DFA / ALM Models

We provide both strategic asset allocation consulting incorporating DFA/ALM and license our models.

Dynamic Financial Analysis (DFA) is a stochastic simulation methodology (also called Asset Liability Management) which quantifies multiple forms of risk by simulating company financial results thousands of times for each asset mix, so that all potential outcomes associated with individual asset mixes can be considered in advance.  The analysis embodies a complete insurance company financial model, and considers all of the interrelationships between the asset and liability sides of the business.   The model provides both an expected value and a distribution of possible values for each of the parameters evaluated.  This approach allows us to quantify and determine the relationships among the multiple dimensions of risk that should be evaluated: asset risk, underwriting risk, reinsurance risk and business risk. 

The value of this approach is that it takes into account all of the variables which affect the financial results of the company.  By simulating investment, underwriting and premium growth results we are able to assign probabilities and provide ranges of probable outcomes given changes in the variables. This provides decision makers with an analysis that evaluates the interrelationship among all the various risks that the company faces, rather than simply considering investment risk in isolation.

The analysis offers an integrated perspective of risks, rather than the classic financial analysis in which different aspects of the company were considered in isolation from each other. Specifically, DFA / ALM models the reactions of the company in response to a large number of interrelated risk factors including both underwriting risks – detailed by lines of business, as well as asset risks.

Peer Analytics’ consultants have been assisting clients in the asset allocation process for over thirty years. Together we have conducted over 250 asset/liability studies and developed asset allocation models for virtually every type of investment organization. Michael Kantor and Dave Newsom developed one of the first stochastic asset allocation models for property casualty insurers in 1989.

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