The Quest For The Perfect Reinsurance Price

By Igor Nikitin, ASA, MAAA CEO, Nice Technologies LLC

Based on a true story of“Pricing Reinsurance or Similar Risk Transfer Transactions Involving Life Insurance, Annuities, or Long-Duration Health Benefit Plans” by the Actuarial Standards Board.

Once upon a time in the Kingdom of Reinsurance Pricing, in a great enterprise castle, lived a Principal. One day, the Principal decided to obtain the perfect reinsurance price. So he summoned his actuarial hero to find and deliver this perfect price to him.

“My lord,” asked the actuarial hero, “how will I know what the perfect price looks like?”
The Principal pondered the question and handed our hero a huge scroll outlining the Principal’s Desires. The scroll included profitability metrics and targets, relevant characteristics of the reinsurance, and even a description of the entity he wished to do business with. All of it, of course, written in a very vague language.

Principal’s Desires in hand, the actuary rode into the Experience Forest. There, under the great Tree of Reflection, our hero studied the data of the past to understand its implications for the present and the future. He compared what was with what was expected, seeking wisdom to guide his quest.

Beyond the forest, our hero emerged on the shores of the Sea of Profitability. To make it across, he had to consider every aspect that could make the journey both profitable and sound. From the Principal’s Desires to the characteristics of the quest, from long-term financial implications to the hidden risks beneath the waves. Only when every relevant factor was considered could the voyage be safe.

After days of sailing through the Sea of Profitability, the actuarial hero arrived at the Assumptions Fortress, built on the ancient ASOP stones of Data Quality and Credibility. The citadel was filled with scholars debating mortality, expenses, lapses, and investments. Inside, our hero carefully forged each assumption, not too optimistic, not too pessimistic, and sometimes tempered with margins for uncertainty. Once complete, he packed every assumption into his quiver, checking for consistency and recording carefully what each was meant to overcome and how it was created. These records would help future adventurers complete their quests faster and better than ever before.

Beyond the fortress rose the Modeling Tower, around which many model dragons circled in the clouds. Some were small and harmless, while others were enormous and fierce. The mightiest of them all was the Stochastic Dragon, which devoured data by the terabyte and gold by the minute. To defeat the modeling dragon, our hero had to choose one of suitable ferocity and study it carefully before attempting to tame it. Only after fully understanding the dragon’s nature and verifying that it possessed the required wisdom could the mighty duel to tame it begin.

Once the dragon was tamed, our hero flew on its back to the Risk Evaluation Arena, where knights of the ancient Order of Outcomes competed against the Uncertainty itself.

There, the hero tested the strength of his assumptions in fierce sensitivity battles and, aided by his mighty model dragon, emerged victorious. As a reward, glimpses of the future were bestowed upon him to aid in his quest for the perfect reinsurance price.

Next, the hero traveled to the Governance Mountains, where wise overseers ensured the work was sound, the model dragon validated, the assumptions documented, and the controls strong. For in this land, no quest was complete without good governance.

The hero then journeyed down the Reliance River, reflecting on all the help and advice he had received along the way. He recorded it carefully to give due credit and pondered whether the magic cat was truly qualified to give investment advice.

Before the actuary could return home, one last peril awaited: the vast and restless Documentation Sea. To cross these waters safely, our hero had to chart every detail, each assumption, each rationale, each source of data, and even the margins added for uncertainty. For in this kingdom, unwritten work was as good as undone. Storms rose when models were adjusted without record or when new data were used but the reasoning was lost. Only those who kept clear records in their captain’s journal found calm seas and safe passage.

At long last, the actuary returned to the Principal’s castle.
The Principal asked, “Have you found the perfect reinsurance price?”
The actuary bowed. “Not just the price, my lord, but also the story of finding it, written in risk, data, and judgment.”

Having completed his quest, our hero visited the Renewal Camp to rest and reflect on his adventures. Some quests he decided to renew, some to revise, and others to close. As always, he recorded in his journal the story and reasons for each decision. And it is from that very journal that we came to know this tale.