The Swedish automobile portfolio in 1977

Abstract

In a recent paper (Hallin & Ingenbleek, 1981a), the selection procedure proposed in (Hallin, 1977) was applied to the study of the claim probability in the motor third party portfolio of an important Belgian company. The number of observations, however, did not allow for an investigation of the claim amount. The data we study here consist of the entire Swedish portfolio (more than two millions of policies). An adapted version of the selection procedure provides a good insight into the structure of the risk, hence into what the tariff structure should be ¹ The rating system used for the Swedish Automobile Insurance Portfolio is based on the factor method. This paper should be looked upon as a critical discussion of the practical application of this method and of its statistical significancy.      

On quantitative statistical analysis

Abstract

The point of the present paper is an elementary distinction, i. e. between definite and modifiable statistical units. This classification will prove to throw light on the paradoxon that correlation analysis, while of fundamental importance in many sciences, in others is severely criticized and disclaimed of quantitative significance. In fact, only when referring to a definite unit a correlation index is unconditionally quantitative. A. moment's consideration will reveal that a correlation index referring to a modifiable unit is not directly commensurable to the corresponding index of another unit. For quantitative analysis of modifiable units detailed hypotheses regarding the effect of the unit size are necessary. Some methods for such analysis are indicated and examplified below. We reserve, however, for an ulterior paper the explicit formulæ and a more exhaustive investigation of modifiable units.     

An Actuarial Analysis of Participating Life Insurance

An actuarial model is developed to reveal the intrinsic nature of participating life insurance. The basic safe-side criterion is examined. It is established how the first-order prospective net premium reserve includes safety margins or bonus loadings, and it is demonstrated how the bonus loadings are currently released. It is demonstrated how surplus may be distributed and accumulated as a terminal bonus in an equitable way. The level premium is divided into a variable recurrent single premium and a variable natural premium, and an alternative to the prospective net premium reserve is examined. A capitalization of future safety margins or bonus loadings, which are related to past premiums and the paid-up benefit, may allow the insurance company a considerable increase in investment freedom. The theory is illustrated by numerical results.     

China as a reserve sink: The evidence from offset and sterilization coefficients

China has been stockpiling international reserves at an extremely rapid pace since the late 1990s and has surpassed Japan to become the largest reserve holder in the world. This paper undertakes an empirical investigation to assess the extent of de facto sterilization and capital mobility using monthly data between mid 2000 and late 2008. We find that China has been able to successfully sterilize a large portion of these reserve increases thus making it a reserve sink such as Germany was under the Bretton Wood system.     

Mortality experience of life annuitants insured with thirteen Swedish offices during the period 1900–1924.

Abstract

To the Scandinavian Life Insurance Congress in Oslo 1926 an investigation into the mortality of annnitants was presented by thirteen Swedish Life Insurance Companies1 The investigation was executed by a committee consisting of Harald Cramér, Reinh. Palmqvist and Iwar Sjögren.      

Tax-Induced Trading and the Identity of the Marginal Investor: Evidence from Sweden

Abstract

Changes in the Swedish tax code during the 1990s were structured in a way that offers an opportunity to test whether ex-dividend prices were determined by the taxation of domestic individual investors. The results presented in this paper indicate that ex-dividend prices were not influenced by the relatively large tax changes for domestic individual investors. In addition, there was no evidence that the taxation of domestic individual investors influenced ex-dividend prices for any specific dividend yield group.     

Optimal Dynamic Premium Control in Non-life Insurance. Maximizing Dividend Pay-outs

In this paper we consider the problem of finding optimal dynamic premium policies in non-life insurance. The reserve of a company is modeled using the classical Cramér-Lundberg model with premium rates calculated via the expected value principle. The company controls dynamically the relative safety loading with the possibility of gaining or loosing customers. It distributes dividends according to a 'barrier strategy' and the objective of the company is to find an optimal premium policy and dividend barrier maximizing the expected total, discounted pay-out of dividends. In the case of exponential claim size distributions optimal controls are found on closed form, while for general claim size distributions a numerical scheme for approximations of the optimal control is derived. Based on the idea of De Vylder going back to the 1970s, the paper also investigates the possibilities of approximating the optimal control in the general case by using the closed form solution of an approximating problem with exponential claim size distributions.     

The Role and Current Status of IFRS in the Completion of National Accounting Rules – Evidence from Sweden

Abstract

In this paper, the influence of IFRS on Swedish national accounting rules is analyzed. The lawmaker’s and standard setters’ response to EU Accounting Directive 2013/34/EU is studied, as well as the use of IFRS in enforcement. The conclusion is that IFRS have a strong position and legitimacy in Swedish financial reporting.     

Statistical study of waivers of premiums on disablement

Abstract

At the request of the author, the Managing Director of Livförsäkringsbolaget Framtiden, ömsesidigt (the Swedish Mutual Life Insurance Co. ? Future?), gave him an opportunity to make an investigation into the waivers of premiums on disablement. This investigation which at first was suggested by the Chief Mathematician of the Company, K. G. Hagstroem D. Sc., was meant to contain a study of the experience of a single year, 1932. With regard to view points put forward by the author, the original scheme was essentially widened to give a complete study of the whole experience ever since the foundation of the Company. The author wishes to express his gratitude to the Managing Director for placing a working staff at his disposal for carrying out this plan. He also wants to thank Dr. Hagstroem for his appreciation of the views advanced. The author, furthermore, has pleasure to express his thanks to the entire staff of the Company, for aiding him in his work in many ways, and in this connection he wants especially to mention Mr. Erik Grune, the manager of the actuarial department. Finally, he wishes to thank his many collaborators, especially Miss Elsa Fredricsson and Stig Cronvali, M. Bc. for their assistance.     

Unallocated loss adjustment expense reserving

In non-life insurance, the provision for outstanding claims (the claims reserve) should include future loss adjustment expenses, i.e. administrative expenses to settle the claims, and therefore we have to estimate the expected Unallocated Loss Adjustment Expenses (ULAE) – expenses that are not attributable to individual claims, such as salaries at the claims handling department. The ULAE reserve has received little attention from European actuaries in the literature, supposedly because of the lack of detailed data for estimation and evaluation. Having good estimation procedures will, however, become even more important with the introduction of the Solvency II regulations, which require unbiased estimation of future cash flows for all expenses. We present a model for ULAE at the individual claim level that includes both fixed and variable costs. This model leads to an estimate of the ULAE reserve at the aggregate (line-of-business) level, as demonstrated in a numerical example from a Swedish non-life insurer.     

Risk and Discounted Loss Reserves

Abstract

The author places the discounting of loss reserves for investment income within a financial economics context. This enables the evaluation of a loss reserve containing a security margin, such as to produce p% confidence in adequacy, taking account of both asset and liability risks. This loss reserve is expressed as a multiple of the economic value of the liabilities. If the security margin is defined as the difference between these two quantities, it is found to increase (decrease) withincreasing asset risk for high (low) values of p. Finally, the author provides a numerical example.     

Insider trading,growth opportunities and the market reaction to new financing announcements*

Abstract

This paper explores the profitability of momentum strategies, by investigating if a momentum strategy is superior to a benchmark model once the effects of data-snooping have been accounted for. Two data sets are considered. The first set of data consists of US stocks and the second one consists of Swedish stocks. For the US data strong evidence is found of a momentum effect and hence the hypothesis of weak market efficiency is rejected. Splitting the sample in two parts, it is found that the overall significance is driven by events in the earlier part of the sample. The results for the Swedish data indicate that momentum strategies based on individual stocks generate significant profits. A very weak or no momentum effect can be found when stocks are sorted into portfolios. Finally, and perhaps most importantly, results show that data-snooping bias can be very substantial. Neglecting the problem would lead to very different conclusions.     

On Bonus and Bonus Prognoses in Life Insurance

The surplus on a life insurance policy is defined, at any time during the term of the contract, as the difference between the second order retrospective reserve and the first order prospective reserve. General principles for redistribution of the systematic part of the surplus as bonus are formulated, and various special bonus schemes are discussed. Techniques for forecasting future bonuses are worked out in an extended model with stochastic experience basis. Numerical illustrations are provided.     

A numerical comment on an upper bound for ruin probabilities

Abstract

In a paper by de Vylder (1977) an upper bound for the probability of ruin is constructed. A numerical example is given for a Poisson-process with claim d.f.=l-e?y , the operational time T=100, the premium loading λ=0.05 (c= 1.05) and the initial reserve u=50. In this case the limit is found to be ψ(u, T)?00.0025.     

Using extreme value theory to estimate the likelihood of banking sector failure

Abstract

The growing interest in management of credit risk and estimation of default probabilities has given rise to a range of more or less elaborate credit risk models. While these models work well for non-financial firms they are usually not very successful in capturing the financial strength of banks. As an answer to this, Hall and Miles suggest a simple approach of estimating bank failure probabilities based solely on their stock prices. This paper suggests an extension to the Hall and Miles model using extreme value theory and applies the extended model to the Swedish banking sector around the banking crisis of the early 1990s. The extended model captures very well the increased likelihood of a systemic banking sector failure around the peak of the crisis and it produces default probabilities that are more stable, more realistic and more consistent with Moody’s and Fitch rating implied default rates than probabilities from the original Hall and Miles model.     

Remarks on the foundations of actuarial science

Abstract

In a paper entjtled ?Critical Thoughts on Actuarial Science? read before the Swedish Actuarial Society and published in this part of the Journal K. ENGLUND has expressed some views which gave rise to objections also from my part in the verbal discussion at the meeting of the Society. In the following lines I have tried to develop my views about the most important questions touched upon in his paper.     

A Theoretical Framework for Evaluating the Impact of Universal Reserve Requirements

This paper provides an appropriate framework to evaluate the impact of the universal reserve requirements called for by the new DIDMC Act of 1980. We derived the optimal reserve ratios for a dual banking system under the objective of controlling the monetary aggregates and the level of output. Then optimal reserve requirements were calculated from illustrative money market and macroeconomic parameters since the usual comparative statics were not useful. The results, generally, suggested optimal reserve ratios which were significantly higher than the old dual or the new universal reserve regimes for all targets. However, the calculation of values for the loss functions under various reserve regimes suggests that attainment of $r_1^{*},r_2^{*}$ and $t^{*}$ may not be imperative, since the discrepancy between losses for optimal and various nonoptimal reserve schemes were not large. A major result of this paper, observed for both monetary and real targets, was that the differences in the instability of the targets for the old dual reserve ratios and the Fed's new universal reserve scheme were small. This result clearly suggests that although the DIDMC Act may solve the Federal Reserve's membership problem, it will not significantly enhance the Fed's effectiveness in controlling monetary or real sector aggregates.     

The Poisson Log-Bilinear Lee-Carter Model

Abstract

Life insurance companies deal with two fundamental types of risks when issuing annuity contracts: financial risk and demographic risk. Recent work on the latter has focused on modeling the trend in mortality as a stochastic process. A popular method for modeling death rates is the Lee-Carter model. This methodology has become widely used, and various extensions and modifications have been proposed to obtain a broader interpretation and to capture the main features of the dynamics of mortality rates. In order to improve the measurement of uncertainty in survival probability estimates, in particular for older ages, the paper proposes an extension based on simulation procedures and on the bootstrap methodology. It aims to obtain more reliable and accurate mortality projections, based on the idea of obtaining an acceptable accuracy of the estimate by means of variance reducing techniques. In this way the forecasting procedure becomes more efficient. The longevity question constitutes a critical element in the solvency appraisal of pension annuities. The demographic models used for the cash flow distributions in a portfolio impact on the mathematical reserve and surplus calculations and affect the risk management choices for a pension plan. The paper extends the investigation of the impact of survival uncertainty for life annuity portfolios and for a guaranteed annuity option in the case where interest rates are stochastic. In a framework in which insurance companies need to use internal models for risk management purposes and for determining their solvency capital requirement, the authors consider the surplus value, calculated as the ratio between the market value of the projected assets to that of the liabilities, as a meaningful measure of the company’s financial position, expressing the degree to which the liabilities are covered by the assets.     

A Robustification of the Chain-Ladder Method

Abstract

In a non-life insurance business an insurer often needs to build up a reserve to able to meet his or her future obligations arising from incurred but not reported completely claims. To forecast these claims reserves, a simple but generally accepted algorithm is the classical chain-ladder method. Recent research essentially focused on the underlying model for the claims reserves to come to appropriate bounds for the estimates of future claims reserves. Our research concentrates on scenarios with outlying data. On closer examination it is demonstrated that the forecasts for future claims reserves are very dependent on outlying observations. The paper focuses on two approaches to robustify the chain-ladder method: the first method detects and adjusts the outlying values, whereas the second method is based on a robust generalized linear model technique. In this way insurers will be able to find a reserve that is similar to the reserve they would have found if the data contained no outliers. Because the robust method flags the outliers, it is possible to examine these observations for further examination. For obtaining the corresponding standard errors the bootstrapping technique is applied. The robust chain-ladder method is applied to several run-off triangles with and without outliers, showing its excellent performance.