Brehm Ch 3 Flashcards
Describe 4 organizational details to be addressed early in IRM startup.
- Organization chart: modeling team reporting line, solid line vs dotted line reporting
- Functions represented: reserving, pricing, finance, planning, UW, risk
- Resource commitment: mix of skill set (actuarial, UW, communication), full time vs part time
- Critical Roles and Responsibilities: control of input parameter, control of output data, analyses and uses of output
- Purpose: goal of the model to quantify variation around plan or provide distribution of results
- Scope: prospective UW year only or including reserves, assets and operational risks. Low detail (whole company) or high detail (specific segment).
Provide a recommendation for reporting relationship of IRM startup.
The reporting line for the IRM team is less important than ensuring they report to a leader who is fair and balanced.
Provide a recommendation for resource commitment of IRM startup.
Team should have a full-time commitment to the implementation.
Provide a recommendation for inputs and outputs of IRM.
Should be controlled similarly to the general ledger or reserving systems.
Provide a recommendation for initial scope of IRM.
Prospective underwriting period, variation around plan.
Describe 4 parameter development details to be addressed in IRM development.
- Modelling software: capabilities, scalability, learning curve, integration with other systems, output management.
- Developing input parameters: process is heavily data driven, requires expert opinion, many functional areas should be involved
- Correlations: LOB representatives cannot set cross-line parameters, corporate-level ownership of these parameters
- Validation and testing: no existing IRM with which to compare, multi-metric testing is required, iterative testing with increasing scope and detail.
Provide a recommendation for modelling software when developing IRM.
Capabilities of the modelling team should determine how much is pre-built and how much the team builds.
Provide a recommendation for IRM parameter development.
Include expert opinion from underwriting claims, planning and actuarial.
Provide a recommendation for correlation in IRM development.
Modelling team recommends assumptions, which are owned at the corporate level (CRO/CEO/CUO)
Provide a recommendation for validation of IRM.
Validate and test over an extended period.
Describe 4 model implementation details to be addressed.
- Priority setting: importance of priority, approach and style (ask vs mandate), priority and timeline must be driven from the top.
- Interest and impact: implement communication and education plans across enterprise
- Pilot test: assign multidisciplinary team to provide real data and real analysis on company as a whole or on one specific segment
- Education process: run in parallel with pilot test, bring leadership to same point of understanding regarding probability and statistics.
Provide a recommendation for priority setting in implementation of IRM.
Top management should set the priority for implementation.
Provide a recommendation for communication during IRM implementation.
Regular communication to broad audiences.
Provide a recommendation for pilot testing during IRM implementation.
Do pilot testing to prepare stakeholders for the magnitude of the change.
Provide a recommendation for education during IRM implementation.
Bring leadership to a base level of understanding about the model.
Describe 3 IRM integration and maintenance details to be addressed
- Cycle: integrate model runs into major corporate calendar and ensure output support major company decisions.
- Updating: determine frequency and magnitude of updates.
- Controls: ensure there is centralized storage and control on inputs/outputs, ensure there is an endorsed set of analytical templates used to manipulate IRM outputs for various purposes.
Provide a recommendation for cycle in integration and maintenance of IRM.
Integrate into the corporate calendar (at least for planning)
Provide a recommendation for updating IRM during integration and maintenance.
Major updates to inputs no more frequently than semiannual.
Provide a recommendation for controls during integration and maintenance of IRM.
Maintain centralized control of inputs, outputs and templates.
Contrast the impact of parameter risk on small versus large companies
A small insurer already has significant uncertainty, so the added impact of parameter risk is not too large.
For a large company, without parameter risk, the loss ratio modelled is unrealistically stable. Parameter risk is not diversified away with more insureds, so it significantly increases uncertainty for a large insurer.
Calculate the coefficient of variation (CV) of total losses (S)
CV(S) = ((V(N)/E(N) + CV^2(X))/E(N))^0.5
CV(X) = SD(X)/E(X)
Note:
E(S) = E(N)E(X)
V(S) = E(N)V(X) + V(N)*E^2(X)
Does the CV of total losses results in more risk for small or large companies?
Smaller companies
Describe a simple trend model
To project future levels of loss costs, a trend line is often fit to loss cost history.
Prediction intervals can be placed around this projection to provide a quantification of projection risk.
Provide 2 disadvantages of the simple trend model.
- Loss cost data is based on historical claims that have not settled, which adds uncertainty.
- Assumes a single constant trend for historical data that will continue into the future.