Workshop on the Interface between Quantitative Finance and Insurance

A satellite workshop of the Quantitative Finance Programme of the Isaac Newton Institute and a 2005 Regional Seminar of the AFIR Section of the International Actuarial Association

Edinburgh, 4 - 8 April 2005

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Days 1 and 2 of the workshop will consist of invited talks with a more applied or practical orientation. (It is possible to register for these two days only.) Days 3 to 5 will have a more academic flavour although with some further applied talks. There is a framework of invited talks on days 3 to 5, but there will also be contributed talks, which are now shown on the timetable below.


Monday 4 April
09.00 - 10.30 Registration
10.30 - 11.30 John Hibbert (Barrie and Hibbert)
Asset Models
11.30-12.30 Stefan Jaschke and Gerhardt Stahl (Federal Financial Supervisory Authority (BaFin), Germany)
Internal models in banks and insurers
Download presentation: PDF file 1 | PDF file 2
12.30-14.00 Lunch
14.00-15.00 Andrew Smith (Deloittes)
Stochastic mortality modelling
Download presentation: Powerpoint file
15.00-16.00 John Mulvey (Princeton University)
Decentralised risk management for global financial companies
Download presentation: PDF file of talk | PDF file of Slides
16.00-16.30 Tea/Coffee
16.30-17.30 Per Linnemann (Pensam, Denmark)
The role of the Chief Risk Officer
17.30-18.30 Reception hosted by AFIR
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Tuesday 5 April
09.30-10.30 Craig Turnbull (Barrie and Hibbert)
Risk-based capital
Download presentation: Powerpoint file
10.30 - 11.00 Coffee
11.00-12.00 David McCarthy (Tanaka Business School) and Cliff Speed (Hewitt Bacon and Woodrow)
Are DB schemes insurable?
Download presentation: PDF file
12.00-13.30 Lunch
13.30-14.30 Con Keating and Chris Golden (Finance Development Centre)
Evergreens: A new financial instrument
Download presentation: Powerpoint file
14.30-15.30 Nick Webber (Warwick Business School)
Reducing dimensionality in interest-rate models
15.30-16.00 Tea/Coffee
16.00-17.00 Phil Dybvig (Washington University in St. Louis)
Life-cycle consumption and investment
Download presentation:  PDF file of slides | PDF file of talk
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Wednesday 6 April
09.30-10.30 Ales Cerny (Imperial College, London)
Performance of dynamic hedging strategies: the tale of two trading desks
10.30-11.00 Coffee
11.00-11.30 Enrico Biffis (Bocconi University)
A bidimensional approach to life portfolio valuations and to the insurer's future business
Download presentation: PDF file
11.30-12.00 Pierre Devolder (Université Cathollique de Louvain)
Stochastic mortality and securitization of longevity risk in a continuous time environment
Download presentation: Powerpoint file
12.00-12.30 Elena Vigna (University of Turin)
A note on stochastic survival probabilities and their calibration
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12.30-14.00 Lunch
14.00-15.00 John Aquilina (Bath and Cambridge Universities)
The squared Ornstein-Uhlenbeck market
15.00-15.30 Michael Monoyios (Brunel University)
Esscher transforms and martingale measures in incomplete diffusion models
15.30-16.00 Tea/Coffee
16.00-16.30 Yue Kuen Kwok (Hong Kong University of Science and Technology) Valuation of guaranteed annuity options in affine term structure models
Download presentation: PDF file
16.30-17.00 David Forfar (Heriot-Watt University)
Guarantee annuity rate options
Download presentation: Powerpoint file | EXCEL spread sheet
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Thursday 7 April
09.30-10.30 Pauline Barrieu (London School of Economics)
Transfer of non-tradeable risk
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10.30 - 11.00 Coffee
11.00-11.30 Antoon Pelsser (Erasmus University Rotterdam)
On the applicability of the Wang transform for pricing financial risks
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11.30-12.00 Tom Fischer (Heriot-Watt University)
On the decomposition of risk in life insurance
Download presentation: PDF file
12.00-12.30 Klaus Dragosits (HNO Medizinisch Universität Wien)
Analysis of Risk Trading Networks
Download presentation: PDF file
12.30-14.00 Lunch
14.00-15.00 Dirk Becherer (Imperial College, London)
Solutions to hedging problems with interacting Ito and point processes
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15.00-15.30 Johanna Neslehova (Swiss Federal Institute of Technology Zurich)
Dependence of non-continuous random variables
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15.30-16.00 Tea/Coffee
16.00-16.30 Claudia Klüppelberg (Munich University of Technology)
Ruin estimation in multivariate models with Clayton dependence structure
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16.30-17.00 Martin Riesner (University of Ulm)
A risk-minimizing hedging strategy for unit-linked life insurance contracts in a Levy process driven financial market
19.30 Workshop Dinner
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Friday 8 April
09.30-10.30 Rudiger Kiesel (University of Ulm)
Fair Valuation of Insurance Contracts
10.30 - 11.00 Coffee
11.00-11.30 Radostina Kostadinova (Munich University of Technology)
Integrated risk management when stock processes follow an exponential Levy process
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11.30-12.00 François Quittard-Pinon (University of Lyon 1)
Market value of life insurance contracts under stochastic interest rates and default risk
Download presentation: PDF file
12.00-12.30 Michèle Vanmaele (Ghent University)
Bounds for stop-loss premiums of life annuities with random interest rates
Download presentation: PDF file
12.30-14.00 Lunch
14.00-14.30 Edward Furman (University of Haifa)
Tail variance premium with applications for elliptical portfolio of risks
14.30-15.30 Andreas Kyprianou (Heriot-Watt University)
Levy processes in insurance
15.30-16.00 Close and Coffee
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Workshop themes (further details):

A: Stochastic asset models and asset-liability modelling for life insurance and pensions
Recent years have seen the need for the development of stochastic models which model a number of key variables affecting insurance companies: economic variables such as interest rates and price inflation; and other series directly relating to asset returns. Many financial institutions already use such models for internal asset-liability studies, to assess risks and also to manage their risks in some circumstances by altering investment strategies and their portfolio of liabilities. More recently regulators have begun to require the use of stochastic asset models for statutory reserving calculations.

B: Fair value, solvency testing and capital adequacy
Knowledge of the "fair value" of an insurance liability has increased in terms of importance in recent years as a result of changes first in international accounting regulations and second as actuaries see the benefit of the clarity revealed in using this as a method o liability valuation. Fair value can be interpreted as the price at which a liability would trade if a well informed and liquid market existed in this asset - even though such an asset is unlikely to exist at least in the near future. This allows shareholders to assess accurately the value of the company. Before the introduction of the use of "fair values", a variety of valuation techniques were used for liabilities that often had the effect of making it difficult for shareholders to establish the true value of an insurance company. In many cases liabilities incorporate substantial risks that are not diversifiable. As examples:
- natural catastrophes;
- systematic mortality risk (that is, unanticipated changes in population mortality rates);
- some pension liabilities are linked to salary growth which is a non-tradable economic risk.
As such there is a need for continued development of the principles as well as the practice underpinning fair value calculations. Financial mathematics and mathematical economics offer a range of alternative approaches to valuation in incomplete markets but there is little guidance as to which of these approaches is appropriate for insurance valuation.

Solvency testing and capital adequacy incorporates fair value but also goes beyond. Specifically stochastic reserving is becoming an important issue for insurers with practice and regulations beginning to mimic banking practice. Thus insurers need to be able to demonstrate that they have sufficient capital to withstand the risks they face (insurance, economic and financial risks) with a high probability. Here time horizons are generally much longer than those considered by banks and this presents insurers with some different issues.

C: Long-term risks: pricing and risk assessment
The issue of stochastic reserving for capital adequacy has been discussed already above. Long-term risks perhaps present greater problems for modellers. Short-term risks often can be hedged reasonably well using existing financial contracts in combination with suitably diversified portfolios of liabilities. For long-term risks pricing and hedging is more problematic. Some pensions and life insurance liabilities fall due many decades ahead and some of these incorporate financial guarantees. Portfolio risk management techniques which work well for banks for portfolios of short-term derivatives cannot be easily translated into methods for insurance companies: partly because no markets exist in relevant, long-dated assets, and partly because insurers cannot easily manipulate their portfolios of liabilities in the same way that a bank can its portfolio of derivatives.
Relevant subtopics:
- asset models designed for long-term economic "reasonableness";
- development of new financial markets which help insurers to manage their long-term insurance risks (e.g. mortality swaps);
- philosophical issues.

D: Dependence modelling, extreme-value theory, Levy processes and their application in insurance problems
Many of the issues raised above have specific aspects that may well be sensitive to the underlying stochastic processes and, for example, the dependencies between asset classes and certain liabilities. These sorts of issues are well known to have a substantial impact on short-term risks. It is less clear to what extent that these issues are important when we consider longer-term risk. It may be that model and parameter risk is much more important.

E: Optimal stochastic control and optimal hedging problems in insurance
There is a well-established body of research dealing with optimal investment and consumption in the financial economics literature, originally using the Hamilton-Jacobi-Bellman equation and more recently using the martingale approach. These methods have recently begun to find applications in insurance-related problems. Insurers and pension plans have become much more aware of the need to manage their risks effectively and this can be facilitated by using optimal control. To date research has focused on relatively simple models with a view to understanding which control variables do make a difference. There is considerable scope for future work of both a theoretical and an applied nature. For example, many problems in insurance involve incomplete markets, requiring a more-sophisticated theoretical base that many classical problems. On the applications side, many problems require numerical solution. However, the existing literature does not give much guidance on effective and accurate numerical methods.

F: Issues relating to specific contracts and securitisation of insurance risks
Many of the risks described above which are carried by insurers could be reduced by the use of practical hedging techniques and/or by the use of new traded securities which incorporate relevant insurance risks. This specific theme incorporates talks that might deal with the pricing and hedging of specific contracts. Examples might include catastrophe derivatives and guaranteed annuity options. Contract design here is a key factor. A poorly designed security may be too expensive or may not help insurers to an adequate extent, resulting in poor liquidity.

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31 March
Name Institution
Andersson, Daniel Royal Institute of Technology Stockholm
Aquilina, John University of Bath
Bao, Chenming Heriot-Watt University
Barrieu, Pauline London School of Economcs
Becherer, Dirk Imperial College London
Berkaoui, Abdel University of Warwick
Berthon, Jean Institut des Actuaries Français
Biffis, Enrico Bocconi University
Butlin, Simon Standard Life Assurance Co
Cairns, Andrew Heriot -Watt University
Cerny, Ales Tanaka Business School
Danielsson, Johanna Skandia
Devin, Siobhán Dublin City University
Devolder, Pierre Université Cathollique de Louvain
Dragosits, Klaus Complex Systems Research Group
Dybvig, Philip Washington University in St Louis
Fischer, Tom Heriot-Watt University
Forfar, David Heriot-Watt University
Fu, Xingran Heriot-Watt University
Furman, Edward University of Haifa
Gaiser-Porter, Jurgen Willis
Gobet, Emmanuel Ecole Polytechnique
Golden, Chris Finance Development Centre
Goodman, Dougal The Foundation for Science and Technology
Hartinger, Jürgen Graz University of Technology
Henn, Peter Skandia
Hibbert, John Barrie and Hibbert
Hodges, Stewart University of Warwick
Hunt, Matthew Standard Life Assurance Co
Jaschke, Stefan Bundesanstalt für Finanzdienstleistungsaufsicht
Kautto, Erkki Tapiola Mut Life & Corp Life Ins Co Ltd
Keating, Con Finance Development Centre
Kiesel, Rudiger University of Ulm
Kleinow, Torsten Heriot-Watt University
Klüppelberg, Claudia Munich University of Technology
Kollar, Jozeph Heriot-Watt University
Kostadinova, Radostina Munich University of Technology
Kwok, Yue Kuen Hong Kong University of Science & Technology
Kyprianou, Andreas Heriot-Watt University
Lee, Peter Standard Life Assurance Co
Li, Robin Manulife Financial Corporation
Linnemann, Per Pen-Sam Liv Forsikringsaktieselskab
Lu, Li Heriot-Watt University
Maharaj, Ravindra Heriot-Watt University
Martin, Richard Standard Life Assurance Company
Martin-Löf, Anders Stockholm University
McCarthy, David Tanaka Business School
Moloney, Michael Mercer Investment Consulting
Monoyios, Michael Brunel University
Mueller, Alfred University Karlsruhe
Mueller, Marius Munich Reinsurance
Mulvey, John Princeton University
Mummenhoff, Gregor University of Ulm
Neslehova, Johanna Swiss Federal Institute of Technology Zurich
Oertel, Frank Heriot-Watt University
Ouwehand, Peter University of Cape Town
Owen, Mark Heriot-Watt University
Pelsser, Antoon Erasmus University Rotterdam
Pitts, Susan University of Cambridge
Quittard-Pinon, François University of Lyon 1, ISFA
Reed, Alan Standard Life Assurance Co
Riesner, Martin University of Ulm
Rogers, Chris University of Cambridge
Siu, Tak Kuen Heriot-Watt University
Smith, Andrew Deloitte
Speed, Cliff Hewitt Associates
Stahl, Gerhard Bundesanstalt für Finanzdienstleistungsaufsicht
Stevenson, David Standard Life Assurance Co
Stewart Roper, Kate Standard Life Assurance Co
Svensson, Jens Royal Institute of Technology Stockholm
Swanepoel, Johann Sanlam Investment Management
Turnbull, Craig Barrie and Hibbert
Vanmaele, Michèle Ghent University
Vigna, Elena University of Turin
Waters, Howard Heriot-Watt University
Webber, Nick University of Warwick
Wiese, Anke Heriot-Watt University
Wilkie, David Heriot-Watt University
Willder, Mark Heriot-Watt University
Zhang, Keli Heriot-Watt University

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