Exhibit 7: DFAIC's Statutory Surplus Comparisons
Statutory Surplus Current Mix vs. Strategy D
2,c~0 C~0 -
Exhibit 7 shows that while there is no increased economic risk from moving to Strategy D, there is additional statutory risk over both a one- and five-year horizon. Management is left to decide whether the increased economic reward is great enough to compensate for the increased statutory risk.
We are thus left with determining whether this is the optimal investment strategy on the efficient frontier. Stated another way, does Strategy D result in the greatest value added to DFAIC given their objectives and risk tolerance? This issue is addressed in "Beyond the Frontier: Using a DFA Model to Derive the Cost of Capital", by Daniel Isaac and Nathan Babcock.
The final part of our DFAIC analysis is to examine the impact on the investment guidelines under the revised reinsurance program. To do this we generated a second efficient frontier assuming the reinsurance program was based on implementing an accident year aggregate cover in place of DFAIC's existing program. Exhibit 8 shows both the revised and the original efficient frontiers.