C - CIA DCAT Flashcards
CIA DCAT
2 requirements for financial condition to be satisfactory.
1) Under DCAT base scenario and under all adverse scenarios, ASSETS > LIABILITIES throughout the forecast period
2) Under Base scenario, insurer meets Supervisory Target Capital Requirement (150%)
CIA DCAT
5 key elements of DCAT
1) Development of a Base scenario
2) Analysis of impact of plausible adverse scenario
3) Identification/Analysis of corrective management actions to mitigate risks
4) Report and Recommendations to management and board
5) Opinion signed by AA and included in report on financial condition
CIA DCAT
Define RIPPLE EFFECT
6 inclusions in RIPPLE EFFECTS
an event that occurs when an adverse scenario triggers a change in one or more interdependent risk factors
It includes :
1) chg in assumptions of base scenario that are no longer appropriate for adverse scenario being tested
2) Insurer’s expected RESPONSE to adversity
3) policyholder’s RESPONSE
4) rating agency’s RESPONSE
5) change in planned capital injections
6) regulatory RESPONSE
CIA DCAT
2 Principal goals of DCAT
Describe 3 steps of DCAT Process
identify possible threats to financial condition
identify appropriate corrective actions to address those threats
1) review recent and current financial position
2) run base scenario and several adverse scenarios
3) report the results including at least 3 adverse scenarios
CIA DCAT
Discuss typical approach of DCAT
1) Review financial position of 3 most recent years
2) DEVELOP BASE SCENARIO for forecast period (consistent with business plan). Forecast period NPT LESS THAN 3 FISCAL YEARS
3) ASSESS the RISK CATEGORIES. Identify those relevant to circumstances (may use sensitivity testing for identification)
4) SELECT PLAUSIBLE ADVERSE SCENARIOS
(single-risk sc, integrated sc, combination of single-risk scenarios).
Identify interactions and RIPPLE EFFECTS.
Consider reverse stress testing of adverse scenarios (see how far the risk factor has to be changed to drive a negative surplus during forecast period, then evaluate whether that degree of change is plausible)
5) Select at least 3 SCENARIOS WITH GREATEST SURPLUS SENSITIVITY to include in DCAT. Also include any scenario where insurer fall below STCR (150%)
6) IDENTIFY POSSIBLE CORRECTIVE MGMT ACTIONS
7) IDENTIFY POSSIBLE REGULATORY ACTIONS for each scenario causing insurer to fall below STCR
CIA DCAT
Contrast
Materiality Standard of
DCAT vs VALUATION of policy liabilities.
3 considerations of AA when selecting a materiality standard
Materiality for DCAT should be less vigorous than the one used for valuation of policy liabilities
1) SIZE
2) FINANCIAL POSITION (more rigorous if base scenario closer to STCR)
3) NATURE of REGULATORY TEST
CIA DCAT
DEFINE
Base scenario in DCAT
A realistic set of assumptions used to forecast financial POSITION over the forecast period
consistent with business plan
AA must report material inconsistency between base scenario and business plan
CIA DCAT
4 items to recognize in future financial position under BASE SCENARIO when it differs from the projected financial results in the business plan
1) change in distribution assumptions
2) management decisions not discussed in business plan
3) change in capital level not reflected in business plan
4) impact actual recent experience on future experience
CIA DCAT
Define PLAUSIBLE ADVERSE SCENARIOS
Define them within STOCHASTIC MODELS
scenario, being MATERIAL, PLAUSIBLE and ADVERSE, to which the financial condition is sensitive.
Reverse stress testing can help identify material plausible adverse risk over the forecast period
–Under stochastic models–
PLAUSIBLE ADVERSE SCENARIOS must be in the 95-99 percentile range
-95th percentile or greater : ADVERSE
-99th or lower are deemed PLAUSIBLE
CIA DCAT
5 examples of POSSIBLE CORRECTIVE MGMT ACTIONS to reduce likelihood of threat identified by plausible adverse scenarios
1) change pricing
2) suspend payment of dividends
3) raise more capital
4) strengthen of ERM practice
5) increase risk monitoring and reporting
6) mitigate the risk causing the capital shortfall
CIA DCAT
Define
INTEGRATED SCENARIOS
combining 2 or more adverse scenarios
the 2 adverse scenarios may or may not be correlated
Resulting integrated scenario must be REALISTIC ADVERSE and PLAUSIBLE (aka between 95 and 99 percentile range)
use reverse stress test to assess if Integrated scenarios is PLAUSIBLE
CIA DCAT
3 approaches used to determine adverse scenarios
STOCHASTIC risk (such as capital markets, exposure to CATS) are ideally modeled stochastically
DETERMINISTIC
scenarios selected judgmentally by the AA
COMBINATION
risk modeled stochastically and then result used to derive deterministic scenario
CIA DCAT
2 possible approaches to model ripple effects in a DCAT
1) Automatically generated by the model
2) manually created by the AA by modifying appropriate assumptions
CIA DCAT
5 frequency and severity risks that can be included in DCAT
single CAT event (natural, man-made)
single LARGE CLAIM (full PML)
Multiple CAT event
Multiple LARGE CLAIM
Social Inflation (from suits, awards)
CIA DCAT
Examples of RIPPLE EFFECTS arising from
freq and sev risk
insolvency of reinsurer
increase in reinsurance rates or non-availability of coverage for next term
post-event inflation
increased PACICC assessment resulting from failure of other insurers
CIA DCAT
Examples of CORRECTIVE MANAGEMENT ACTIONS to correct for freq and sev risk
1) review reinsurance coverage
2) rate increase
3) change in mix of business
4) restrict writing in hazard-prone zones
CIA DCAT
9 broad risk categories considered in DCAT
1) freq and sev risk
2) policy liabilities risk
3) inflation risk
4) premium risk
5) reinsurance / counterparty risk
6) investment risk
7) governmental / political risk
8) off-balance sheet risk
9) related-company risk
CIA DCAT
5 examples of ADVERSE SCENARIOS from POLICY LIABILITIES risk in DCAT
1) selection of inadequate LDFs
2) class actions and mass torts
3) change in mix of business
4) claims paid faster than assumed
5) actual RoR on investments supporting liabilities lower than assumed
