Risk Management
Task Force

Extreme Value Models Subgroup

 

 

Credit Risk Management | Economic Capital Calculation and Allocation
Enterprise Risk Management | Equity Modeling | Extreme Value Models
Health Risk Management | Policyholder Behavior in the Tail
Pricing for Risk | Risk Based Capital Covariance | Risk Management Metrics


Extreme Value Models
Bob Guth, Leader

Goals
In today's business environment, extreme events are commanding more attention. These events have very low frequencies (e.g., once-a-century) but extraordinarily high costs. Research has shown that the Normal Distribution, which is pervasively used in actuarial work, underestimates the frequency of these events, sometimes significantly. Consequently, actuaries need to have more expertise in this aspect of risk management.

The Extreme Value Models subgroup of the Risk Management Task Force has two goals:

  • Increase the actuarial profession's awareness of these extreme risks and of the pitfalls of using simplistic methods to assess these risks.
  • Provide education and tools needed to quantify, manage, and price the risks associated with extreme-valued outcomes.
In order to accomplish these goals, the subgroup will:
  • Identify, develop, and publicize resources for actuaries concerning the quantification, management, and pricing of relevant risks.
  • Investigate the statistical distributions describing the frequency of extreme-valued outcomes, including non-parametric and non-symmetric distributions.
  • Monitor and/or sponsor research in this area.
  • Provide continuing education opportunities about applications of extreme-valued risk measurement and management.

Recent Activities

The Extreme Value Models subgroup helped organize a session on Extreme Value Theory at the 2004 Enterprise Risk Management Symposium. A description of the sessions, Track E, as well as the handouts are available online.

In 2003 we sponsored a contest encouraging actuaries to consider possible, but perceived-to-be unlikely, events. Read the
winning entry, a thought provoking essay on negative interest rates by Ken Faig!

Sample Applications
Steve Craighead has developed an Excel workbook that can be used to become familiar with calculations stemming from Extreme Value Theory. To begin applying these techniques to your applications follow this link. For instructions on use of the workbook follow this link
.

Jonathan T Wang has prepared a discussion on using extreme value theory to model operational risk.
Click here for details
. * PowerPoint

Documents & Links (all files are in .pdf format unless otherwise indicated)

Bibliography
  Reviewed Materials
  Other Materials

Rare or Surprising Events
  Some Context
  Surprising Events that Have Happened
  Surprising Events that May Happen



Recent Meeting Minutes:
  EVM Minutes – August 22, 2005
  EVM Minutes – June 29, 2005
| PowerPoint*
  EVM Minutes – May 24, 2005
  EVM Minutes – April 12, 2005
  EVM Minutes – October 11, 2004
 
* To download PowerPoint File right click the link and click "Save Target As..."

  

Links to EVM related sites:

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