ICRFS-Plus™ Demonstration videos
ICRFS-Plus™ is a tour de force of interactive software design and computational speed.
An ICRFS-Plus™ corporate database, which is not difficult to create, enables complete executive oversight. This means that that you will be able to find, with just a few mouse clicks, models and reports for any segment of your business in any country, the actuary modelling that segment of the business, capital allocation by LOB and calendar year, reserve risk charge and underwriting risk charge for the aggregate of LOBs, whether outward reinsurance is effective in respect of reducing retained risk, and more. Creation of an ICRFS-Plus™ database from triangles stored elsewhere or unit record transactional data is also seamless and effortless using COM scripts.
One great benefit of ICRFS-Plus™ is that you can manage and measure all your long tail liability risks with a single composite model. Only one model for each company!
A single composite model measures the reserve, underwriting and combined risks for each LOB and the aggregate.
One double click loads the model and reveals pictorially the volatility structure of each long tail LOB in your company and their inter-relationships (correlation structures). All the critical financial information such as risk capital allocation by LOB and calendar year, and Tail Value-at-Risk for different time horizons can be computed in a matter of seconds. A company-wide report can be created effortlessly with a single report template.
In respect of Solvency II Capital Requirements (SCR), Market Value Margins (Risk Margins) and Technical Provisions (Fair Value of Liabilities), for the aggregate of multiple LOBs, video chapter 5 provides Insureware's solution to the one year risk horizon.
View the videos below to experience the numerous unique benefits and applications afforded by a unique paradigm shift.
Some of the (real) case studies modelled in the videos are also discussed briefly in the ICRFS-Plus™ brochure.
These videos are arranged in logical order so it is important that you view them that way.
If for any reason you are unable to view the training or demonstration videos, please contact our support staff at support@insureware.com and we will arrange to send you a copy of the videos on CD-ROM. You will be able to run the videos from the CD.
Table of Contents
1. Introduction to ICRFS-Plus™
2. Applications of the PTF and ELRF modelling frameworks
3. The MPTF modelling framework
4. Capital Management of all long tail liabilities
- 5.1 Our solution for calculating the long-tail liability Solvency II risk measures for the one-year risk horizon
- 5.2 Solvency II risk measures for a real life example involving six LOBs
- 5.3 Comparison of TP+SCR with undiscounted BEL
- 5.4 Consistency of estimates of prior accident year ultimates and Solvency II metrics on updating
8. Importing data into ICRFS-Plus and COM Automation
9. Additional applications of ICRFS-Plus™
10. Bootstrap: how it shows the Mack method doesn't work
Solvency II one year risk horizon: SCR, Best Estimate of Liabilities (BEL), Technical Provisions (TP), and Market Value (Risk) Margins (MVM) for the aggregate of long-tail LOBs
In the following four videos, we present a mathematically tractable solution to the Solvency II risk metrics for the one year risk horizon that is not recursive or circular. Our solution is based on relevant Solvency II directives and consultation papers.
It is only in the Probabilistic Trend Family (PTF ) and Multiple PTF (MPTF) modelling frameworks that parameter uncertainty and forecast assumptions going forward are explicit, auditable, and can be monitored in a sound probabilistic framework.
In order to compute the Solvency II metrics, it would typically be necessary to conduct 20 million simulations in order to have sufficient accuracy at the 99.5th percentile for 100,000 conditional simulations. As our proprietary algorithms can simulate correlated lognormals conditional on the sum of lognormals (being at 99.5%), we do not take this approach. Instead, we can run 100,000 simulations unconditionally, and another 100,000 conditional simulations - a significantly faster algorithm with no loss of accuracy.
Statistical and mathematical technicalities are treated in the first video.
The second video considers a real life example comprising six LOBs. Solvency II metrics are computed for the most volatile LOB and the aggregate of all LOBs to illustrate, amongst other things, risk diversification credit of SCR and Technical Provisions.
In the third video it is shown that for the aggregate of the six LOBs,
Technical Provisions + SCR = Undiscounted Reserves,
assuming a risk free rate of 4% and a spread of 6%. This is due to risk diversification credit of writing the six LOBs that are uncorrelated.
This result is far from true for the most volatile LOB4, were it the only one written!
Each year, Solvency II metrics are recomputed. In the fourth video, we discuss conditions under which estimates of prior year ultimates and related solvency II metrics are statistically consistent on updating.
5.1 Our solution for calculating the long-tail liability Solvency II risk measures for the one-year risk horizon
This video discusses Best Estimates of Liabilities (BEL), Market Value Margins (or Risk Margins), Technical Provisions (TP), and Solvency Capital Requirements (SCR). It is emphasized that calendar year loss distributions and their correlations are necessary to compute any solvency II risk measure.
Our solution to the one-year risk horizon is shown to arise directly out of relevant directives and consultation papers. Our solution is not recursive or circular contrary to other proposed solutions.
For the one-year risk horizon, risk capital is raised at the beginning of each year. The cost of raising the risk capital, the Market Value Margin (MVM) or premium on the risk capital, is paid to the capital providers at the end of each year along with any unused risk capital. The sum of the MVMs and the Best Estimate of Liabilities (BELs) for each calendar year is the Technical Provision (also referred to as Fair Value of Liabilities).
We show that based on the directives and definition of the first calendar year being in distress that SCR is given by the equation,
SCR = VaR(1) + ΔTP,
where VaR(1) is the VaR99.5% for the first calendar year and ΔTP is the additional technical provisions for the subsequent years if the first year is in distress.
The SCR is required to cover the losses for the distressed year (VaR99.5%) and to restore the fair value (technical provisions) of the balance sheet at the beginning of the second year. The ΔTP is allocated to each year as required to ensure that there is sufficient monies to meet the additional BEL and sufficient MVM to raise the risk capital in the event of the first calendar year being a distressed year.
Click here to view this video. Powerpoint slides referenced in this video are available here.
5.2 Solvency II risk measures for a real life example involving six LOBs
The second video considers a real life example comprising six LOBs. Solvency II metrics are computed for the most volatile LOB and the aggregate of all LOBs to illustrate, amongst other things, risk diversification credit of SCR and Technical Provisions.
The most volatile LOB (LOB 4) possesses much process variability and a large degree of parameter uncertainty. The base development year trend is not negative until development year six. As a result of this, and a high calendar trend assumption going forward, it takes ten years before 50% of the total reserves are paid out. More importantly, the high correlations of the calendar year paid loss distributions have a large impact on the additional technical provisions required if the first calendar year is in distress, resulting in an SCR that is a high proportion of BEL.
By contrast, for the aggregate of the six LOBs, 50% of the total reserves are paid out in the next two years and the paid loss calendar year correlations are comparatively low. Furthermore, there is only significant (low) process correlation between two LOBs. Accordingly, there is significant diversification credit in respect of SCR and risk capital allocation by writing the six LOBs instead of just the single, most volatile LOB.
Indeed, if only the most volatile line was written, then the SCR as a percentage of BEL, is close to 100%! For the aggregate, however, the SCR as a percentage of BEL is only 11%.
Click here to view this video.
5.3 Comparison of TP+SCR with undiscounted BEL
In the third video it is shown that for the aggregate of the six LOBs,
Technical Provisions + SCR = Undiscounted Reserves,
assuming a risk free rate of 4% and a spread of 6%. This is due to risk diversification credit of writing the six LOBs that are uncorrelated.
This result is far from true for the most volatile LOB4, were it the only one written!
In practice, we conclude that Solvency II capital requirements are not expected to be a burden on insurers or reinsurers with good diversification between LOBs, even when highly volatile lines are written as part of their portfolio.
Click here to view this video.
5.4 Consistency of estimates of prior accident year ultimates and Solvency II metrics on updating
It is first explained using a simulation example that calendar year trends project onto development years and accident years. Consequently, estimates of prior accident year ultimates and Solvency II risk measures are statistically consistent on updating only if assumptions going forward are consistent.
One does not want to be in a position where the distress situation in the next calendar year is due to model error distress rather than outcomes in the tail of the projected loss distributions.
A real life example is considered involving updating that illustrates the importance of explicit assumptions going forward and shows consistency of estimates of prior accident year ultimates and Solvency II metrics.
Click here to view this video.
For additional information on ICRFS-Plus™ features - click here.
Solvency II Capital requirements for each LOB and the aggregate of all LOBs are only met by ICRFS-Plus™ in a sound statistical framework.