Update on CAS Working Parties Midwest Actuarial Forum

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

2. Agenda • What is a “working party”? • Completed Working Parties • Current Working Parties • Objectives • Timeframes http://www.casact.org/research/index.cfm?fa=workingparty

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

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

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

6. Completed Working Parties • Correlations and Dependencies Among All Risk Sources • 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. • http://www.casact.org/members/committees/index.cfm?fa=corr_wp

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

8. Completed Working Parties • Elicitation and Elucidation of Risk Preferences • Sponsored by CAS • Goal: survey of methods in use to elicit risk preferences in management, for use in ERM policy. • http://www.casact.org/pubs/forum/05fforum/05f01.pdf

9. Completed Working Parties • Quantifying Variability in Reserve Preferences • Sponsored by CAS • Goal: survey of historical research relating to estimation of potential variability in ultimate losses. • http://www.casact.org/pubs/forum/05fforum/05f29.pdf

10. Completed Working Parties • Risk Transfer Testing • 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. • http://www.casact.org/research/risk-transfer-wp-report.pdf

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

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

13. Current Working Parties • Data Management & Information Educational Materials • Status: • 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. • 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.

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

15. Current Working Parties • Loss Simulation Model • Goal (cont’d) • 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. • Includes evaluation of simulated data to ensure it is realistic, i.e. not distinguishable from real data sets.

16. Observation Period Time Intervals Exposures Events Distributions Frequency Report Lag Payment Lag Inter-valuation waiting times 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 Current Working Parties • Loss Simulation Model –Key Model Features

17. Current Working Parties • Loss Simulation Model • Status: • Prototype model has been developed. • VBA programming of model to be completed by end 2006. • Programming in at least one additional language in 2007. • Minimal generation of data for testing of model to date; expected during 2006. • Testing completed and report written in 2007.

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

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

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

21. Current Working Parties • Public Access DFA Model • Sponsored by Dynamic Risk Modeling Committee • 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.

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

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

24. Current Working Parties • Public Access DFA Model • Status: • Documentation to be completed by late 2006 (after Annual Meeting). • 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).

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

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

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

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

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

30. Current Working Parties • Bornhuetter-Ferguson Initial Expected Losses • Status: • Literature survey and survey of methods in use throughout industry completed in 2005. • Groundwork prepared for evaluating various methodologies. • 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?

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

32. Feedback • Questions / Comments • Areas of Future Research?

33. Casualty Actuarial Society 4350 N. Fairfax Drive, Suite 250 Arlington, Virginia 22203 www.casact.org