CIA DCAT Flashcards
List SOP requirements for DCAT
AA should:
• Make an annual investigation of the insurer’s recent and current financial position and condition
• Make a report of each investigation in writing to the BOD. It should identify possible actions for dealing with any threats to satisfactory financial condition
• Make an interim investigation if there is a material adverse change in insurer’s circumstances.
• Ensure that the investigation is current. It should take into consideration recent events and recent financial operating results of the insurer
List goals of stress testing
- Risk identification and control (Institution-wide risks, concentration and interactions between risks in stress envs)
- Providing a complementary risk perspective to other risk management tools
- Supporting capital management
- Improving liquidity management
List key elements of DCAT
- Development of a BaseS
- Analysis of impact of AdvS
- Identification and analysis of various mitigating strategies
- Report to management and BOD or chief agent
- Opinion signed by actuary
List analysis items included in the DCAT
- Reviewing the recent and current financial position of the insurer
- Running a BaseS and several AdvS
- Reporting the results of the analysis, including details on at least three AdvS
List items that need to be recognized even if the projected financial results and future financial positions under the BaseS continue to be consistent with the business plan
- Different distribution assumptions
- Recent management decisions that may not have been anticipated
- Changes in the capitalization of the insurer
- Impact on future xp, due to actual recent xp
List risks included under AdvS required by SOP to test threats to capital adequacy
- Claim frequency and severity risk
- Policy liabilities risk
- Inflation risk
- Premium risk
- Re risk
- Investment risk
- Gov and political risk
- Off-balance sheet risk
- Related company risk
Briefly explain and list inclusions of Ripple Effects
Incident that occurs when an AdvS triggers a change in one or more interdependent assumptions or risk factors
Effects include:
• Adj to assumptions used in the BaseS that may no longer be appropriate in the AdvS being tested
• Insurer’s expected response to adversity
• PHs actions
• Regulatory actions
• Rating agency actions
• Likelihood of changes in planned capital injections
List communications to the BoD in the primary purpose of the DCAT
- Significant risks to which the insurer is exposed
* Possible actions that could be taken to reduce or eliminate the exposure to those risks
List requirements for financial condition to be satisfactory
- Under BaseS and all plausible scenarios, the statement value of the insurer’s assets is greater than the statement value of its liabs
- Under BaseS , the insurer meets supervisory TCR
Briefly explain the DCAT
Allows the actuary to inform the insurer’s management about the implications that the business plan has on capital and to provide guidance on the significant risk to which the insurer will be exposed
What happens if the capital position in a given scenario is inadequate during the forecasted period?
This is not in itself an indication of current or anticipated difficulties. It is the specific degree and timing of capital depletion that indicate the risks to which the insurer is particularly sensitive
Discuss steps included in a typical approach for DCAT
- Review of operations for the recent years and of the financial position at the end of each of them
- Dev and modeling of BaseS for the forecast period
- Assessment of the risk categories and identification of those that are relevant to the insurer’s circumstances
- Selection of plausible AdvS requiring further analysis from the relevant risk categories
- Selection of at least 3 AdvS showing the greatest surplus sensitivity
- Identification of possible corrective management actions and the impact of these on the insurer’s financial condition for each AdvS included in the report
- Identification of possible regulatory actions for each AdvS that causes the insurer to fall below the supervisory TCR
Discuss the selection of plausible AdvS requiring further analysis from the relevant risk categories within the DCAT process
- Modeling of the plausible AdvS likely to significantly impact surplus or that may cause the insurer to fail the MCT during the forecast period
- Identification and modeling of associated ripple effects caused by a change in assumptions triggered by an AdvS
- Consideration of stress testing the AdvS .
***Stress testing means a determination of just how far the risk factor in question has to be changed in order to drive the insurer’s surplus negative during the forecast period, and then evaluating if that degree of change is plausible
Discuss DCAT materiality rigorousness and considerations
Would usually be less rigorous than that used for valuation of the insurer’s policy liabs.
Give considerations to:
• Size of the company
• Financial position of the company
• Nature of the regulatory test
Discuss selection of plausible AdvS
AdvS is considered plausible if it reflects the 95th to 99th percentile
• More than 95th to be adverse
• Less than 99th to be plausible
Briefly explain an integrated scenario
AdvS that results when 2 or more AdvS are combined
Discuss Basic requirements of the model
1 - Model reproduces key elements and pages from FS
• BS: assets, liabs and retained earnings/surplus
• Income statement
• Applicable regulatory measure of capital adequacy
2 - Model is expected to be valid on an accounting basis, the actuary would verify the validity of the model, specifically that: Statement of income = CF + change in BS items
3 - Actuary may use more than one model depending on the LOB and jurisdictions
Briefly discuss model validation in a static environment
• Tested with the BaseS
• Financial results would flow logically from year to next
• When updating an existing model, a retrospective check on validity may be made. Each year, differences between actual and BaseS model results would be justified
• When building a new model, a possible approach could be:
o Use as input the data prior to the most recent actual year and use the xp of the last year to set the parameters
o Compare to the actual result
o The model may be acceptable if the results are found to be sufficiently close
Discuss Stochastic, Deterministic approach and Combination
- Stochastic: Such as those where the statistical loss distribution may be inferred and percentiles for results readily determined
- Deterministic: AdvS are selected judgmentally by the AA, based on considerations such as variability in historical results or credibility of data
- Combination: Modelled stochastically and the results then used to derive a deterministic scenario that reproduces the desired stochastic results
Briefly explain possible approaches to generate the ripple effects
- Automatically generated by the model
- Manually created by the actuary by modifying the appropriate assumptions
***Example: Re rates could automatically increase in the year following a CAT or it could be manually modified by the actuary
Briefly explain level of aggregation of model results and considerations in order to derive model segments
Modelling may be done by LOB, business unit, or geo area, the model results would be aggregated at the legal entity level. In order to derive model segments, AA may consider:
• Management: Reflects the management structure
• Product: Smallest subdivision of business considered
• Investment: Defined based on asset categories
Discuss Claim Frequency and Severity Risk
Adverse scenarios • Single CAT event / large claim • Multiple CAT events / large claims • Other frequency and severity • Social inflation
Possible ripple effect
• Re insolvency
• Increased in policy liabs related to Re contract, which are swing rated and have variable commission
• Loss of Re coverage
• Post-event inflation
• Increase in Re rates or non-availability at next renewal
• Forced sale or liquidation of assets
• Increased PACICC assessment resulting from failure of other insurer
• Rating agency downgrade
Management action • Reviewing Re coverage at renewal • Reviewing the target MOB • Reviewing the type of products offered • Implementing rate increases • Restricting writing in hazard prone areas • Selling or reinvesting assets
Discuss Underestimation of policy liabilities risk
Adverse scenarios • Selection of inadequate LDF • Class actions and other mass torts • Change in MOB • Claims paid faster than assumed • Lower actual ROR on investment supporting liabs than assumed
Ripple effects
• Increase in ultimate claim costs
• Force sale or liquidation of assets
• Rating agency downgrade
Management actions
• Review reserving and claim settlement guidelines
• Review target mix by LOB or jurisdiction
• Settling claims faster
• Implementing rate increase
Discuss Inflation risk
Adverse scenarios
• Significant increase in the general rate of inflation
• Significant increase in the cost following a major event
• Severe recession: increase in # and size of claims
Ripple effects
• Rapid increase in market interest rates
• Increase in operating expenses
• Increase in Re rate on current swing-rated contracts
Management actions • Review Re coverage • Review target MOB • Review type of product offered • Implementing rate increase • Selling or reinvesting assets • Adjusting the ITV or cost calculator
Discuss Premium risk
Premium volume significantly lower than expected
Adverse scenarios
• Entry of new competitor
• Increased competitiveness in a market
• Loss of a key distributor or client
• Action by an influential entity affecting reputation
• Inability to implement planned rate increases
• Non-competitive premium rates
Ripple effects
• Increase in LR due to soft market, inadequate pricing
• Increase in fixed expense ratio
• Shift in portfolio MOB
• Increase in Re cost as % of subject premium
• Forced sale or liquidation of assets
Management actions • Implementing rate change • Reducing personnel • Identifying other distributor • Changing Re coverage • UW actions in market subject to increased competition • Changing MOB • Adj investment portfolio to mitigate CF strains
Discuss Premium risk
Premium volume significantly higher than expected
Adverse scenarios
• Withdrawal of major competitors from a market
• Appointment of a key distributor
• Unexpected new business from a large client
• Action by an influential entity affecting reputation
• Unexpected success in a new market/product
• Premium rates set too low
Ripple effects • Higher LR on new business due to inadequate pricing • Shift in portfolio MOB • Higher expenses • Increased PACICC and pool assessments • Increased Re costs
Management actions • Implementing rate changes • UW actions in unprofitable market • Review the distribution channel • Reducing certain type of expenses (advertising) • Using Re to mitigate capital strain
Discuss Reinsurance risk
Adverse scenarios • Increase in Re rates or reduction in Re commissions • Reduction in capacity • Disputes over policy provision • Re insolvency: -Affiliated vs unaffiliated Re -Registered vs unRe -Concentration of Re -Rating of Re
Ripple effects
• Increase in Re rate due to replacement
• Reduced availability of Re
Management actions • Changing Re structure • Diversifying participants in the Re program • Increase retention limit • Changing Re • Reducing primary policy limits
Discuss Investment risk
Can lead to changes in:
• Market value of debt and equity
• Default rate on debt securities
• Match CFs on assets and liabs
Adverse scenarios
• Significant change in the yield curve
• Increase in default rate on debt securities
• Significant change in foreign exchange rates
• Decrease in return or value of equities, real estate, subsidiaries or other assets
Ripple effect
• Forced sale or liquidation of assets
• Significant CF (+/-) affecting liquidity position
• Rating agency downgrade
• Negative change on derivative position
• Counterparty default on derivative
• Liquidity crisis caused by large sustained default losses
• Increase in freq/sev of claims from worsened economy
• Change in discount rate used for calculating APV of policy liabs
Management actions • Selling or reinvesting assets • Changing the investment strategy • Repositioning derivative tools • Implementing rate increases • Reducing costs through layoffs, consolidation, etc.
Discuss Government and political risk
Adverse scenarios
• Rate freeze by regulator
• Change to regulation regarding rating variables
• Change in prescribed levels of insurance coverage
• Change in regulatory solvency standards
• Nationalization/privatization of a LOB
• Change in taxation rates or rules
Ripple effects • Deterioration of LR • Reduced availability of Re • Increased volume of industry pools • Increased regulatory monitoring • Forced sale or liquidation of assets • Problems with Re coverage • Increase Re rates or non-availability
Management actions
• Reducing volume or business written
• Review target MOB by LOB or jurisdiction
• Review Re coverage
• Creating a separate company or distribution channel
Discuss Off-balance sheet risk
Adverse scenarios • Structured settlement • Contingent liabs • LOC and pledged assets • Pension under-funding • Derivative instruments -Market risk (Liquidity risk, Basis risk) -Credit risk -Management risk -Legal risk
Ripple effects
• Forced sale or liquidation of assets
• Significant CF affecting liquidity position
Management actions • Selling or reinvesting assets • Changing the Re strategy • Repositioning of derivative tools • Reducing costs — layoff, consolidation • Changing pension plan form
Discuss Related company risk
Adverse scenarios
• Increased reliance on parent financial support
• Increase in financial support to parent
• High level of dependency on group operational resources
• Rating agency downgrade of the group
Ripple effects
• Management focus on group
• Need to provide for disruption of service
• Regulator action to protect PH
Management actions
• Find alternative source of fund for support
• Adj premium volume and MOB
• Review Re coverage to mitigate capital strain
• Review target MOB
• Review type of products offered
• Selling or reinvesting assets
