1 / 36

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

suzuki
Download Presentation

DFA Implementation Issues

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript


  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

More Related