PROCEEDINGS May 15, 16, 17, 18, 2005 - Casualty Actuarial Society

THE APPLICATION OF FUNDAMENTAL VALUATION PRINCIPLES 301are authorized to engage in a range of financial activities such asinsurance agency and underwriting activities, merchant bankingactivities, and securities underwriting and dealing.To date, GLBA has not had a significant impact on the property/casualtyinsurance industry because there are very few affiliationsof insurance companies with other financial institutions.The 1998 merger of Citicorp and Travelers Group to form Citigroupwas the first merger between an insurer and a bank sincesuch mergers were prohibited in 1933. (In August 2002, however,Citicorp spun off the property/casualty operations of Travelersto end the affiliation of the banking institution and lifeinsurance operation with the property/casualty insurance operation.)There has been no subsequent merger activity betweenproperty/casualty insurers and other financial institutions sincethe Citicorp merger.Nonetheless, if a property/casualty insurer were affiliated withan FHC, the affiliation might affect certain assumptions relatedto the valuation of the insurer. The Federal Reserve Board, whichregulates FHCs, is prohibited from directly imposing capital requirementson insurance affiliates, but it does establish capitalrequirements for FHCs. These FHC capital requirements mayhave an implicit influence on the capital level of an insurancesubsidiary.5.3. Stochastic Analysis of Insurance Company FinancialResultsA unique feature of property/casualty insurance is the stochasticnature of claim emergence and settlement. In general, it is difficultto predict the timing of cash flows related to policyholderclaims. While almost every line of business has the potentialto generate unexpected claim experience, catastrophic insuredevents are particularly difficult to estimate because of the lowfrequency and high severity of these events. These events mayhave a severe and adverse impact on the operating earnings of