Reserving for Infrastructure Service Contracts
By Thomas Emil Wendling
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.