The Use of Dynamic Financial Analysis to Determine Whether an使用动态财务分析以确定是否.pptVIP

Session C-5: ARIA Prize PaperCAS Spring Meeting May 2006The Use of DFA to Determine Whether an Optimal Growth Rate Exists for a Property-Liability Insurer by Stephen P. D’Arcy and Richard W. Gorvett University of Illinois Published in the Journal of Risk and Insurance, December, 2004 Overview Introduction Dynamic Financial Analysis Aging Phenomenon Market Value of P-L Insurance Company Optimal Growth Rate Analysis of Results Dynamic Financial Analysis An approach to modeling insurance companies Solvency testing Ratings DFA models also allow managers to test various operational strategies Objective of Paper Utilize a DFA model to determine the optimal growth rate based on - mean-variance efficiency - stochastic dominance - constraints of leverage Based on the latest version of a public access DFA model (DynaMo3) / Aging Phenomenon New business has a very high loss ratio, often in excess of the initial premium The loss ratio then declines with each renewal cycle to the profitable point Longer-term business has an even lower loss ratio, making it very profitable A P-L insurer’s growth rate has a significant effect on profitability Market Value of P-L Insurance Company Determining the market value of a hypothetical property-liability insurer is not a simple task. Only a few P-L insurers are stand-alone companies that are publicly traded, allowing the market value of the firm to be observed Approaches to Determine Company Value Fama-French model (three factor model) r - Rf?=? beta x ( Km - Rf )?+ bs x SMB + bv x HML + alpha SMB - small [cap] minus big HML - high [book/price] minus low CAPM Multiple Regression (our method) Multiple Regression Approach The market value of an insurer is measured by - Policyholders’ Surplus - Net Written Premium (the size of the book of business) - Combined Ratio and Operating Ratio (profitability) Optimal Growth Rate Target Metric Net income over the project