PROCEEDINGS May 15, 16, 17, 18, 2005 - Casualty Actuarial Society

MODELING FINANCIAL SCENARIOS 203idends may (or may not) reverse the long-term trends of lowerdividends.Estimation of this process is analogous to the inflation processdescribed above. The mean reversion speed of the series is notsignificantly different from zero. Given the long-term changes inhistorical dividend patterns, the log of dividends appears to be arandom walk around its starting value.Real Estate (Property)Given that the real estate portfolios of insurers are dominatedby commercial properties, we use the National Councilof Real Estate Investment Fiduciaries (NCREIF) pricing indexto capture the quarterly returns on commercial properties (seehttp://www.ncreif.com). The NCREIF data are generated frommarket appraisals of various property types, including apartment,industrial, office, and retail. While the use of appraisal datamay only approximate sharp fluctuations in market valuation,publicly obtainable transaction-based real estate data were notavailable.Using quarterly return data from NCREIF from 1978 to2001 (http://www.ncreif.com/indices/), we estimated the followingOrnstein-Uhlenbeck model for real estate:d(re) t = ·re (¹ re ¡ (re) t )dt + ¾ re dB re : (3.18)We estimated two separate models including the levels of inflation.While we expected inflation to provide additional explanatorypower for real estate returns, the results were not significant.The following parameters were used to project quarterly real estatereturns:·re ¹ re ¾ re1.20 2.3% 1.3%