Convention Papers 2008

The 2008 Convention was held on 23 and 24 October  

23 October 2008

CATASTROPHE MODELLING

By Oscar Kitasoboka & Pieter Visser

GENERATING INTEREST RATE SCENARIOS FOR FIXED INCOME PORTFOLIO OPTIMISATION

By Machiel F. Kruger & Helgard Raubenheimer

EDUCATING FOR ACUTARIAL QUALITY

By MW Lowther, WJ McMillan and F Venter

ABSTRACT
This paper is located in the field of actuarial professional education. It draws on current literature and empirical evidence to suggest best practice for teaching generic ‘normative’ capabilities in the actuarial profession. The paper examines three themes of normative education for actuaries – the intended purpose of an education programme, the range of capabilities to be developed, and educational ‘best practice’. A literature review of normative education in various professions provided a theoretical framework for data analysis, and for making recommendations. Data was collected from three sources – interviews with stakeholders; documentary evidence regarding current education of actuaries and accountants; and advertisements for employment of nearly or newly qualified actuaries. The paper draws on the literature and the empirical evidence to argue that the purpose of an actuarial education programme is to ensure the delivery of a service of quality. For this delivery to be achieved, both technical and normative capabilities need to be developed. The paper then suggests normative capabilities for actuaries. Thereafter, educational considerations for developing these capabilities are discussed. The paper concludes by drawing on the study to outline principles to guide curriculum planning for the normative component of the new South African actuarial qualification.

OPTIMAL ANNUITY STRATEGIES AFTER RETIREMENT

THE IMPACT OF WELLNESS ACTIVITIES ON HOSPITAL AND CHRONIC CLAIMS EXPERIENCE

MODELLING THE MARKET IN A RISK-AVERSE WORLD: The case of South Africa

By Prof Robert John Thomson

ABSTRACT
In this paper, descriptive models of real returns on the market portfolio of South Africa are developed and analysed. The ‘market portfolio’ is taken to comprise listed equity and government bonds, aggregated in proportion to their market capitalisation from time to time. The models have the attributes that, conditionally on information at the start of a year:
− the real return on the market portfolio during that year is normally distributed; and
− the market price of risk during that year is reasonably greater than zero.
For the purpose of predictive modelling the best of the models considered was found to be a linear function of the risk-free rate. For this purpose it was decided to use ex-ante estimates of expected returns. This led to bias in the observed mean returns, which negates the rational expectations hypothesis. In the light of the literature on the subject, this is considered acceptable for these purposes.

FACTORS LIKELY TO AFFECT THE SUCCESSFUL COMPLETION OF AN ACTUARIAL QUALIFICATION IN SA

By Nalen Naidoo

FREE COVER LIMITS AND UNDERWRITING AS USED IN GROUP RISK  BUSINESS

By Grete Kritzinger and Nico van der Colff

ABSTRACT
Both in South Africa and abroad, insurance companies follow a range of different approaches both in setting Free Cover Limits (FCLs) as well as the level of underwriting they do above the limit. In practice, most FCLs are quoted after a manual and subjective change to the “theoretical result”, with FCLs as high as twice the “theoretical value” sometimes quoted.

This paper takes a critical look at current market standards, both locally and abroad, with a specific focus on different providers’ views as to the appropriateness in terms of general approach, the level of FCLs and underwriting and competition in the market. A stochastic approach is used to evaluate various different FCL approaches and the underwriting done above it, based on a sample of actual group risk schemes. The paper aims to provide the group risk market with an overview of the science and technical considerations behind FCLs and underwriting in the group market.

INTRODUCTION TO SOLVENCY II: a non-valuator's view

By Paul Withey

PREDICTION MARKETS: A new investment tool

By Greg Mark Ovenden

ABSTRACT
Prediction Markets are trading exchanges for event driven binary options i.e. options that pay out a fixed amount if a strike condition is met. The event in question might be anything from an equity index being above some level at some time, to a future CPI release being above a certain level, or a candidate winning a political election. Because the payoffs of the options in a Prediction Market are of known size and not unbounded as is the case with vanilla options, it is possible through a system of trust accounts and immediate margining of trades for the Prediction Market exchange to bear no risk at all. Research shows that Prediction Market-generated forecasts typically perform well. In the case of Prediction Market contracts which have as underlying a financial instrument it is possible to use a pricing formula for binary options derived from the Black-Scholes framework; however there are some problems and caveats in respect of the usage of these formulae. Apart from speculative bets, Prediction Markets may be used for hedging and arbitrage. Interesting inferences can be made from families of contracts on the same underlying but with differing strikes or expiries. A South African Prediction Market under the auspices of the Bond Exchange of South Africa has been launched offering contracts based on equity, bond and commodity prices, econometric data and MPC interest rate decisions. It is intended that the data from this market will be freely available to any interested party.

THE ROLE OF THE STATUTORY ACTUARY IN LIFE INSURANCE

By Bozenna Hinton, Gary Palser & Marius du Toit

A STOCHASTIC PROGRAMMING APPROACH TO INTEGRATED ASSET AND LIABILITY MANAGEMENT OF INSURANCE PRODUCTS WITH GUARANTEES

By Helgard Raubenheimer & Machiel Kruger

ABSTRACT
In recent years insurance products have become more complex by providing investors with various guarantees and bonus options. This increase in complexity has provided an impetus for the investigation into integrated asset and liability management frameworks that could realistically address dynamic portfolio allocation in a risk-controlled way.
We propose a multi-stage dynamic stochastic programming model for the integrated asset and liability management of insurance products with guarantees that minimises the down-side risk of these products. We investigate with-profits guarantee funds by including regular bonus payments while keeping the optimisation problem linear.
The uncertainty is represented in terms of arbitrage-free scenario trees using a four-factor term structure model that includes macro economic factors (inflation, capacity utilisation and repo-rates). We construct scenario trees with path dependent intermediate discrete yield curve outcomes suitable for the pricing of fixed income securities. The main focus of the paper is the formulation and implementation of a multi-stage stochastic programming model. The model is back-tested on real market data over a period of five years.

THE IAA AND ITS ROLE IN SHAPING THE FUTURE OF THE ACTUARIAL PROFESSION

By Katsumi Hikasa

AN UPDATE ON THE UK PROFESSION'S MERGER PROPOSALS

By Ronnie Bowie

SETTING A GLOBAL ACTUARIAL ENTERPRISE RISK MANAGEMENT DESIGNATION

By Prof Harry Panjer & Prof Riaan de Jongh

Click here to go to day 2 of the 2008 Convention - 24 October.