CIA – DCAT

September 1, 2018 0 By c.boersma

CIA, 

Stress testing goals

  • Risk identification and control
  • complementary risk perspective to other risk management tools—
  • capital management
  • liquidity management

Approach

  • Review of operations for the recent years
  • Development and modelling of the base scenario
  • Assessment of the risk categories and identification of those that are relevant to the insurer’s circumstances.
  • Selection of plausible adverse scenarios requiring further analysis from the relevant risk categories:
    • Development and modelling of the plausible adverse scenarios that are likely to significantly impact surplus.
    • Identification and modelling of associated system-wide interactions and feedback effects (ripple or second-order effects and macroeconomic effects) caused by a change in assumptions triggered by an adverse scenario.
    • Reverse stress testing means a determination of just how far the risk factor(s) in question has to be changed in order to drive the insurer’s surplus to negative during the forecast period, and perhaps evaluating if that degree of change is plausible
  • Selection of at least three scenarios
  • Identification of possible corrective management actions
  • Identification of possible regulatory actions

Key elements

  • Development of a base scenario;
  • Analysis of the impact of plausible adverse scenarios;
  • Identification and analysis of the effectiveness of various corrective management actions to mitigate risks;
  • A report on the results of the analysis and recommendations to the insurer’s management and the board of directors or chief agent; and
  • An opinion signed by the Appointed Actuary and included in the report on the financial condition of the insurer.

Method (CSOP 2520)

Reviewing the recent and current financial position of the insurer;
• Running a base scenario and several adverse scenarios; and
Reporting the results of the analysis, including details on at least three adverse scenarios.

Adverse Scenarios

Summary of Risks

  • Future: Claim Frequency / Severity / Inflation
  • Past: Unpaid Claims
  • Sales (Premium)
  • Yield / Market
  • Reinsurance
  • Other Risks: Government, Off Balance Sheet, Parent-Subsiduary

Claim Frequency and Severity Risk

  • Single catastrophic event
  • Single large claim
  • Multiple catastrophic events
  • Multiple large claims

Policy Liabilities Risk

  • Selection of inadequate loss development factors
  • Class actions and other mass torts
  • Change in mix of business
  • Claims paid faster than assumed
  • Actual rate of return on investments significantly lower

Inflation Risk

  • A significant, rapid, and sustained increase in the general rate of inflation
  • A significant temporary increase in the cost of labour and materials following a
    catastrophe or other major event
  • A severe recession in the economy

Premium Risk

  • Entry of a new and strong competitor into a market
  • Increased competitiveness in a market;
  • Loss of a key distributor, or even an entire distribution channel;
  • Loss of a key client;
  • Action by any influential entity (consumers, distributors, rating agencies, etc.) that affects the company’s reputation or growth negatively;
  • Inability to implement planned premium rate increases; and
  • Non-competitive premium rates
  • Withdrawal or failure of major competitors from a market;
  • Unexpected new business from a large client;
  • Unexpected success in a new product area, or against previously stronger competition;

Reinsurance Risk

  • Reinsurer insolvency
  • An increase in reinsurance rates or a reduction in reinsurance commission
  • Reduction in capacity
  • Disputes over policy conditions

Investment Risk

  • A significant change in the yield curve;
  • An increase in the default rate on debt securities;
  • A decrease in the returns and/or value of equities, real estate or subsidiary;
  • A significant change in foreign exchange rates; and
  • A decrease in the returns and/or value of other major asset categories.

Government Risk

  • A rate freeze or rollback of rates by a government body or regulator on lines of business and jurisdictions in which rates are subject to regulatory approval
  • A change to regulations regarding use of rating variables that may impact the adequacy of
    rates and availability of insurance on lines of business and jurisdictions in which rates are
    subject to regulatory approval;
  • An increase in taxation rates or rules for corporations, such as income tax, capital gains
    tax deductions, or offshore income;
  • Nationalization or privatization of a line of business in a jurisdiction;

Off-Balance-Sheet Risk

  • Structured settlement
  • Contingent liabilities or losses
  • Letters of credit and pledged assets
  • Capital maintenance agreements
  • Derivative instruments
  • Pension Underfunding

Related Company Risk

  • A reduction in reliance on the parent company for financial support
  • An increase in the provision of financial support to the parent
  • A high level of dependency on group operational resources
  • A rating agency downgrade reflecting difficult financial conditions at the group level.

Ripple Effects

  • Re-insurance: Insolvency / Loss of coverage / Availability / Increase in rates
  • Post-event inflation (in region / out-of region)
  • Increases in policy liabilities related to re-insurance
  • Forced sale or liquidation of assets;
  • Other insurer failures
  • Rating Agency downgrade
  • Increase in market interest rates
  • Increase in operating expenses
  • Increase in loss ratio
  • Significant positive or negative cash flow
  • A liquidity crisis caused by large, sustained default losses;

Corrective Actions

  • Reviewing reinsurance
  • Rate changes
  • Restricting writing
  • Reviewing the target mix
  • Selling or reinvesting assets.
  • Underwriting actions
  • Adjusting the insurance to value or cost calculator.
  • Reducing personnel
  • Identifying other distributors for the company’s product(s);
  • Changing the investment strategy;
  • Finding alternative sources of funds for operational support;