Milliman's Risk Simulator™ is a computerized model that quantifies financial uncertainty for blocks of insurance policies. It's a valuable tool for anyone who manages those risks.

The Main Module of Risk Simulator measures the likelihood that financial targets will be met. The Ruin Theory Module measures the capital needed to achieve consistent risk levels between blocks of business (and between RBC formulae).

Risk Simulator models medical, disability, P&C, and life coverages, using the statistical models generally in use by actuaries in those areas of practice. It models both individual and group insurance, with and without various kinds of reinsurance. In addition, blocks of business that have been separately modeled can be combined, to evaluate strategic business units, regional blocks, or even entire companies.

Risk Simulator can help you answer a variety of management questions, including:

• What is the right level and type of reinsurance needed to achieve management comfort? How much should it cost?
• How likely is it that last year's negative financial results were a random fluctuation rather than mispricing? How reliable will this year's results be?
• How volatile are the various lines of business we write (or could get into)? How much does each contribute to the company's overall financial volatility?
• What is a fair allocation of our capital and surplus between and within lines of business?

How does Risk Simulator work?

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A company has an individual major medical block of 3,000 lives. Management is negotiating a reinsurance agreement and wants to know the impact of various retention levels. Using Risk Simulator, you can see how different retention levels change the risk profile for the block (see Variation in Total Claims chart).

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Volatility of an acquired block of LTD business. Risk Simulator quantifies the likelihood of a range of potential results. You can also see how sensitive those results are to various assumptions, such as the age composition of the block. The impact on one such block is shown below. The size of the block is also a key factor in considering the relative risk of a block of business. Risk Simulator shows that the bigger the block, the more predictable the results (see Variation in Total Claims—Individual DI chart).

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Risk Simulator history

Risk Simulator evolved from an earlier model, originally used to build the American Academy of Actuaries formula for Health Organizations Risk Based Capital for the National Association of Insurance Commissioners. The original model was developed by Milliman with input from members of the Academy's task force. Since that time, we have invested substantial resources in programming a model that:

• operates many times faster than the original program
• generalizes the original model in a number of ways, including coverages other than just medical and disability
• allows for a mix of the arandom walk model and the adeviation from the mean model defined by the Academy Task Force
• provides graphical as well as numerical results

Risk Simulator can be customized to handle the unique plan designs, risk sharing arrangements and other characteristics of your business. In addition, it can model your actual inforce, using a listing of policyholders and customized probability distributions.