1. Presenting DFA Results to Decision Makers Spring 2008 Midwest Actuarial Forum

2. Agenda Overview of committee work Sample presentation (illustration purposes only) Examples of slides using Power Point

3. Presenting DFA Results to Decision Makers 2003 CAS Research Working Party: Executive Level Decision Making using DFA Scott Sobel, FCAS, MAAA

4. Agenda  What are the challenges in presenting DFA results?  What are some common elements in a DFA presentation?  What elements vary in DFA presentations?  What are the end products of the working party’s efforts?

5. DFA studies driven by probability distributions Volume of data can be overwhelming Complexity of the modeling process Easy to get lost in the details Challenges in Presenting DFA Results

6. State the options to be evaluated State the financial metrics for the evaluation Summarize the model assumptions Display ranges of results for the financial statistics of interest Compare key financial statistics Conclude with evaluation of the options Common Elements in DFA Presentations

7. Varying Elements in DFA Presentations Options to be evaluated are specific to the DFA study Financial metrics are the choice of the management team – varies by company Display of results need to reflect these choices The particular graphs selected Comments placed on the graphs Conclusion – dependent on option types

8. End Products of the Working Party Efforts Summary report PowerPoint template for graphs Paper describing concepts behind template Three sample presentations applying template graphs Guidelines for Presenting DFA.doc Web site http://www.casact.org/research/drmwp/

9. Investment Option Review Example 2003 CAS Research Working Party: Executive Level Decision Making using DFA Michael R. Larsen, FCAS, MAAA

10. Goals of Study Review Reinvestment Options Measure results using simulation model results Risk as Average Loss in Surplus in Worst 1% of Cases over Five Years Return as Average Increase in Policy Holder Surplus at End of Five Years

11. Change in Reinvestment Allocation

12. DFA flow Work Comp Grow 5% a year Multi_Peril Grow 5% a year Financial Calculator Starting Policy Holder Surplus 40,000 Corporate Elements Reinsurance Investment Capital MixTaxes Financial Results Simulated over Five Years Analyze Results Measures of Risk Return Change in Policy Holder Surplus

13. Model / Assumptions Assumption s Behind Simulation Assume Underwriting Operations Not Affected Ability to take rate changes not driven by investment results Growth rates in exposure does not change Investment Scenario Long run average interest rate of 4% Starting interest rate of 4% Investment Models Short term interest rate model is a mean reversion model Long term rates are a function of short term rates Stock returns modeled as a function of short term rates and interest rate changes Stable relationship between bond and equity market

14. Policyholder Surplus Change by Reinvestment Option

15. Surplus Change Over Time by Investment Option

16. Investment Option Comparison Better Option D highest return less risk

17. Investment Option Summary OptionReturnRisk A12.617.2 B13.617.0 C13.817.0 D14.216.9

18. Conclusion Reviewed four reinvestment options Option D gives best gain in Surplus with less additional risk

19. DFA presentation Template

20. Uncertainty

21. Aggregate Distribution Stop Loss

22. Liability cash flow Practically, no chance of paying this much

23. Ranking

24. Value of Reinsurance what you give up what you get back no reinsurance current reinsurance

25. Development & Trends

26. Cash Flow over time Still going and going and going…

27. Cash Flow over time Theoretically possible ranges More realistic outcomes

28. Allocations

29. Change in Allocation More bonds Less Equity

30. Change in Allocation More bonds Less Equity

31. Not to Do

32. Too Much Info