Update on CAS Working Parties Midwest Actuarial Forum September 29, 2006 Leslie R. Marlo, FCAS, MAAA

Agenda What is a “working party”? What is a “working party”? Completed Working Parties Completed Working Parties Current Working Parties Current Working Parties Objectives Objectives Timeframes Timeframes

What is a working party? Task force focused on a specific research topic or solution to a specific problem. Task force focused on a specific research topic or solution to a specific problem. Team approach. Team approach. Critical mass Critical mass Broad knowledge base Broad knowledge base Elicits discussion Elicits discussion Motivated and created by research committees. Motivated and created by research committees. Instead of or in addition to call paper programs. Instead of or in addition to call paper programs.

What is a working party? Deliverables Deliverables White Papers White Papers Literature Surveys – existing research Literature Surveys – existing research Studies of industry experience related to a specific topic, perhaps with specific data calls. Studies of industry experience related to a specific topic, perhaps with specific data calls.

Completed Working Parties Correlations and Dependencies Among All Risk Sources Correlations and Dependencies Among All Risk Sources Executive Level Decision Making Using Dynamic Risk Modeling Executive Level Decision Making Using Dynamic Risk Modeling Elicitation and Elucidation of Risk Preferences Elicitation and Elucidation of Risk Preferences Quantifying Variability in Reserve Preferences Quantifying Variability in Reserve Preferences Risk Transfer Testing Risk Transfer Testing

Completed Working Parties Correlations and Dependencies Among All Risk Sources Correlations and Dependencies Among All Risk Sources Sponsored by Enterprise Risk Management Committee Sponsored by Enterprise Risk Management Committee Goal: laying the foundation for quantifying variability when data is limited, estimating the nature and magnitude of dependence relationships, and generating aggregate distributions that integrate these disparate risk sources. Goal: laying the foundation for quantifying variability when data is limited, estimating the nature and magnitude of dependence relationships, and generating aggregate distributions that integrate these disparate risk sources. =corr_wp =corr_wp =corr_wp =corr_wp

Completed Working Parties Executive Level Decision Making Using Dynamic Risk Modeling Executive Level Decision Making Using Dynamic Risk Modeling Sponsored by Dynamic Risk Modeling Committee Sponsored by Dynamic Risk Modeling Committee Goal: give practicing actuaries help in developing effective DRM presentations for senior management. Goal: give practicing actuaries help in developing effective DRM presentations for senior management. Series of written guidance and presentation templates, available at Series of written guidance and presentation templates, available at

Completed Working Parties Elicitation and Elucidation of Risk Preferences Elicitation and Elucidation of Risk Preferences Sponsored by CAS Sponsored by CAS Goal: survey of methods in use to elicit risk preferences in management, for use in ERM policy. Goal: survey of methods in use to elicit risk preferences in management, for use in ERM policy pdf 01.pdf 01.pdf 01.pdf

Completed Working Parties Quantifying Variability in Reserve Preferences Quantifying Variability in Reserve Preferences Sponsored by CAS Sponsored by CAS Goal: survey of historical research relating to estimation of potential variability in ultimate losses. Goal: survey of historical research relating to estimation of potential variability in ultimate losses pdf 29.pdf 29.pdf 29.pdf

Completed Working Parties Risk Transfer Testing Risk Transfer Testing Sponsored by Committee on Reinsurance Sponsored by Committee on Reinsurance Goal: provide suggestions on definition and testing of “risk transfer” in reinsurance transactions; at the request of the Casualty Actuarial Task Force of the NAIC. Goal: provide suggestions on definition and testing of “risk transfer” in reinsurance transactions; at the request of the Casualty Actuarial Task Force of the NAIC. report.pdf report.pdf report.pdf report.pdf

Current Working Parties Data Management & Information Educational Materials Data Management & Information Educational Materials Loss Simulation Model Loss Simulation Model Dynamic Risk Modeling Handbook Dynamic Risk Modeling Handbook Public Access DFA Model Public Access DFA Model Tail Factors Tail Factors Bornhuetter-Ferguson Initial Expected Losses Bornhuetter-Ferguson Initial Expected Losses Joint GIRO – CAS ERM Guidance Note for General Insurers Joint GIRO – CAS ERM Guidance Note for General Insurers

Current Working Parties Data Management & Information Educational Materials Data Management & Information Educational Materials Sponsored by Committee on Management Data & Information Sponsored by Committee on Management Data & Information Completion: late 2006 Completion: late 2006 Goal: Identification of key educational resources on data for actuaries =>>> literature survey Goal: Identification of key educational resources on data for actuaries =>>> literature survey

Current Working Parties Data Management & Information Educational Materials Data Management & Information Educational Materials Status: Status: Finalized taxonomies and abstracts of 8 texts for CAS online database; one additional text to be finalized. Finalized taxonomies and abstracts of 8 texts for CAS online database; one additional text to be finalized. Prepared 9 book reviews with draft of the reviews for Winter Forum; draft to be finalized. Prepared 9 book reviews with draft of the reviews for Winter Forum; draft to be finalized. Preparing presentation of work for Annual Meeting. Preparing presentation of work for Annual Meeting. Drafting overview paper on data management synthesizing knowledge gained from literature survey. May end up on Part 5 syllabus. Drafting overview paper on data management synthesizing knowledge gained from literature survey. May end up on Part 5 syllabus.

Current Working Parties Loss Simulation Model Loss Simulation Model Sponsored by Dynamic Risk Modeling Committee Sponsored by Dynamic Risk Modeling Committee Completion: early 2007 Completion: early 2007 Goal: Creation of a simulation model for generating claims (individual and bulk) for summarization into loss development triangles. Goal: Creation of a simulation model for generating claims (individual and bulk) for summarization into loss development triangles.

Current Working Parties Loss Simulation Model Loss Simulation Model Goal (cont’d) Goal (cont’d) Data to be generated by layer, type of information (e.g. paid vs. incurred), hazard, line of business Data to be generated by layer, type of information (e.g. paid vs. incurred), hazard, line of business Goal is not to focus on actual testing but to generate data sets for future testing. Includes development of criteria for assessing various methods/models for future research. Goal is not to focus on actual testing but to generate data sets for future testing. Includes development of criteria for assessing various methods/models for future research. Includes evaluation of simulated data to ensure it is realistic, i.e. not distinguishable from real data sets. Includes evaluation of simulated data to ensure it is realistic, i.e. not distinguishable from real data sets.

Current Working Parties Observation Period Observation Period Time Intervals Time Intervals Exposures Exposures Events Events Distributions Distributions Frequency Frequency Report Lag Report Lag Payment Lag Payment Lag Inter-valuation waiting times Inter-valuation waiting times Adjustment Lag Adjustment Lag Size of Loss Case Reserve Factor Fast-Track Reserve Second-Level Distributions Monthly Vector of Parameters Trend, Seasonality Lines and Loss Types Correlations Clustering Output Loss Simulation Model –Key Model Features Loss Simulation Model –Key Model Features

Current Working Parties Loss Simulation Model Loss Simulation Model Status: Status: Prototype model has been developed. Prototype model has been developed. VBA programming of model to be completed by end VBA programming of model to be completed by end Programming in at least one additional language in Programming in at least one additional language in Minimal generation of data for testing of model to date; expected during Minimal generation of data for testing of model to date; expected during Testing completed and report written in Testing completed and report written in 2007.

Current Working Parties Dynamic Risk Modeling Handbook Dynamic Risk Modeling Handbook Sponsored by Dynamic Risk Modeling Committee Sponsored by Dynamic Risk Modeling Committee Completion: late 2006 Completion: late 2006 Goal: Preparing a re-write of the existing Dynamic Financial Analysis Handbook. Goal: Preparing a re-write of the existing Dynamic Financial Analysis Handbook. Includes addition of introduction and practical examples. Includes addition of introduction and practical examples.

Current Working Parties Dynamic Risk Modeling Handbook Dynamic Risk Modeling Handbook Chapters: Chapters: One – Introduction One – Introduction Two – Overview of DRM Process Two – Overview of DRM Process Three – Strategies Three – Strategies Four – Scenarios Four – Scenarios Five – Asset Modeling Five – Asset Modeling Six – Price Modeling Six – Price Modeling Seven – Reserve Modeling Seven – Reserve Modeling Eight – Performance and Risk Measure Eight – Performance and Risk Measure Nine – Coherent Measures of Risk Nine – Coherent Measures of Risk Ten – Presentation of DRM Results Ten – Presentation of DRM Results Glossary of Terms Glossary of Terms

Current Working Parties Dynamic Risk Modeling Handbook Dynamic Risk Modeling Handbook Status: Status: Most chapters, plus glossary of terms, in process of being finalized. Most chapters, plus glossary of terms, in process of being finalized. As finalized, chapters being placed on DRM website. As finalized, chapters being placed on DRM website. Chapters on Reserve Modeling and Pricing Models still need significant work. Chapters on Reserve Modeling and Pricing Models still need significant work.

Current Working Parties Public Access DFA Model Public Access DFA Model Sponsored by Dynamic Risk Modeling Committee Sponsored by Dynamic Risk Modeling Committee Completion: late 2006 (phase 1) Completion: late 2006 (phase 1) Goal: Phase 1 involves updating and enhancing current public access DFA model documentation. Phase 2 involves improving model components and evolving model into open source framework. Goal: Phase 1 involves updating and enhancing current public access DFA model documentation. Phase 2 involves improving model components and evolving model into open source framework.

Current Working Parties Public Access DFA Model Public Access DFA Model Current Model Current Model Interest Rate and Inflation Generator Interest Rate and Inflation Generator Investment Module Investment Module Pricing Pricing Underwriting Cycle Underwriting Cycle Jurisdictional Cycle Jurisdictional Cycle Loss Development and Payment Patterns Loss Development and Payment Patterns Catastrophe Module Catastrophe Module Taxation Taxation Financial Statement Development Financial Statement Development Output Output

Current Working Parties Public Access DFA Model Public Access DFA Model Documentation Documentation Brief description of module (what it does, interrelation with other components) Brief description of module (what it does, interrelation with other components) Current Strengths Current Strengths Current Weaknesses Current Weaknesses Potential Enhancements Potential Enhancements Additions / Deletions Additions / Deletions Changes to interrelations Changes to interrelations Assessment of importance of each suggested enhancement. Assessment of importance of each suggested enhancement.

Current Working Parties Public Access DFA Model Public Access DFA Model Status: Status: Documentation to be completed by late 2006 (after Annual Meeting). Documentation to be completed by late 2006 (after Annual Meeting). Fully documented model will be posted to CAS website. Fully documented model will be posted to CAS website. Next step will be to solicit additional modules – likely through a call paper program (driven by Dynamic Risk Modeling Committee). Next step will be to solicit additional modules – likely through a call paper program (driven by Dynamic Risk Modeling Committee).

Current Working Parties Tail Factors Tail Factors Sponsored by Committee on Reserves Sponsored by Committee on Reserves Completion: late 2006 Completion: late 2006 Goal: Survey existing literature and identify additional methods in use, with goal of educating students and practitioners Goal: Survey existing literature and identify additional methods in use, with goal of educating students and practitioners

Current Working Parties Methods under Consideration Methods under Consideration Bondy-Type Bondy-Type Algebraic Algebraic Benchmark Benchmark Open Claims Open Claims Curve Fitting Curve Fitting Lifespan Lifespan Miscellaneous Miscellaneous

Current Working Parties Tail Factors Tail Factors Status: Status: Documentation of methods in progress, organized by type: Documentation of methods in progress, organized by type: Mechanics of each method; Mechanics of each method; Examples of each method; Examples of each method; Results of testing and surveys; Results of testing and surveys; Preparation of standard notation in progress: Preparation of standard notation in progress: Started with notation from Reserve Variability Working Party; Started with notation from Reserve Variability Working Party; Consistent notation desired; Consistent notation desired; Additional notation being added as necessary. Additional notation being added as necessary. Consideration of areas of future research Consideration of areas of future research

Current Working Parties Bornhuetter-Ferguson Initial Expected Losses Bornhuetter-Ferguson Initial Expected Losses Sponsored by Committee on Reserves Sponsored by Committee on Reserves Completion: unknown Completion: unknown Goal: Produce secondary research on effectiveness of initial expect loss methodologies already in use, for education of students and practitioners. Goal: Produce secondary research on effectiveness of initial expect loss methodologies already in use, for education of students and practitioners.

Current Working Parties Methods under Consideration Methods under Consideration Price Trend Rollforward – several versions varying the point at which losses are rolled forward from Price Trend Rollforward – several versions varying the point at which losses are rolled forward from Stanard-Buhlmann/Cape Cod – original and Gluck’s version Stanard-Buhlmann/Cape Cod – original and Gluck’s version Benktander Benktander Frequency/Severity Frequency/Severity Least Squares Regression Least Squares Regression Excess Ratio of 1 st dollar expected losses Excess Ratio of 1 st dollar expected losses Grace’s Method for Salvage and Subrogation Grace’s Method for Salvage and Subrogation

Current Working Parties Bornhuetter-Ferguson Initial Expected Losses Bornhuetter-Ferguson Initial Expected Losses Status: Status: Literature survey and survey of methods in use throughout industry completed in Literature survey and survey of methods in use throughout industry completed in Groundwork prepared for evaluating various methodologies. Groundwork prepared for evaluating various methodologies. Various “principles” relating to soundness of use of initial expected losses have been debated. Various “principles” relating to soundness of use of initial expected losses have been debated. Working party currently at a crossroads – Is the information to be produced valuable? Is it appropriate for a working party? Working party currently at a crossroads – Is the information to be produced valuable? Is it appropriate for a working party?

Current Working Parties ERM Guidance Note for General Insurers ERM Guidance Note for General Insurers Sponsored jointly by GIRO and CAS Sponsored jointly by GIRO and CAS Completion: unlikely but may be revived at upcoming GIRO meeting Completion: unlikely but may be revived at upcoming GIRO meeting Goal: Produce advisory note relative to ERM and general (property/casualty) insurance. Goal: Produce advisory note relative to ERM and general (property/casualty) insurance.

Feedback Questions / Comments Questions / Comments Areas of Future Research? Areas of Future Research?

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