New Model Now Available to Actuaries for Testing Loss Reserving Methods and Models

The Casualty Actuarial Society's Loss Simulation Model Working Party has just completed its charge. Their open source Loss Simulation Model (both run-time versions and source code) and a paper summarizing the working party's accomplishments, “Modeling Loss Emergence and Settlement Processes” was recently completed and posted on the CAS web site at http://www.casact.org/research/lsmwp/. The paper fully documents the model and tests completed to date, provides instructions for working with both the run-time and source code versions of the model, provides a bibliography for the benefit of those who will use the model to test loss reserving methods and models, and discusses future development and testing of the model.

Presentations on the Loss Simulation Model given at the 2010 Casualty Loss Reserve Seminar are also on the CAS web site, as well as help files for the model that include program instructions and instructions on how to customize this open source model.

A CAS Call Paper program was launched on October 20 entitled “Testing Loss Reserving Methods, Models, and Data Using the Loss Simulation Model.” Details are available at http://www.casact.org/research/. Participants will need to work with the Loss Simulation Model to develop enhancements to the model, perform additional testing, and apply the model to test alternative loss reserving methods and models.

Extreme Value Theory

Given the extreme natural catastrophe and extraordinary financial events of recent years, there has been renewed interest in a branch of statistics known as Extreme Value Theory. An introduction and additional references may be found on Wikipedia at http://en.wikipedia.org/wiki/Extreme_value_theory. I will be presenting a seminar on this subject at next week's 2010 Casualty Reserve Seminar. The slides my be downloaded at the Sites of Interest page on my website at http://www.rabsolutions.net/id5.html. Extreme value theory is useful for assessing the risk of low probability events that can have catastrophic consequences but for which we don't have credible data.

Reinsurance Claims Group on Linked In

Keeping abreast of the claims environment is necessary in order that appropriate judgments are made in the model building process. The Reinsurance Claims Group on Linked In is a forum for the open discussion of issues and sharing of information concerning ceded and assumed reinsurance claims in the U.S. and overseas markets. Topics of discussion may include, but are not limited to the presentation, adjustment, processing, settlement and payment of ceded and assumed reinsurance claims; claims dispute resolution, including litigation, arbitration, mediation and other forms of ADR; commutation; handling claims for a company in run-off; handling claims for an active writer; collections, including collections from companies in run off; comparative claims practices and procedures (e.g., London versus U.S. market); claims issues pertinent to insurance insolvencies; and coordination between the claims department and other departments of the company. Members from both the U.S. and international community are welcome.

Persons who should consider joining this group include in-house claims professionals; in-house and outside counsel; claims consultants and experts; actuaries; reinsurance arbitrators and mediators; brokers with claims responsibilities; and anyone genuinely interested in learning more about the subject. The purpose of the group is information sharing and professional networking, not recruiting, advertising, or self-promotion.

Additional information may be found at the following post on the Loree Reinsurance and Arbitration Law Forum:
http://loreelawfirm.com/blog/meet-the-reinsurance-claims-group-co-managers

Update on CAS Dynamic Risk Modeling Committee

The Loss Simulation Model Working Party is nearing completion of its paper that documents its new open source model which will enable actuaries to test alternative reserving methods and models.

The Dynamic Financial Analysis Working Party is developing a 2011 call paper program for the Public-Access DFA Model (DYNAMO)that will seek significant enhancements and applications of this open source model.

The Economic Capital Model Working Party is charged with developing a stochastic, principles-based economic capital model that meets Solvency II objectives and can be used by insurers, rating agencies, and regulators for solvency monitoring. Working party members are currently working on what is expected to become an important report to appropriate American Academy and NAIC committees.

The DRM Handbook Working Party is working on updating and completing what is expected to become an excellent reference source for those new to dynamic risk modeling work.

Casualty Actuarial Society Web Page of Research Resources

The Casualty Actuarial Society web page of Research Resources,
www.casact.org/research/index.cfm?fa=researchresources, is a rich source of search databases, papers, seminars, spreadsheets and links to related sites that can facilitate dynamic risk modeling and other actuarial R&D work. This may be a helpful reminder for many CAS members and a useful discovery for many non-CAS members.

2010 CAS Reinsurance Seminar

The May 6-7 Casualty Actuarial Society Seminar on Reinsurance included several excellent presentations related to Enterprise Risk Management. They may be downloaded at http://www.casact.org/education/reinsure/2010/handouts/.

CAS Dynamic Risk Modeling Handbook

The CAS Committee on Dynamic Risk Modeling has established a Working Party that is working on updating and completing the Dynamic Risk Modeling Handbook at www.casact.org/research/drm/.  The purpose of this handbook is to discuss and provide guidance on the important issues and considerations that confront actuaries when designing, building or selecting Dynamic Risk Models (DRM) of property-casualty risks.  In its “simplest” form, a dynamic risk model can be used to analyze a narrowly defined pricing or reserving risk using stochastic simulation of future cash flows.  In a complex form, a dynamic risk model can be used to analyze the entire cash flow of a corporation, including all aspects of company operations.

The complex form of dynamic risk modeling for an entire insurance operation is commonly referred to as Dynamic Financial Analysis (DFA). Enterprise Risk Management (ERM) focuses on the wider aspect of market, credit, and operational risk of an organization. In the application of ERM to an insurance operation, DFA focuses on the modeling of insurance risks. While many excellent papers have been written on both ERM and DRM, the goal of the Working Party is to distill the essential technical aspects of creating a model into a cohesive document for the practicing actuary as well as the student of risk modeling. The DRM Handbook WP will write Chapters 6 and 7 on Price Modeling and Reserve Modeling and update the remaining chapters.

Public Access Dynamic Financial Analysis (DFA) Model

The CAS Committee on Dynamic Risk Modeling has updated the Public Access DFA Model, called Dynamo, and made it available on its web site www.casact.org/research/drm.  The Committee finished the 2009 Call for Papers by awarding a prize to authors John Burkett, FCAS, MAAA, PhD, Timothy Pratt, FIAA, MAAA, Gerald Kirschner, FCAS, MAAA, Jennifer Cheslawski, ACAS, MAAA and Diana Rangelova, Fellow, Institute des Actuaires for their paper “Holistic Approach to Setting Risk Limits” which has been published in the CAS 2010 Winter eForum and presented at the 2010 Enterprise Risk Management Symposium.  This paper applied the Dynamo model to test and suggest improvements to a hypothetical company's risk limits (eg, growth rates, retentions within reinsurance program, investment policy statement limits)  from an enterprise wide capital preservation perspective.

Open Source Loss Simulation Model

Last year the Casualty Actuarial Society's Loss Simulation Model Working Party (LSMWP) , via the Dynamic Risk Modeling Committee, engaged a consulting firm to develop an open source simulation model of the processes of loss emergence and settlement, commonly known as loss development, that underlie the loss "triangles" and other statistics used to estimate unpaid claims. It has created a tool which is programmed in R and VB.NET that researchers could use to test loss reserving methods and models. The LSMWP will present the new model and the draft of its working party paper at the September Casualty Loss Reserve Seminar. The new open source model and paper will be uploaded to the CAS web site after this seminar.