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Investment Presentation Example . 2003 CAS Research Working Party: Executive Level Decision Making using DFA Michael R. Larsen, FCAS, MAAA. Goals of Study. Review Reinvestment Options Measure Results using Simulation Model Results

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Investment presentation example

InvestmentPresentation Example

2003 CAS Research Working Party:

Executive Level Decision Making using DFA

Michael R. Larsen, FCAS, MAAA


Goals of study
Goals of Study

  • Review Reinvestment Options

  • Measure Results using Simulation Model Results

    • Risk as Average Loss in Surplus in Worst 1% of Cases over Five Years

    • Return as Average Increase in Policy Holder Surplus at End of Five Years

2003 CAS Research Working Party


Change in reinvestment allocation
Change in Reinvestment Allocation

2003 CAS Research Working Party


Dfa flow

Corporate Elements

Reinsurance

Investment

Capital Mix

Taxes

  • Measures of

  • Risk

  • Return

Change in Policy Holder Surplus

DFA Flow

Starting Policy Holder

Surplus 40,000

Work Comp

Grow 5% a year

Multi_Peril

Grow 5% a year

Financial

Calculator

Analyze

Results

Financial Results

Simulated over Five Years

2003 CAS Research Working Party


Model assumptions

  • Investment Scenario

  • Long run average interest rate of 4%

  • Starting interest rate of 4%

  • Investment Models

  • Short term interest rate model is a mean reversion model

  • Long term rates are a function of short term rates

  • Stock returns modeled as a function of short term rates and interest rate changes

  • Stable relationship between bond and equity market

Model / Assumptions

Assumptions Behind Simulation

2003 CAS Research Working Party



Surplus change over time by investment option
Surplus Change Over Time by Investment Option

2003 CAS Research Working Party


Investment option comparison
Investment Option Comparison

Better

Option D Highest Return Less Risk

2003 CAS Research Working Party


Investment option summary
Investment Option Summary

2003 CAS Research Working Party


Conclusion
Conclusion

  • Reviewed four Reinvestment Options

  • Option D gives Best Gain in Surplus with Less Additional Risk

2003 CAS Research Working Party


Questions
Questions

  • Questions on Presentation?

  • Questions on Working Party Process?

  • Suggestions for New Working Parties?

2003 CAS Research Working Party