dfa implementation issues l.
Skip this Video
Loading SlideShow in 5 Seconds..
DFA Implementation Issues PowerPoint Presentation
Download Presentation
DFA Implementation Issues

Loading in 2 Seconds...

play fullscreen
1 / 36

DFA Implementation Issues - PowerPoint PPT Presentation

  • Uploaded on

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

I am the owner, or an agent authorized to act on behalf of the owner, of the copyrighted work described.
Download Presentation

PowerPoint Slideshow about 'DFA Implementation Issues' - cheri

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.While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server.

- - - - - - - - - - - - - - - - - - - - - - - - - - E N D - - - - - - - - - - - - - - - - - - - - - - - - - -
Presentation Transcript
dfa implementation issues

DFA Implementation Issues

CAS Risk and Capital Management Seminar

Toronto, Ontario, Canada

July 8-9, 2002

  • Jen Ehrenfeld, ACAS, MAAA

American Re-Insurance Company

  • Gerald Kirschner, FCAS, MAAA

Classic Solutions Risk Management, Inc.

  • Elizabeth Wiesner, FCAS, MAAA

Accident Fund Company

dfa implementation issues agenda
DFA Implementation IssuesAgenda
  • Lessons Learned with…
    • Building the Model
    • Parameterizing Model
    • Presenting Results
    • Corporate Structure
building the model
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
parameterizing model
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.
parameterizing model continued
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
mean vs mode vs median
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

mean vs mode vs median9
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
  • 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….
correlation continued
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
correlation continued15
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.
correlation continued17
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
presenting results
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
corporate structure
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
success vs failure
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.
large company outside consultant software vendor perspective

Large Company / Outside Consultant / Software VendorPerspective

Gerald Kirschner

Classic Solutions Risk Management, Inc.


key item to remember
Key item to remember

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

internal obstacles unrealistic timelines
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
internal obstacles desire to cross tie with other systems
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
internal obstacles overly detailed modeling
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.
getting the consultants involved company preparation
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
getting the consultants involved consultant preparation
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
consultant preparation continued
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
once you are under way
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”
small company perspective

Small Company Perspective

Elizabeth Wiesner

business needs
Business Needs
  • Everything driven by business needs
  • Complete assessment
  • Compare alternatives for fit with company
    • prioritize needs
    • costs
    • determine and include other interested parties
  • Strategic planning
  • Financial projections
  • Coordination among company operations
  • Loss reserving
  • Management training
  • Cost
  • Time of delivery
  • Complexity of use
  • Thoroughness of model
implementation issues
Implementation Issues
  • Buy/build
  • Transfer knowledge to internal staff
  • Spread of knowledge internally
  • Keeping all interested departments involved
  • Keep it simple
issues with day to day use
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