The Cape Cod (CC) method was designed by Bühlmann and Straub in order to overcome some shortcomings of the chain ladder (CL) method. Owing to its simplicity and because of the advantages over the CL method, the CC method has become a well-established method in practice. In this paper we consider a distribution-free stochastic model for the CC method. Within this model we give the parameter estimates and we derive estimates for the conditional mean square error of prediction for the CC method. In addition, we derive an estimate for the uncertainty in the claims development result.

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.

The liquidity premium on corporate bonds has been high on the agenda of Solvency regulators owing to its potential relationship to an additional discount factor on long-dated insurance liabilities. We analyse components of the credit spread as a function of standard bond characteristics during 2003–2014 on a daily basis by regression analyses, after introducing a new liquidity proxy. We derive daily distributions of illiquidity contributions to the credit spread at the individual bond level and find that liquidity premia were close to zero just before the financial crisis. We observe the time-varying nature of liquidity premia as well as a widening in the daily distribution in the years after the credit crunch. We find evidence to support higher liquidity premia, on average, on bonds of lower credit quality. The evolution of model parameters is economically intuitive and brings additional insight into investors’ behaviour. The frequent and bond-level estimation of liquidity premia, combined with few data restrictions makes the approach suitable for ALM modelling, especially when future work is directed towards arriving at forward-looking estimates at both the aggregate and bond-specific level.

Non-homogeneous renewal processes are not yet well established. One of the tools necessary for studying these processes is the non-homogeneous time convolution. Renewal theory has great relevance in general in economics and in particular in actuarial science, however, most actuarial problems are connected with the age of the insured person. The introduction of non-homogeneity in the renewal processes brings actuarial applications closer to the real world. This paper will define the non-homogeneous time convolutions and try to give order to the non-homogeneous renewal processes. The numerical aspects of these processes are then dealt with and a real data application to an aspect of motorcar insurance is proposed.

The funding position of a defined benefit pension plan is often closely linked to the performance of the sponsoring company’s business. For example, a plan sponsor whose financial health is dependent on high oil prices may struggle during periods of oil price weakness. If the pension plan’s assets perform poorly at this time, the ability of the sponsor to address any funding requirement could be restricted precisely when the need for funding is heightened. In this paper, we propose an approach to dealing with joint plan and sponsor risk that can provide protection against extreme adverse events for the sponsor. In particular, adopt a strategy of minimising a portfolio’s expected losses in the event of an assumed drop of x% in the oil price. Our methodology relies on an asset allocation framework that takes into account the impact of serial correlation in asset returns, as well as the negative skewness and leptokurtosis resulting from the non-normal shape of marginal distributions of historical asset returns. We also make use of copulas to measure the dependence between asset class returns.

We propose a Poisson mixture model for count data to determine the number of groups in a Group Life insurance portfolio consisting of claim numbers or deaths. We take a non-parametric Bayesian approach to modelling this mixture distribution using a Dirichlet process prior and use reversible jump Markov chain Monte Carlo to estimate the number of components in the mixture. Unlike Haastrup, we show that the assumption of identical heterogeneity for all groups may not hold as 88% of the posterior probability is assigned to models with two or three components, and 11% to models with four or five components, whereas models with one component are never visited. Our major contribution is showing how to account for both model uncertainty and parameter estimation within a single framework.

Human longevity is changing, but at what rate? Insurance claims are increasing, but at what rate? Are the trends that we glean from data true or illusionary? The shocking fact is that true trends might be quite different from those that we actually see from visualised data. Indeed, in some situations the upward trends (e.g. inflation) may even look decreasing (e.g. deflation). In this paper, we discuss this “trends in disguise” phenomenon in detail and offer a way for estimating true trends.

This paper proposes a discrete-time risk model that has a certain type of correlation between premiums and claim amounts. It is motivated by the well-known bonus-malus system (also known as the no claims discount) in the car insurance industry. Such a system penalises policyholders at fault in accidents by surcharges, and rewards claim-free years by discounts. For simplicity, only up to three levels of premium are considered in this paper and recursive formulae are derived to calculate the ultimate ruin probabilities. Explicit expressions of ruin probabilities are obtained in a simplified case. The impact of the proposed correlation between premiums and claims on ruin probabilities is examined through numerical examples. In the end, the joint probability of ruin and deficit at ruin is also considered.

This paper is a continuation of and a supplement to the paper by Jørgensen & Linnemann. Both papers deal with TimePension – a (formula-based) smoothed investment-linked annuity pension scheme. Both papers compare TimePension with other pension savings products using stochastic financial simulation. TimePension as well as the financial model and simulation concept being used in both papers were introduced in the paper op cit.

Jørgensen & Linnemann compare TimePension with a traditional with-profits scheme involving bonus entitlement and an investment-linked Unit Link scheme with a fixed proportion of assets invested in equities and other so-called risky assets. Here, TimePension is compared with two investment-linked life-cycle (target date) products. The focus is especially on the decumulation period, and we show that despite the fact that the life-cycle products reduce investment risk in retirement (compared with TimePension’s fixed proportional allocation of assets), the year-over-year stability in benefits provided by TimePension cannot be matched. Even though the overall investment risk on accumulated benefits is at the same level, TimePension provide year-over-year stability, also in case of sharp price changes in the financial market.

Our results show that not only investment profiles define the stability of annuity benefits over time. In addition, more fundamental elements of the product design are important. The perspective on product design and development is Danish, but two of the compared products are generic life-cycle products that exist in equivalent forms in many countries. Similarly, the smoothed income annuities could also become an alternative product design in an international perspective.

These abstracts are compiled by the library service of the Institute and Faculty of Actuaries. Single copies of the papers listed here can be obtained, subject to copyright law, by contacting the libraries. There may be a charge for this service. Members of the Institute and Faculty of Actuaries can also access these journals directly by registering for the eLibrary. A password is available on request. Please email libraries@actuaries.org.uk for more information.

Home equity release products have been promoted as a potential solution to residential long-term care costs for the elderly. Lower than expected utilisation of home equity release loans has prompted efforts to better model and price the no-negative-equity-guarantee (NNEG) built into the contracts, but loan rates are still widely perceived by homeowners as being unattractive. We propose the introduction of a new adjustable rate loan based on a regional house price index, with the NNEG being borne by a specially created intermediary. The proposed approach allows us to directly address and separately price the basis risk between individual house price returns and index returns. In addition, it offers the opportunity to create securities based on residential real estate that would be attractive to a wider class of investors. The alternative risk-sharing mechanism creates a more transparent and simple pricing structure for the loans. We then use house sales data to demonstrate the approach. We find in our sample that it would be possible to make higher loans than seen in previous literature using standard roll-up contracts. In the most favourable scenario for our simulations, the maximum loan is 89% of the appraised home value if the loan is advanced as a lump sum and 95% if the loan is advanced in instalments.

In this paper we calculate and compare diagnosis and net premium rates for critical illness insurance using different models for the claim delay distribution (CDD). The choice of CDD affects the diagnosis rates and hence the net premium rates in two ways: through the estimation of missing dates of diagnosis and through the adjustment of the exposure to allow for claims diagnosed but not settled in the observation period. We consider two CDDs: a three-parameter Burr distribution and a lognormal distribution. Our conclusion, based on a single, but extensive, data set, is that net premium rates are not significantly affected by the choice of CDD.

With the advent of formal regulatory requirements for rigorous risk-based, or economic, capital quantification for the financial risk management of banking and insurance sectors, regulators and policy-makers are turning their attention to the pension sector, the other integral player in the financial markets. In this paper, we analyse the impact of applying economic capital techniques to defined benefit pension schemes in the United Kingdom. We propose two alternative economic capital quantification approaches, first, for individual defined benefit pension schemes on a stand-alone basis and then for the pension sector as a whole by quantifying economic capital of the UK’s Pension Protection Fund, which takes over eligible schemes with deficit, in the event of sponsor insolvency. We find that economic capital requirements for individual schemes are significantly high. However, we show that sharing risks through the Pension Protection Fund reduces the aggregate economic capital requirement of the entire sector.

The analysis of causal mortality provides rich insight into changes in mortality trends that are hidden in population-level data. Therefore, we develop and apply a multinomial logistic framework to model causal mortality. We use internationally classified cause-of-death categories and data obtained from the World Health Organization. Inherent dependence amongst the competing causes is accounted for in the framework, which also allows us to investigate the effects of improvements in, or the elimination of, cause-specific mortality. This has applications to scenario-based forecasting often used to assess the impact of changes in mortality. The multinomial model is shown to be more conservative than commonly used approaches based on the force of mortality. We use the model to demonstrate the impact of cause-elimination on aggregate mortality using residual life expectancy and apply the model to a French case study.

Single copies of the papers listed here can be obtained, subject to charge and copyright regulations, from the libraries of the Institute and Faculty of Actuaries. Members can also access the journals online by registering for the libraries’ Athens service. Email: libraries@actuaries.org.uk or telephone 0131 240 1311 or 020 7632 2114 for a password.