ENID not Blyton

ENID is a term widely used, just generally not in South Africa. For some reason we didn’t import the term along with most of Solvency II.

This has nothing to do with the Famous Five. While it is most common in the general insurance space, it is relevant across the spectrum of risk management and assumption setting.

Events Not In Data or “ENID” is the forgotten cousin of “what to do with outliers in your data”.

Outliers and where to find them

Outliers are observed values substantially different from others in a sample. Some more formal definitions include:

“An outlier is an observation that lies an abnormal distance from other values in a random sample from a population”

“an outlier is an observation point that is distant from other observations”

Not these sort of outliers. Entertaining book though.

How to deal with outliers?

Simple question, complex answer. It depends a great deal on the context.

Ultimately you need to make the judgement call “are these outliers under- or over-represented in the data”. Continue reading “ENID not Blyton”

Why the last 7 years have felt rough

We’ve been in and out of recession. We’ve had more political drama than I’d like for a lifetime. We’ve had several lifetimes of obvious, unresolved corruption and fraud. We’ve had a volatile and depreciating currency by and large.

This graph brought it home a little to me:

You can see the sharp decline in South Africa’s GDP measured in USD terms over the period.

Egypt, despite an Arab Spring has not experienced the same precipitous decline. Nigeria’s recent troubles are now also clear.

Our USD GDP is below the point it was in 2010, offsetting a brief period after 2010 when it was still increasing. So maybe it’s more about the last 5 years than the last 7.

Of course, that is the wrong chart. GDP is affected by population growth and what we experience as individual citizens within a country is closer to GDP per capita. Continue reading “Why the last 7 years have felt rough”

Book Review: Loss Coverage – Why Insurance Works Betters with Some Adverse Selection

In their book, Loss Coverage: Why Insurance Works Better with Some Adverse Selection, Pradip Tapadar and Guy Thomas propose an interesting point that adverse selection may not be as harmful as many actuaries believe. They actually go further and suggest that, at least from a policy perspective, adverse selection may be a good thing.

This is particularly relevant given the ambition of some InsurTech players to hyper select risks or price on many more factors than are traditionally used in order to gain a competitive advantage.  Tapadar and Thomas don’t argue that it will be individual insurers’ interests to allow adverse selection, but if these companies are successful it may then have implications for policy makers.

Incidentally, there are some interesting reasons for insurers themselves (with commercial interests) to be wary of selecting too well, counterintuitive as that may seem, but more on that for another time. Continue reading “Book Review: Loss Coverage – Why Insurance Works Betters with Some Adverse Selection”

Board game recommendations (and reasons to use them)

I’ve played plenty of board games in my life. I’m not (only) talking about Monopoly.

I went to Cambridge (to visit, very sadly, not to study) in 2003. I found an awesome board game store and tried to buy Diplomacy.  The incredibly wise assistant basically forced me to buy Settlers of Catan before he would allow me to buy Diplomacy.

About Settlers of Catan

I have played hundreds of hours of Settlers, and recently gave Diplomacy away never having played it. I still believe it’s an awesome game.  (Strategy, relationships, IQ and EQ, competition and a little backstabbing. What’s not to like?) However, it  requires having enough people, the right sort of people. enough time (a weekend apparently is ideal) and ideally a couple people who have played before because it is complicated.

Now, Settlers has plenty of scope for tension as it is.  I kicked my best friend out of my flat once after a kingmaking incident. I’ve had arguments with significant others over games. And this is Settlers, not Diplomacy.

Do I recommend Settlers? Continue reading “Board game recommendations (and reasons to use them)”

Modelling one side of a two-sided problem

Ah models, my old friends. You’re always wrong, but sometimes helpful. Often dangerous too.

A recent article in The Actuary magazine addressed whether “de-risking in members’ best interests?”  I say “recent” even though it’s from August because I am a little behind on my The Actuary reading.

In the article, the authors demonstrate that by modelling the impact of covenant risk, optimal investment portfolios for Defined Benefit (DB) pensions actually have more risky assets than if this covenant risk is ignored.

The covenant they refer to is the obligation of the sponsor to make good deficits within the pension fund. Covenant risk then is the risk that the sponsor is unable (typically through its own insolvency) to make good on this promise.

On the surface it should seem counterintuitive that by modelling an additional risk to pensioners, the answer is to invest in riskier assets, thus increasing risk.

The explanation proffered by the authors is that the higher expected returns from riskier assets allow the fund to potentially build up surplus, thus reducing the risks of covenant failure.

I can follow that logic, particularly in the case where the dependence between DB fund insolvency and sponsor default is week. It doesn’t mean it’s a useful result. Continue reading “Modelling one side of a two-sided problem”

reserve discount and inflation part 3 is still coming

I need a little more time (read: a weekend) to finish the third part of my series on inflation and discounting for non-life claims reserves.  Keep an eye out for it next week, along with some posts on systemic risk, equity investments and risks to pension fund sponsors and a book review.