Risk Management
Task Force

Pricing for Risk Minutes

 

Pricing for Risk
November 13, 2003
10:00 a.m. Central Time

Participants: Novian Junus (Leader), Andy Chua, Harold Dershowitz, Dave Ingram,
Julie Perks, Guarav Upadhya, Julie Young (SOA)

Proposed Objectives for the Pricing for Risk Task Force

Andy

  1. Using the survey as a foundation, identify the common profit measures used in the insurance industry and the common methods for reflecting risk.

  2. Put together a comprehensive specialty guide. Ideally concepts for reflecting risk in pricing used by other financial institutions would be represented.

  3. Complement #2 above with a “toolkit of examples”.

Julie

I would agree with some others that a Specialty Guideline document would be a useful and achievable objective for our group. I think the focus should be on those risks that actuaries have not traditionally considered in their pricing models. The recommended readings should provide indications of how to price each of the risks, and ideally how they should be incorporated directly and interactively or independently with traditional actuarial risk models. I am not sure that the scope should include design modifications to products to eliminate/reduce risk in the first place, and/or hedging strategies and their cost to mitigate identified risks.

Guarav

Help bring together ideas for resolving issues related to actually using emerging techniques for measuring risk (e.g. economic capital, stochastic analysis) in making better pricing and product design decisions. This means that actuaries need the methodologies (including new metrics) that enable them to understand the profitability under different scenarios and then make good business decisions on rates to charge and product designs to avoid.

There are a number of issues that need to be dealt with in pricing that are not there for the inforce risk modeling, including not knowing what actual sales mix will be, projection of actual income in order to calculate lifetime return metrics, setting prices for long-term insurance products using current market interest rates vs. long-term averages, etc. These kinds of issues should be dealt with in this group as they may not be addressed in other groups.

Discussion of Rationale Behind Our Proposals

The results of the Pricing for Risk survey is on the web site.

Going forward with #2 (see Andy’s proposal) – specialty guide – we should put equal emphasis on educational value and we should have a starting point for people who want to do further research. The specialty guide will have theoretical and practical sides.

#3 (see Andy’s proposal) will be the practical side of this. We need to show simple examples to expedite the value to the practitioner.

We can place an article in the Actuary with reference to the survey and link.

What is a good model to shoot for to hit the number 2 objective?
Let’s look at the ALM Specialty Guide. It appears to have diversity. Use this as a springboard.

We should focus on emerging techniques. In the survey people used a lot of metrics. We should use the new techniques such as economic capital and stochastic modeling. We should ask ourselves “How do we take those techniques and apply them in pricing?”

The Specialty Guide is good in terms of trying to understand the landscape and determining gaps. We can outline the specialty guide, then focus efforts on doing a gap analysis. It’s not clear that the material is out there to support a specialty guide. Usually a study guide shows references to material that is already printed. The act of developing or outlining a specialty guide would lead you to do a gap analysis.

In going through the material for the specialty guide it’s conceivable that there are people who are non-actuaries who have done studies on risk management. Do we have a means of including non-members of the society in the project?

We agree that the focus is on product development and product pricing. We all want to create a document that references what our recommendations are in terms of researching topics and pricing risks. What is the list of risks that we don’t currently price well? We should use our contacts to determine what this list is. What is lacking in pricing development? Is it looking at existing products with different kinds of exposures? Are they being priced correctly or is there a better model out there to use?

Pricing for Risk Survey – Can we look at the results and questions and come up with a list of the risks? We can use that as a starting point.

As a group do we have adequate representation of all the product lines?

Novian and Andy - Life and Annuity
Guarav – Corporate Area, aware of all lines
Julie – Annuities and Universal Life
Harold – Life

Bernie Rabinowitz is in the Health area but he was not on the call.

We don’t have anyone from pension.

There should be some people whom we can recruit – Mark Shaw worked for a health company in risk assessment. He is now a VP of Development at Fortis. He has a good background.

Reaction to survey – it appeared that a significant number of people were using judgment to price for risk. We need to move people away from the judgment model. Most methods do not depend on the calculation.

When you look at risk management literature from outside the insurance industry and compare it to the findings in our survey we appear rather primitive. We need to move the practice into the quantitative realm for dealing with risk.

Next steps
1 – Begin work on a specialty guide.
2 – Determine the gaps.
3 – Advance the actuaries’ ability to analyze and quantify risk in pricing.

Our Plan
There will be two people to start, and the group will review outline. We will then determine next steps.

We need to outline the specialty guide, determine gaps, and decide type of people to recruit.

ACTION ITEMS: Dave and Andy will come up with an outline within three weeks. They will send it to the group by December 4. Also send any relevant articles to the list serve.

Next Call
December 17 at 10 a.m. Central Time.

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