Investment Presentation Example 2003 CAS Research Working Party: Executive Level Decision Making...
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Investment Presentation Example 2003 CAS Research Working Party: Executive Level Decision Making using DFA Michael R. Larsen, FCAS, MAAA
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2003 CAS Research Working Party3 Change in Reinvestment Allocation
Transcript of Investment Presentation Example 2003 CAS Research Working Party: Executive Level Decision Making...
InvestmentPresentation Example
2003 CAS Research Working Party:Executive Level Decision Making using DFA
Michael R. Larsen, FCAS, MAAA
2003 CAS Research Working Party 2
Goals of Study
Review Reinvestment Options
Measure Results using Simulation Model Results Risk as Average Loss in Surplus in Worst 1%
of Cases over Five Years
Return as Average Increase in Policy Holder Surplus at End of Five Years
2003 CAS Research Working Party 3
44%
54%
0%0%2%
29%
44%
10%
15%
2%
29%
29%
25%
15%
2%
24%
24%
30%
20%
2%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Reinvestment Strategy
Cash 2% 2% 2% 2%Common Stock Unaffiliated 0% 15% 15% 20%Unaffiliated Bonds 0% 10% 25% 30%Municipal 54% 44% 29% 24%U.S. Govt Bond 44% 29% 29% 24%
Option A Option B Option C Option D
Change in Reinvestment Allocation
2003 CAS Research Working Party 4
DFA Flow
Work CompGrow 5% a year
Multi_PerilGrow 5% a year Financial
Calculator
Starting Policy Holder Surplus 40,000
Corporate Elements
Reinsurance Investment
Capital Mix Taxes
Financial Results
Simulated over Five Years
Analyze Results
Measures of
•Risk•Return Change in Policy
Holder Surplus
2003 CAS Research Working Party 5
Model / Assumptions
Assumptions Behind
Simulation
Assume Underwriting Operations Not Affected• Ability to take rate changes not driven by investment results• Growth rates in exposure does not change
Investment Scenario• Long run average interest rate of 4% • Starting interest rate of 4%
Investment Models• Short term interest rate model is a mean reversion model• Long term rates are a function of short term rates• Stock returns modeled as a function of short term rates and interest rate changes• Stable relationship between bond and equity market
2003 CAS Research Working Party 6
Policyholder Surplus Change by Reinvestment Option
Option A
0
0.04
0.08
0.12
0.16
0.2
0.24
0.28
0.32
0.36
0.4
-40 -30 -20 -10 0 10 20 30 40
Mil
Prob
abili
ty
0
0.2
0.4
0.6
0.8
1
pdf cdf
Option B
0
0.04
0.08
0.12
0.16
0.2
0.24
0.28
0.32
0.36
0.4
-40 -30 -20 -10 0 10 20 30 40
Mil
Prob
abili
ty
0
0.2
0.4
0.6
0.8
1
pdf cdf
Option C
0
0.04
0.08
0.12
0.16
0.2
0.24
0.28
0.32
0.36
0.4
-40 -30 -20 -10 0 10 20 30 40
Mil
Prob
abili
ty
0
0.2
0.4
0.6
0.8
1
pdf cdf
Option D
0
0.04
0.08
0.12
0.16
0.2
0.24
0.28
0.32
0.36
0.4
-40 -30 -20 -10 0 10 20 30 40
Mil
Prob
abili
ty
0
0.2
0.4
0.6
0.8
1
pdf cdf
2003 CAS Research Working Party 7
Option A(10 - 90 percentiles)
-10.0
-5.0
0.0
5.0
10.0
15.0
20.0
2004 2005 2006 2007 2008
Thou
sand
s
Surplus Change Over Time by Investment Option
Option B(10 - 90 percentiles)
-10.0
-5.0
0.0
5.0
10.0
15.0
20.0
2004 2005 2006 2007 2008
Thou
sand
s
Option C(10 - 90 percentiles)
-10.0
-5.0
0.0
5.0
10.0
15.0
20.0
2004 2005 2006 2007 2008
Thou
sand
s
Option D(10 - 90 percentiles)
-10.0
-5.0
0.0
5.0
10.0
15.0
20.0
2004 2005 2006 2007 2008
Thou
sand
s
2003 CAS Research Working Party 8
Risk-Reward
10
11
12
13
14
15
16
17
18
19
20
10 11 12 13 14 15 16 17 18 19 20
Thou
sand
s
Thousands
Average Surplus Loss in Worst Case
Ave
rage
Sur
plus
Gai
n
Option AOption BOption COption D
Investment Option Comparison
BetterOption D Highest Return Less Risk
2003 CAS Research Working Party 9
Investment Option Summary
Option Return Risk
A 12.6 17.2
B 13.6 17.0
C 13.8 17.0
D 14.2 16.9
2003 CAS Research Working Party 10
Conclusion
Reviewed four Reinvestment Options
Option D gives Best Gain in Surplus with Less Additional Risk
2003 CAS Research Working Party 11
Questions
Questions on Presentation?
Questions on Working Party Process?
Suggestions for New Working Parties?
