CAS Working Party on the Public-Access DFA Model Session C22 Pat Crowe November 2005

Background Mid-1990s Miller, Rapp, Herbers & Terry –Actuarial consulting firm in Bloomington, Illinois –Joined forces with University of Illinois (Gorvett & D’Arcy) –Created a public-access DFA model for the property-liability industry –Called DynaMo Public-Access framework provides –Opportunity for industry peer review –Education of actuaries regarding DFA

Literature on the Public-Access DFA Model 1997 CAS DFA Seminar –D’Arcy, Gorvett, Herbers, Hettinger, Lehmann and Miller Contingencies, Nov/Dec 1997 –D’Arcy, Gorvett, Herbers and Hettinger 1998 CAS DFA Seminar –D’Arcy, Gorvett, Hettinger and Walling 1999 CAS DFA Seminar –Ahlgrim, D’Arcy and Gorvett –Walling, Hettinger, Emma and Ackerman

U/W Inputs Investment & Economic Inputs U/W Generator Payment Patterns U/W Cycle Catastrophe Generator Investment Generator U/W Cashflows Investment Cashflows Tax Outputs & Simulation Results DynaMo Interest Rate Generator

Specific Provisions of DynaMo Six separate, but interrelated modules InvestmentsCatastrophes UnderwritingTaxation Interest rate generatorLoss reserve dev. Multi-state Multi-line For each line of business –New business –1st renewals –2nd and subsequent renewals

What Does This Model Do? Simulates results for the next 5 years Generates financial statements –Balance sheet –Operating statement –IRIS results Indicates expected values and distribution of results for any value selected

Key DFA Variables in DynaMo Financial Short-term interest rate Term structure Default potential Equity performance Inflation Mortgage pre-payment patterns Underwriting Loss freq. / sev. Rates and exposures Expenses Underwriting cycle Loss reserve dev. Jurisdictional risk Aging phenomenon Payment patterns Catastrophes Reinsurance Taxes

Sample DFA Model Output

Outputs Available 5-year projections Balance sheets Income statements Loss ratio reports IRIS tests Others as needed –Select any cell of spreadsheet –Graphs and histograms

Model Uses Internal Strategic Planning Ratemaking Reinsurance Valuation / M&A Market Simulation and Competitive Analysis Asset / Liability Management External External Ratings Communication with Financial Markets Regulatory / Risk- Based Capital Capital Planning / Securitization

Current Project Working Party on the Public-Access Model –Sponsored by the Committee on Dynamic Risk Modeling –Co-Chairs: Shawna Ackerman and Rick Gorvett Charge: to update and enhance the public- access DFA model

Working Party Plan Phase 1: Documentation and evaluation of the components of the existing model (1) Interest rate and inflation generator (2) Investment module (3) Financial statement development (4) Loss development and payment patterns (5) New business (6) Jurisdictional risk (7) Catastrophe module (8) Underwriting cycle (9) Taxation (10) Output

Working Party Plan (cont.) Phase 2: Identification of selected enhancements to the model –E.g., incorporate results from recent CAS/SOA research project on economic and financial scenario modeling Phase 3: Implementation of selected enhancements Phase 4: Ultimately, consider an “open source” framework for the public-access model

Current Project For additional information, or to volunteer for the Working Party, please feel free to contact either of the co-chairs: Rick Gorvett Shawna Ackerman