Edward L. Robbins, Samuel H. Cox, and Richard D. Phillips
This paper offers practical guidance to actuaries who are seeking ways to evaluate and manage the output from the stochastic cash-flow-testing process. A commonly expressed opinion about the stochastic approach is that almost all the results are successes, whereas the adverse scenarios are arguably the ones of major interest. This paper responds to the following question: “Given that I have run a large number of stochastic cash-flow-testing scenarios resulting in only a very small number of scenarios landing in the adverse area, or “ruin tail,” how can I use the results of the entire set of observations to better estimate the area under the ruin tail?
We begin the paper with a discussion of the types of variables that could be investigated by using the output from typical simulation models. The choice of variable worth examining appears flexible and could include the accumulated surplus at the end of the time horizon of the scenario, the present value of the accumulated surplus discounted to the beginning of the time horizon, or the lowest risk-based capital (RBC) multiple realized during the time horizon. We use the present value of accumulated surplus in this study.
