Presenting DFA Resultsto Decision Makers
Spring 2008
Midwest Actuarial Forum
Agenda
Overview of committee work
Sample presentation (illustration purposesonly)
Examples of slides using Power Point
Presenting DFAResults to DecisionMakers
2003 CAS Research Working Party:
Executive Level Decision Making using DFA
Scott Sobel, FCAS, MAAA
Agenda
What are the challenges in presenting DFAresults?
What are some common elements in aDFA presentation?
What elements vary in DFA presentations?
What are the end products of the workingparty’s efforts?
DFA studies driven by probability distributions
Volume of data can be overwhelming
Complexity of the modeling process
Easy to get lost in the details
Challenges in Presenting DFAResults
State the options to be evaluated
State the financial metrics for the evaluation
Summarize the model assumptions
Display ranges of results for the financialstatistics of interest
Compare key financial statistics
Conclude with evaluation of the options
Common Elements in DFAPresentations
Varying Elements in DFAPresentations
Options to be evaluated are specific to theDFA study
Financial metrics are the choice of themanagement team – varies by company
Display of results need to reflect thesechoices
The particular graphs selected
Comments placed on the graphs
Conclusion – dependent on option types
End Products of the WorkingParty Efforts
Summary report
PowerPoint template for graphs
Paper describing concepts behind template
Three sample presentations applyingtemplate graphs
Guidelines for Presenting DFA.doc
Web sitehttp://www.casact.org/research/drmwp/
Investment OptionReview Example
2003 CAS Research Working Party:
Executive Level Decision Making using DFA
Michael R. Larsen, FCAS, MAAA
Goals of Study
Review Reinvestment Options
Measure results using simulation modelresults
Risk as Average Loss in Surplus in Worst 1%of Cases over Five Years
Return as Average Increase in Policy HolderSurplus at End of Five Years
Change in Reinvestment Allocation
DFA flow
Work Comp
Grow 5% a year
Multi_Peril
Grow 5% a year
Financial
Calculator
Starting Policy Holder
Surplus 40,000
Corporate Elements
Reinsurance
Investment
Capital Mix
Taxes
Financial Results
Simulated overFive Years
Analyze
Results
Measures of
•Risk
•Return
Change in PolicyHolder Surplus
Model / Assumptions
Assumptions BehindSimulation
Assume Underwriting Operations Not Affected
• Ability to take rate changes not driven by investment results
• Growth rates in exposure does not change
Investment Scenario
• Long run average interest rate of 4%
•Starting interest rate of 4%
Investment Models
• Short term interest rate model is a mean reversion model
•Long term rates are a function of short term rates
•Stock returns modeled as a function of short term rates and interest rate changes
•Stable relationship between bond and equity market
Policyholder Surplus Change by Reinvestment Option
Surplus Change Over Time by Investment Option
Investment Option Comparison
Better
Option D highestreturn less risk
Investment Option Summary
Option
Return
Risk
A
12.6
17.2
B
13.6
17.0
C
13.8
17.0
D
14.2
16.9
Conclusion
Reviewed four reinvestment options
Option D gives best gain in Surplus with lessadditional risk
DFA presentation
Template
Uncertainty
Aggregate Distribution
Stop Loss
Liability cash flow
Practically,
no chance ofpaying thismuch
Ranking
Value of Reinsurance
what you give up
what you get back
no
reinsurance
current
reinsurance
Development & Trends
Cash Flow over time
Still going and going and going…
Cash Flow over time
Theoretically possible ranges
More realistic outcomes
Allocations
Change in Allocation
More bonds
Less Equity
Change in Allocation
More bonds
Less Equity
Not to Do
Too Much Info
