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Foundations of Casualty Actuarial Science

meaningful only to the initiated, such as reserve
uncertainty and investment returns, metamorphose into
fundamental questions of business strategy. So the risk
analysis gets shifted from actuarial department to
corporate boardrooms.

9) Explain the method of scenario testing.

Ans. A typical scenario testing dynamic financial analysis
generally take the following form :
(i) Scenario building - One starts with realistic
scenarios, covering a variety of economic, financial,
and business conditions, and emphasizing those
attributes that have the greatest effect on insurance
performance. For e.g, scenarios might be build for
a moderate recession and for a prolonged expansion,
so that the differential effects of each on company's
performance can be evaluated.

For solvency monitoring, an additional scenario of a
severe recession along with an abrupt downturn in
financial market may be used. For each scenario,
the attributes of inflation, interest rates, GNP growth,

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