Abstracts and Reviews 73

063009 (MOl) practically-oriented minds.

Markov models and optimization.
Davis M.H.A., Monographs on Statistics and Applied
Probability, Chapman and Hall, 1993, 295 pp.
Stochastic control theory has for many years attracted
the interest of actuarial researchers, since there are many
practical insurance problems that can be expressed by
means of this theory. Continuous-time stochastic control
theory has until now achieved most of its results in the
domain of systems driven by stochastic differential
equations. This is due to the close connection with the
theory of partial differential equations and to the fact
that that theory is so well-developed. The limitations of
the theory are that the systems that can be studied in
many cases are too far from the real situations.
This book presents a new direction which studies
piecewise-deterministic Markov processes, so-called
PDP models. These models can be made much more
realistic, although they pose new problems as regards
finding solutions. The models are connected with
systems of integro-differentktt equations for which there
is no unified theory such as exists for partial differential
equations. Such integro-differential equations can,
however, be solved by a simple recursive method that
allows efficient computation.
The table of contents of the book is as follows:
1. Analysis, probability and stochastic processes
2. Piecewise-deterministic Markov processes
3. Distributions and expectations
4. Control theory
5. Control by intervention
Appendix: Jump processes and their martingales.
(B. Palmgren)
Keywords: Stochastic Processes, Markov Processes,
PDP models.
063010 (MOl)
Practical risk theory for actuaries.
Daykin C.D., Pentiklinen T., Pesonen M., Mttei-
lungen der Vereinigung schweizerischer Versiche-
rungsmathematiker, Heft I, 1994, pp. 98.
Over the years, the book Risk Theory: The stochastic
basis of insurance has evolved from a concise mono-
graph to a voluminous book now entitled Practical risk
theory for actuaries that is meant as a replacement to
the older book.
The successor of the late R.E. Beard is C.D. Daykin
who joined his effort to those of the other authors to
write - in fact - a new book more up to date and for the
The book is divided in two parts. Part I, Foundations of
Practical Risk Theory, covers the standard basic themes:
the number of claims and claim amount random vari-
ables, the calculation of the distribution of the aggregate
claims, etc. It also discusses the use and implementation
of the simulation techniques (or Monte-Carlo methods)
to obtain the desired quantities (ruin probabilities,
expectations, etc.). The models presented in Part II are
generally so complex that there is no hope to develop
analytical results, and for these reasons the authors rely
heavily on simulation.
Part II, Stochastic Analysis of Insurance Business, deals
with “the analysis of variability of assets and liabilities
with a short- and long-term horizon and practical aspects
of modelling the insurance business”. The authors
address the problem of taking into account inflation,
investment returns, expenses, taxes and dividends. The
last two chapters are devoted to life insurance and
pension “schemes” (pension funds, trusts, etc.) from both
the deterministic and stochastic point of view.
Part I is intended to be used as a primary text-book and
contains a number of exercises while they are quite rare
in Part II. This latter part is dedicated to the practicing
actuary who will find it a plentiful source of inspiration
when building his own models. This text is easy to read
since the level of mathematical sophistication is kept
low, emphasis being given to the practical aspects of
applying risk theory. (F. Dufresne)
Keywords: Risk Theory, Insurance Business.
063011 (MOl)
Unbiased loss development factors.
Murphy D.M., Casualty Actuarial Society Forum, Vol.
I, 1994, pp. 183-246.
Casualty Actuarial Society literature is inconclusive
regarding whether the loss development technique is
biased or unbiased, or which of the traditional methods
of estimating link ratios is best. This paper presents a
mathematical framework to answer those questions for
the class of linear link ratio estimators used in practice.
A more accurate method of calculating link ratios is
derived based on classical regression theory. The
circumstances under which the traditional methods could
be considered optimal are discussed. It is shown that
two traditional estimators may in fact be least squares
estimators depending on the set of assumptions one
believes governs the process of loss development.
Formulas for variances of, and confidence intervals