2006 Insured Catastrophe Losses

Swiss Re has posted their preliminary evaluation of worldwide catastrophe losses (go to their website, and click on the December 20 news release link). Based on their calculations, 2006 insured worldwide catastrophe losses are around $15 billion -- as opposed to 2005's $100+ billion figure. The 2006 figure, assuming it holds for the next ten days of the year, is the third lowest in the last 20 years.

Looking forward, we have already begun to see and hear some predictions that 2007's hurricane season will be worse. There's a very interesting dynamic in the catastrophe insurance / reinsurance market going on right now!

- Rick

Catastrophe Bond Sales are Anything But (a catastrophe)

Today's Wall Street Journal (page C1) has an article describing the active 2006 market in catastrophe bonds. According to data compiled by Goldman Sachs, investments in cat bonds and similar instruments have totalled over $9.2 billion this year (well more than twice 2005's total).

In addition to this recent activity, I think there may be some "unexplored" types of securitized insurance instruments whose markets will develop in the future -- e.g., contingent equity puts based upon the occurrence or non-occurrence of a specified catastrophe.

- Rick

Football and Actuarial Science

It has become popular to offer prizes or monetary awards in the event of something occurring. Examples are numerous:

• Prizes for holes-in-one at golf tournaments.
• Awards for successfully making a basket from half-court at half-time of an NBA game.
• Taco Bell's offer, a few years ago, of a free taco to everyone in the U.S. if the space station Mir hit a target off the coast of Australia when it fell back to earth (it missed....).
• The capture of the Loch Ness monster (I think it was Seagrams that offered an award for this a few decades ago -- they insured this contingency with Lloyd's of London) (no one cashed in....).

Here is a link to an article describing a recent example -- free furniture because the Bears shut out the Packers! (Woof woof!!!)

As an actuary, how would YOU have priced this?

- Rick

Where Do Pensions Come From?

Here's an interesting and thought-provoking article on some of the socioeconomic and political dynamics underlying the early days of pensions, and how changes in those dynamics are helping to cause the concerns and problems associated with current pension systems.

- Rick

Even Actuaries Aren't Clairvoyant

This is an interesting press release, from the UK actuarial profession, regarding new mortality tables. A couple of key sentences:

Previous sets of tables have incorporated projections of future mortality, but this has not been done with the latest tables because of the uncertainty surrounding future improvements.... Instead the profession is saying that actuaries – and other professionals using mortality projections – should consider a range of scenarios.

Apparently, the UK organization feels that medical and other developments are occurring with too much rapidity and uncertainty to allow traditional actuarial point estimate projections.

- Rick

Self-Control: The Key to Success!

Here is an article from an Australian publication. I've often told my students that, when it comes to actuarial and general business success, intelligence is no more than 1/3 of the equation (and perhaps less) -- that other factors (discipline, communication skills, etc.) are worth at least twice as much. Here's more ammunition.

By the way, this article also explains why I never try to resist a chocolate-chip cookie (or "biscuit," as they call them in the UK and Australia): I'm saving my willpower reserves for much more important matters! (-:

- Rick

Dynamic (Financial) Analysis

One of my research interests involves a process referred to in the actuarial profession and insurance industry as "dynamic financial analysis" (DFA). DFA emerged a decade or so ago as an approach to integrate the analysis of both the underwriting and financial (or liability and asset) sides of an insurer, and to recognize their interrelationships. It has now largely evolved into an analytical tool within another research interest, enterprise risk management (ERM) -- DFA can help to understand and quantify the impact on a company of risks viewed in an enterprise-wide or holistic framework.

In general, DFA treats the emergence of economic and financial variables as stochastic (and usually projects future values of those variables via Monte Carlo or other simulation techniques). Another approach is the testing of specific, hypothesized future scenarios. But internal consistency is important. For example, while it's possible to change just one variable at a time, and leave the others static or unchanged (ceteris paribus, in latin), such a scenario may not be reasonable -- a change in one variable may generally be associated with a change in another variable (through causation or just simple correlation).

The U.S. Department of the Treasury has recently issued a report titled "A Dynamic Analysis of Permanent Extension of the President's Tax Relief." This represents a new type of analysis -- dynamic as opposed to the historical static -- of tax policy. A quote from the Executive Summary:

Dynamic analysis goes beyond traditional analysis of tax policy by focusing on the broad economic effects in both the short and long term. Simply, dynamic analysis provides a more comprehensive and complete approach to analyzing tax policy by including its effects on the overall size of the economy and other major macroeconomic variables. The President’s FY 2007 Budget proposes to create a division of dynamic analysis within the Department of Treasury’s Office of Tax Analysis.

A nice start down the D(F)A road.

- Rick