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Evolution of DST International financial reporting changed to a GAAP basis Actuarial reserves were no longer “good and sufficient” but “appropriate” Risk-based capital requirement (MCCSR) was seen as static and retrospective There was a need for a dynamic and forward looking study of a company’s financial condition Cash Flow Projections Can be used to examine the profile and interaction of the cash inflows and outflows from the company’s in force and future new business. At the most basic level, cash flows are projected based on sample policies which give a good representation of the in force portfolio. with investment returns being calculated at a fixed rate on liabilities. Further increases in sophistication can be gained by projecting the cash-flow for each individual asset, allowing for reinvestment. and/or bringing in a stochastic model of investment returns What is DST? A process whereby the business of the company is tested through cash flow projections into the future under a variety of scenarios of possible (unfavourable) experience A process of stress testing A process that allows for the testing of possible management strategies for handling adverse experience A risk management process Stochastic Dynamic Solvency Testing It may be desirable to test certain factors with randomly generated scenarios derived from a known distribution Economic variables Claims (general insurance) For general insurance, this is DFA Useful for pricing Stochastic methods require greater attention paid to algorithms describing business volume, pricing, expenses, investments, ….. Data storage becomes a problem Use caution in interpreting the results: Use appropriate risk measures Remember the technical competence of the reader Advantage of Stochastic modelling Enables you to model path-dependency, policyholder behaviour and any type of complex option Allows calculation of market price of any option (whether a similar traded option exists or not) Can allow for manageme