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by Ermanno Pitacco (Author)
About the Author
Ermanno Pitacco is the academic director of the Master in Insurance and Risk Management at the MIB Trieste School of Management, and professor of Actuarial mathematics and Life insurance technique at the University of Trieste. He has been visiting professor at various universities (recently the Universities of Louvain-La-Neuve; New South Wales, Sydney; Ljubljana; Zagreb; and Kyoto). His main fields of scientific interest are life and health insurance mathematics and techniques, pension mathematics, longevity risk, and portfolio valuations. He is the author/coauthor of numerous textbooks and papers in a wide range of insurance and actuarial fields.
About this Book
This book deals with Enterprise Risk Management (ERM) and, in particular, Quantitative Risk Management (QRM) in life insurance business. Constituting a “bridge” between traditional actuarial mathematics and insurance risk management processes, its purpose is to provide advanced undergraduate and graduate students in the Actuarial Sciences, Finance and Economics with the basics of ERM (in general) and QRM applied to life insurance business. The main topics dealt with are: general issues on ERM, risk management tools for life insurance and life annuities, deterministic and stochastic analysis of the behaviour of a portfolio fund, application of sensitivity testing to assess ranges of results of interest, stress testing to assess the impact of extreme scenarios, and the product development process for life annuity products.
Brief Contents
1 Introduction 1
2 Enterprise Risk Management (ERM) and Quantitative Risk Management (QRM) 5
2.1 What Is ERM? 5
2.1.1 Some Definitions 5
2.1.2 Some Ideas 6
2.1.3 Some Aspects of Evolution 7
2.1.4 Some Terms (and the Underlying Ideas) 8
2.2 What Is QRM? 8
2.2.1 The QRM Toolkit 8
2.2.2 QRM: Solvency and Internal Models. 9
2.3 References and Suggestions for Further Reading 10
3 The Risk Management (RM) Process 13
3.1 Phases of the RM Process: An Overall View 13
3.1.1 Setting the Objectives 13
3.1.2 From Risk Identification to Monitoring 14
3.2 From Data to Models, from Models to Results 15
3.2.1 Data and Results 16
3.2.2 Modeling and Communication 16
3.3 Looking at Insurance Companies: ERM and ORSA 18
3.4 RM: Objectives and Actions 19
3.4.1 General Issues 19
3.4.2 Hedging 21
3.5 Risk Transfers 24
3.5.1 Retention Versus Transfer. 24
3.5.2 Counterparts in a Risk Transfer Deal 25
3.6 Monitoring: KPIs and the “Time Table”. 26
3.7 A Forerunner: The Actuarial Control Cycle 28
3.8 References and Suggestions for Further Reading 29
4 RM for Life Insurance and Life Annuities 31
4.1 Risk Identification. 31
4.1.1 Risk Causes and Risk Factors: An Introduction 31
4.1.2 Risk Components 32
4.1.3 More on Risk Components: Hedging the Impact 35
4.2 Risk Causes and Risk Components in a Life Portfolio 36
4.2.1 Underwriting Risks 36
4.2.2 Credit Risks 38
4.2.3 Market Risks 38
4.2.4 Operational Risks 38
4.2.5 Liquidity Risks 39
4.2.6 Event Risks 39
4.2.7 Selection Risk: Further Issues 40
4.3 Risk Assessment 41
4.3.1 Assessing Risks in a Life Insurance Portfolio. 41
4.3.2 Deterministic Models Versus Stochastic Models. 41
4.3.3 Random Fluctuations in Mortality 46
4.3.4 Systematic Deviations in Mortality 47
4.4 Moving to Impact Assessment 49
4.4.1 Risk Factors in a Life Insurance Portfolio 49
4.4.2 From Scenario to Results 49
4.4.3 A Formal Setting 50
4.4.4 From Deterministic to Stochastic Approaches 52
4.4.5 Updating the Probabilistic Setting via Monitoring 55
4.4.6 More on Deterministic Approaches 57
4.5 RM Actions for Life Insurance 59
4.5.1 Outlook 59
4.5.2 Solvency 60
4.5.3 Reinsurance: General Aspects 61
4.5.4 Life Reinsurance Arrangements 64
4.5.5 Reinsurance: Further Aspects 67
4.5.6 The Risk Transfer Process 69
4.5.7 Alternative Risk Transfers. Securitization. ILS 70
4.5.8 Mortality Bonds 73
4.5.9 Capital Allocation 77
4.5.10 Solvency Versus Value Creation 79
4.6 RM Actions for Life Annuities 81
4.6.1 Expected Versus Actual Cash Flows 82
4.6.2 Pricing and Product Design 84
4.6.3 Capital Allocation 84
4.6.4 Hedging and Risk Transfers: General Issues 85
4.6.5 Reinsurance 85
4.6.6 Longevity Swaps 89
4.6.7 Longevity Bonds 90
4.6.8 Hedging via Longevity Bonds: Examples 94
4.6.9 Natural Hedging. 97
4.6.10 Bulk Annuities: Buy-In, Buy-Out 97
4.7 References and Suggestions for Further Reading 99
5 Product Design: Guarantees and Options 101
5.1 Outlook 101
5.2 The Product Design as a RM Action 102
5.3 Term Insurance. 103
5.3.1 Product Main Features 104
5.3.2 Underwriting Issues 105
5.3.3 Mortality Risk in Term Insurance Portfolios 105
5.4 Endowment Insurance 105
5.4.1 Product Main Features 106
5.4.2 Participation Mechanisms 107
5.5 Immediate Life Annuities 108
5.5.1 Product Main Features 108
5.5.2 Hedging the Longevity Risk 110
5.5.3 Raising the Number of Annuitants 111
5.6 Long-Term Care Insurance Products 112
5.6.1 LTCI Products: A Classification 112
5.6.2 Fixed-Amount and Degree-Related Benefits 112
5.6.3 Guarantees, Options and Related Risks 114
5.7 From Liability-Driven to Asset-Driven Insurance Products 115
5.8 Guarantees in Unit-Linked Policies 116
5.9 Variable Annuities 119
5.9.1 Main Features of the Products. 119
5.9.2 Guaranteed Minimum Accumulation Benefit (GMAB) 120
5.9.3 Guaranteed Minimum Death Benefit (GMDB) 123
5.9.4 Guaranteed Minimum Income Benefit (GMIB) 125
5.9.5 Guaranteed Minimum Withdrawal Benefit (GMWB) 125
5.9.6 Risks in Variable Annuities 127
5.10 References and Suggestions for Further Reading 128
6 Risk Assessment and Impact Assessment in Life Insurance Business 131
6.1 A Stochastic Model for a Life Insurance Portfolio 131
6.1.1 The Portfolio 131
6.1.2 From Theory to Practice 135
6.1.3 Defining an Endowment Portfolio 136
6.1.4 Scenarios 137
6.1.5 Deterministic Approach 139
6.1.6 Stochastic Approach 147
6.1.7 Introducing Systematic Deviations. 152
6.1.8 A Double-Stochastic Approach 153
6.1.9 Checking the Impact of Decision Variables 156
6.2 A Case Study: Assessing the Impact of Alternative Interest Guarantees 157
6.2.1 Basic Ideas 157
6.2.2 Alternative Interest Rate Guarantees 158
6.2.3 Deterministic Approach 160
6.2.4 Stochastic Approach 162
6.3 References and Suggestions for Further Reading 169
7 Risk Assessment and Impact Assessment in Life Annuity Business 171
7.1 A Stochastic Model for a Life Annuity Portfolio 171
7.1.1 The Portfolio 171
7.1.2 From Theory to Practice 173
7.1.3 Defining an Annuity Portfolio 173
7.1.4 Scenarios 174
7.1.5 Deterministic Approach 176
7.1.6 Stochastic Approach 179
7.1.7 Introducing Systematic Deviations. 182
7.1.8 A Double-Stochastic Approach 182
7.1.9 Checking the Impact of Decision Variables 183
7.2 Solvency and Capital Allocation 186
7.2.1 Portfolio Default 186
7.2.2 Capital Requirement According to a Stochastic Model 187
7.2.3 Capital Requirement Based on a Stress Scenario 189
7.3 References and Suggestions for Further Reading 190
8 Sensitivity Testing for Long-Term Care Insurance Products 191
8.1 Outlook 191
8.2 The Biometric Model 191
8.2.1 A Three-State Model 192
8.2.2 Biometric Functions 192
8.3 Actuarial Values. Premiums 195
8.3.1 Actuarial Values 195
8.3.2 Single Premiums 196
8.3.3 Product P1: LTCI as a Stand-Alone Cover 196
8.3.4 Product P2: LTCI as an Acceleration Benefit 197
8.3.5 Product P3: LTCI in Life Insurance Package 198
8.3.6 Product P4: The Enhanced Pension 198
8.4 Sensitivity Testing 199
8.4.1 A Formal Setting 199
8.4.2 Sensitivity Testing: Marginal Analysis 200
8.4.3 Sensitivity Testing: Joint Analysis 202
8.4.4 Profit Testing via Sensitivity Analysis 203
8.5 References and Suggestions for Further Reading 204
9 ERM and QRM in Product Development: An Example 205
9.1 Motivation and Outlook 205
9.2 Product Development: Stage-Gate® and RM Process 205
9.2.1 The NPD Process According to the Stage-Gate® System 206
9.2.2 Combining Stage-Gate® and RM Process in Life Insurance Business 207
9.3 The NPD Process for Special-Rate Life Annuities 209
9.3.1 The Product and Its Motivation 210
9.3.2 The NPD Process: Specific Issues 212
9.3.3 Approaches to Underwriting 213
9.3.4 The Biometric Risk Profile 215
9.4 References and Suggestions for Further Reading 216
References 217
Index 223
Pages : 241
ISBN-10 : 3030498514
ISBN-13 : 978-3030498511
Publisher : Springer; 1st ed. 2020 Edition (August 26, 2020)
Language : English
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