Marshall

Question 1

2 sources of uncertainty

Answer 1

systemic risk and independent risk

Question 2

Describe systemic risk

Answer 2

Systemic risk represents risks that are common across valuation classes or claim groups

Question 3

2 sources of systemic risk

Answer 3

1. Internal Systemic risk
2. External systemic risk

Question 4

Describe internal systemic risk

Answer 4

Risks internal to the insurance liability valuation/modeling process. such as model structure, model parameterization and data accuracy.
This risk is also called Model Specification risk

Question 5

Describe External systemic risk

Answer 5

Risks external to the insurance liability valuation/modeling process. such as future trends in claim cost outcomes (material costs, labor costs) that may cause actual experience to differ from what is expected based on the current environment and trends

Question 6

Describe independent risks

Answer 6

Risks that occur due to the randomness inherent in the insurance process

Question 7

Two sources of independent risk

Answer 7

1. The random component of parameter risk
2. The random component of process riskD

Question 8

Describe the random component of parameter risk

Answer 8

represents the extent to which the randomness associated with the insurance process affects the ability to select appropriate parameters in the valuation models

Question 9

Describe the random component of process risk

Answer 9

Represents the pure effect of the randomness associated with the insurance process

Question 10

What techniques are best suited for analyzing sources of independent risk and historical external systemic risk

Answer 10

Traditional quantitative modeling techniques (bootstrapping, stochastic chain-ladder)

Question 11

Reasons stochastic modeling techniques do NOT capture all sources of uncertainty

Answer 11

1. Good models fit past data well. This tends to remove past episodes of external systemic risk, leaving only random sources of uncertainty behind
2. When past episodes of external systemic risk are not completely removed from the model, consideration must be given to whether or not we should expect these episodes to continue into the future
3. Models normally do not capture uncertainty arising from internal systemic risk

Question 12

3 sources of internal systemic risks

Answer 12

1. Specification error
2. Parameter selection error
3. Data error

Question 13

Describe specification error

Answer 13

The error that arises because the model cannot perfectly model the insurance process

Question 14

Describe Parameter selection error

Answer 14

the error that arises because the model cannot adequately measure all predictors of future claim costs or trends in these predictors

Question 15

Describe the data error

Answer 15

The error that arises due to the lack of credible data. This can also refer to an inadequate knowledge of the portfolio being analyzed, including pricing, underwriting, and claims management processes

Question 16

Approach to analyzing internal systemic risk

Answer 16

• A balanced scorecard is developed to objectively assess the model specification against a set of criteria
• for each of the sources of internal systemic risk, risk indicators are developed and scored against the criteria.
• The scores are aggregate for each valuation class and mapped to a quantitative measure (CoV) of the variation arising from internal systemic risk

Question 17

Examples of external systemic risks

Answer 17

1. Economic and social risks (uncertainty associated with inflation, social trends)
2. Legislative, political and claim inflation risks (the uncertainty associated with changes in the political landscape, shifts/trends in the level of claim settlements)
3. Claim management process changing risk (uncertainty associated with changes in claim reporting, payment, estimation)
4. Expense risk (uncertainty associated with the cost of managing the run-off of the insurance liabilities or the cost of maintaining the unexpired risk until the date of loss)
   5.Event risk (uncertainty associated with claim costs arising from events, either natural or man-made)
5. Latent claim risk (uncertainty associated with claims that arise from sources that are not currently covered such as asbestos)
6. Recovery risk (uncertainty associated with recoveries either reinsurance or non-reinsurance)

Question 18

Correlation effect for independent risk

Answer 18

assumed to be uncorrelated with any other source of uncertainty, either within a particular valuation class or between classes

Question 19

Correlation effect for internal systemic risk

Answer 19

Assumed to be uncorrelated with independent risk, and with each source of external system risk.
However, internal system risk tends to be correlated between valuation classes AND between OLC’s and OL’s

Question 20

Correlation effect for external systemic risk

Answer 20

Assume that each risk category is uncorrelated with independent risk and internal systemic risk.
However, correlation may exist between risks that belong to similar external system risk categories.
If correlation occurs, correlated risk categories can be aggregated into broader categories that are not correlated

Question 21

For independent risk, internal benchmarking should be done for 2 main dimensions

Answer 21

1. Portfolio size - the larger the portfolio, the lower the volatility arising from the random effects
2. Length of claim run-off - the longer a portfolio takes to run-off, the more time there is for random effects to have an impact

Question 22

Describe Outstanding claim liability independent risk CoV for long-tail vs. short-tail

Answer 22

OCL CoVs for short-tail portfolios should be lower than similarly sized long-tailed portfolios, and substantially lower than smaller long-tailed portfolio

Question 23

Compare independent risk CoV for long-tailed vs. short-tailed and PL vs. OLC

Answer 23

PL CoVs for long-tailed portfolios should be higher than OCL CoV for the same portfolio due to the law of large numbers. The PLs for long-tailed lines will be smaller resulting in more volatility.
PL CoVs for short-tailed portfolios should be lower than OCL CoVs for the same portfolios due to the law of large numbers. The PLs for short-tailed lines will be larger since most of the OCLs will have already closed, resulting in less volatility for the PLs.

Question 24

Comparing internal systemic risk CoVs for long-tailed vs. short-tailed

Answer 24

Long-tailed portfolios should have higher CoVs than short-tailed portfolios sine the long-tailed tend to be more complicated.
Classes with homogeneous claim groups should have similar CoVs

Question 25

Comparing external systemic risk CoV for long-tailed vs. short-tailed

Answer 25

Long-tailed portfolios should have higher CoVs than short-tailed
Except: event risk and liability risk for home classes

Question 26

What factors should we consider when choosing the statistical method

Answer 26

1. The valuation class being assessed
2. The materiality of the independent risk for that class relative to the overall claims portfolio risk margin
3. The cost and effort associated with applying the method

Question 27

What method should we use for independent risk assessment for OCL

Answer 27

GLM
GLM is used for reserving purposes to identify the key factors that have contributed to past claim costs.
Bootstrapping is less flexible than GLM, but can be used to help assess random effects

Question 28

Methods used for independent risk assessment for premium liabilities

Answer 28

Bootstrapping, GLM, Bayesian

Question 29

Goal of sensitivity testing

Answer 29

Gain insights about the sensitivity of the final risk margin to key assumptions.

Question 30

Goal of scenario testing

Answer 30

Tie the risk margin to a set of valuation outcomes. We adjust the assumptions used for the central estimate in order to align the central estimate with the assessed provisions including the risk margin

Question 31

Goal of internal benchmarking

Answer 31

Compare the proposed CoVs to one another to check for internal consistency and reasonableness

Question 32

Goal of external benchmarking

Answer 32

compare the reasonableness of CoVs and risk margins to those from external sources

Question 33

Goal of hindsight analysis

Answer 33

Compare the past reserve estimates of liabilities against the latest view of the same liabilities to review the actual volatility in the past

Question 34

Goal of independent risk assessment

Answer 34

use a model to ‘fit away’ past systemic episodes in order to analyze the residual volatility in order to get the CoVs for independent risk

Question 35

Goal of balanced scorecard (internal systemic risk assessment)

Answer 35

Assess the adequacy of the modeling infrastructure and its ability to reflect and predict the underlying insurance process