Reserving for Infrastructure Service Contracts

By Thomas Emil Wendling

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Abstract

In volume 8, no. 2 of Variance, a technique using actuarial present value was applied to infrastructure service contracts (ISCs) as a way to manage obsolescence in portfolios of fixed, physical capital assets. The theory put forth in that paper was purely deductive and used basic financial mathematics to posit some untested hypotheses. In contrast, this paper documents a simulation experiment using rudimentary machine learning to computationally demonstrate the idea that culling and replacing obsolete physical assets might be critical to maximizing the recovery of significant efficiencies expressible as shareholder value. We will simultaneously create an objective definition of obsolescence and describe a robust stochastic reserving method for long-term ISCs providing asset replacement coverage in the contingent event of obsolescence.

Citation

Wendling, Thomas Emil, "Reserving for Infrastructure Service Contracts," Variance 12:2, 2019, pp. 199-213.

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Mission Statement

Variance (ISSN 1940-6452) is a peer-reviewed journal published by the Casualty Actuarial Society to disseminate work of interest to casualty actuaries worldwide. The focus of Variance is original practical and theoretical research in casualty actuarial science. Significant survey or similar articles are also considered for publication. Membership in the Casualty Actuarial Society is not a prerequisite for submitting papers to the journal and submissions by non-CAS members is encouraged.