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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

CAS Risk and Capital Management Seminar

Toronto, Ontario, Canada

July 8-9, 2002

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  • Jen Ehrenfeld, ACAS, MAAA

    American Re-Insurance Company

  • Gerald Kirschner, FCAS, MAAA

    Classic Solutions Risk Management, Inc.

  • Elizabeth Wiesner, FCAS, MAAA

    Accident Fund Company

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DFA Implementation IssuesAgenda

  • Lessons Learned with…

    • Building the Model

    • Parameterizing Model

    • Presenting Results

    • Corporate Structure

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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

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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.

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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

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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

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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

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  • 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….

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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

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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.

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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

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Presenting Results


  • “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

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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

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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.

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Large Company / Outside Consultant / Software VendorPerspective

Gerald Kirschner

Classic Solutions Risk Management, Inc.


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Key item to remember

There is no silver bullet - A DFA model can NOT do anything and everything

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Large Company Perspective

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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

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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

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Internal Obstacles – systemsoverly 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.

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Getting the consultants involved…company preparation systems

  • 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

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Outside Consultant / systemsSoftware Vendor Perspective

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Getting the consultants involved…consultant preparation systems

  • 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

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Consultant preparation continued systems

  • 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

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Once you are under way… systems

  • 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”

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Small Company Perspective systems

Elizabeth Wiesner

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Business Needs systems

  • Everything driven by business needs

  • Complete assessment

  • Compare alternatives for fit with company

    • prioritize needs

    • costs

    • determine and include other interested parties

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Examples systems

  • Strategic planning

  • Financial projections

  • Coordination among company operations

  • Loss reserving

  • Management training

  • Cost

  • Time of delivery

  • Complexity of use

  • Thoroughness of model

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Implementation Issues systems

  • Buy/build

  • Transfer knowledge to internal staff

  • Spread of knowledge internally

  • Keeping all interested departments involved

  • Keep it simple

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Issues with ‘Day to Day’ Use systems

  • 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