Ralph S. Blanchard, III and Eduardo P. Marchena
Abstract
The paper outlines an approach that has evolved at Aetna through ten years of property/casualty insurance cash flow testing. Methodologies and approaches to setting parameters reflecting both default and call/prepayment risk are discussed for major invested asset categories. Modeling runoff cash flows for a base scenario (and, for some of these assets, shocked scenarios) also is examined for major non-invested asset categories. Loss reserve cash flow modeling is not addressed, except for a brief description of one approach to shocking projected flows. Finally, various alternatives are given for presenting cash flow testing results to management and non-actuarial audiences.
Key words and phrases: interest rate scenarios, assets, liabilities, default risk, prepayment risk
Ralph S. Blanchard, III