Milliman Moving Beyond Point Estimates
Better risk information can help
your business thrive and prosper.
Historically, actuaries have estimated reserve risk using one-dimensional deterministic
methods, selecting a single “best” estimate within a reasonable range of point
estimates. Advances in software and computing power now allow you to move beyond
these traditional approaches. As you do, you’ll find a host of new benefits.
Stochastic models can quickly simulate thousands of possible
outcomes, often using the same basic data as deterministic
methods. However, the result is not a simple estimate, or even a
range, but a probability distribution that provides a robust picture of
the variability and volatility of your past and future losses.
Today’s newer tools allow you to evaluate data using several
different models. They help you understand which models best fit
your data and why. They also let you turn on and off variables and
calculations to discern which ones offer the most predictive ability
for your specific data and circumstances. In essence, you can now
model your business much more realistically than ever before.
Reinsurance
Reinsurance buyers are often forced to rely on their gut instincts about
how changes in retentions or prices might affect their profitability. By
using distributions of estimated future claim costs rather than point
estimates and traditional rules of thumb, you can compare various
risk transfer options under different scenarios. You can now make
decisions based on a true measurement of the underlying risks.
The value of this analysis is far greater than a balance sheet reserve
number. Distribution modeling allows you to explore more informed
approaches to your strategic concerns, such as capital allocation,
future pricing, and reinsurance optimization.
Key management concerns
Capital levels and reinsurance are only the beginning. The
information provided by distribution modeling can help you solve
complex questions about acquisitions, pricing, allocating capital
among lines, and DFA modeling. In effect, it is the quantitative
underpinning of effective enterprise risk management.
Total capital
Stochastic tools can help you
understand the risk profile
of each line of business
independently, and also
estimate the effect of the
correlation of all lines taken
together. A risk analysis that
quantifies the benefits from
multi-line diversification often
translates into lower total
capital requirements.
Every company, large or small, can now take advantage of the
wealth of risk information available from these emerging tools.
They provide a compelling competitive advantage and are readily
available today. Can you afford to wait?
Sum of the Distributions of All Lines
Estimated Total Liability
Estimated Total Liability
Sum of the Distributions of All Lines
Adjusting for Correlation Effects
Expected Value
Probability
99th Percentile
99th Percentile
Required Capital = 1,000M
Required Capital = 600M
