Actuarial Outpost
Go Back   Actuarial Outpost > Actuarial Discussion Forum > Life
FlashChat Actuarial Discussion Preliminary Exams CAS/SOA Exams Cyberchat Around the World Suggestions

Thread Tools Search this Thread Display Modes
Old 06-11-2018, 08:32 PM
joshren joshren is offline
Join Date: Nov 2003
Location: NYC
Posts: 39
Default MCEV / AFR -Cost of Nonhedagble Risk

In MCEV framework, the cost of nonhedgable risk (i.e. mortality, longevity , behavior etc) are estimated based on a capital charge * economic capital * duration

I believe this is needed because those risks are not modeled stochastically like financial risks.

However, if i were to model those risks stochastically, the cost of option and guarantee is much smaller vs the proposed approach above. This is because the cost of O&G is trying to capture deviation around the mean, while the approach above is calibrated based and extreme tail event like 2.57x standard deviation.

In my opinion, this creates a significant dis-adavange for Insurance risk given there is not such deduction for financial risk, only O&G

Is anyone aware if this issue was discussed at the MCEV forum or any reasoning behind such different treatment for risks?

Reply With Quote
Old 06-13-2018, 09:17 AM
E's Avatar
E E is offline
Eddie Smith
Join Date: May 2003
College: UGA
Posts: 9,336

The cost of nonhedgable risk is a cost of capital measure that reflects the capital owners' (e.g. shareholders) willingness to bear the risk that insurance experience will be worse than the best estimates that go into the value of inforce (i.e. the PV of distributable earnings on a best estimate basis).

The cost of nonhedgable risk exists because there is no way to hedge away non-financial risk using tradable market instruments, so it's based on an economic capital approach that allows the framework (as a whole) to remain market-consistent (because the the cost of nonhedgable risk is like a market measure of the uncertainty in non-financial risks like mortality, etc.) The EC base that goes into the cost of nonhedgable risk calculate can certainly be based on stochastic simulations for mortality tail risk, but you could also use equivalent 1-year VaR shocks for the mortality, etc. components (a la Solvency II).

Learn how FSA exams are different from the prelims

We have your exam covered:

LPM | LFV-U | LFV-C | LAM | ERM | QFI Quant | QFI PM | QFI IRM | G&H DP | G&H FV | G&H Sp

Check out our Technical Skills Course and our new R Course!

Connect on Twitter, Facebook, & LinkedIn
Reply With Quote

Thread Tools Search this Thread
Search this Thread:

Advanced Search
Display Modes

Posting Rules
You may not post new threads
You may not post replies
You may not post attachments
You may not edit your posts

BB code is On
Smilies are On
[IMG] code is On
HTML code is Off

All times are GMT -4. The time now is 06:21 PM.

Powered by vBulletin®
Copyright ©2000 - 2019, Jelsoft Enterprises Ltd.
*PLEASE NOTE: Posts are not checked for accuracy, and do not
represent the views of the Actuarial Outpost or its sponsors.
Page generated in 0.12902 seconds with 9 queries