A Decade of Cash Flow Testing - Some Lessons Learned

The paper outlines the approach that has evolved at the authors’ employer (a major multi-line writer) through ten years of cash flow testing. Methodologies and approaches to parameterization are discussed for major invested asset categories, reflecting both default and repayment risk. Modeling of runoff cash flows for a base scenario (and, for some of these assets, shocked scenarios) is also discussed for major non-invested asset categories. Loss reserve cash flow modeling is not addressed, except for a brief description of one approach to shocking these projected flows. Finally, alternatives are given for presenting the cash flow testing results to management and non-actuarial audiences.