Decisional optimality in life reinsurance modelingRORAC net of reinsurance) : Profitability S1 =...

IAA colloquium - Oslo 2015

Maxence Saunier

maxence.saunier@aonbenfield.com35 rue de la fédération, 75015 Paris, FRANCE

ReferentsArnaud ChevalierFrédéric Planchet

Decisional optimality in lifereinsurance modeling

Summary

Context and approach

Formal development and mean-variance efficient frontier

Simulation and optimisation results

Conclusion

Decisional optimality in life reinsurance modeling 2/26

Insurers’ margins are stressed witheconomic turmoil : cost of reinsurance is questioned towardsits efficiency.

Diverse regulations assess for reinsurance impacts

Financing solvency through- enough own funds- subordinated debt- cession in reinsurance

Context Context and approach

3/26Decisional optimality in life reinsurance modeling

« Increasing the means or reducing the needs »

Reinsurance on life protection product(perimeter)

Which indicators to optimise for the cedant ? (objective function)

Which parameters to be set ?(decision variables)

Our approach Context and approach

→ Formal and numerical optimisation program

Our approach Context and approach

Existing approaches- Stop loss optimality & price optimisation- Financial analysis with Markowitz and de Finetti

Need to give a precise definition of a reinsurance structure

- perimeter (portfolio(s), LOB(s), entity, …)

- trigger (cat or non cat)

- form (quota share, surplus, excess of loss, aggregate, …)

- level parameters (cession rate, retention amount, limits, …)

- commercial parameters (price for non-prop, fixed or profit commission)

- duration

Summary

Conclusion

Markowitz efficient frontier

Markowitz’s analysis (1958) with n risk assets : A = ( ai )i

without condition on A → straight linewith condition on A in equality → hyperbola

Problem : efficient frontier is not defined everywhere(negative cession rates)

Mean variance efficient frontier

→ need for other constraints on ai

Constraints in inequalities and convex optimisation

de Finetti (1940) resolution. Each ai is expressed as :

de Finetti optimisation Mean variance efficient frontier

- 200 000 400 000 600 000 800 000 1 000 000

ltat c

Volatilité résultat conservée

de Finetti optimisation

→ Mean-variance efficient frontier, defined everywhere

withoutreinsurance

Limits for the formal analysis

individual cession rates to define in the treaty

only one couple of measures (mean – variance)

no account for regulatory environment (capital measure)

complexity if other reinsurance parameters (commission, …)

limits in normality assumptions (cf. conclusion)

→ Use of simulation and empirical distributions

Summary

Conclusion

The model Optimality with simulation

Stochastic multi-year modeling, for each line in the portfolio Recording each ceded cashflow for each layer of reinsurance Indicators gross and net of reinsurance :

- Distributions of 1-year result and NAV- best estimate over 30 years for S2 calculations

Cumulative distributions after Quota Share structures12/26Decisional optimality in life reinsurance modeling

The outputs Optimality with simulation

Sensitivities on- mean- standard deviation- variation ratio- percentiles- Tail Value-at-Risk- requirements in S1 et SCR S2

functions of- Quota share : cession rate- Surplus : retention- Limits- Commission rate- Profit sharing rate

→ Enable to build risk-reward diagram to compare structures13/26Decisional optimality in life reinsurance modeling

Simulation and mean-variance results

- 200 000 400 000 600 000 800 000 1 000 000

ltat c

Optimality with simulation

Simulation and mean-variance results Optimality with simulation

- 200 000 400 000 600 000 800 000 1 000 000

ltat c

→ new measure : « Mean ceded result » represents total cost of reinsurance

Risk measures against mean ceded resultOptimality with simulation

Δ (brut-net) coeff. variationsMinimum

TVaR5% TVaR0,5%

→ Exhaustive plotting gives various interpretations16/26Decisional optimality in life reinsurance modeling

Effects on capital requirements Optimality with simulation

Requirement S1

Requirement S2

→ optimisation S1 : form of reinsuranceoptimisation S2 : duration of reinsurance

Focus on treaty duration Optimality with simulation

Effect on VIF (Value In Force) and SCR

SCR sub modules for a 80% quota share, against treaty duration

+ 1 year = + 4% reduction of SCRLife

Local and global optimality ? Optimality with simulation

Definition of profitabilities (RORAC net of reinsurance) :

Profitability S1 =

Profitability S2 =

→3 indicators in the same diagram to analyse reinsuranceefficiency on :

capital & risk reductionvs.

value reduction

𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀 𝑀𝑀𝑀𝑀𝑛𝑛 𝑟𝑟𝑀𝑀𝑟𝑟𝑟𝑟𝑟𝑟𝑛𝑛𝑆𝑆1 𝑀𝑀𝑀𝑀𝑛𝑛 𝑟𝑟𝑀𝑀𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑀𝑀𝑟𝑟𝑀𝑀𝑀𝑀𝑛𝑛

𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀 𝑀𝑀𝑀𝑀𝑛𝑛 𝑟𝑟𝑀𝑀𝑟𝑟𝑟𝑟𝑟𝑟𝑛𝑛𝑆𝑆2 𝑀𝑀𝑀𝑀𝑛𝑛 𝑟𝑟𝑀𝑀𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑀𝑀𝑟𝑟𝑀𝑀𝑀𝑀𝑛𝑛

Profitability S1 Profitability S2

New efficient frontiers Optimality with simulation

Comparison between proportional structures

- reducing net required capital with same mean net result- increasing mean net result with same net required capital

Comparison with non-proportional structures

- allows to determine price ranges in which non-proportionalstructures (defined by their price) could be more interesting

About non-proportional reinsurance Optimality with simulation

No proportional share in good or adverse scenarios

No proportional price

Effects on risk & capital

XS per head XS CAT event XS pandemic (aggregate)

Risk Volatility reduction Peak risk Mean term mortalitydeviation

CapitalNo significant impact of

capital requirement(duration)

Effect on CAT scenario in S2 and C9

Effect on sub-moduleSCRCAT in modules Life &

Health

→ limitation of duration

→price negociation

Our study suggests a method to compare reinsurancestructures according to risk - reward - capital criterion (for agiven perimeter/segmentation)

To go further :

- Equations of the efficient frontiers and normalityassumption

- Analysis with VIF as reward measure- Combining portfolios in a reinsurance treaty- Parameters to the limits : alternative reinsurance- Placement optimisation : shares, ratings and guarantees

(with SCR counterparty as a criteria)

ConclusionConclusion

Thank you for your attention-

Questions

Annex 1 – Réassurance Solvabilité 1

Decisional optimality in life reinsurance modeling

Annex 2 – mean convergence

Graphe de convergence de statistiques de la variable aléatoire « résultat net », par nombre de simulation

Annex 3 – standard deviation convergence

Graphe de convergence de la volatilité de la variable aléatoire « résultat net », par nombre de simulation

Annex 4 – Convex non linear optimisation

Program

Lagrangian

Conditions K.K.T

Annex 5 – Model in Lifemetrica

Annex 6 – Portfolio

Cumulative distribution of sums insured

Density of sums insuredby age

Annex 7 – States C8 C9

http://www.acp.banque-france.fr/fileadmin/user_upload/acp/Controle_prudentiel/Documents_a_remettre_en_assurance/NI-cess-reassurance_222.pdf

Annex 8 – SCR Counterparty (cf. SCR.6. SCR Counterparty risk module)

Annex 9 – Monetisation

Annex 10 – Quota Share

Annex 11 – Surplus

Decisional optimality in life reinsurance modelingRORAC net of reinsurance) : Profitability S1 =...

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