Dynamic Financial Analysis
Background
Insurance markets are becoming more competitive and it is vital that senior management applies robust risk modelling techniques to its company. The regulators in many countries are also becoming increasingly interested in management being able to demonstrate that it has considered the risks to its company and is able to manage them appropriately.
Dynamic Financial Analysis (DFA) is the principle technique to allow a full analysis of the risks a company faces. It takes the current financial position and projects forward different stochastic scenarios in order to determine the impact of key risks. Correctly parameterising such models is vital in order to make sense of the correlations between risks. We have 15 years of global DFA experience, building models for companies, helping them to understand their risks and most importantly we have extensive experience of parameterising such models.
Regulatory
One of the key uses of a DFA model is for regulatory reporting and for the demonstration of capital adequacy. EU regulators are expressing increased interest in companies carrying out full internal capital assessments based on a well documented DFA model. We have close contacts with the regulators, including advising the UK FSA on the enhanced capital requirements that UK companies will be obliged to hold.
Strategic management
DFA can be used for much more than keeping the regulators happy. A well parameterised model can help in a number of key strategic decisions, such as:
We have experience of using sophisticated DFA in all of these areas. We have also used DFA techniques in the evaluation of reinsurance purchasing, and have quantified the risk/reward trade-off for various reinsurance strategies.
Pricing and assessing profitability
A key concern facing management is to make sensible decisions based on the underlying profitability of a class. In order to do this properly, the cost of “risk capital” backing a line of business needs to be included to reflect the different levels of risk that different lines run. We have carried out such capital allocation exercises using state of the art techniques, spreading the cost between lines of business as well as the assets backing the company.
Reserve variability
A key input to a good DFA model is the uncertainty in an insurance company’s reserves. We have carried out extensive research in this area, and have developed modelling techniques which go beyond the currently accepted, although sometimes flawed, methodologies.
Watson Wyatt Simulum®
Watson Wyatt provides the software package Simulum® to help companies with DFA and internal capital assessments.
 |
|
|
Case studies
|
|
Recent DFA assignments include the following:
working with the UK FSA in the calibration of the Enhanced Pillar I capital requirements for UK based insurers, building models for each UK regulated company and then determining a simple but practical basis for the capital required for each company analysing the large claims experience of a large UK personal lines insurance company and then using DFA modelling techniques to assess the risk/reward trade-off for a number of different reinsurance strategies building a DFA model to assess the optimal investment strategy of a UK insurance company undertaking a DFA modelling exercise, in numerous currencies, for a captive insurer writing business across the globe on behalf of the parent company undertaking a modelling exercise to assess the capital adequacy of a UK company assessing the value for money of an insurance programme to a housing association and carrying out a full risk review for the association.
|
|
|
|
|
Featured News
| 
