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

56 RISKINESS LEVERAGE MODELSthe starting surplus has been reduced to 7,250,000 in order tobring the mean return on the total back up to 14%. Running thesimulations, the 2% level on income is actually (3,237,000) butwe ran the TVAR at (3,300,000). The essential point is that theresults look reasonable, and the rule would allow release of stillmore surplus.What is omitted in the calculation is the value of the 1,750,000already released from the original 9,000,000 surplus. What thisis worth depends on how the released surplus is going to beused. At the very least, this should be worth the risk-free incomefrom it. Classical financial theory would suggest that it shouldbe evaluated at the firm’s cost of borrowing.Measures other than TVAR were also run on the same basicsituation, but are not shown in the spreadsheet. They were oftwo types. One was VAR measures, using a 1% interval aroundthe VAR values. This measure says, given that the total loss isat a particular level, how much of it is from the different contributions.The other class of measures is the power measures,as in Equation (3.10). Each measure is a power of (¹ ¡ x) for¹>x, and zero otherwise. In other words, these are downsidemeasures. 16 The powers 0 and 1 are respectively the mean downsidedeviation and the semivariance. The others could be called“semiskewness,” “semikurtosis,” and so on–but why bother?The results for VAR are quite similar to TVAR, except at the10% level. This is because of the particular conditions we havefor variability and correlation, and will not be true in general.16 Note that in contrast to the earlier discussion on losses where the downside is outcomesgreater than the mean, here on return to surplus the downside is outcomes less than themean.