Browsing by Author "Koskinen, Lasse"

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  • Luoma, Arto; Puustelli, Anne; Koskinen, Lasse (2008)
    In this paper a Bayesian approach is utilized to analyze the role of the underlying asset and interest rate model in the market consistent valuation of life insurance policies. The focus is on a novel application of advanced theoretical and computational methods. A guaranteed participating contract embedding an American-style option is considered. This option is valued using the regression method. We exploit the flexibility inborn in Markov Chain Monte Carlo methods in order to deal with a fairly realistic valuation framework. The Bayesian approach enables us to address model and parameter error issues. Our empirical results support the use of elaborated instead of stylized models for asset dynamics in practical applications. Furthermore, it appears that the choice of model and initial values is essential for risk management.
  • Puustelli, Anne; Koskinen, Lasse; Luoma, Arto (2007)
    In this research we model the claim process of financial guarantee insurance and predict the pure premium and the required amount of risk capital. The used data is from the financial guarantee system of the Finnish statutory pension scheme. The losses in financial guarantee insurance may be devastating during an economic depression (that is, deep recession). This indicates that the economic business cycle, and in particular depressions, must be taken into account when the claim amounts of financial guarantee insurance are modelled. A Markov regime-switching model is used to predict the number and length of depression periods in the future. The claim amounts are predicted by using a transfer function model where the predicted growth rate of real GNP is an explanatory variable. The pure premium and initial risk reserve are evaluated on the basis of the predictive distribution of claim amounts. Bayesian methods are applied throughout the modelling process. For example, the Gibbs sampler is used in the estimation of the business cycle model. Simulation results show that the required amount of risk capital is high even though depression is an infrequent phenomenon.
  • Ronkainen, Vesa; Koskinen, Lasse; Koskela, Laura (2008)
    In the EU the supervision of the insurance industry is expected to step into the new Solvency II framework within some years. The new framework will mean a fundamental update for both valuation and solvency requirements. Instead of just offering a standard formula for calculating the solvency capital requirement, in Solvency II insurance companies will be encouraged to develop internal models that are expected to be able to assess numerous effects which would not be easily quantified using the “one fits all” standard approach. However, to develop an internal model that will satisfy the approval criteria is a major project, during which the model builders and implementers will be faced with serious challenges.
  • Kaliva, Kasimir; Koskinen, Lasse; Ronkainen, Vesa (2007)
    There is a major trend in the insurance sector towards arbitrage-free valuation of insurance liabilities and assets. The assumption of no-arbitrage is fundamental in financial modelling. This paper surveys assumptions of arbitragefree modelling and studies their consequences for the use of internal model in insurance. The model uncertainty arises as a particularly severe problem under the assumption that the conditions of arbitrage-free complete market theory do not hold and all participants in the market are not fully rational. We argue that the approximation errors of these idealistic assumptions are generally larger in insurance applications than elsewhere in the financial sector. Hence, the model uncertainty plays a particularly important role in the use of internal models. This should be taken into account in the development of the models and in risk management practice. Finally, we present some known Bayesian methods that might be useful for managing the model risk.
  • Alvarez, Luis; Koskinen, Lasse (2007)
    Vakuutusvalvontaviraston julkaisusarja. Monisteet 3
    Tämä moniste on tarkoitettu aktuaaritutkinnon suorittajille sijoitustoiminnan osuuden oppimateriaaliksi. Toivomme siitä olevan hyötyä myös muille rahoituksen teoriasta ja vakuutusalasta kiinnostuneille. Monisteen tarkoituksena on perehdyttää lukija rahoituksen perusteoriaan ja tarjota sitä kautta välineistö syvemmän teorianmuodostuksen ymmärtämiseen sekä soveltamiseen. Lukijan matematiikan lähtötiedoiksi oletetaan todennäköisyyslaskennan ja stokastisten prosessien sekä tilastotieteen perusteet. Lisäksi rahoituksen perusteet oletetaan tunnetuksi esimerkiksi Helsingin yliopiston kurssin rahoituksen matematiikkaa tasoisesti.
  • Korhonen, Pekka; Koskinen, Lasse (2008)
    In this paper, we explore critical aspects related to the use and development of internal models in insurance companies’ risk and capital management. Our aim is to find out how crucial the various risk factors of internal models are for successful performance of essential management sub-tasks. The problem is approached hierarchically starting from relevant management sub-tasks, then analyzing the possible causes for the failure of the firm, and finally ending up with an analysis of the most important risk components which have to be taken into account when internal models are used and developed. As source information for causal and risk factors, we use a cause effect model of the European insurance supervisors and an international insurance survey. The problem is formulated as a multiple criteria decision making task with a hierarchical structure. We use the Analytical Hierarchy Process as a planning tool to analyze management criteria, causal and risk factors. The evaluation is carried out by a panel consisting of senior managers of Finnish insurance companies. As a result, we obtain a list and rank order of the key risk components for the use and development of internal models. The results also illustrate the potential usefulness of decision science tools when making subjective decisions in the context of internal models.
  • Kaliva, Kasimir; Koskinen, Lasse (2006)
    Insurance Supervisory Authority. Research reports 2
    This paper proposes an autoregressive regime-switching model of stock price dynamics in which the process creates pricing bubbles in one regime while error-correction prevails in the other. In the bubble regime the stock price depends negatively on inflation. In the error-correction regime it depends on the price-dividend -ratio. We find that the probability of regime-switch depends on exogenous inflation and lagged price. The model is consistent with Shleifer and Vishny’s theoretical noise trader and arbitrageur model and Modigliani’s inflation illusion phenomenon. The results emphasize the importance of inflation and the price-dividend -ratio when assessing investment risk.
  • Kaliva, Kasimir; Koskinen, Lasse (2008)
    In this paper we quantify the risk caused by the crash of a pricing bubble in the US stock market by utilizing a recently introduced econometric bubble model. The skewness and kurtosis are shown to vary widely with the price-dividend ratio. Simulation experiments quantify how the moments and VaR of the predictive distribution depend on the holding period, the price-dividend ratio and inflation. This information is useful in deciding on market timing and needed risk capital. In addition the analysis of higher moments support the old wisdom that stocks are a more attractive investment in the long run than in the short run.
  • Koskinen, Lasse (2007)
    Suomen Tilastoseuran vuosikirja
    Tässä artikkelissa pyritään kuvaamaan yleistajuisesti tilastollisten menetelmien roolia vakuutusyhtiön riskienhallinnassa. Tarkastelukulmana on moderni riskienhallinta ja tilasto-tieteen suhde muihin kvantitatiivisiin tieteisiin. Erityisesti pohditaan alan kehitystrendien tarjoamia mahdollisuuksia.