of the surplus prior to ruin and the deficit at ruin.
Numerical examples are later considered to numerically evaluate certain ruin-related quantities. A comparison with their
counterparts in a constant premium rate model is also presented.
Landriault, David; Shi, Tianxiang (2015). Occupation times in the MAP risk model. [RKN: 47215]
Occupation times have so far been primarily analyzed in the class of Lvy processes, most notably some of its special cases, by
capitalizing on the stationary and independence property of the process increments. In this paper, we relax this assumption and
provide a closed-form expression for the Laplace transform of occupation times for surplus processes governed by a Markovian
claim arrival process [MAP: Markovian arrival process]. This will naturally allow us to revisit some occupation time results for the
compound Poisson risk model. We also identify the density of the total duration of negative surplus and its individual contributions
when the number of claims occurring with negative surplus levels is jointly studied. Finally, a numerical example in an Erlang-2
renewal risk process is also considered.
Landriault, David; Li, Bin; Li, Shu (2015). Analysis of a drawdown-based regime-switching Lvy insurance model. [RKN: 47217]
In this paper, we propose a new drawdown-based regime-switching (DBRS) Lvy insurance model in which the underlying
drawdown process is used to model an insurers level of financial distress over time, and to trigger regime-switching transitions. By
some analytical arguments, we derive explicit formulas for a generalized two-sided exit problem. We specifically state conditions
under which the survival probability is not trivially zero (which corresponds to the positive security loading conditions of the
proposed model). The regime-dependent occupation time until ruin is later studied. As a special case of the general DBRS model,
a regime-switching premium model is given further consideration. Connections with other existing risk models (such as the
loss-carry-forward tax model of Albrecher and Hipp, 2007) [Albrecher, H, Hipp, C, (2007), Lundbergs risk process with tax, Bltter
der Deutsche Gesellschaft fur Versicherungsmathematik (2008) 28(1):13-28] are established.
70

Di Bernardino, Elena; Fernndez-Ponce, J M; Palacios-Rodrguez, F; Rodrguez-Griolo, M R (2015). On multivariate extensions of
the conditional Value-at-Risk measure. [RKN: 47218]
CoVaR is a systemic risk measure proposed by Adrian and Brunnermeier (2011) able to measure a financial institutions
contribution to systemic risk and its contribution to the risk of other financial institutions. CoVaR stands for conditional
Value-at-Risk, i.e. it indicates the Value at Risk for a financial institution that is conditional on a certain scenario. In this paper, two
alternative extensions of the classic univariate Conditional Value-at-Risk are introduced in a multivariate setting. The two
proposed multivariate CoVaRs are constructed from level sets of multivariate distribution functions (resp. of multivariate survival
distribution functions). These vector-valued measures have the same dimension as the underlying risk portfolio. Several
characterizations of these new risk measures are provided in terms of the copula structure and stochastic orderings of the
marginal distributions. Interestingly, these results are consistent with existing properties on univariate risk measures. Furthermore,
comparisons between existent risk measures and the proposed multivariate CoVaR are developed. Illustrations are given in the
class of Archimedean copulas. Estimation procedure for the multivariate proposed CoVaRs is illustrated in simulated studies and
insurance real data.
Bignozzi, Valeria; Puccetti, Giovanni; Rschendorf, Ludger (2015). Reducing model risk via positive and negative dependence
assumptions. [RKN: 47219]
We give analytical bounds on the Value-at-Risk and on convex risk measures for a portfolio of random variables with fixed
marginal distributions under an additional positive dependence structure. We show that assuming positive dependence
information in our model leads to reduced dependence uncertainty spreads compared to the case where only marginals
information is known. In more detail, we show that in our model the assumption of a positive dependence structure improves the
best-possible lower estimate of a risk measure, while leaving unchanged its worst-possible upper risk bounds. In a similar way, we
derive for convex risk measures that the assumption of a negative dependence structure leads to improved upper bounds for the
risk while it does not help to increase the lower risk bounds in an essential way. As a result we find that additional assumptions on
the dependence structure may result in essentially improved risk bounds.
Ghossoub, Mario (2015). Vigilant measures of risk and the demand for contingent claims. [RKN: 47220]
We examine a class of utility maximization problems with a non-necessarily law-invariant utility, and with a non-necessarily
law-invariant risk measure constraint. Under a consistency requirement on the risk measure that we call Vigilance, we show the
existence of optimal contingent claims, and we show that such optimal contingent claims exhibit a desired monotonicity property.
Vigilance is satisfied by a large class of risk measures, including all distortion risk measures and some classes of robust risk
measures. As an illustration, we consider a problem of optimal insurance design where the premium principle satisfies the
vigilance property, hence covering a large collection of commonly used premium principles, including premium principles that are
not law-invariant. We show the existence of optimal indemnity schedules, and we show that optimal indemnity schedules are
nondecreasing functions of the insurable loss.
Sordo, Miguel A; Surez-Llorens, Alfonso; Bello, Alfonso J (2015). Comparison of conditional distributions in portfolios of dependent
risks. [RKN: 47223]
See online abstract for correct notation used.
Given a portfolio of risks, we study the marginal behavior of the [i]th risk under an adverse event, such as an unusually large loss
in the portfolio or, in the case of a portfolio with a positive dependence structure, to an unusually large loss for another risk. By
considering some particular conditional risk distributions, we formalize, in several ways, the intuition that the iith component of the
portfolio is riskier when it is part of a positive dependent random vector than when it is considered alone. We also study, given two
random vectors with a fixed dependence structure, the circumstances under which the existence of some stochastic orderings
among their marginals implies an ordering among the corresponding conditional risk distributions.
Chau, K W; Yam, S C P; Yang, H (2015). Fourier-cosine method for Gerber-Shiu functions. [RKN: 47233]
Refer to online abstract for correct notation used.
In this article, we provide a systematic study on effectively approximating the Gerber-Shiu functions, which is a hardly touched
topic in the current literature, by incorporating the recently popular Fourier-cosine method. Fourier-cosine method has been a
prevailing numerical method in option pricing theory since the work of Fang and Oosterlee (2009) [F Fang, C Oosterlee, A novel
pricing method for european options based on Fourier-cosine series expansions, SIAM Journal of Scientific Computing (2009) 31:
826-848]. Our approximant of Gerber-Shiu functions under Lvy subordinator model has O(n) computational complexity in
comparison with that of O(nlogn) via the fast Fourier transform algorithm. Also, for Gerber-Shiu functions within our proposed
refined Sobolev space, we introduce an explicit error bound, which seems to be absent from the literature. In contrast with our
previous work (Chau et al., 2015) [K W Chau, S C P Yam, H. Yang, Fourier-cosine method for ruin probabilities, Journal of
Computational and Applied Mathematics (2015) 281: 94-106], this error bound is more conservative without making heavy
assumptions on the Fourier transform of the Gerber-Shiu function. The effectiveness of our result will be further demonstrated in
the numerical studies.
71
Targino, Rodrigo S; Peters, Gareth W; Shevchenko, Pavel V (2015). Sequential Monte Carlo Samplers for capital allocation under
copula-dependent risk models. [RKN: 47236]
In this paper we assume a multivariate risk model has been developed for a portfolio and its capital derived as a homogeneous risk
measure. The Euler (or gradient) principle, then, states that the capital to be allocated to each component of the portfolio has to be
calculated as an expectation conditional to a rare event, which can be challenging to evaluate in practice. We exploit the
copula-dependence within the portfolio risks to design a Sequential Monte Carlo Samplers based estimate to the marginal
conditional expectations involved in the problem, showing its efficiency through a series of computational examples.
Schmidli, Hanspeter (2015). Extended Gerber-Shiu functions in a risk model with interest. [RKN: 47242]
We consider a compound Poisson risk model with interest. The Gerber-Shiu discounted penalty function is modified with an
additional penalty for reaching a level above the initial capital. We show that the problem can be split into two independent
problems; an original Gerber-Shiu function and a first passage problem. We also consider the case of negative interest. Finally, we
apply the results to a model considered by Embrechts and Schmidli (1994) [P Embrechts, H Schmidli, Ruin estimation for a
general insurance risk model, Advanced Applied Probability (1994) 26: 404-422].
Hainaut, Donatien (2015). Evaluation and default time for companies with uncertain cash flows. [RKN: 47243]
In this study, we propose a modelling framework for evaluating companies financed by random liabilities, such as insurance
companies or commercial banks. In this approach, earnings and costs are driven by double exponential jump-diffusion processes
and bankruptcy is declared when the income falls below a default threshold, which is proportional to the charges. A change of
numeraire, under the Esscher risk neutral measure, is used to reduce the dimension. A closed form expression for the value of
equity is obtained in terms of the expected present value operators, with and without disinvestment delay. In both cases, we
determine the default threshold that maximizes the shareholders equity. Subsequently, the probabilities of default are obtained by
inverting the Laplace transform of the bankruptcy time. In numerical applications of the proposed model, we apply a procedure for
calibration based on market and accounting data to explain the behaviour of shares for two real-world examples of insurance
companies.
Gomes-Gonalves, Erika; Gzyl, Henryk; Mayoral, Silvia (2015). Two maxentropic approaches to determine the probability density of
compound risk losses. [RKN: 47266]
Here we present an application of two maxentropic procedures to determine the probability density distribution of a compound
random variable describing aggregate risk, using only a finite number of empirically determined fractional moments. The two
methods that we use are the Standard method of Maximum Entropy (SME) and the method of Maximum Entropy in the Mean
(MEM). We analyze the performance and robustness of these two procedures in several numerical examples, in which the
frequency of losses is Poisson and the individual losses are lognormal random variables. We shall verify that the reconstructions
obtained pass a variety of statistical quality criteria, and provide good estimations of VaR and TVaR, which are important
measures for risk management purposes. As side product of the work, we obtain a rather accurate numerical description of the
density of such compound random variable.
These approaches are also used to develop a procedure to determine the distribution of the individual losses from the knowledge
of the total loss. Thus, if the only information available is the total loss, and the nature of the frequency of losses is known, the
method of maximum entropy provides an efficient method to determine the individual losses as well.
Willmot, Gordon E (2015). On a partial integrodifferential equation of Seals type. [RKN: 47267]
In this paper we generalize a partial integrodifferential equation satisfied by the finite time ruin probability in the classical Poisson
risk model. The generalization also includes the bivariate distribution function of the time of and the deficit at ruin. We solve the
partial integrodifferential equation by Laplace transforms with the help of Lagranges implicit function theorem. The assumption of
mixed Erlang claim sizes is then shown to result in tractable computational formulas for the finite time ruin probability as well as the
bivariate distribution function of the time of and the deficit at ruin. A more general partial integrodifferential equation is then briefly
considered.
Meng, Hui; Li, Shuanming; Zhou, Jin (2015). A reinsurance game between two insurance companies with nonlinear risk processes.
[RKN: 47270]
Refer to online article for correct notation in this abstract.
In this paper, we consider a stochastic differential reinsurance game between two insurance companies with nonlinear (quadratic)
risk control processes. We assume that the goal of each insurance company is to maximize the exponential utility of the difference
between its terminal surplus and that of its competitor at a fixed terminal time T. First, we give an explicit partition (including nine
subsets) of time interval [0,T]. Further, on every subset, an explicit Nash equilibrium strategy is derived by solving a pair of
Hamilton-Jacobi-Bellman equations. Finally, for some special cases, we analyze the impact of time tt and quadratic control
parameter on the Nash equilibrium strategy and obtain some simple partition of [0,T]. Based on these results, we apply some
numerical analysis of the time tt, quadratic control parameter and competition sensitivity parameter on the Nash equilibrium
strategy and the value function.
Chen, Yiqing; Liu, Jiajun; Liu, Fei (2015). Ruin with insurance and financial risks following the least risky FGM dependence structure.
[RKN: 47271]
Refer to online article for correct notation in this abstract.
Recently, Chen (2011) [Y Chen, The finite-time ruin probability with dependent insurance and financial risks, Journal of Applied
72
Probability 48(4) (2011), pp. 1035-1048] studied the finite-time ruin probability in a discrete-time risk model in which the insurance
and financial risks form a sequence of independent and identically distributed random pairs with common bivariate
Farlie-Gumbel-Morgenstern (FGM) distribution. The parameter of the FGM distribution governs the strength of dependence, with
a smaller value of corresponding to a less risky situation. For the subexponential case with -1< =1, a general asymptotic formula
for the finite-time ruin probability was derived. However, the derivation there is not valid for the least risky case =-1 =-1. In this
paper, we complete the study by extending it to =-1 =-1. The new formulas for =-1 =-1 look very different from, but are intrinsically
consistent with, the existing one for -1< =1, and they offer a quantitative understanding on how significantly the asymptotic ruin
probability decreases when switches from its normal range to its negative extremum.
Malinovskii, Vsevolod K (2015). On rational pricing for a profit-seeking insurer in the year of hard market. [RKN: 47272]
The aim of this paper is to examine rational pricing of a profit-seeking insurer carrying on its business when underwriting cycle is in
its upper phase. We focus on migration of insureds wishing to get the same services at a lower price. We investigate pricing which
maximizes the insurers intrinsic value linked to its attractiveness for investors, provided that its solvency position is fixed. The
main tool in this paper is explicit bounds on ruin capital in Lundberg risk model with migration. Written in terms of elementary
functions, they make the solution straightforward.
Denuit, Michel; Kiriliouk, Anna; Segers, Johan (2015). Max-factor individual risk models with application to credit portfolios. [RKN:
47276]
Individual risk models need to capture possible correlations as failing to do so typically results in an underestimation of extreme
quantiles of the aggregate loss. Such dependence modelling is particularly important for managing credit risk, for instance, where
joint defaults are a major cause of concern. Often, the dependence between the individual loss occurrence indicators is driven by
a small number of unobservable factors. Conditional loss probabilities are then expressed as monotone functions of linear
combinations of these hidden factors. However, combining the factors in a linear way allows for some compensation between
them. Such diversification effects are not always desirable and this is why the present work proposes a new model replacing linear
combinations with maxima. These max-factor models give more insight into which of the factors is dominant.
Yao, Kai; Qin, Zhongfeng (2015). A modified insurance risk process with uncertainty. [RKN: 47282]
An insurance risk process is traditionally considered by describing the claim process via a renewal reward process and assuming
the total premium to be proportional to the time with a constant ratio. It is usually modeled as a stochastic process such as the
compound Poisson process, and historical data are collected and employed to estimate the corresponding parameters of
probability distributions. However, there exists the case of lack of data such as for a new insurance product. An alternative way is
to estimate the parameters based on experts subjective belief and information. Therefore, it is necessary to employ the uncertain
process to model the insurance risk process. In this paper, we propose a modified insurance risk process in which both the claim
process and the premium process are assumed to be renewal reward processes with uncertain factors. Then we give the inverse
uncertainty distribution of the modified process at each time. On this basis, we derive the ruin index which has an explicit
expression based on given uncertainty distributions.
Huang, Yi-Chieh; Tzeng, Larry Y; Zhao, Lin (2015). Comparative ambiguity aversion and downside ambiguity aversion. [RKN: 47285]
This paper first defines an increase in ambiguity and an increase in downside ambiguity. We then provide comparative criteria for
ambiguity aversion and downside ambiguity aversion. Different from the finding that the comparative criterion for risk aversion is
variant with the measure of the premium to reduce risks, we show that the criteria remain the same, whether the premiums to
reduce ambiguity and downside ambiguity are measured by utility or money. Under the criteria, a more ambiguity-averse
(downside-ambiguity-averse) individual is shown to spend more effort in reducing ambiguity (downside ambiguity) than a less
ambiguity-averse (downside-ambiguity-averse) individual.
73
JOURNAL OF RISK AND UNCERTAINTY

Cubitt, Robin P; Navarro-Martinez, Daniel; Starmer, Chris (2015). On preference imprecision. Springer, - 34 pages. [RKN: 75000]
Recent research invokes preference imprecision to explain violations of individual decision theory. While these inquiries are
suggestive, the nature and significance of such imprecision remain poorly understood. We explore three questions using a new
measurement tool in an experimental investigation of imprecision in lottery valuations: Does such preference imprecision vary
coherently with lottery structure? Is it stable on repeat measurement? Does it have explanatory value for economic behaviour? We
find that imprecision behaves coherently, shows no tendency to change systematically with experience, is related to choice
variability, but is not a main driver of the violations of standard decision theory that we consider.
Byrne, Kaileigh A; Worthy, Darrell A (2015). Gender differences in reward sensitivity and information processing during
decision-making. Springer, - 17 pages. [RKN: 75001]
Gender differences in reward sensitivity and information processing were examined in two studies using a dynamic
decision-making task. In Experiment 1, the optimal strategy involved forgoing an option that provided larger immediate rewards in
favor of one yielding larger delayed rewards. In Experiment 2, the optimal strategy was to select the option that provided larger
immediate rewards because the delayed reward option never gave larger rewards than the immediate reward option. Foregone
reward information was either presented or withheld. In Experiment 1, information regarding foregone rewards biased participants
toward the sub-optimal choice, whereas in Experiment 2, foregone rewards directed participants toward the optimal option. Males
selected the optimal choice more in the delayed rewards task, while females were more biased toward the poorer choice by
foregone reward information. In contrast, females outperformed males in the immediate rewards task. The results suggest a
gender difference in information processing styles during decision-making.
Lahno, Amrei M; Serra-Garcia, Marta (2015). Peer effects in risk taking: Envy or conformity?. Springer, - 23 pages. [RKN: 75003]
We examine two explanations for peer effects in risk taking: relative payoff concerns and preferences that depend on peer
choices. We vary experimentally whether individuals can condition a simple lottery choice on the lottery choice or the lottery
allocation of a peer. We find that peer effects increase significantly, almost double, when peers make choices, relative to when
they are allocated a lottery. In both situations, imitation is the most frequent form of peer effect. Hence, peer effects in our
environment are explained by a combination of relative payoff concerns and preferences that depend on peer choices.
Comparative statics analyses and structural estimation results suggest that a norm to conform to the peer may explain why peer
choices matter. Our results suggest that peer choices are important in generating peer effects and hence have important
implications for modeling as well as for policy.
SCANDINAVIAN ACTUARIAL JOURNAL
Bergel, Agnieszka I; Egdio dos Reis, Alfredo D (2015). Further developments in the Erlang(n) risk process. [RKN: 47127]
For actuarial aplications, we consider the Sparre-Andersen risk model when the interclaim times are Erlang(n) distributed. We first
address the problem of solving an integro-differential equation that is satisfied by the survival probability and other probabilities,
and show an alternative and improved method to solve such equations to that presented by Li (2008) [Li, S. (2008). A note on the
maximum severity of ruin in an Erlang(n) risk process. Bulletin of the Swiss Association of Actuaries, 167-180]. This is done by
considering the roots with positive real parts of the generalized Lundbergs equation, and establishing a one-one relation between
them and the solutions of the integro-differential equation mentioned before. Afterwards, we apply our findings above in the
computation of the distribution of the maximum severity of ruin. This computation depends on the non-ruin probability and on the
roots of the fundamental Lundbergs equation. We illustrate and give explicit formulae for Erlang(3) interclaim arrivals with
exponentially distributed single claim amounts and Erlang(2) interclaim times with Erlang(2) claim amounts. Finally, considering
an interest force, we consider the problem of calculating the expected discounted dividends prior to ruin, finding an
integro-differential equation that they satisfy and solving it. Numerical examples are also provided for illustration.
Kocovic, Jelena; Cojbaic, Vesna; Jovanovic, Milan (2015). Estimating a tail of the mixture of log-normal and inverse Gaussian
distribution. [RKN: 47128]
In this paper, we estimate a tail of the mixture of log-normal and inverse Gaussian distribution in order to model extreme historical
losses. Good estimate of the tail is essential in reinsurance for choosing or pricing high-excess layer. Method is supported by
extreme value theory. We derive useful estimates of value-at-risk and expected shortfall. We apply this methodology to some fire
insurance data.
Nie, Ciyu; Dickson, David C M; Li, Shuanming (2015). The finite time ruin probability in a risk model with capital injections. [RKN:
47174]
We consider a risk model with capital injections. We show that in the Sparre Andersen framework the density of the time to ruin for
the model with capital injections can be expressed in terms of the density of the time to ruin in an ordinary Sparre Andersen risk
process. In the special case of Erlang inter-claim times and exponential claims, we show that there exists a readily computable
formula for the density of the time to ruin. When the inter-claim time distribution is exponential, we obtain an explicit solution for the
density of the time to ruin when the individual claim amount distribution is Erlang(2), and we explain techniques to find the
moments of the time to ruin. In the final section, we consider the related problem of the distribution of the duration of negative
surplus in the classical risk model, and we obtain explicit solutions for the (defective) density of the total duration of negative
surplus for two individual claim amount distributions.
74
Farkas, Julia; Hashorva, Enkelejd (2015). Tail approximation for reinsurance portfolios of Gaussian-like risks. [RKN: 47175]
We consider two different portfolios of proportional reinsurance of the same pool of risks. This contribution is concerned with
Gaussian-like risks, which means that for large values the survival function of such risks is, up to a multiplier, the same as that of
a standard Gaussian risk. We establish the tail asymptotic behavior of the total loss of each of the reinsurance portfolios and
determine also the relation between randomly scaled Gaussian-like portfolios and unscaled ones. Further, we show that jointly two
portfolios of Gaussian-like risks exhibit asymptotic independence and their weak tail dependence coefficient is nonnegative.
75
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later. DOI links are intended to be permanent links to the articles online publication by the journal publisher.
76

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77

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The Actuary (UK)

APPLIED MATHEMATICAL FINANCE

BRITISH ACTUARIAL JOURNAL (BAJ)

European Actuarial Journal (2013) 3(2) : 321-357.

FINANCIAL ANALYSTS JOURNAL

INSURANCE: MATHEMATICS & ECONOMICS

JOURNAL OF RISK AND INSURANCE

JOURNAL OF RISK AND UNCERTAINTY

ADDED PAPERS TO MAY 2015

INSURANCE: MATHEMATICS & ECONOMICS

DOI: http://dx.doi.org/10.1016/j.insmatheco.2014.11.005 (access via Athens login http://www.openathens.net/)

JOURNAL OF RISK AND UNCERTAINTY

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