update on cas working parties midwest actuarial forum september 29, 2006 leslie r. marlo, fcas, maaa

Update on CAS Working Update on CAS Working PartiesParties

Midwest Actuarial ForumMidwest Actuarial ForumSeptember 29, 2006September 29, 2006

Leslie R. Marlo, FCAS, MAAALeslie R. Marlo, FCAS, MAAA

AgendaAgenda

What is a “working party”?What is a “working party”? Completed Working PartiesCompleted Working Parties Current Working PartiesCurrent Working Parties

ObjectivesObjectives TimeframesTimeframes

http://www.casact.org/research/index.cfm?fa=workingparty



What is a working What is a working party?party?

Task force focused on a specific research Task force focused on a specific research topic or solution to a specific problem.topic or solution to a specific problem.

Team approach.Team approach. Critical massCritical mass Broad knowledge baseBroad knowledge base Elicits discussionElicits discussion

Motivated and created by research Motivated and created by research committees.committees.

Instead of or in addition to call paper Instead of or in addition to call paper programs.programs.

What is a working What is a working party?party?

DeliverablesDeliverables White PapersWhite Papers Literature Surveys – existing researchLiterature Surveys – existing research Studies of industry experience related Studies of industry experience related

to a specific topic, perhaps with specific to a specific topic, perhaps with specific data calls.data calls.

Completed Working Completed Working PartiesParties

Correlations and Dependencies Among Correlations and Dependencies Among All Risk SourcesAll Risk Sources

Executive Level Decision Making Using Executive Level Decision Making Using Dynamic Risk ModelingDynamic Risk Modeling

Elicitation and Elucidation of Risk Elicitation and Elucidation of Risk PreferencesPreferences

Quantifying Variability in Reserve Quantifying Variability in Reserve PreferencesPreferences

Risk Transfer TestingRisk Transfer Testing


Correlations and Dependencies Among All Correlations and Dependencies Among All Risk SourcesRisk Sources Sponsored by Enterprise Risk Management Sponsored by Enterprise Risk Management

CommitteeCommittee Goal: laying the foundation for quantifying Goal: laying the foundation for quantifying

variability when data is limited, estimating the variability when data is limited, estimating the nature and magnitude of dependence nature and magnitude of dependence relationships, and generating aggregate relationships, and generating aggregate distributions that integrate these disparate risk distributions that integrate these disparate risk sources. sources.

http://www.casact.org/members/committees/index.http://www.casact.org/members/committees/index.cfm?fa=corr_wpcfm?fa=corr_wp

http://www.casact.org/members/committees/index.cfm?fa=corr_wp

http://www.casact.org/members/committees/index.cfm?fa=corr_wp


Executive Level Decision Making Using Executive Level Decision Making Using Dynamic Risk ModelingDynamic Risk Modeling Sponsored by Dynamic Risk Modeling Sponsored by Dynamic Risk Modeling

CommitteeCommittee Goal: give practicing actuaries help in Goal: give practicing actuaries help in

developing effective DRM presentations developing effective DRM presentations for senior management. for senior management.

Series of written guidance and Series of written guidance and presentation templates, available at presentation templates, available at http://www.casact.org/research/drmwp/http://www.casact.org/research/drmwp/

http://www.casact.org/research/drmwp/


Elicitation and Elucidation of Risk Elicitation and Elucidation of Risk PreferencesPreferences Sponsored by CASSponsored by CAS Goal: survey of methods in use to elicit Goal: survey of methods in use to elicit

risk preferences in management, for risk preferences in management, for use in ERM policy. use in ERM policy.

http://www.casact.org/pubs/forum/05ffohttp://www.casact.org/pubs/forum/05fforum/05f01.pdfrum/05f01.pdf

http://www.casact.org/pubs/forum/05fforum/05f01.pdf



Quantifying Variability in Reserve Quantifying Variability in Reserve PreferencesPreferences Sponsored by CASSponsored by CAS Goal: survey of historical research Goal: survey of historical research

relating to estimation of potential relating to estimation of potential variability in ultimate losses. variability in ultimate losses.

http://www.casact.org/pubs/forum/05ffohttp://www.casact.org/pubs/forum/05fforum/05f29.pdfrum/05f29.pdf




Risk Transfer TestingRisk Transfer Testing Sponsored by Committee on ReinsuranceSponsored by Committee on Reinsurance Goal: provide suggestions on definition Goal: provide suggestions on definition

and testing of “risk transfer” in and testing of “risk transfer” in reinsurance transactions; at the request reinsurance transactions; at the request of the Casualty Actuarial Task Force of of the Casualty Actuarial Task Force of the NAIC.the NAIC.

http://www.casact.org/research/risk-transhttp://www.casact.org/research/risk-transfer-wp-report.pdffer-wp-report.pdf

http://www.casact.org/research/risk-transfer-wp-report.pdf

http://www.casact.org/research/risk-transfer-wp-report.pdf

Current Working Current Working PartiesParties

Data Management & Information Data Management & Information Educational MaterialsEducational Materials

Loss Simulation ModelLoss Simulation Model Dynamic Risk Modeling HandbookDynamic Risk Modeling Handbook Public Access DFA ModelPublic Access DFA Model Tail FactorsTail Factors Bornhuetter-Ferguson Initial Expected Bornhuetter-Ferguson Initial Expected

LossesLosses Joint GIRO – CAS ERM Guidance Note for Joint GIRO – CAS ERM Guidance Note for

General InsurersGeneral Insurers


Data Management & Information Data Management & Information Educational MaterialsEducational Materials Sponsored by Committee on Sponsored by Committee on

Management Data & InformationManagement Data & Information Completion: late 2006Completion: late 2006 Goal: Identification of key educational Goal: Identification of key educational

resources on data for actuaries =>>> resources on data for actuaries =>>> literature surveyliterature survey


Data Management & Information Data Management & Information Educational MaterialsEducational Materials Status:Status:

Finalized taxonomies and abstracts of 8 texts for Finalized taxonomies and abstracts of 8 texts for CAS online database; one additional text to be CAS online database; one additional text to be finalized.finalized.

Prepared 9 book reviews with draft of the reviews Prepared 9 book reviews with draft of the reviews for for Winter ForumWinter Forum; draft to be finalized.; draft to be finalized.

Preparing presentation of work for Annual Preparing presentation of work for Annual Meeting.Meeting.

Drafting overview paper on data management Drafting overview paper on data management synthesizing knowledge gained from literature synthesizing knowledge gained from literature survey. May end up on Part 5 syllabus.survey. May end up on Part 5 syllabus.


Loss Simulation ModelLoss Simulation Model Sponsored by Dynamic Risk Modeling Sponsored by Dynamic Risk Modeling

CommitteeCommittee Completion: early 2007Completion: early 2007 Goal: Creation of a simulation model for Goal: Creation of a simulation model for

generating claims (individual and bulk) generating claims (individual and bulk) for summarization into loss for summarization into loss development triangles. development triangles.


Loss Simulation ModelLoss Simulation Model Goal (cont’d)Goal (cont’d)

Data to be generated by layer, type of information Data to be generated by layer, type of information (e.g. paid vs. incurred), hazard, line of business(e.g. paid vs. incurred), hazard, line of business

Goal is not to focus on actual testing but to Goal is not to focus on actual testing but to generate data sets for future testing. Includes generate data sets for future testing. Includes development of criteria for assessing various development of criteria for assessing various methods/models for future research.methods/models for future research.

Includes evaluation of simulated data to ensure it Includes evaluation of simulated data to ensure it is realistic, i.e. not distinguishable from real data is realistic, i.e. not distinguishable from real data sets.sets.


Observation PeriodObservation Period Time IntervalsTime Intervals ExposuresExposures EventsEvents DistributionsDistributions FrequencyFrequency Report LagReport Lag Payment LagPayment Lag Inter-valuation waiting Inter-valuation waiting

timestimes Adjustment LagAdjustment Lag

Size of LossSize of Loss Case Reserve FactorCase Reserve Factor Fast-Track ReserveFast-Track Reserve Second-Level DistributionsSecond-Level Distributions Monthly Vector of Monthly Vector of

ParametersParameters Trend, SeasonalityTrend, Seasonality Lines and Loss TypesLines and Loss Types CorrelationsCorrelations ClusteringClustering OutputOutput

Loss Simulation Model –Key Loss Simulation Model –Key Model FeaturesModel Features


Loss Simulation ModelLoss Simulation Model Status:Status:

Prototype model has been developed.Prototype model has been developed. VBA programming of model to be completed VBA programming of model to be completed

by end 2006.by end 2006. Programming in at least one additional Programming in at least one additional

language in 2007.language in 2007. Minimal generation of data for testing of Minimal generation of data for testing of

model to date; expected during 2006.model to date; expected during 2006. Testing completed and report written in 2007.Testing completed and report written in 2007.


Dynamic Risk Modeling HandbookDynamic Risk Modeling Handbook Sponsored by Dynamic Risk Modeling Sponsored by Dynamic Risk Modeling

CommitteeCommittee Completion: late 2006Completion: late 2006 Goal: Preparing a re-write of the Goal: Preparing a re-write of the

existing Dynamic Financial Analysis existing Dynamic Financial Analysis Handbook.Handbook. Includes addition of introduction and Includes addition of introduction and

practical examples.practical examples.


Dynamic Risk Modeling HandbookDynamic Risk Modeling Handbook Chapters:Chapters:

One – IntroductionOne – Introduction Two – Overview of DRM ProcessTwo – Overview of DRM Process Three – StrategiesThree – Strategies Four – ScenariosFour – Scenarios Five – Asset ModelingFive – Asset Modeling Six – Price ModelingSix – Price Modeling Seven – Reserve ModelingSeven – Reserve Modeling Eight – Performance and Risk Measure Eight – Performance and Risk Measure Nine – Coherent Measures of RiskNine – Coherent Measures of Risk Ten – Presentation of DRM ResultsTen – Presentation of DRM Results Glossary of TermsGlossary of Terms


Dynamic Risk Modeling HandbookDynamic Risk Modeling Handbook Status:Status:

Most chapters, plus glossary of terms, in Most chapters, plus glossary of terms, in process of being finalized.process of being finalized.

As finalized, chapters being placed on DRM As finalized, chapters being placed on DRM website.website.

Chapters on Reserve Modeling and Pricing Chapters on Reserve Modeling and Pricing Models still need significant work.Models still need significant work.


Public Access DFA ModelPublic Access DFA Model Sponsored by Dynamic Risk Modeling Sponsored by Dynamic Risk Modeling

CommitteeCommittee Completion: late 2006 (phase 1)Completion: late 2006 (phase 1) Goal: Phase 1 involves updating and Goal: Phase 1 involves updating and

enhancing current public access DFA enhancing current public access DFA model documentation. Phase 2 involves model documentation. Phase 2 involves improving model components and improving model components and evolving model into open source evolving model into open source framework.framework.


Public Access DFA ModelPublic Access DFA Model Current ModelCurrent Model

Interest Rate and Inflation GeneratorInterest Rate and Inflation Generator Investment ModuleInvestment Module Pricing Pricing

Underwriting CycleUnderwriting Cycle Jurisdictional CycleJurisdictional Cycle

Loss Development and Payment PatternsLoss Development and Payment Patterns Catastrophe ModuleCatastrophe Module TaxationTaxation Financial Statement DevelopmentFinancial Statement Development OutputOutput


Public Access DFA ModelPublic Access DFA Model DocumentationDocumentation

Brief description of module (what it does, Brief description of module (what it does, interrelation with other components)interrelation with other components)

Current StrengthsCurrent Strengths Current WeaknessesCurrent Weaknesses Potential EnhancementsPotential Enhancements

Additions / DeletionsAdditions / Deletions Changes to interrelationsChanges to interrelations Assessment of importance of each suggested Assessment of importance of each suggested

enhancement.enhancement.


Public Access DFA ModelPublic Access DFA Model Status:Status:

Documentation to be completed by late Documentation to be completed by late 2006 (after Annual Meeting).2006 (after Annual Meeting).

Fully documented model will be posted to Fully documented model will be posted to CAS website.CAS website.

Next step will be to solicit additional Next step will be to solicit additional modules – likely through a call paper modules – likely through a call paper program (driven by Dynamic Risk Modeling program (driven by Dynamic Risk Modeling Committee).Committee).


Tail FactorsTail Factors Sponsored by Committee on ReservesSponsored by Committee on Reserves Completion: late 2006Completion: late 2006 Goal: Survey existing literature and Goal: Survey existing literature and

identify additional methods in use, with identify additional methods in use, with goal of educating students and goal of educating students and practitionerspractitioners


Methods under ConsiderationMethods under Consideration Bondy-TypeBondy-Type AlgebraicAlgebraic BenchmarkBenchmark Open ClaimsOpen Claims Curve FittingCurve Fitting LifespanLifespan MiscellaneousMiscellaneous


Tail FactorsTail Factors Status:Status:

Documentation of methods in progress, organized by Documentation of methods in progress, organized by type: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 Started with notation from Reserve Variability Working

Party;Party; Consistent notation desired;Consistent notation desired; Additional notation being added as necessary.Additional notation being added as necessary.

Consideration of areas of future researchConsideration of areas of future research


Bornhuetter-Ferguson Initial Bornhuetter-Ferguson Initial Expected LossesExpected Losses Sponsored by Committee on ReservesSponsored by Committee on Reserves Completion: unknownCompletion: unknown Goal: Produce secondary research on Goal: Produce secondary research on

effectiveness of initial expect loss effectiveness of initial expect loss methodologies already in use, for methodologies already in use, for education of students and practitioners.education of students and practitioners.


Methods under ConsiderationMethods under Consideration Price Trend Rollforward – several versions Price Trend Rollforward – several versions

varying the point at which losses are rolled varying the point at which losses are rolled forward fromforward from

Stanard-Buhlmann/Cape Cod – original and Stanard-Buhlmann/Cape Cod – original and Gluck’s versionGluck’s version

BenktanderBenktander Frequency/SeverityFrequency/Severity Least Squares RegressionLeast Squares Regression Excess Ratio of 1Excess Ratio of 1stst dollar expected losses dollar expected losses Grace’s Method for Salvage and SubrogationGrace’s Method for Salvage and Subrogation


Bornhuetter-Ferguson Initial Expected Bornhuetter-Ferguson Initial Expected LossesLosses Status:Status:

Literature survey and survey of methods in use Literature survey and survey of methods in use throughout industry completed in 2005.throughout industry completed in 2005.

Groundwork prepared for evaluating various Groundwork prepared for evaluating various methodologies.methodologies.

Various “principles” relating to soundness of Various “principles” relating to soundness of use of initial expected losses have been debated.use of initial expected losses have been debated.

Working party currently at a crossroads – Is the Working party currently at a crossroads – Is the information to be produced valuable? Is it information to be produced valuable? Is it appropriate for a working party?appropriate for a working party?


ERM Guidance Note for General ERM Guidance Note for General InsurersInsurers Sponsored jointly by GIRO and CASSponsored jointly by GIRO and CAS Completion: unlikely but may be revived Completion: unlikely but may be revived

at upcoming GIRO meetingat upcoming GIRO meeting Goal: Produce advisory note relative to Goal: Produce advisory note relative to

ERM and general (property/casualty) ERM and general (property/casualty) insurance.insurance.

FeedbackFeedback

Questions / CommentsQuestions / CommentsAreas of Future Research?Areas of Future Research?

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Arlington, Virginia 22203Arlington, Virginia 22203

www.casact.orgwww.casact.org

update on cas working parties midwest actuarial forum september 29, 2006 leslie r. marlo, fcas, maaa

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