Implications of Reinsurance and Reserves on Risk of Investment Asset Allocation

DFA makes possible a greater integration of asset management with underwriting management. This paper looks at how investment risk and reinsurance can affect the overall risk to the company, and how the two can be managed simultaneously. A significant underwriting variable is the risk of loss development, and models of the development risk are presented, with some methodology for determining which one is most appropriate given the data at hand. Term-structure models are key to asset risk modeling, and a test of these models is proposed.