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DFA Implementation Issues

DFA Implementation Issues. CAS Risk and Capital Management Seminar Toronto, Ontario, Canada July 8-9, 2002. Speakers. Jen Ehrenfeld, ACAS, MAAA American Re-Insurance Company Gerald Kirschner, FCAS, MAAA Classic Solutions Risk Management, Inc. Elizabeth Wiesner, FCAS, MAAA

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DFA Implementation Issues

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  1. DFA Implementation Issues CAS Risk and Capital Management Seminar Toronto, Ontario, Canada July 8-9, 2002

  2. Speakers • Jen Ehrenfeld, ACAS, MAAA American Re-Insurance Company • Gerald Kirschner, FCAS, MAAA Classic Solutions Risk Management, Inc. • Elizabeth Wiesner, FCAS, MAAA Accident Fund Company

  3. Large Company Perspective Jen Ehrenfeld

  4. DFA Implementation IssuesAgenda • Lessons Learned with… • Building the Model • Parameterizing Model • Presenting Results • Corporate Structure

  5. Building The Model • Right resources in-house • Priority of DFA Model – can’t do this and your day job too • Recognition of Investment Up Front before any Returns

  6. Parameterizing Model • Company Organization vs. Risk\Line Segmentation • Politically Sensitive Issues vs. Reality • Highlights areas of concern\Due Diligence on own Company • If unable to model risks well, how well are they being monitored and managed.

  7. Parameterizing Model - Continued • Risk = New Planned Loss Plus Historical Reserves • Planned Losses at least as variable as Reserves • Reserve Modeling – Symmetric distribution or Adverse Development more likely

  8. Mean vs. Mode vs. Median • Plan Loss Ratio – Where does it lie on the distribution? • There are three measures of central tendency. 1. Mode - the most frequent observation 2. Median - the 50th percentile 3. Mean - the average value of the distribution

  9. Mean vs. Mode vs. Median • Surveying Actuaries – All Three Given as Answers • Example: • Plan Loss Ratio = 0.75 • Standard Deviation around Plan = 0.30 • Clearly, Sensitive to Standard Deviation

  10. Mean vs. Mode vs. Median

  11. Correlation • Where to start? • Empirical Measures of Correlation Don’t Result in Intuitive Answers • Initial Sensitivity Testing • Anything below 15% - Basically Independent • Anything above 50% - Basically Dependent • We let intuition take over….

  12. Correlation Continued • For each Line of Business Combo: • Selected Correlation Level • Independent – 0% • Ex: PR Catastrophes with Healthcare • Low - 15% • Ex: WC with International Lines • Medium – 30% • Ex: Different Lines written within same Organizational Div • High – 50% • Ex: Same Line – different types – WC Treaty & WC Fac

  13. Correlation Continued • Important to do Follow-Up Sensitivity Testing • Importance of Correlation to Study • What if all lines 100% Independent • What if all lines 100% Dependent • Munich counterparts using an average correlation for every line combination • Not sure of implications • May be ok for Total Liability analyses, but not for line comparisons.

  14. Correlation Continued

  15. Correlation Continued • Once Correlations are defined, if change detail of analysis, need to adjust correlations • “Answer” should stay the same no matter what detail you review the company • Break down into more detail  between line correlations must decrease to get the same overall variance. • Gets hairy fast

  16. Presenting Results • REASONABILITY CHECK!!! • “Can’t DFA tell you that???” • Not too much at once - even for very savvy audiences • DFA, in some respects, may be too much of a leap from current practices • Start simple - Get buy-in – Expand Analyses • Plan Variability • Reinsurance Analyses

  17. Corporate Structure • Need Dedicated Resources • From time of building model – implementation • Need Interaction & Coordination with All Areas of Company • Need High Exposure & Support from Top Management • Need to be able to have a Tangible Impact

  18. Success vs. Failure • Failure - After describing a work issue or project, someone instantly is reminded of a Dilbert cartoon. • Success - Not receiving any Dilbert cartoons for a week.

  19. Large Company / Outside Consultant / Software VendorPerspective Gerald Kirschner Classic Solutions Risk Management, Inc. www.csrmi.com

  20. Key item to remember There is no silver bullet - A DFA model can NOT do anything and everything

  21. Large Company Perspective

  22. Internal Obstacles – unrealistic timelines Implementation of a DFA model should be measured in years and not weeks or even months. • first year – figure out what you’re trying to do – usually requires a narrowing of scope • second year – improve efficiency of process • third year – start adding to the process

  23. Internal Obstacles – desire to cross tie with other systems • There may be other systems in the company that are doing valuations or projections of parts of the company, and those may overlap with parts of the DFA model scope • Expecting or demanding that the two tie out in a precise manner may be unrealistic, given the assumptions being used by the different systems

  24. Internal Obstacles – overly detailed modeling • Just because data exists to allow you to model at the nth degree of detail, don’t necessarily do it. • Where company data does not allow you to create a logical set of assumptions, don’t overwork the assumptions that you can make.

  25. Getting the consultants involved…company preparation • know what you want to accomplish and be realistic as to short and long term goals • be willing to be flexible • be ready to invest significant time and resources • have a small-scale test case that can be used in a trial run • take advantage of your trial run to learn the software’s strengths and weaknesses

  26. Outside Consultant / Software Vendor Perspective

  27. Getting the consultants involved…consultant preparation • Listen first, talk second • Ask lots of questions about company: • company expectations • desired use(s) of model • unique aspects of the company’s operations (these will be the ones to challenge your model) • Be honest about your model strengths and weaknesses – in the long run, an inappropriate sale is worse than no sale

  28. Consultant preparation continued • Identify appropriate contact persons for the client company – these should encompass all the areas of expertise upon which the client will need help • Be realistic as to what the client can learn on his/her own and be patient – you are the ones who know the model inside and out and the client is going up a steep learning curve

  29. Once you are under way… • Company • read the user manuals • invest the time to learn the software • tell your vendor about software problems you encounter • Consultant / Software Vendor • check in frequently with the client • rein in “scope creep”

  30. Small Company Perspective Elizabeth Wiesner

  31. Business Needs • Everything driven by business needs • Complete assessment • Compare alternatives for fit with company • prioritize needs • costs • determine and include other interested parties

  32. Examples • Strategic planning • Financial projections • Coordination among company operations • Loss reserving • Management training • Cost • Time of delivery • Complexity of use • Thoroughness of model

  33. Implementation Issues • Buy/build • Transfer knowledge to internal staff • Spread of knowledge internally • Keeping all interested departments involved • Keep it simple

  34. Issues with ‘Day to Day’ Use • Desire to use as crystal ball • Acceptance throughout company • Understandable communication • ‘Changing’ results • Following a project process and using DFA as a tool, not the project itself

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