CAS Working Partyon the

Public-Access DFA ModelSession 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 thePublic-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/WInputs

Investment& Economic

Inputs

U/W GeneratorPayment Patterns

U/W Cycle

CatastropheGenerator

InvestmentGenerator

U/WCashflows

InvestmentCashflows

TaxOutputs

& SimulationResults

DynaMo

Interest RateGenerator

Specific Provisions of DynaMo

• Six separate, but interrelated modulesInvestments CatastrophesUnderwriting TaxationInterest rate generator Loss 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 DynaMoFinancial

• 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

Distribution for SURPLUS /Ending/I115

PR

OB

AB

ILIT

Y

Values in Hundreds

0.00

0.03

0.06

0.10

0.13

0.16

6.8 13.9 21.1 28.2 35.4 42.5 49.7

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 Gorvettgorvett@uiuc.edu

• Shawna Ackermanshawnaa@pinnacleactuaries.com