Session C7: Dynamic Risk Modeling
Loss Simulation Model Working Party
Goals & Progress Report
Mark R. Shapland, FCAS, ASA, MAAA
Consulting Actuary
Casualty Actuarial Society Spring Meeting
Disney Contemporary Resort
Orlando, Florida
June 18, 2007
Creation of LSMWP
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Sponsored by DRMC in 2005, began work in 2006.
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Purpose: Create a simulation model that will generate
claims that can be summarized into loss development
triangles and complete rectangles.
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Deliverables: Open source program available to CAS
members, CAS seminar, and paper documenting
work.
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Time Frame: Test, refine and document prototype in
2007. Begin alternate versions in 2007, test &
document in 2008.
Goals of LSMWP
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Triangles by layer, claim information type (e.g., paid,
incurred, Salv & Sub, claim counts, etc.), hazard, line
of business, etc.
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NOT focusing on testing of reserving methods, but
creating simulated data sets for future research.
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Primary criterion for judging quality of model is
realism – i.e., data cannot be distinguished
statistically from real data sets.
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Procedures to review and test proposed
modifications.
LSMWP Organization
WP Co-Chairs:
Robert Bear
Mark Shapland
Group A:
Literature & Test Criteria
Group B:
Data, Parameters & Testing
Group C:
Model Development
Curtis Parker
Joseph Marker
Richard Vaughn
LSMWP Organization

Group A: Literature & Test Criteria (Curtis Parker)
– Survey existing literature and prepare bibliography.
– Develop testing criteria for using simulated data in
reserve model testing.
• Necessary to assure model will support future
research.
– Develop testing criteria for determining “realism” of
simulated data.
• Can simulated data be statistically distinguished
from actual data?
• Ultimate test: “DRM Challenge”
LSMWP Organization

Group B: Data, Parameters & Testing (Joe Marker)
– Identify data sources: Create spreadsheet of test
data.
– Develop parameters for data sources.
– Test model and data using criteria from Group A.

Group C: Model Development (Richard Vaughan)
– Evaluate modeling options and develop simulation
model in at least two software environments. Open
source for future enhancements.
– Refine and enhance model as a result of feedback
from Group B. Document for CAS paper.
Modeling Approach

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Modeling individual transactions rather than
aggregate triangles:
– Don’t need triangle time intervals.
– Can be used to test individual loss models.
– Avoids criticism that “Of course that model predicts
that simulated data well, the simulated data is
based on that model!”
– Easier to test against real data.
Use intervals of one day for lags and waiting periods.
Simulate each event usually in a claims system.
Output in transaction details or a higher level of
aggregation, such as loss triangles.
Status Report – Group A

Surveyed the literature on loss simulation and use of
simulation to test reserving methods.

It is working to refine an approach to test the “realism”
of simulated triangles.

The current approach is summarized in an upcoming
ASTIN paper by Glenn Meyers titled “Thinking
Outside the Triangle.”
Status Report – Group B

Working closely with a Data Source that has provided
data for testing purposes.

Ball State University students have done the
necessary database work and are busy estimating
parameters for the prototype model.
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Will complete testing the prototype and alternative
versions after the Ball State course.
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Will suggest model refinements and document test
results.
Status Report – Group C
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Developed and documented an APL prototype model.
Expect the APL version will available to CAS
members with documentation in 2007.
Work on a Visual Basic version is underway.
– The interface and model features will differ
somewhat due in part to differences in software
capabilities.
– This version will be fully tested and documented in
2008.
A version in the free statistical package R may also
be developed. R is used by Group A for statistical
testing and Group B for parameter estimates.