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Speakers
• Mary Wills, ACAS, MAAAUSAA
• Gerald Kirschner, FCAS, MAAAClassic Solutions Risk Management, Inc.
• Elizabeth Wiesner, FCAS, MAAAAccident Fund Company
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DFA Implementation Issues
• Selling development of P&C DFA model internally
• Issues confronted during model developmentBuild model from scratch in-house, partner withconsultant to build new model, or purchase existingmodel?
Vendor selection process
Model design and customization/enhancement
Enterprise ALM using DFA
• Other issues that could arise when working with vendor
• How the P&C DFA model has been used
Agenda
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Selling P&C DFA Internally
• Financial services company
• Primary Product Lines of Business (LOBs)
P&C (personal)
Life (individual)
Banking
Investment management
Overview of USAA
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Selling P&C DFA InternallyCorporate Asset Liability Management Committee
• Enterprise ALM committee made up of key ALM experts from each LOB
High visibility in enterprise Tasked with identifying, measuring and recommending
actions appropriate to the management of financial risks
Monitors universe of 8 financial risks at enterprise & LOB level
Capital market volatility Interest rates
Concentration Credit
Liquidity Catastrophes
Pricing/Underwriting Reserving
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Universe of Risks
P&C Life BankMutual Funds/
Brokerage Pension EBA
Interest Rate and Stock Market Risk
Concentration and Credit Risk
Reserving Risk
Catastrophe Risk
Pricing/Underwriting Risk
Liquidity Risk
Selling P&C DFA InternallyCorporate Asset Liability Management Committee
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Selling P&C DFA InternallyApproach for Obtaining Approval to Implement
• Developed executive tutorial to gain buy-in on P&C DFA up front
Outlines expected uses for DFACapital management Asset allocationLiquidity management Rating agency supportPricing & reserving studies Reinsurance studiesSupport enterprise-wide DFA
Emphasis on how DFA output would be summarized into formats useful for decision making and strategy/policy
development
Includes both the capabilities of DFA as well as its limitations
• P&C DFA model seen as a natural next step to adding sophistication and integration to corporate ALM process
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Issues Confronted During Model Development
• Considerations Lack of DFA expertise within P&C division Desired timeframe for implementation
• Decision Combined buying and building: Purchased existing vendor
model, and made significant modifications to model to reflect
company’s unique operations
• Was it the right decision? Probably the only way to get the ball rolling and implement
within reasonable timeframe Gradually building expertise in-house
Build Model from Scratch In-House, Partner with Consultant to Build New Model, or Purchase Existing Model?
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Issues Confronted During Model Development
Vendor Selection Process
• Developed detailed selection criteria
Importance of DFA to firm’s strategy
Concentration of expertise in one person vs. department of experts
Broad expertise: P&C actuary, economics, investments, modeling, etc.
Open architecture of model
Flexibility of model to be changed by company staff
Model run time
Confidence in and documentation of model and underlying theories, including methodology for generating economic scenarios
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Issues Confronted During Model Development
• Developed detailed selection criteria (continued)
Ability to use model to support identified needs
Ability to interface P&C model with company’s other existingALM tools
Good balance between strategic focus and level of detail
Ease of use of scenario diagnostic tools
Proactive relationships with rating agencies and regulators
Number of asset classes, P&C lines and reporting periodssupported
Ease of model maintenance (impact of new releases, ease of loading large amount of data)
Vendor Selection Process
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Issues Confronted During Model Development
Vendor Selection Process
• Conducted phone interviews to narrow the field, and held on-site meetings and model demos with selected vendors
• Developed matrix of pros and cons by vendor, based on established selection criteria
• How well did we do in the selection process?
Good job of developing comprehensive list of questions to determine how well each vendor’s model met our needs, but should have given
more attention to ease of loading large amount of data
Devoted sufficient time and diverse group of experts; however, perhaps should have also included our IT experts in evaluation process
Decision was more difficult than we anticipated -- each vendor had strengths and weaknesses
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Issues Confronted During Model Development
• Level of detail
Operational versus strategic tool -- misperception that modelshould replace existing financial forecast (point estimate)planning tool
Usual checks not in place -- P&C industry’s relatively low level of experience with product & lack of IT involvement
• Parameterization
• Commitment of company resources
Grossly underestimated staff time required, as well as length of
time for project
Budget issues
Model Design and Customization/Enhancement
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Other Issues That Could Arise When Working With Vendor
• Very difficult to get a thorough understanding of vendor’s model and its strengths and weaknesses until committed to vendor
• Little control over resources assigned to project
• Different interpretations over what falls within or outside project scope
• Once cost and timeframe locked in, quality may get lower priority
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Issues Confronted During Model Development
P&C Life Bank Pension EBA
Economic Simulator(Inflation, Interest Rates, Stock Market)
Enterprise
MF/Brokerage
Enterprise ALM Using DFA
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How the P&C Model Has Been Used
• Capital management
Measure variability in net worth over planning horizon andidentify major sources of risk that cause fluctuations
Better understand the interaction of these risks Future plans
Determine if risks can/should be reduced or eliminated
Determine how much capital must be held against thoserisks
Test risk management strategies
• P&C portfolio asset allocation
• Rating agency support
• P&C reinsurance strategy analysis
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How the P&C Model Has Been Used
• Future applications
Reserve risk margin analysis
Pricing studies
Liquidity studies
• Side benefits
Utilized dynamic feature of DFA model to build new model forderiving aggregate level reserve ranges for actuarial reports
Parameter analysis for DFA model also provides benefits toother areas of actuarial work
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Internal Obstacles – unrealistic timelines
Implementation of a DFA model should be measured in years and not weeks or even months.
first year – figure out what you’re trying to do – usually requires a narrowing of scope
second year – improve efficiency of process
third year – start adding to the process
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Internal Obstacles – desire to cross tie with other systems• There may be other systems in the company
that are doing valuations or projections of parts of the company, and those may overlap with parts of the DFA model scope
• Expecting or demanding that the two tie out in a precise manner may be unrealistic, given the assumptions being used by the different systems
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Internal Obstacles – overly detailed modeling
• Just because data exists to allow you to model at the nth degree of detail, don’t necessarily do it.
• Where company data does not allow you to create a logical set of assumptions, don’t overwork the assumptions that you can make.
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Getting the consultants involved…company preparation• know what you want to accomplish and be
realistic as to short and long term goals• be willing to be flexible• be ready to invest significant time and
resources• have a small-scale test case that can be
used in a trial run• take advantage of your trial run to learn the
software’s strengths and weaknesses
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Getting the consultants involved…consultant preparation
• Listen first, talk second• Ask lots of questions about company:
– company expectations– desired use(s) of model– unique aspects of the company’s operations
(these will be the ones to challenge your model)
• Be honest about your model strengths and weaknesses – in the long run, an inappropriate sale is worse than no sale
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Consultant preparation continued
• Identify appropriate contact persons for the client company – these should encompass all the areas of expertise upon which the client will need help
• Be realistic as to what the client can learn on his/her own and be patient – you are the ones who know the model inside and out and the client is going up a steep learning curve
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Once you are under way…
• Company– read the user manuals– invest the time to learn the software– tell your vendor about software problems
you encounter
• Consultant – check in frequently with the client– rein in “scope creep”
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Business Needs
• Everything driven by business needs• Complete assessment• Compare alternatives for fit with
company– prioritize needs– costs– determine and include other interested
parties
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Examples
• Strategic planning
• Financial projections
• Coordination among company operations
• Loss reserving
• Management training
• Cost
• Time of delivery
• Complexity of use
• Thoroughness of model
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Implementation Issues
• Buy/build
• Transfer knowledge to internal staff
• Spread of knowledge internally
• Keeping all interested departments involved
• Keep it simple