Pricing Insurance Risk With Steve Mildenhall and John Major

The Not Unreasonable Podcast

Nobody knew how to price volatility until now. I bet you're surprised!
This isn't hyperbole, Steve Mildenhall and John Major have a deep and thorough understanding of all the relevant literatures and have been part of a loosely collaborative team of academics and actuaries working out the details of a coherent, actionable theoretical foundation for pricing insurance for their entire careers. Now that they're both retired they've delivered us the tome the actuarial profession needs.
Their new book: *Pricing Insurance Risk: Theory and Practice* is an absolute masterpiece. It is theoretically sound and immensely practical. Until today no financial institution could choose a sophisticated portfolio model that wasn't hiding biases or inefficiencies that had to be 'band-aid-ed' over with coarse heuristics. Very importantly how does one calculate the margin required to service the capital base when the risks vary so much? The science of managing a portfolio of incompletely diversified, highly volatile financial instruments has gained serious ground with this book.
Steve Mildenhall is head of analytics at Qualrisk, an Insurance consulting firm, formerly assistant professor of actuarial science at St. John's University, and before that CEO of analytics at Aon. This is Steve's fifth appearance on this show. John Major is principal at Major analytics and the former director of actuarial research at guy carpenter.
youtube: https://youtu.be/ZQHpMVH7d9s
show notes: https://notunreasonable.com/?p=7694
Steve and John did a tutorial on this material and more with some technical examples you can see here: https://www.youtube.com/@ermdiner/
Here is a link to the spreadsheet used in the tutorial:
https://docs.google.com/spreadsheets/d/1CV3sF52cjPH8mw6T4E-jOfCNDagCptRs4xBZTug8Z0A/edit?usp=sharing
Here are some Not Unreasonable Podcast Episodes about related content:
Samir Shah on Innovating Capital
https://www.buzzsprout.com/126848/8171216
and
Steve on the Macro History of insurance Part 1:
https://www.buzzsprout.com/126848/8121657
And Part 2
https://www.buzzsprout.com/126848/8507268
In the show we cover:
How do you think of the cost of running the capital side of insurance?
2:06
The importance of connecting the value to the value of the original customers.
5:18
What is the value of reinsurance?
7:34
The timing of Hurricane Andrew relative to the early cat models.
18:44
The history of cat models in the 60s.
21:22
What the CEO’s are disagreeing about in volatility?
33:04
What could possibly justify 50% margins in these companies?
42:59
What doesn’t make sense about the intentionality argument.
46:28
What is the market price for risk?
48:02
The difference between allocating capital vs. allocating margin.
1:01:39
What’s the right metric for determining performance of a reinsurance company?
1:08:07
The further removed you get from loss, the cheaper the capital is as a percent of capital, but the more expensive the insurances are.
1:22:59
How long did it take for these ideas to emerge? How did they evolve?
1:24:55
The key to unlocking a lower cost of capital
1:29:07
What is the required return in a regulated environment?
1:32:55
The amount of leverage you get is huge.
1:48:24
Steve’s envelope theorem and how it works.
1:53:18
What’s the insight that underlies the ability to determine bounds for spectral measures?
1:56:46
Characterizing the worst risk-adjusted expected outcome.

Twitter: @davecwright
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