Dynamic Financial Analysis DFA Insurance Company Case Study
Part I: Reinsurance and Asset Allocation
By John C. Burkett, Ph.D., ACAS, MAAA, Thomas Mclntyre, FCAS, MAAA and Stephen M. Sonlin, CFA
Dynamic Financial Analysis (DFA) is still fairly new to a property-casualty insurance industry whose roots can be traced back to the 17~ Century end earlier. As such it is not surprising that the industry is cautious about a technology that purports to look at their business in a whole new way. The Casualty Actuarial Society, being active in the formulation and development of DFA, has classified it as:
"a systematic approach to financial modeling in which financial results are projected under a variety of possible scenarios, showing how outcomes might be affected by changing internal and~orexternal conditions~."
As a result of published papers, shared research and call paper programs such as this one, the technical specifications behind DFA have been well developed. This has led to a high level of convergence among many of the different concepts, models and processes behind DFA. Unfortunately, while the details of DFA are better understood, the industry is still scratching its collective head on what to do with this new technology.
Part of the problem has to due with the fact that DFA is considered to be a modeling tool, one that can be used to supplement existing tools. While a modeling tool is essential for implementing dynamic financial analysis, it is just one element of a much grander picture. More than a model, dynamic financial analysis is a way of thinking that weaves through the entire operations of an insurance company. Effective dynamic financial analysis calls for dedicated and knowledgeable professionals who are trained in the intricacies of DFA and enabled to identify and take advantage of current industry and company inefficiencies. DFA promotes moving from existing structures designed to evaluate and reward the individual pieces of the business to a structure that encourages and rewards the evaluation of strategic decisions in a holistic, total company framework.
1Casualty Actuarial Society Dynamic Financial Analysis Website, DFA Research Handbook, http:/Iwww.casact.orglRESEARCHIDFA