Mathematical and statistical assessment of the solvency of financial institutions

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Insurance companies, (investment) banks, pension plans and governments are exposed to several risks that can threaten their ability to protect the savings of millions of Canadians. Therefore, this research program is intended to assess the solvency of financial institutions in three different areas where they could fail. First, we will look at how life insurance companies manage exposure to equity and interest rate risks in a popular line of business known as segregated funds (variable annuities). Using mathematical models that simulate realistic scenarios, the intent is to measure how common risk management strategies typically work and how we can improve risk management whenever modelling assumptions do not match reality. We would like to raise awareness among actuarial researchers on the mathematical aspects of managing these products. We also seek to provide general guidance to insurers and regulators as to how risk management can be improved to ensure that the savings of retirees are better protected. Second, corporate bonds are very commonly used by banks, insurers and pension plans to manage their liabilities. But the lessons we learned from 20082009 is that even investment-grade bonds can be hit hard by credit risk. Therefore, we seek to improve the assessment of credit risk in these bonds. We propose statistical methods to accurately estimate the creditworthiness of corporations using prices of credit derivatives that are highly liquid and traded by experts (e.g. credit default swaps). We would like finance researchers and risk managers to use this approach as a complement to popular ratings-based methods. Given that trillions of dollars are traded in corporate bonds, the potential impact can be enormous, especially for Canadian insurers and pension plans. Few people know that hurricanes have made landfall in Canada more than 25 times since 1950. They provoked storm surges, heavy rainfall and floods causing hundreds of millions of dollars in damage. Very recent climatology research has shown that hurricanes tend to migrate towards the poles (north or south), indicating that in a not-so-distant future, the risk posed by these storms is likely to increase over Eastern Canada. We will design and analyze actuarial and statistical models of hurricane risk in light of the connections between the frequency and intensity of these events. The impacts of this dependence relationship in catastrophe risk modelling and management have been rarely investigated, and this should help reduce the societal impacts of future hurricanes over the country. In the past, the latter three risks have had an important impact on banks, insurers, governments, pension plans, etc. Therefore, this research program is meant to develop tools to assess and manage these risks with an eye to increasing the solvency of financial institutions and in turn, protect the savings of the public.