Simulation Models for Reserve and Surplus Analysis

Simulation models have a long history of use in the actuarial profession for estimating confidence intervals for loss reserves and pricing estimates. More recently, models have been developed which can be used to derive probability levels for insurance company surplus. In this session we will describe procedures for modeling loss reserve uncertainty using simulation models. Models utilizing claim count and claim severity distribution will be discussed. The issue of parameter variance and its estimation will be presented. Techniques for estimating payout patterns and its impact on discounted reserve variability will be presented. A more comprehensive model of insurance company operations which can be used to assess insurance company solvency will then be presented. The items modeled will include premiums, claims outstanding, investment returns, business cycles, and effect of inflation.