Portfolio Selection for Insurance Linked Securities: An Application of Multiple Criteria Decision Making

Dominic Ho () and Michael Sherris ()
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Dominic Ho: School of Risk and Actuarial Studies, Australian School of Business, University of New South Wales
Michael Sherris: School of Risk and Actuarial Studies and ARC Centre of Excellence in Population Ageing Research, Australian School of Business, University of New South Wales

No 201203, Working Papers from ARC Centre of Excellence in Population Ageing Research (CEPAR), Australian School of Business, University of New South Wales

Abstract: The insurance linked securities (ILS) market is an increasingly important alternative asset class for which risk and return analysis differs from other asset classes. Measures of portfolio risk and return for an ILS portfolio are based on the expected losses and expected excess returns over the risk free rate. Multiple criteria decision making (MCDM) has found successful applications to many real world decision problems. This paper examines the application of two popular MCDM methods, Analytical Hierarchy Process (AHP) and ELECTRE III, to ILS portfolios. These methods are used to screen the securities before constructing portfolios using linear optimisation with constraints. The objective function is to minimise the portfolio expected loss for a given level of expected excess return. Upper and lower bounds are also placed on the investment in each individual ILS. The results demonstrate the benefits from applying MCDM to ILS portfolio selection.

Keywords: Portfolio selection; insurance linked securities; multiple criteria decision making; Analytical Hierarchy Process; ELECTRE (search for similar items in EconPapers)
JEL-codes: C61 G11 G22 G32 (search for similar items in EconPapers)
Pages: 31 pages
Date: 2012-05
New Economics Papers: this item is included in nep-ias
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