A Framework for Forecasting Property/Casualty Insurers' Financial Results

This paper discusses considerations in modelling insurers' financial results and describes a model developed by the authors to forecast results for the property-casualty industry. One purpose of the model presented is to project industry GAAP-adjusted return on net worth in future years. Rather than model return on net worth directly, e.g., using a single equation, the authors use a component approach that models earned premium, incurred losses, net investment income, etc. separately and uses accounting relationships to calculate return on net worth figures. To date, in the few cases where the literature of the CAS has addressed financial modelling, the applications have usually been narrow, focusing on only one or two components of total profitability. This paper seeks to provide a ready reference and starting point for actuaries involved in financial forecasting. The paper presents models for most variables of interest and discusses modelling considerations in cases where acceptable models have not yet been developed. Several potential areas of improvement to the models are noted. Considerations in adapting the industry model to a particular company or group are discussed. Some interpretative issues are also addressed, including how to measure profitability of property-casualty insurers and how to adjust statutory income and surplus to be approximately consistent with GAAP.