Workshop on the Interface between Quantitative Finance and Insurance
A satellite workshop of the Quantitative Finance Programme of the Isaac Newton Institute and a 2005 Regional Seminar of the AFIR Section of the International Actuarial Association
Edinburgh, 4 - 8 April 2005
Programme & Participants | Workshop Arrangements | Application Form | HomeQuick links within this page: Timetable | Themes | Participants
Programme
Days 1 and 2 of the workshop will consist of invited talks with a more applied or practical orientation. (It is possible to register for these two days only.) Days 3 to 5 will have a more academic flavour although with some further applied talks. There is a framework of invited talks on days 3 to 5, but there will also be contributed talks, which are now shown on the timetable below.Timetable
Monday 4 April
| 09.00 - 10.30 | Registration |
| 10.30 - 11.30 | John Hibbert (Barrie
and Hibbert) Asset Models |
| 11.30-12.30 | Stefan Jaschke and Gerhardt Stahl
(Federal Financial Supervisory Authority (BaFin), Germany) Internal models in banks and insurers Download presentation: PDF file 1 | PDF file 2 |
| 12.30-14.00 | Lunch |
| 14.00-15.00 | Andrew Smith (Deloittes) Stochastic mortality modelling Download presentation: Powerpoint file |
| 15.00-16.00 | John Mulvey (Princeton University) Decentralised risk management for global financial companies Download presentation: PDF file of talk | PDF file of Slides |
| 16.00-16.30 | Tea/Coffee |
| 16.30-17.30 | Per Linnemann (Pensam, Denmark) The role of the Chief Risk Officer |
| 17.30-18.30 | Reception hosted by AFIR |
Tuesday 5 April
| 09.30-10.30 | Craig Turnbull (Barrie
and Hibbert) Risk-based capital Download presentation: Powerpoint file |
| 10.30 - 11.00 | Coffee |
| 11.00-12.00 | David McCarthy (Tanaka Business
School) and Cliff Speed (Hewitt Bacon and Woodrow) Are DB schemes insurable? Download presentation: PDF file |
| 12.00-13.30 | Lunch |
| 13.30-14.30 | Con Keating and Chris Golden
(Finance Development Centre) Evergreens: A new financial instrument Download presentation: Powerpoint file |
| 14.30-15.30 | Nick Webber (Warwick Business
School) Reducing dimensionality in interest-rate models |
| 15.30-16.00 | Tea/Coffee |
| 16.00-17.00 | Phil Dybvig (Washington University
in St. Louis) Life-cycle consumption and investment Download presentation: PDF file of slides | PDF file of talk |
Wednesday 6 April
| 09.30-10.30 | Ales Cerny (Imperial
College, London) Performance of dynamic hedging strategies: the tale of two trading desks |
| 10.30-11.00 | Coffee |
| 11.00-11.30 | Enrico Biffis (Bocconi University) A bidimensional approach to life portfolio valuations and to the insurer's future business Download presentation: PDF file |
| 11.30-12.00 | Pierre Devolder (Université
Cathollique de Louvain) Stochastic mortality and securitization of longevity risk in a continuous time environment Download presentation: Powerpoint file |
| 12.00-12.30 | Elena Vigna (University of Turin) A note on stochastic survival probabilities and their calibration Download presentation: PDF file |
| 12.30-14.00 | Lunch |
| 14.00-15.00 | John Aquilina (Bath and Cambridge
Universities) The squared Ornstein-Uhlenbeck market |
| 15.00-15.30 | Michael Monoyios (Brunel University) Esscher transforms and martingale measures in incomplete diffusion models |
| 15.30-16.00 | Tea/Coffee |
| 16.00-16.30 | Yue Kuen Kwok (Hong Kong
University of Science and Technology) Valuation of guaranteed
annuity options in affine term structure models Download presentation: PDF file |
| 16.30-17.00 | David Forfar (Heriot-Watt
University) Guarantee annuity rate options Download presentation: Powerpoint file | EXCEL spread sheet |
Thursday 7 April
| 09.30-10.30 | Pauline Barrieu (London
School of Economics) Transfer of non-tradeable risk Download presentation: PDF file |
| 10.30 - 11.00 | Coffee |
| 11.00-11.30 | Antoon Pelsser (Erasmus University
Rotterdam) On the applicability of the Wang transform for pricing financial risks Download presentation: Powerpoint file |
| 11.30-12.00 | Tom Fischer (Heriot-Watt
University) On the decomposition of risk in life insurance Download presentation: PDF file |
| 12.00-12.30 | Klaus Dragosits (HNO Medizinisch
Universität Wien) Analysis of Risk Trading Networks Download presentation: PDF file |
| 12.30-14.00 | Lunch |
| 14.00-15.00 | Dirk Becherer (Imperial College,
London) Solutions to hedging problems with interacting Ito and point processes Download presentation: PDF file |
| 15.00-15.30 | Johanna Neslehova (Swiss Federal
Institute of Technology Zurich) Dependence of non-continuous random variables Download presentation: PDF file |
| 15.30-16.00 | Tea/Coffee |
| 16.00-16.30 | Claudia Klüppelberg (Munich
University of Technology) Ruin estimation in multivariate models with Clayton dependence structure Download presentation: PDF file |
| 16.30-17.00 | Martin Riesner (University of Ulm) A risk-minimizing hedging strategy for unit-linked life insurance contracts in a Levy process driven financial market |
| 19.30 | Workshop Dinner |
Friday 8 April
| 09.30-10.30 | Rudiger Kiesel (University
of Ulm) Fair Valuation of Insurance Contracts |
| 10.30 - 11.00 | Coffee |
| 11.00-11.30 | Radostina Kostadinova (Munich
University of Technology) Integrated risk management when stock processes follow an exponential Levy process Download presentation: PDF file |
| 11.30-12.00 | François Quittard-Pinon (University
of Lyon 1) Market value of life insurance contracts under stochastic interest rates and default risk Download presentation: PDF file |
| 12.00-12.30 | Michèle Vanmaele (Ghent
University) Bounds for stop-loss premiums of life annuities with random interest rates Download presentation: PDF file |
| 12.30-14.00 | Lunch |
| 14.00-14.30 | Edward Furman (University of Haifa)
Tail variance premium with applications for elliptical portfolio of risks |
| 14.30-15.30 | Andreas Kyprianou (Heriot-Watt
University) Levy processes in insurance |
| 15.30-16.00 | Close and Coffee |
Workshop themes (further details):
A: Stochastic asset models and asset-liability modelling for life insurance and pensions
Recent years have seen the need for the development of stochastic models which model a number of key variables affecting insurance companies: economic variables such as interest rates and price inflation; and other series directly relating to asset returns. Many financial institutions already use such models for internal asset-liability studies, to assess risks and also to manage their risks in some circumstances by altering investment strategies and their portfolio of liabilities. More recently regulators have begun to require the use of stochastic asset models for statutory reserving calculations.
B: Fair value, solvency testing and capital adequacy
Knowledge of the "fair value" of an insurance liability has increased in terms of importance in recent years as a result of changes first in international accounting regulations and second as actuaries see the benefit of the clarity revealed in using this as a method o liability valuation. Fair value can be interpreted as the price at which a liability would trade if a well informed and liquid market existed in this asset - even though such an asset is unlikely to exist at least in the near future. This allows shareholders to assess accurately the value of the company. Before the introduction of the use of "fair values", a variety of valuation techniques were used for liabilities that often had the effect of making it difficult for shareholders to establish the true value of an insurance company. In many cases liabilities incorporate substantial risks that are not diversifiable. As examples:
- natural catastrophes;
- systematic mortality risk (that is, unanticipated changes in population mortality rates);
- some pension liabilities are linked to salary growth which is a non-tradable economic risk.
As such there is a need for continued development of the principles as well as the practice underpinning fair value calculations. Financial mathematics and mathematical economics offer a range of alternative approaches to valuation in incomplete markets but there is little guidance as to which of these approaches is appropriate for insurance valuation.
Solvency testing and capital adequacy incorporates fair value but also goes beyond. Specifically stochastic reserving is becoming an important issue for insurers with practice and regulations beginning to mimic banking practice. Thus insurers need to be able to demonstrate that they have sufficient capital to withstand the risks they face (insurance, economic and financial risks) with a high probability. Here time horizons are generally much longer than those considered by banks and this presents insurers with some different issues.
C: Long-term risks: pricing and risk assessment
The issue of stochastic reserving for capital adequacy has been discussed already above. Long-term risks perhaps present greater problems for modellers. Short-term risks often can be hedged reasonably well using existing financial contracts in combination with suitably diversified portfolios of liabilities. For long-term risks pricing and hedging is more problematic. Some pensions and life insurance liabilities fall due many decades ahead and some of these incorporate financial guarantees. Portfolio risk management techniques which work well for banks for portfolios of short-term derivatives cannot be easily translated into methods for insurance companies: partly because no markets exist in relevant, long-dated assets, and partly because insurers cannot easily manipulate their portfolios of liabilities in the same way that a bank can its portfolio of derivatives.
Relevant subtopics:
- asset models designed for long-term economic "reasonableness";
- development of new financial markets which help insurers to manage their long-term insurance risks (e.g. mortality swaps);
- philosophical issues.
D: Dependence modelling, extreme-value theory, Levy processes and their application in insurance problems
Many of the issues raised above have specific aspects that may well be sensitive to the underlying stochastic processes and, for example, the dependencies between asset classes and certain liabilities. These sorts of issues are well known to have a substantial impact on short-term risks. It is less clear to what extent that these issues are important when we consider longer-term risk. It may be that model and parameter risk is much more important.
E: Optimal stochastic control and optimal hedging problems in insurance
There is a well-established body of research dealing with optimal investment and consumption in the financial economics literature, originally using the Hamilton-Jacobi-Bellman equation and more recently using the martingale approach. These methods have recently begun to find applications in insurance-related problems. Insurers and pension plans have become much more aware of the need to manage their risks effectively and this can be facilitated by using optimal control. To date research has focused on relatively simple models with a view to understanding which control variables do make a difference. There is considerable scope for future work of both a theoretical and an applied nature. For example, many problems in insurance involve incomplete markets, requiring a more-sophisticated theoretical base that many classical problems. On the applications side, many problems require numerical solution. However, the existing literature does not give much guidance on effective and accurate numerical methods.
F: Issues relating to specific contracts and securitisation of insurance risks
Many of the risks described above which are carried by insurers could be reduced by the use of practical hedging techniques and/or by the use of new traded securities which incorporate relevant insurance risks. This specific theme incorporates talks that might deal with the pricing and hedging of specific contracts. Examples might include catastrophe derivatives and guaranteed annuity options. Contract design here is a key factor. A poorly designed security may be too expensive or may not help insurers to an adequate extent, resulting in poor liquidity.
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Participants31 March
| Name | Institution |
| Andersson, Daniel | Royal Institute of Technology Stockholm |
| Aquilina, John | University of Bath |
| Bao, Chenming | Heriot-Watt University |
| Barrieu, Pauline | London School of Economcs |
| Becherer, Dirk | Imperial College London |
| Berkaoui, Abdel | University of Warwick |
| Berthon, Jean | Institut des Actuaries Français |
| Biffis, Enrico | Bocconi University |
| Butlin, Simon | Standard Life Assurance Co |
| Cairns, Andrew | Heriot -Watt University |
| Cerny, Ales | Tanaka Business School |
| Danielsson, Johanna | Skandia |
| Devin, Siobhán | Dublin City University |
| Devolder, Pierre | Université Cathollique de Louvain |
| Dragosits, Klaus | Complex Systems Research Group |
| Dybvig, Philip | Washington University in St Louis |
| Fischer, Tom | Heriot-Watt University |
| Forfar, David | Heriot-Watt University |
| Fu, Xingran | Heriot-Watt University |
| Furman, Edward | University of Haifa |
| Gaiser-Porter, Jurgen | Willis |
| Gobet, Emmanuel | Ecole Polytechnique |
| Golden, Chris | Finance Development Centre |
| Goodman, Dougal | The Foundation for Science and Technology |
| Hartinger, Jürgen | Graz University of Technology |
| Henn, Peter | Skandia |
| Hibbert, John | Barrie and Hibbert |
| Hodges, Stewart | University of Warwick |
| Hunt, Matthew | Standard Life Assurance Co |
| Jaschke, Stefan | Bundesanstalt für Finanzdienstleistungsaufsicht |
| Kautto, Erkki | Tapiola Mut Life & Corp Life Ins Co Ltd |
| Keating, Con | Finance Development Centre |
| Kiesel, Rudiger | University of Ulm |
| Kleinow, Torsten | Heriot-Watt University |
| Klüppelberg, Claudia | Munich University of Technology |
| Kollar, Jozeph | Heriot-Watt University |
| Kostadinova, Radostina | Munich University of Technology |
| Kwok, Yue Kuen | Hong Kong University of Science & Technology |
| Kyprianou, Andreas | Heriot-Watt University |
| Lee, Peter | Standard Life Assurance Co |
| Li, Robin | Manulife Financial Corporation |
| Linnemann, Per | Pen-Sam Liv Forsikringsaktieselskab |
| Lu, Li | Heriot-Watt University |
| Maharaj, Ravindra | Heriot-Watt University |
| Martin, Richard | Standard Life Assurance Company |
| Martin-Löf, Anders | Stockholm University |
| McCarthy, David | Tanaka Business School |
| Moloney, Michael | Mercer Investment Consulting |
| Monoyios, Michael | Brunel University |
| Mueller, Alfred | University Karlsruhe |
| Mueller, Marius | Munich Reinsurance |
| Mulvey, John | Princeton University |
| Mummenhoff, Gregor | University of Ulm |
| Neslehova, Johanna | Swiss Federal Institute of Technology Zurich |
| Oertel, Frank | Heriot-Watt University |
| Ouwehand, Peter | University of Cape Town |
| Owen, Mark | Heriot-Watt University |
| Pelsser, Antoon | Erasmus University Rotterdam |
| Pitts, Susan | University of Cambridge |
| Quittard-Pinon, François | University of Lyon 1, ISFA |
| Reed, Alan | Standard Life Assurance Co |
| Riesner, Martin | University of Ulm |
| Rogers, Chris | University of Cambridge |
| Siu, Tak Kuen | Heriot-Watt University |
| Smith, Andrew | Deloitte |
| Speed, Cliff | Hewitt Associates |
| Stahl, Gerhard | Bundesanstalt für Finanzdienstleistungsaufsicht |
| Stevenson, David | Standard Life Assurance Co |
| Stewart Roper, Kate | Standard Life Assurance Co |
| Svensson, Jens | Royal Institute of Technology Stockholm |
| Swanepoel, Johann | Sanlam Investment Management |
| Turnbull, Craig | Barrie and Hibbert |
| Vanmaele, Michèle | Ghent University |
| Vigna, Elena | University of Turin |
| Waters, Howard | Heriot-Watt University |
| Webber, Nick | University of Warwick |
| Wiese, Anke | Heriot-Watt University |
| Wilkie, David | Heriot-Watt University |
| Willder, Mark | Heriot-Watt University |
| Zhang, Keli | Heriot-Watt University |
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