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CAS Risk and Capital Management Seminar International Perspectives on DFA – Canadian DCAT

CAS Risk and Capital Management Seminar International Perspectives on DFA – Canadian DCAT. Introduction History Role of the CIA Who? 2001 and 2003 surveys What’s next?. Jacqueline Friedland July 2003.

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CAS Risk and Capital Management Seminar International Perspectives on DFA – Canadian DCAT

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  1. 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 Friedland July 2003

  2. CAS Risk and Capital Management SeminarInternational Perspectives on DFA – Canadian DCAT Difference in US and Canada: Regulatory Requirement in Canada

  3. 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

  4. CAS Risk and Capital Management SeminarInternational Perspectives on DFA – Canadian DCAT Role of the CIA • Standard of Practice • Educational Note • Surveys • AA Seminar

  5. CAS Risk and Capital Management SeminarInternational Perspectives on DFA – Canadian DCAT Educational Note • Definition of DCAT process • Principal goal • Detailed description of process

  6. 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

  7. 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

  8. 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

  9. 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

  10. 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

  11. CAS Risk and Capital Management SeminarInternational Perspectives on DFA – Canadian DCAT Educational Note – Risk Categories Expanded Deterioration 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

  12. 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

  13. 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

  14. 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

  15. CAS Risk and Capital Management SeminarInternational Perspectives on DFA – Canadian DCAT 2003 Survey Technical issues Timing Report/presentation Purpose/use MCT Areas for improvement Opinion statement Relationship with regulators

  16. 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

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