nep-rmg New Economics Papers
on Risk Management
Issue of 2013‒08‒05
seven papers chosen by
Stan Miles
Thompson Rivers University

  1. Assessing Systemic Risk in the Brazilian Interbank Market By Benjamin M. Tabak; Sergio R. S. Souza; Solange M. Guerra
  2. An effective equity model allowing long term investments within the framework of Solvency II By Mohamed Majri; François-Xavier De Lauzon
  3. Systematic and non-systematic mortality risk in pension portfolios By Helena Aro
  4. Applicable eventology of safety: inconclusive totals By Vorobyev, Oleg Yu.
  5. One-Year Volatility of Reserve Risk in a Multivariate Framework By Yannick Appert-Raullin; Laurent Devineau; Hinarii Pichevin; Philippe Tann
  6. New Brunswick’s New Shared Risk Pension Plan By Alicia H. Munnell; Steven A. Sass
  7. Liability-driven investment in longevity risk management By Helena Aro; Teemu Pennanen

  1. By: Benjamin M. Tabak; Sergio R. S. Souza; Solange M. Guerra
    Abstract: In this paper, we propose a methodology to measure systemic risk that stems from financial institutions (FIs) interconnected in interbank markets. We show that this framework is useful to identify systemically important FIs. This methodology can be used to perform stress tests using additional information from FIs default probabilities and their correlation structure. We present how to implement this methodology and apply it to the Brazilian case. We also evaluate the effects of the recent global crisis on the interbank market.
    Date: 2013–07
  2. By: Mohamed Majri (SMABTP - SMABTP); François-Xavier De Lauzon (SMABTP - SMABTP)
    Abstract: We propose an effective equity model adapted for medium term and long term risk assessment. One of its specific aspects is to allow an asymetrical dampening of the equity risk (called the dampener effect) conditional to the cyclical level of equity prices and to enable accurate Value At Risk assessements for medium and long term horizons (1 year and beyond). For a set of selected equity indexes we compare its relevancy for the 1-year 99.5% Value At Risk (VaR) assessment with the different releases of the Solvency II dampener equity models. In a second step we test its relevancy for VaR assessments beyond a 1 year investment horizon. We show in our analysis that this alternative model gives quite good results and outperforms widely the others tested. It appears particularly suitable for insurance companies and pension funds given their medium or long term asset management process.
    Keywords: Value-At-Risk, Long term Equity Risk Assessment, Solvency II, Dampener, Standard Formula, Back Testing
    Date: 2013–05–15
  3. By: Helena Aro
    Abstract: We study the effects of non-systematic and systematic mortality risks on the required initial capital in a pension plan, in the presence of financial risks. We discover that for a pension plan with few members the impact of pooling on the required capital per person is strong, but non-systematic risk diminishes rapidly as the number of members increases. Systematic mortality risk, on the other hand, is a significant source of risk is a pension portfolio.
    Date: 2013–07
  4. By: Vorobyev, Oleg Yu.
    Abstract: Totals of the eventological safety system modeling is considered for examples and illustrations, which are intended to demonstrate the main features of the algorithm for calculating the risk of a dangerous event at the company under established the event-related circumstances based on the portfolio of identification indicators of company safety; inter alia the examples and illustrations show the role and functions (in calculating the risk) of the three main event-based figurants in the safety eventological system: the total subject, the total object and the total barrier; and most importantly they reveal the key of eventological approach applicability for the field of safety in the methods for selecting the optimal portfolio of identification indicators of safety providing specified accuracy of estimating risk of the dangerous event for this company by minimal expert costs.
    Keywords: Eventology, applicable eventology, probability theory, event, probability, set of events, algebra of events, mean probable event, value of an event, Gibbsean event-based model, event identification, total subject, total object, total barrier, portfolio of identification indicators, accuracy of estimating risk, minimum cost of expert.
    JEL: C02 C30
    Date: 2013–04–27
  5. By: Yannick Appert-Raullin (Group Risk Management, GIE AXA - GIE AXA); Laurent Devineau (Recherche et Développement, Milliman Paris - Milliman, SAF - Laboratoire de Sciences Actuarielle et Financière - Université Claude Bernard - Lyon I : EA2429); Hinarii Pichevin (Recherche et Développement, Milliman Paris - Milliman); Philippe Tann (Group Risk Management, GIE AXA - GIE AXA)
    Abstract: The one-year prediction error (one-year MSEP) proposed by Merz and Wüthrich has become a market-standard approach for the assessment of reserve volatilities for Solvency II purposes. However, this approach is declined in a univariate framework. Moreover, Braun proposed a closed-formed expression of the prediction error of several run-off portfolios at the ultimate horizon by taking into account their dependency. This article proposes an analytical expression of the one-year MSEP obtained by generalizing the modeling developed by Braun to the one-year horizon with an approach similar to Merz and Wüthrich. A full mathematical demonstration of the formula has been provided in this paper. A case study is presented to assess the dependency between commercial and motor liabilities businesses based on data coming from a major international insurer.
    Keywords: multivariate reserving; correlation; run-off portfolio; prediction error; estimation error; process error; one-year multivariate reserve risk; claims development result; Solvency II; aggregation; dependency; lines of business
    Date: 2013–07–30
  6. By: Alicia H. Munnell; Steven A. Sass
    Abstract: Employer defined benefit pension plans have long been an important component of the U.S. retirement system. Although these plans are disappearing in the private sector – replaced by 401(k)s – they remain the prevalent retirement plan arrangement in the public sector. But these public sector defined benefit plans are currently under financial pressure, as two financial crises since the turn of the century have caused liabilities to soar and assets to plummet. The response so far among state and local plan sponsors has been to suspend or eliminate cost-of-living adjustments, cut back sharply on benefits for new employees, and raise employee contributions. Some states have also introduced a defined contribution component. While the cutbacks have sharply reduced future costs, they have been ad hoc and unexpected. The question is whether a more orderly and predictable way can be devised to share risks, and perhaps head off trouble in advance. The Netherlands certainly offers one model of risk sharing; this brief discusses an adaptation of the Dutch approach closer to home –namely New Brunswick’s Shared Risk Pension Plan introduced in May 2012. The discussion proceeds as follows. The first section reviews the problem of risk in employer defined benefit plans. The second section describes New Brunswick’s response – the Shared Risk design and the regulatory framework for supervising such plans. The third section discusses the response of union representatives of workers covered by the new program. The fourth section considers what lessons U.S. plans can draw from the New Brunswick approach. The final section concludes that the Shared Risk approach is an important evolutionary step, and potentially an attractive alternative to the traditional defined benefit plan design.
    Date: 2013–07
  7. By: Helena Aro; Teemu Pennanen
    Abstract: This paper studies optimal investment from the point of view of an investor with longevity-linked liabilities. The relevant optimization problems rarely are analytically tractable, but we are able to show numerically that liability driven investment can significantly outperform common strategies that do not take the liabilities into account. In problems without liabilities the advantage disappears, which suggests that the superiority of the proposed strategies is indeed based on connections between liabilities and asset returns.
    Date: 2013–07

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