The Representative Scenarios Method (RSM)

The RSM is a simplified approach to the calculation of principles-based reserves for statutory insurance financial reporting in the U.S.   The central idea is to use the results of a small number of representative scenarios (or stress tests) to calculate the required reserve.  The result is intended to be a usable approximation to full stochastic modeling of all risk drivers, but with substantially less effort, simpler auditability, and greater understanding of the results.

RSM is in at this point as much a concept as a fully implemented and agreed upon methodology.  Several aspects are still under debate and review, and it is by no means certain that it will ever be adopted.  Since it is still in early stages, there is no comprehensive document that describes all aspects of it.  However, much can be learned from the documents that have been prepared so far.  These are listed below.

• Presentation of the original idea.  In May 2014, the concept of the RSM was presented to the Annuity Reserves Work Group of the American Academy of Actuaries using this Powerpoint presentation.
• Theory used to develop scenarios.  This document explains the theory behind the development of the "representative" scenarios used in the RSM.
• Scenario generator users's guide.  Implementation of the RSM would require use of a software tool to generate the representative scenarios.  Such a tool has been developed for use in testing the RSM.  This document explains what a user would need to do to generate scenarios using the tool, including the kind of input required.

Kansas sponsors RSM testing

The Kansas Insurance Department has sponsored research to test RSM as applied to several kinds of insurance products.  Click here to read more about that research.