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DFA Insurance Company Case Study, Part I: - page 16 / 40

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Workers Comp

Auto Liability

Property

General Liability

All Other

2000

-2.5%

-2.5%

-2.5%

-2.5%

-2.5%

Table 3: Projected Growth Rates for Written Premium

2001

-2.5%

-2.5%

-2.5%

-2.5%

-2.5%

2002

-2.5%

-2.5%

-2.5%

-2.5% '

-2.5%

2003

0%

0%

0%

0%

0%

2004

2,5%

2.5%

2.5%

2.5%

2.5%

DFAIC's simulated losses have been modeled in two pieces, core and large. Bdefly, losses are categorized as large or core depending on magnitude. Large losses are simulated through a collective risk model, while core losses, specifically core loss ratios, are generated through a mean-reverting, momentum-driven random walk.

The model user determines the appropriate mean reversion factor, momentum factor and long term average core loss ratio. Considerations in selecting such parameter values might include an anticipated underwriting cycle or other market change. The actual simulated core loss ratio is generated from a user-selected distribution having a mean and a variance defined by the user. A blind algorithmic approach to selecting these parameters is not appropriate. As is true throughout the parameterization process, simulated results must be constantly checked to verify the reasonableness of results. For example, the variance of simulated, total loss ratios was checked against estimates of loss ratio volatility obtained from historical company results. Modeled gross accident year loss ratios by year and by line of business are shown in Table 3.

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