Jacqueline FriedlandJuly 2003

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CAS Risk and Capital Management SeminarInternational Perspectives on DFA – Canadian DCAT

Introduction

History

Role of the CIA

Who?

2001 and 2003 surveys

What’s next?Jacqueline FriedlandJuly 2003

Jacqueline FriedlandJuly 2003

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CAS Risk and Capital Management SeminarInternational Perspectives on DFA – Canadian DCAT

Jacqueline FriedlandJuly 2003

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CAS Risk and Capital Management SeminarInternational Perspectives on DFA – Canadian DCAT

History

DST for valuation actuaries

DCAT for P&C actuaries in 1999

Legal requirement as Appointed Actuary per OSFI

Jacqueline FriedlandJuly 2003

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CAS Risk and Capital Management SeminarInternational Perspectives on DFA – Canadian DCAT

Role of the CIA

Standard of Practice

Educational Note

Surveys

AA Seminar

Jacqueline FriedlandJuly 2003

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CAS Risk and Capital Management SeminarInternational Perspectives on DFA – Canadian DCAT

Educational Note

Definition of DCAT process

Principal goal

Detailed description of process

Jacqueline FriedlandJuly 2003

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CAS Risk and Capital Management SeminarInternational Perspectives on DFA – Canadian DCAT

Educational Note – 11 Risk Categories

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 FriedlandJuly 2003

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CAS Risk and Capital Management SeminarInternational 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 FriedlandJuly 2003

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CAS Risk and Capital Management SeminarInternational 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 FriedlandJuly 2003

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CAS Risk and Capital Management SeminarInternational 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 FriedlandJuly 2003

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CAS Risk and Capital Management SeminarInternational 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 FriedlandJuly 2003

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CAS Risk and Capital Management SeminarInternational Perspectives on DFA – Canadian DCAT

Educational Note – Risk Categories ExpandedDeterioration of Asset Value Drop in market value of debt securities based on increase of 150 basis points Decline in equities consistent with 25% decline in TSE 300 index 50% decline in value of all real estate 75% decline in value of largest subsidiary 

Ripple Effects: Counter-party defaults on derivatives Loss or significant decline of value for other major asset categories Fluctuations in currency values Ratings downgrade leading to decreased new business Liquidity crisis caused by large, sustained default losses Economic conditions related to decline in asset values effecting losses

Jacqueline FriedlandJuly 2003

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CAS Risk and Capital Management SeminarInternational Perspectives on DFA – Canadian DCAT

Who does DCAT apply to?

All federally licensed P&C insurers

Insurers and reinsurers

Large and small

Active and runoff 

Jacqueline FriedlandJuly 2003

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CAS Risk and Capital Management SeminarInternational Perspectives on DFA – Canadian DCAT

2001 Survey

Written survey

In-house AAs of largest Canadian companies

Technical focus

Primary finding: compliance exercise

Jacqueline FriedlandJuly 2003

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CAS Risk and Capital Management SeminarInternational Perspectives on DFA – Canadian DCAT

2003 Survey

12 interviews

Consulting, in-house, and regulatory actuaries

Insurers and reinsurers, small and large companies

Jacqueline FriedlandJuly 2003

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CAS Risk and Capital Management SeminarInternational 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 FriedlandJuly 2003

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CAS Risk and Capital Management SeminarInternational Perspectives on DFA – Canadian DCAT

What’s next?

Continue push to integrate into company business planning

Introduce stochastic modeling – make DCAT truly dynamic

Continue to push value of DCAT

Subject to new Canadian peer review requirements

Revise CIA Educational Note