Nanyang Business School Forum on Risk Management and Insurance

IFoA Roundtable on Employment Opportunities for Actuaries, Singapore (12 Sep 2018)

Tags: The Institute and Faculty of Actuaries, Singapore Actuarial Society, actuary, Life Insurance Association, Singapore, Nanyang Technological University

Editor’s Note: Posted by Marie Lee, Regional Coordinator, South-East Asia, IFoA

The Institute and Faculty of Actuaries (IFoA) and Singapore Actuarial Society (SAS) jointly organised a roundtable on employment opportunities with representatives from Nanyang Technological University, the Life Insurance Association and several employers of actuaries in Singapore.

The first session considered the future of insurance in light of these evolving risks:
• Societal
• Technological
• Economic
• Environmental
• Political

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Testing for information asymmetry in liability coverage in China’s automobile insurance market

Tags: information asymmetry, adverse selection, auto insurance, liability coverage, China, IRFRC
More from: Yi Yao, Yinglu Deng, Hao Zheng

Editor’s Note: Posted by Yi Yao, Associate professor at Department of Risk Management and Insurance, School of Economics, Peking University; Yinglu Deng, Assistant professor at PBC School of Finance Tsinghua University; Hao Zheng, PhD candidate at Department of Risk Management and Insurance, School of Economics, Peking University

Information asymmetry is an important problem in insurance market. It has important and complicate implications on pricing, contract design and regulation. Since Akerlof’s theoretic work on this question and get a prediction on a positive relationship between risk and coverage, there are a lot of empirical research to find the evidence to prove this result especially in automobile insurance market. However, scholars from the world get different results. No matter which county their data is from and what the result is, most of those papers pay attention only on different characteristics of insureds (for example, newly insureds, experienced drivers etc.), and less frequently on different types of claims. However, it is unreasonable to treat different kinds of accidents as the same, such as accident with bodily injury and accident with only property damage. Intuitively, the former one has a higher claim amount but a smaller frequency than the second one, and this may has lead different performance of insurance contract on information asymmetry.

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Constructing Out-of-the-Money Longevity Hedges Using Parametric Mortality Indexes

Tags: mortality index, longevity risk, K-forward, K-option, longevity hedge, IRFRC
More from: Johnny Siu-Hang Li, Jackie Li, Uditha Balasooriya, Kenneth Q. Zhou

Editor’s Note: Posted by Johnny Siu-Hang Li, Professor, The University of Melbourne and the University of Waterloo; Jackie Li, Associate Professor, Macquarie University; Uditha Balasooriya, Senior Lecturer, Nanyang Technological University; Kenneth Q. Zhou, PhD Candidate, University of Waterloo

Parametric mortality indexes are mortality indexes that are created using the time-varying parameters in an appropriately chosen stochastic mortality model. They summarize how the mortality curve of a certain population evolves over time, and the random deviations from their expected trajectories reflect the level of longevity risk that the population is subject to.

Compared to non-parametric mortality indexes such as the LLMA’s LifeMetrics and Deutsche Borse’s Xpect Cohort Indexes, parametric mortality indexes are advantageous of being richer in information content, so that non-parallel shifts in the underlying mortality curve over time can be captured with only a few indexes. This property enables the market to better concentrate liquidity, fostering the popularity of less costly index-based longevity hedging solutions. Further, depending on the model from which they are created, parametric mortality indexes are often highly interpretable.

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Coherent Mortality Forecasting for Less Developed Countries

Tags: mortality rate, forecasting, life expectancy, longevity, developing country, IRFRC
More from: Pintao Lyu, Hong Li, Yang Lu

Editor’s Note: Posted by Pintao Lyu, M.Phil., Tilburg University; Hong Li, University of Manitoba; Yang Lu, University of Paris 13

The past decades have witnessed a drastic increase of life expectancy in the less developed countries around the world. According to the 2017 revision of the World Population Prospects, life expectancy at birth in the less developed countries has increased by 27.4 years (from 41.7 to 69.1) between 1950 and 2015, against the 13.6 years gain in the more developed countries (64.8 to 78.4). Meanwhile, the total population in the less developed countries reached 6.13 billion in 2015, which was about 5 times that of the more developed ones (1.25 billion). This fast mortality improvement in the less developed countries would have huge impacts on the worldwide population aging process, and thus spells a critical need for reliable mortality projection tools.

Although the life expectancy at birth in the less developed countries has been extensively studied. Much less attention has been paid to the age-specific mortality rates. Yet the latter are important on their own right, since they contain much richer information than the life expectancy at birth, and are the necessary inputs to generate other useful demographic indicators, such as the population structure, the dependency ratio, and the life expectancy at age, say, 65.

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Credit Rating Migration Risk and Interconnectedness in a Corporate Lending Network

Tags: credit rating migration risk, corporate lending, interconnectedness, centrality measure, credit value at risk and expected shortfall, IRFRC
More from: Masayasu Kanno

Editor’s Note: Posted by Masayasu Kanno, Professor of Finance, College of Commerce, Nihon University

This study is about credit rating migration risk and interconnectedness in a corporate lending network. A large body of financial literature exists on corporate lending in countries worldwide. However, the literature barely mentions the interconnectedness of corporate lending contracts in a country. A network analysis of contractual relationships in the corporate lending network has yet to be conducted. It is important to analyze the credit rating migration risk in the lending network.

This study conducts three analyses: credit risk analysis, network analysis, and stress test.

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Should We Do More When We Know Less? Optimal Risk Reduction Under Technological Uncertainty

Tags: Self-Insurance, Self-Protection, Risk Aversion, Prudence, Technological Uncertainty, IRFRC
More from: Lu Li, Richard Peter

Editor’s Note: Posted by Lu Li, doctoral candidate at the Institute for Risk Management and Insurance, Munich School of Management, Ludwig-Maximilians-Universitaet Muenchen; Richard Peter, Assistant Professor at the Department of Finance, Henry B. Tippie College of Business, The University of Iowa

Technological uncertainty (TU) arises whenever the effects of risk mitigation depend on exogenous factors or are subjectively perceived to be uncertain. For example, a sprinkler system might operate more or less reliably when a fire breaks out. The benefits of climate change mitigation depend on a variety of environmental factors, over which there is considerable scientific disagreement. While economists commonly assume that the benefits of risk mitigation are precisely known at the time a decision is made, we argue that many, if not all forms of risk reduction are characterized by TU. In this paper, we study the effects of TU on self-insurance (the reduction of the magnitude of a loss) and self-protection (the reduction of the probability of a loss) for a risk-averse, expected utility maximizing decision maker.

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NBS IRFRC Cyber Risk Project

Tags: Cyber Risk, Cyber Security, Modeling, Risk Transfer, IRFRC
More from: Shaun S. Wang

Editor’s Note: Posted by Shaun S. Wang, Professor at Division of Banking & Finance, Nanyang Business School, Nanyang Technological University

The cyber project fulfills three objectives based on Government-Industry-Academic collaborations

Firstly is data and modelling, in analyzing the economic loss as a consequence of cyber breach.

Secondly is cyber risk assessment based on inside-out; outside-in principles in terms of data input and data output.

Thirdly is the policy and recommendation especially on how cyber insurance products can be offered.

The main findings of the project through developing a series of economics of risk management. Based on three main findings as:

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Medicaid and Long-Term Care: Do Eligibility Rules Impact Asset Holdings?

Tags: Medicaid, Long-Term Care, Asset Holdings, Deficit Reduction Act, IRFRC
More from: Junhao Liu, Anita Mukherjee

Editor’s Note: Posted by Junhao Liu, Ph.D candidate at Department of Risk and Insurance, Wisconsin School of Business, University of Wisconsin-Madison; Anita Mukherjee, Assistant Professor, Department of Risk and Insurance, Wisconsin School of Business, University of Wisconsin-Madison

This paper is about the financing of long-term care, which is a key issue now that people are living longer but remain financially vulnerable in old age. In the United States, social insurance remains a major payer of long-term care services, and in particular, the majority of nursing home care is paid for by Medicaid, which is a large social safety net program targeted towards those poorest. For context, current program expenditures of Medicaid are about USD 500 billion each year, of which 30% goes to nursing home and other long-term care services. Since Medicaid is a means-tested program and offers large benefits (nursing home costs are close to USD 100,000 each year), program officials worry that people may attempt to become eligible by transferring money to children and thus appearing to be less poor than they are. In an effort to reduce this type of behaviour, which has been observed in the past, policymakers have devised new penalties for asset transfers made to become Medicaid-eligible.

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Risk Exchange under EUUP

Tags: Ambiguity, Economic premium principle, Equilibrium, Expected Utility with Uncertain Probability (EUUP), IRFRC
More from: Hideki Iwaki

Editor’s Note: Posted by Hideki Iwaki, Professor at Faculty of Business Administration, Kyoto Sangyo University

This paper considers a pure exchange economy with insurance against ambiguous loss. Here, ambiguity means a condition in which probabilities of possible events are not uniquely assigned. Although the search for models of decision making and insurance pricing under ambiguity has been evolving toward the ultimate separations between risk and ambiguity, the existing models still remains some relation between risk and ambiguity and the search for an applicable model is still ongoing.

This paper further develops a model of pricing insurance or an economic premium principle that can be used in empirical and behavioral studies by refining the separations between tastes and beliefs, and between risk and ambiguity.

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Optimal Investment and Premium Control for an Insurance Company with Ambiguity Aversion

Tags: Investment, Pricing, Insurance Company, Ambiguity Aversion, IRFRC
More from: Bing Liu, Ming Zhou, Peng Li

Editor’s Note: Posted by Bing Liu. Dr. Bing Liu and Dr. Ming Zhou are from Central University of Finance and Economics, China; Peng Li, Assistant Professor at Nanjing University of Finance and Economics, China

In this paper, our purpose is to find the impacts of model ambiguity on optimal strategies. We consider the optimal investment and premium control problem for insurers who worry about model ambiguity. Different from most of the researches, we assume that insurers’ surplus processes are depicted by non-homogeneous compound Poisson models. With consideration of the existence of ambiguity and the objective of maximizing the expected utility of terminal wealth, we obtain the close-form solutions of the optimal investment and premium control policies by solving the Hamilton-Jacobi-Bellman (HJB) equations.

In recent years, the research fields of actuarial science have been more diversified as we can see the relationship between risk theory and financial mathematics is becoming closer. In addition, optimal control problems are getting larger important and interests. As a result, many researchers paid their attention to optimal investment, optimal reinsurance, optimal dividend and risk control problems. In particular, the investment problem has been extensively studied under mathematical insurance context.

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