Profitability Targets: DFA Provides Probability Estimates

This paper will discuss the analysis we undertook to address the questions described below. During each of the past several years, an insurance company's actual experience has been much worse than the plan provided to its Board. A dynamic financial analysis was performed to address the following questions: 1. What is the probability that the insurance company will meet or exceed the earnings estimates for the following year provided to its Board? 2. Are the assumptions underlying the earnings estimates overly optimistic, or has the company had a run of bad luck? 3. What elements of the company's business are its source of greatest risk? This paper will discuss the type of model we developed to address these questions, which risk variables (e.g., catastrophe losses, investment yield, expense ratios, etc.) were addressed in the model, the type of information that we collected from the company and from external sources for the model, and how the model results were interpreted to develop answers to the questions. The paper concludes with a presentation of the results of the analyses and a summary of management's actions. Briefly, these actions were: 1. Changed underwriting guidelines and pricing for general liability business. 2. Revised plan to be closer to findings of our analysis. 3. Developed monthly monitoring statistics reflecting key drivers identified in analysis.