A Dynamic Financial Analysis of the Effect of Growth on Property Liability Insurers

Dynamic Financial Analysis (DFA) represents a new area of study for insurance researchers, an area requiring new tools and new expertise. The need for DFA developed as the financial world became a more risky place, a trend that started in the 1970s when foreign exchange rates and interest rates became more volatile. DFA is a powerful business planning tool that will allow researches to assess the financial risk of individual insurers and of different business strategies. It can used to highlight the financial or operating conditions that might generate unfavorable outcomes, allowing company managers to deal with these potential conditions appropriately. DFA can provide a calibrated tool to replace intuition for measuring the effects of operational decisions.

The actuarial consulting firm Miller, Herbers, Lehmann & Associates has developed a public-access DFA model that is available, via the internet, at no charge. The General approach used in this model, the key risks of U.S. property-liability insurers subject to modeling, the parameters incorporated in the financial aspects of the model, and examples of the output from the model are described in D'Arcy, Gorvett, et al. (1997 and 1998). One of the objectives of this model is to serve a learning tool for researchers interested in obtaining hands-on experience with DFA. To further this objective, we propose to utilize the public access DFA model to analyze the effect of growth on property-liability insurers. One benefit of this project will be to illustrate the data requirements of the model, the parameter selection process, the system and time requirements for running the model, the output from the model, and how a researcher can utilize the model to understand the financial or operational positions of an insurer, Additionally, this project will provide an analysis, using the DFA model, of the impact of growth rates and persistency on insurance profitability.

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