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The Actuary The magazine of the Institute & Faculty of Actuaries

A view from ASTIN

Leading general insurance actuaries of the world met in Manchester, England, in July. After more than two years in the making, the 38th ASTIN colloquium was a resounding success. The topical and immensely practical fields of Solvency II, climate change, emerging risks, and actuarial tools, amongst others, were extremely popular with delegates, encouraging around 45 papers to be presented and discussed.

Of course it was not all work, and on our only afternoon off we left the City of Manchester to visit Tatton Park, for a cruise on the River Dee in the splendid old Roman city of Deva (Chester). Accompanying persons had additional outings to Lyme Park (where Darcy romantically strode from a lake in the TV adaption of Jane Austin’s Pride and Prejudice), and to the art museum of famous local painter, L S Lowry. There was also an escorted trip around Manchester, and a visit to Urbis, an exhibition centre focusing on city life.

The colloquium began on Sunday evening with a reception in the Sculpture Hall of Manchester’s magnificent Victorian Town Hall. Built in 1877 for a mere million pounds, this large and functional gothic building incorporates the facilities that a modern convention centre needs, but is set in the grandeur of that wonderful age. It was a pleasant change from the ultra modern centres that so often host such events.

Early on Monday morning, set in the large and spectacular Great Hall, surrounded by paintings depicting the history of Manchester, work began in earnest. The delegates were welcomed by the organising and scientific committees, the UK Actuarial Profession (UKAP), and the International Actuarial Association. We were quickly into our stride as Professor Julia Slingo of Reading University presented our first plenary session by performing an in-depth analysis of the effects of climate change on insurance. What was so interesting was the inherent uncertainty of the possible outcomes of climate change, owing to the complexities of our worldwide climate and weather. Although there is no doubt that climate change is occurring, the various scenarios will make life increasingly difficult for insurers in the areas of pricing, realistic disaster scenarios, and exposure analyses, amongst others. In time, this will become more predictable, we hope.

While some companies were planning for the possible effects of climate change, others were not. This should be reflected in their share price - but is it? This session came to an end far too quickly and we were soon into our breakout sessions.

As was to become far too common at this colloquium, we were faced with a difficult choice between several interesting topics. I chose to continue on the current theme and attend presentations on papers connected with “climate change and its impacts”, although the alternative choice of “modelling and model risk” was also very tempting. It was pleasing that two of the three papers presented in the climate change session were by members of the UKAP’s own Environmental Research Group. The first questioned whether insurance pricing for US business should be based on long-term averages. The second introduced us to insurance in the carbon market. To complete the session there was a discussion on the impact of climate change on water damage in buildings. Climate change is a popular topic and is amongst those selected for ASTIN 2009 in Finland, yet the presentations were most unnerving.

The papers in the modelling session dealt with bootstrapping, loss reserving with incomplete data, and modelling risk in claims reserving. An excellent start whichever session you selected.

After lunch, held in another equally grand and colourful setting within the Town Hall, we had further breakout sessions. The first had the generic title of “emerging risks”. Another UKAP ERG member presented his views on the economic consequences of a global energy crisis, and what might happen when oil and other energy resources start to run out in just a few years, with no clear alternative sources of energy. Other papers described how tax deductible catastrophe loss reserves could operate prior to a Florida hurricane, and how option pricing could be applied to flood insurance and similar risks. The second session on “shortfall” had papers on practical aspects of expected shortfall of claims amounts, a transform approach for operational risk modelling, and how a quantile-based value at risk approach can be used to appraise an insurer’s economic risk capital. The third session was on “risk transfer and securitisation”. The first paper addressed credit and basis risk arising from hedging weather-related risk with derivatives. The second helped us to understand the insurance-linked securities market, and the third discussed a drop-down excess of loss premium formula.

The final work of the day was a choice between “The actuary’s toolkit software” and the “claims development process and loss reserving”. The first session was intended to illustrate just how far actuarial software for non-life insurance had come in a relatively short time. PCs have been around for more than 25 years, but only in the last few years have they become powerful enough to make innovative methods practical. The first paper showed a reinsurance pricing software tool that combined experience and exposure rating for property excess of loss treaties. The second showed how proprietary software can be used for many actuarial applications in ways that would have been unthinkable just a few years ago. This greatly assists the much wider variety of tasks that actuaries are now performing. Data handling, manipulation, analysis and calculation projections are all much easier in a fraction of the time than they used to take. The power at our fingertips these days is awesome.

The final paper showed how we can use dynamic financial analysis within Solvency II. The other session’s first paper modelled claims development for solvency purposes. It continued with a paper on a Bayesian approach for calculating the prediction error in chain ladder claims reserving, and finished with an analysis of the Bornhuetter Ferguson approach to loss reserving.

Although the work was now complete for day one, we had to change for our Civic Reception and Conference Dinner. The speakers were certainly in their finery. The exceedingly popular Lord Mayor of Manchester welcomed us to her city. The Presidents of the Institute and Faculty told us how pleased they were that the UK had been selected to be the hosts for ASTIN 2008, and finally, the Master of the Worshipful Company of Actuaries, in full regalia, extended his welcome and told us of the charitable works that are performed by this livery company. It seemed that we had hardly sat down to our feast before it was over, and we staggered back to the hotel to prepare for day two.

On Tuesday, at 9am, we had what had threatened to be a complicated and difficult session on copulas. However, Professor Christian Genest, an excellent and experienced speaker, made the subject appear easy and extremely useful to our analytical work. We often have to examine extreme values and their dependence, and we learned how to test, measure and account for this dependence. It was also very entertaining, and an excellent way to start the day.

After coffee, we broke out into different sessions. In one session entitled Dependence modelling, we started on modelling the dependence between interest rates, inflation and investment returns. The second paper looked at the pricing of insurance and financial risks, whilst the third modelled non-life underwriting risk using both the standard formula and internal models, especially for Solvency II. The second session was on “capital allocation and finance” and started by examining capital allocation by percentile layer. The second paper looked at the return attribution analysis of UK insurers, whilst the third considered the uncertainty of past inflation rates. The third session was about “statistical modelling and insurance”. The first paper modelled claims count and stable distributions, and the second used generalised linear models for solvency matters. The session finished with a paper of a strategy that modelled risk over time by geographical areas.

Then it was fun time. The weather was fine and, after a short coach trip, we were at Tatton Park, the home of the third largest English garden show (after Chelsea and Hampton Court), and a wonderful old stately home and park. After a leisurely few hours, we were off to Chester for even more relaxation. However, the boat trip was followed by a walk round the city walls. After dinner, we obediently returned to our coaches at the allotted time to find that we appeared to be nine delegates short. Whoops!

It was now our last day and all had gone well. The nine were safe, having returned earlier on Tuesday under their own steam, and we were all looking forward to the sessions. There were union pickets on the doors, although they did not seem to be objecting to the use of copulas in insurance modelling. It was also Solvency II day. Some actuaries seem to live and breathe this subject, but given its potential importance to our industry and also to our profession, it is easy to see why. The first breakout session was about “Solvency II and risk”. The Solvency II actuary was described. The second paper was on one year non-life insurance risk, and the third was a Bayesian analysis of operational risk. The second session was on “statistical modelling and ratemaking” The first paper was about justifying the bonus-malus experience-rating system by a Poisson model. This was followed by a geographical clustering analysis in ratemaking, and then finally the fitting of a claims severity distribution. The third session was entitled “economic modelling in insurance”. The paper on the dynamic modelling of a non-life insurance portfolio was followed by a model of cross-subsidisation in price regulated markets with the potential for moral hazard. The last paper was on insurance coverage with a premium loading.

We then went straight into our final plenary speaker session. David Ingram, from Standard and Poor’s, talked about Insurance Enterprise Risk Management. This presentation reviewed the objectives, standards and processes that Standard and Poor’s use to assess the economic capital models produced by insurers, to obtain their rating evaluation. We were surprised at the enormous variety of both data volume and quality, and also the results. Given the importance of rating agencies these days, and with the spotlight on them since the recent banking crisis, it was eye-opening to learn how they go about their business.

After lunch, we sat down to the last few sessions. The first was our final break-out. The first topic was “enterprise risk management and catastrophes”. After a paper illustrating the stochastic modelling of catastrophe risks in a dynamic financial analysis model, we had a similar subject on the measurement and transfer of catastrophe risks by simulation analysis. The third paper was a valuation of reinsurance contracts when the liabilities can be described as a fractional Brownian motion type. The alternative subject was “Solvency II and internal models”. The first paper described the dynamic financial analysis of a minimum capital requirement. The second was about the non-life Solvency II model whilst the third was a discussion of Solvency II versus the International Financial Reporting Standard.

Given all the above topics and papers, the worth of full theoretical justification of the practical methods that we currently use, or will use in the future, cannot be overemphasised. To use methods in practice without a full and sound statistical basis is dangerous, even if they work for part of the time. ASTIN stands for such justification.

The afternoon continued with an educational theme. There are plans to develop a global designation in Enterprise Risk Management, supported by a number of major actuarial associations and with a common syllabus. Whilst still in its early stages, we were provided with an update of progress and what the final programme would look like. This is clearly an area for considerable actuarial input in the future, and we will be ensuring that the actuaries working in that field are well prepared.

After the ASTIN General Meeting, the 38th ASTIN was formally closed and the ASTIN banner was passed ceremonially to the hosts of ASTIN 2009 in Finland. We all went off to the Imperial War Museum North, close to the home of the European Champions at the Theatre of Dreams (Old Trafford) for an excellent Gala Dinner. Well done to all those involved.

All the papers and abstracts from the colloquium are available at www.actuaries.org/ASTIN/Colloquia/Manchester/Papers_EN.cfm.