Transactionsof Society of Actuaries

The probabilistic concepts underlying measurement of asset adequacy are discussed in a simplified way. The basic theory involves complex probability distributions of C-l, C-2, and C-3 risks and their combination, with degree of adequacy expressed as a level of probability of ultimate ruin. Practical surrogates for such distributions are universes of deterministic cash flow scenarios of reasonable and plausible deviations from expected with bounding worst scenarios. These are related to ruin probabilities by stochastic generation of scenarios or by heuristic reasoning reflecting levels of comfort or intuitive feelings. The intent is to show the relationship of theoretical and practical procedures that differ only in degree of precision. Certain significant problems that arise in the absence of determination of risk surplus are discussed.