Components of Internal Model

1. Future Written Premium
• First move is to group business line and product line, so the separate projection of cash flow can be made. Each business lines and product lines have their own assumption and historical data to project the estimated future written premium.
2. Future claims
• To get future claims we will separate business line into following parts:
• Catastrophe claims
• Notified claims (incurred but not enough reported - IBNER)
• Incurred but not reported – IBNR
• Claims expected on the existing business
• Claims from the future written business
3. Future expenses
• Some of the future claims are easily to calculate because it is simply a function of other assumptions, to make it clearer take an example of compensation paid to agents. It is simply a percentage of insurance products. Claims expense is again based on the extrapolation method to get the future claim expenses. Other expenses such as human resource cost and other are difficult to predict and can be identified by business owner and it is suppose to based on the growth strategy of an insurer. 
4. Future investment Return
• While calculating future investment insurer suppose to consider the market volatility and investment expenses
•  Current investment portfolio
• Prospects investment
• Future investment policy of new business written by insurer
5. Reinsurance
• Assumptions about reinsurance which we will need to consider:
• Existing agreement
• New agreement may come into picture
• Changes may happen in the existing agreement
6. External environment
• We will need to consider interest rate, inflation rate, currency ratio and other economical factor into account and it will be considered to each component of internal model.

Components	Data Needed
Gross written premium	Historical data of rate changes Underwriter views Business plans and targets
Reinsurance premium – ceded premium	Historical changes of reinsurance rates Terms of reinsurance written in the contract Insurer business plan Credit rating of re-insurers Data from rating agencies Historical data re-insurers failures
Gross Claims	Historical claim ratios, frequencies and severities Claim inflation Terms and conditions changes Underwriting view points on the extreme losses Business plan Historical and potential catastrophic events Experts opinions on catastrophic events Best estimated claims reserves Number of reports and estimated IBNR claims Past settled claims
Expenses	Historical data of firms Insurer business plan Inflation
Investment	Historical data of Inflation rate and current inflation rate Historical data of Interest rate and current interest rate Government bond yield rate (by duration and terms) Equity return (by duration and terms) Currency ratios Exchange rates Extreme events losses
Tax and Dividends	Rules from local taxation authority. Board policy on dividend payments.