CAS Risk and Capital Management Seminar
International Perspectives on DFA – Canadian DCAT
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Introduction
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History
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Role of the CIA
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Who?
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2001 and 2003 surveys
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What’s next?
Jacqueline Friedland
Jacqueline
July 2003 Friedland
July 2003
1
CAS Risk and Capital Management Seminar
International Perspectives on DFA – Canadian DCAT
Jacqueline Friedland
July 2003
2
CAS Risk and Capital Management Seminar
International Perspectives on DFA – Canadian DCAT
History
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DST for valuation actuaries
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DCAT for P&C actuaries in 1999
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Legal requirement as Appointed Actuary per OSFI
Jacqueline Friedland
July 2003
3
CAS Risk and Capital Management Seminar
International Perspectives on DFA – Canadian DCAT
Role of the CIA
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Standard of Practice
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Educational Note
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Surveys
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AA Seminar
Jacqueline Friedland
July 2003
4
CAS Risk and Capital Management Seminar
International Perspectives on DFA – Canadian DCAT
Educational Note
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Definition of DCAT process
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Principal goal
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Detailed description of process
Jacqueline Friedland
July 2003
5
CAS Risk and Capital Management Seminar
International Perspectives on DFA – Canadian DCAT
Educational Note – 11 Risk Categories
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Frequency and severity
Pricing
Misestimation of policy liabilities
Inflation
Interest rate
Premium volume
Expense
Reinsurance
Deterioration of asset values
Government and political action
Off balance sheet risk
Jacqueline Friedland
July 2003
6
CAS Risk and Capital Management Seminar
International Perspectives on DFA – Canadian DCAT
Educational Note – Risk Categories Expanded
Frequency and Severity:
 Single catastrophic loss
 Multiple catastrophic losses
 Multiple large losses
 Loss ratio (frequency and severity)
Pricing
 Rate freeze
 Increased competition
 Parameter risk, estimation error or data errors
Jacqueline Friedland
July 2003
7
CAS Risk and Capital Management Seminar
International Perspectives on DFA – Canadian DCAT
Educational Note – Risk Categories Expanded
Misestimation of Policy Liabilities
 Significant understatement of unpaid claim liability
 Significant understatement of cost to settle future claims
Inflation
 Significant rapid and sustained increase in general inflation rate
 Significant sustained increase in rate of social inflation
 Significant temporary increase in cost of labour and materials
following property catastrophe
 Severe recession in general economy
Jacqueline Friedland
July 2003
8
CAS Risk and Capital Management Seminar
International Perspectives on DFA – Canadian DCAT
Educational Note – Risk Categories Expanded
Interest Rate
 Change in future rates of interest
 Change in claims payment pattern
Premium Volume
 Significant reduction in premium volume
 Significant increase in premium volume
Jacqueline Friedland
July 2003
9
CAS Risk and Capital Management Seminar
International Perspectives on DFA – Canadian DCAT
Educational Note – Risk Categories Expanded
Expense
 Severe inflationary environment
 Unexpectedly low premium volume
 Technology obsolescence
 Court decisions related to market conduct
 PACICC assessments
Reinsurance
 Reinsurer insolvency
 Increase rates or reduced commissions
 Reduction in capacity
 Disputes over policy conditions
Jacqueline Friedland
July 2003
10
CAS Risk and Capital Management Seminar
International Perspectives on DFA – Canadian DCAT
Educational Note – Risk Categories Expanded
Deterioration of Asset Value
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Drop in market value of debt securities based on increase of 150 basis points
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Decline in equities consistent with 25% decline in TSE 300 index
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50% decline in value of all real estate
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75% decline in value of largest subsidiary
Ripple Effects:
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Counter-party defaults on derivatives
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Loss or significant decline of value for other major asset categories
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Fluctuations in currency values
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Ratings downgrade leading to decreased new business
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Liquidity crisis caused by large, sustained default losses
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Economic conditions related to decline in asset values effecting losses
Jacqueline Friedland
July 2003
11
CAS Risk and Capital Management Seminar
International Perspectives on DFA – Canadian DCAT
Who does DCAT apply to?
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All federally licensed P&C insurers
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Insurers and reinsurers
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Large and small
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Active and runoff
Jacqueline Friedland
July 2003
12
CAS Risk and Capital Management Seminar
International Perspectives on DFA – Canadian DCAT
2001 Survey
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Written survey
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In-house AAs of largest Canadian companies
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Technical focus
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Primary finding: compliance exercise
Jacqueline Friedland
July 2003
13
CAS Risk and Capital Management Seminar
International Perspectives on DFA – Canadian DCAT
2003 Survey
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12 interviews
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Consulting, in-house, and regulatory actuaries
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Insurers and reinsurers, small and large companies
Jacqueline Friedland
July 2003
14
CAS Risk and Capital Management Seminar
International Perspectives on DFA – Canadian DCAT
2003 Survey
1) Technical issues
2) Timing
3) Report/presentation
4) Purpose/use
5) MCT
6) Areas for improvement
7) Opinion statement
8) Relationship with regulators
Jacqueline Friedland
July 2003
15
CAS Risk and Capital Management Seminar
International Perspectives on DFA – Canadian DCAT
What’s next?
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Continue push to integrate into company business
planning
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Introduce stochastic modeling – make DCAT truly
dynamic
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Continue to push value of DCAT
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Subject to new Canadian peer review requirements
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Revise CIA Educational Note
Jacqueline Friedland
July 2003
16