MIDAS: A Dynamic Financial Model of a Property Casualty Insurer

This paper discusses the development of a dynamic financial planning model of a Property and Casualty insurer. The model provides management with a tool to instantaneously determine the impact of various actions on key financial ratios. It has helped management analyze pricing, reserving, catastrophe and investment risks. The theoretical basis of the model is the accounting equation (Assets = Liabilities + Surplus). The model incorporates both known and unknown components of the equation. The known components, such as premiums and losses, are developed using various forecasting techniques. The model determines the unknown components of investment income and assets by solving a series of simultaneous equations using linear programming. In order to integrate the model into the organization's financial planning process, it was necessary for management to agree to the theoretical basis; however, that was only the first step. Throughout the model's five year evolution, it became apparent that the method of delivery was as important as the theoretical basis. Management felt it was important to develop a financial model that was mobile, integrated numerous companies, provided dynamic change capability, analyzed instantaneously the impact n key financial ratios, all in a compact system. Thus the Mobile Integrated Dynamic Analysis System, MIDAS, was born.