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CAS Working Party Releases New Open Source Loss Simulation Model
By Robert Bear, Chair, CAS Dynamic Risk Modeling Committee 

In 2005 the Dynamic Risk Modeling Committee charged the Loss Simulation Model Working Party (LSMWP) with creating a simulation model of the processes of loss emergence and settlement (commonly known as loss development) that underlie the loss “triangles” and other statistics used to estimate loss reserves. The goal was to create a tool that researchers could use to generate claims that can be summarized into loss development triangles and complete rectangles, which would then be used to test loss reserving methods and models.

Soon after the 2010 Casualty Loss Reserve Seminar, the LSMWP completed its work with the release of the new open source Loss Simulation Model (LSM). A draft of the working party paper was presented at the CLRS, where the model was demonstrated, preliminary testing results were presented, and future testing and enhancements were discussed. The models, working party paper, model documentation are available on the CAS Loss Simulation Model Working Party Web Site at www.casact.org/research/lsmwp. (Model documentation includes help files providing an explanation of all model features and parameters, instructions for both running the model and customizing this open source software, and related seminars and papers.)   

In October 2010, the Dynamic Risk Modeling Committee and the Committee on Reserves announced details of a 2011 Call for Papers on “Testing Loss Reserving Methods, Models and Data Using the Loss Simulation Model.” Proposals should describe the issue to be addressed (e.g., which of several loss reserving methods or models works best in a given loss reserving situation), the author’s approach to using the Loss Simulation Model, and any model enhancements or testing to be performed on the model.   

This call for papers is intended to foster the use of the Loss Simulation Model and to generate publicly available improvements to the model. Authors of accepted papers or model enhancements may be invited to present their work at the 2011 Casualty Loss Reserve Seminar. This call will be unique in that there are specific areas that the Dynamic Risk Modeling Committee and the Committee on Reserves are looking to have addressed, in addition to seeing applications of the model to test alternative loss reserving methods and models.   

It should be noted that if the user runs at least 100 iterations of the LSM, one can generate reserve percentile tables and customary statistics from the simulation results (e.g., mean, standard deviation, minimum, and maximum). These tables are distributions of payments made subsequent to the assumed valuation date, both by accident year and by calendar year and for all years combined. This key model feature enables users to test their models for estimating reserve variability. An important potential application of this feature would be in estimating capital needed to support reserves.

The LSMWP has developed a model that we hope will become a valuable tool in researching loss reserving methods and models. We anticipate that actuaries will use the LSM to:

  1. better understand the underlying loss development process.
  2. determine which methods and models work best in different reserving situations.
  3. reflect this knowledge in evolving loss reserving practices.

Robert Bear is a consultant whose firm RAB Actuarial Solutions LLC offers actuarial, reinsurance, and statistical modeling services. He may be reached at rabsolutions@gmail.com.   

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