Jacqueline Friedland July CAS Risk and Capital Management Seminar International Perspectives on DFA – Canadian DCAT  Introduction  History  Role of the CIA  Who?  2001 and 2003 surveys  What’s next? Jacqueline Friedland July 2003

Jacqueline Friedland July CAS Risk and Capital Management Seminar International Perspectives on DFA – Canadian DCAT

Jacqueline Friedland July CAS Risk and Capital Management Seminar International Perspectives on DFA – Canadian DCAT History  DST for valuation actuaries  DCAT for P&C actuaries in 1999  Legal requirement as Appointed Actuary per OSFI

Jacqueline Friedland July CAS Risk and Capital Management Seminar International Perspectives on DFA – Canadian DCAT Role of the CIA  Standard of Practice  Educational Note  Surveys  AA Seminar

Jacqueline Friedland July CAS Risk and Capital Management Seminar International Perspectives on DFA – Canadian DCAT Educational Note  Definition of DCAT process  Principal goal  Detailed description of process

Jacqueline Friedland July CAS Risk and Capital Management Seminar International Perspectives on DFA – Canadian DCAT Educational Note – 11 Risk Categories  Frequency and severity  Pricing  Misestimation of policy liabilities  Inflation  Interest rate  Premium volume  Expense  Reinsurance  Deterioration of asset values  Government and political action  Off balance sheet risk

Jacqueline Friedland July CAS Risk and Capital Management Seminar International Perspectives on DFA – Canadian DCAT Educational Note – Risk Categories Expanded Frequency and Severity:  Single catastrophic loss  Multiple catastrophic losses  Multiple large losses  Loss ratio (frequency and severity) Pricing  Rate freeze  Increased competition  Parameter risk, estimation error or data errors

Jacqueline Friedland July CAS Risk and Capital Management Seminar International Perspectives on DFA – Canadian DCAT Educational Note – Risk Categories Expanded Misestimation of Policy Liabilities  Significant understatement of unpaid claim liability  Significant understatement of cost to settle future claims Inflation  Significant rapid and sustained increase in general inflation rate  Significant sustained increase in rate of social inflation  Significant temporary increase in cost of labour and materials following property catastrophe  Severe recession in general economy

Jacqueline Friedland July CAS Risk and Capital Management Seminar International Perspectives on DFA – Canadian DCAT Educational Note – Risk Categories Expanded Interest Rate  Change in future rates of interest  Change in claims payment pattern Premium Volume  Significant reduction in premium volume  Significant increase in premium volume

Jacqueline Friedland July CAS Risk and Capital Management Seminar International Perspectives on DFA – Canadian DCAT Educational Note – Risk Categories Expanded Expense  Severe inflationary environment  Unexpectedly low premium volume  Technology obsolescence  Court decisions related to market conduct  PACICC assessments Reinsurance  Reinsurer insolvency  Increase rates or reduced commissions  Reduction in capacity  Disputes over policy conditions

Jacqueline Friedland July CAS Risk and Capital Management Seminar International Perspectives on DFA – Canadian DCAT Educational Note – Risk Categories Expanded Deterioration of Asset Value  Drop in market value of debt securities based on increase of 150 basis points  Decline in equities consistent with 25% decline in TSE 300 index  50% decline in value of all real estate  75% decline in value of largest subsidiary Ripple Effects:  Counter-party defaults on derivatives  Loss or significant decline of value for other major asset categories  Fluctuations in currency values  Ratings downgrade leading to decreased new business  Liquidity crisis caused by large, sustained default losses  Economic conditions related to decline in asset values effecting losses

Jacqueline Friedland July CAS Risk and Capital Management Seminar International Perspectives on DFA – Canadian DCAT Who does DCAT apply to?  All federally licensed P&C insurers  Insurers and reinsurers  Large and small  Active and runoff

Jacqueline Friedland July CAS Risk and Capital Management Seminar International Perspectives on DFA – Canadian DCAT 2001 Survey  Written survey  In-house AAs of largest Canadian companies  Technical focus  Primary finding: compliance exercise

Jacqueline Friedland July CAS Risk and Capital Management Seminar International Perspectives on DFA – Canadian DCAT 2003 Survey  12 interviews  Consulting, in-house, and regulatory actuaries  Insurers and reinsurers, small and large companies

Jacqueline Friedland July CAS Risk and Capital Management Seminar International Perspectives on DFA – Canadian DCAT 2003 Survey 1)Technical issues 2)Timing 3)Report/presentation 4)Purpose/use 5)MCT 6)Areas for improvement 7)Opinion statement 8)Relationship with regulators

Jacqueline Friedland July CAS Risk and Capital Management Seminar International Perspectives on DFA – Canadian DCAT What’s next?  Continue push to integrate into company business planning  Introduce stochastic modeling – make DCAT truly dynamic  Continue to push value of DCAT  Subject to new Canadian peer review requirements  Revise CIA Educational Note