551:. The deterministic part will go in the reverse direction of where the current short term rate is heading. In other words, the further the current interest rate is from the long term expected rate, the harder the deterministic part tries to reverse it back to the long term mean.
566:
of the current interest rate, when the current interest rate is low, its impact is minimum, thus leading to the unlikelihood of the interest rate going below zero, and the interest rate cannot be negative. However, the reverse is true if the current rate is high.
95:
of the company, but also uncover the dependencies among its business practices. Because DFA tries to account for every aspect of the company, it produces a vast amount of data. As a result, analyzing and presenting the
388:
405:= the speed of reversion of the interest rate to its long-run mean (e.g., a = 2 means the interest is expected to return to its long-term mean within half a year, and a = 1/5 means it would take 5 years).
289:. Although CIR was first used to project continuous changes in the interest rates, it is also possible to use it to project discrete changes from one time period to another. Below is the formula.
273:. Although none of the existing models are perfect, they have their own advantages and disadvantages. The following is a simple interest rate model used in a publicly access DFA model.
549:
108:
DFA is used primarily used by financial practitioners to manage profitability and financial stability (the risk control function of DFA) Not only do DFA users seek to maximize
269:
The interest rate generator is the core fundamental of DFA. Many sophisticated interest rate models were created in the effort to best imitate the real world interest rate
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863:
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values. Furthermore, outputs from DFA could help managers identify strengths and weaknesses of the following areas.
1080:
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257:
Careful calibration is required to ensure the accuracy of the scenarios and the correlations among
190:
162:
47:
38:
and their impacts on the insurance company's financial well being as a whole such as business mix,
639:
D'arcy, Stephen P. Richard W. Gorvett. Thomas E. Hettinger. Robert J. Walling III. (1998, Summer)
399:= the long-run mean to which the interest rate reverts; the expected interest rate in the long run
1675:
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669:
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71:
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233:, generating expected and extreme economic scenarios to assess the company's reaction to changes
137:: uncovers the structure of the company's line of businesses types, interrelations, and cost of
441:
1507:
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258:
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239:, quantifying the company's business models and uncovering the dependencies among them
1669:
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1323:
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24:
558:; it can either help the current interest rate deviate from its long term
285:
characterizes the short-term interest rate as a mean-reverting stochastic
91:
that is being analyzed. Such models not only reveal the operation and the
1290:
270:
250:
204:
124:
113:
66:
51:
27:
1228:
1164:
645:, Retrieved October 23, 2009, from Casualty Actuarial Society website:
589:. Retrieved October 23, 2009, from Casualty Actuarial Society website:
883:
555:
35:
383:{\displaystyle dr_{t}=a(b-r_{t})\,dt+\sigma {\sqrt {r_{t}}}\,dW_{t}}
1543:
214:
31:
1238:
559:
665:
661:
34:
individually. Specifically, DFA reveals the dependencies of
624:, Retrieved October 23, 2009, from Converium Ltd website:
583:
Kaufmann, Roger. Andeas Gadmer. Ralf Klett. (2004, May)
217:
that are hard to understand without a holistic modeling.
123:: estimates relative and absolute value of each line of
562:
or the reverse. Because this part is multiplied by the
277:
Cox, Ingersoll, and Ross (CIR) interest rate generator
522:
480:
444:
414:
297:
69:
scenarios through using scenario generators such as
1493:
1418:
1202:
1031:
973:
902:
821:
773:
708:
699:
543:
508:
451:
427:
382:
89:financial models of the targeted insurance company
467:of historical or projected interest rate changes.
199:: assess the company's resilience to a change in
23:using a holistic model as opposed to traditional
626:http://www.scor.fr/www//index.php?id=350&L=2
463:of the interest rate process expressed as the
87:models, DFA also links the scenarios with the
19:(DFA) is method for assessing the risks of an
677:
8:
635:
633:
591:http://www.casact.org/library/astin/vol31no1
607:
605:
705:
684:
670:
662:
647:http://www.casact.org/pubs/forum/98sforum/
586:Introduction to Dynamic Financial Analysis
540:
532:
526:
521:
497:
479:
448:
443:
419:
413:
374:
366:
358:
352:
339:
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296:
544:{\displaystyle \sigma {\sqrt {r_{t}}}\,}
213:: uncovers dependencies of all kinds of
165:of each line of business in the company.
576:
226:DFA consists of the following 3 parts:
185:: assesses the likelihood of change in
611:Blum, Peter. Michel Dacorogna. (2004)
436:= the current short-term interest rate
112:values, but they also try to maintain
7:
471:The CIR model has two components: a
100:effectively is of great importance.
723:Accidental death and dismemberment
14:
642:Using the Public Access DFA Model
245:, presenting the analysis to the
147:: determines whether a company's
849:Directors and officers liability
554:The stochastic part is purely
503:
484:
336:
317:
179:to meet financial obligations.
1:
1616:Savings and loan association
1049:Insurance-linked securities
1692:
738:Total permanent disability
614:Dynamic Financial Analysis
509:{\displaystyle a(b-r_{t})}
61:In addition to projecting
17:Dynamic financial analysis
1641:
1478:Health insurance coverage
743:Business overhead expense
452:{\displaystyle \sigma \,}
879:Protection and indemnity
175:problems, mismatches of
1336:Explanation of benefits
808:Variable universal life
283:CIR interest rate model
265:Interest rate generator
1473:Health insurance costs
874:Professional liability
545:
510:
453:
429:
384:
151:is taking on too much
1329:Out-of-pocket expense
1190:Workers' compensation
844:Collateral protection
834:Business interruption
546:
516:and a stochastic part
511:
454:
430:
428:{\displaystyle r_{t}}
385:
243:Analysis Presentation
1552:Corpus Juris Civilis
520:
478:
442:
412:
295:
1611:Rochdale Principles
1606:Mutual savings bank
1601:Mutual organization
1586:Cooperative banking
1503:Mesopotamian banker
783:Longevity insurance
191:business operations
84:jurisdictional risk
1363:Insurable interest
864:Payment protection
765:Payment protection
652:2011-06-17 at the
620:2009-06-12 at the
596:2009-07-31 at the
541:
506:
465:standard deviation
449:
425:
380:
127:(e.g. premium and
93:business structure
78:underwriting cycle
72:interest rate risk
1663:
1662:
1508:Code of Hammurabi
1483:Vehicle insurance
1378:Replacement value
1270:Actual cash value
1234:Adverse selection
1224:Actuarial science
1198:
1197:
1130:Kidnap and ransom
1103:Extended warranty
750:Income protection
538:
364:
189:or deteriorating
30:, which analyzes
21:insurance company
1683:
1621:Social insurance
1576:Friendly society
1468:Health insurance
1296:Short rate table
1044:Catastrophe bond
945:Lenders mortgage
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149:asset allocation
145:Asset allocation
44:asset allocation
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1633:Insurance cycle
1596:Fraternal order
1489:
1420:
1414:
1373:Proximate cause
1368:Insurance fraud
1348:General average
1307:Claims adjuster
1249:Risk management
1244:Risk assessment
1208:
1205:
1194:
1160:Prize indemnity
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859:Over-redemption
817:
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760:National health
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654:Wayback Machine
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622:Wayback Machine
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598:Wayback Machine
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259:business models
237:Business Models
224:
161:: measures the
153:investment risk
106:
12:
11:
5:
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1654:List of topics
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1539:Burial society
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1521:§235–238; §240
1513:§100–105; §126
1505:
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1463:Climate change
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1453:United Kingdom
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1398:Underinsurance
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1388:Self-insurance
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1155:Political risk
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1135:Legal expenses
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915:Builder's risk
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803:Universal life
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1263:Value of life
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1125:Interest rate
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993:Inland marine
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988:GAP insurance
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473:deterministic
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163:profitability
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159:Profitability
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48:profitability
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29:
26:
22:
18:
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1591:Credit union
1557:
1550:
1531:
1403:Underwriting
1358:Insurability
1340:
1319:Co-insurance
1289:
1285:Cancellation
1076:Catastrophic
1061:Climate risk
889:Trade credit
641:
613:
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579:
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121:Business mix
120:
107:
88:
82:
76:
70:
60:
16:
15:
1626:Trade union
1581:Cooperative
1254:Uncertainty
1113:Index-based
1081:Multi-peril
1039:Reinsurance
998:Public auto
903:Residential
564:square root
207:conditions.
197:Sensitivity
187:regulations
139:reinsurance
135:Reinsurance
110:shareholder
40:reinsurance
1421:by country
1419:Insurance
1393:Total loss
1314:Deductible
1275:Cash value
1219:Act of God
1204:Insurance
1118:Parametric
1098:Expatriate
974:Transport/
940:Landlords'
925:Earthquake
813:Whole life
733:Disability
571:References
461:volatility
247:executives
211:Dependency
201:strategies
183:Compliance
177:cash flows
171:: reveals
129:commission
104:Objectives
63:stochastic
56:compliance
1676:Insurance
1567:Syndicate
1533:Collegium
1428:Australia
1383:Risk pool
1353:Indemnity
1324:Copayment
1258:Knightian
1170:Terrorism
1140:Liability
1008:Satellite
869:Pollution
793:Term life
702:insurance
700:Types of
693:Insurance
524:σ
491:−
446:σ
350:σ
324:−
253:decisions
251:strategic
249:who make
231:Scenarios
173:liquidity
25:actuarial
1670:Category
1647:Category
1525:§275–277
1443:Pakistan
1291:Pro rata
1180:War risk
1145:No-fault
1056:Casualty
1013:Shipping
983:Aviation
960:Renters'
955:Property
950:Mortgage
920:Contents
894:Umbrella
854:Fidelity
822:Business
718:Accident
650:Archived
618:Archived
594:Archived
287:forecast
271:behavior
222:Elements
205:economic
169:Solvency
125:business
114:customer
67:economic
52:solvency
28:analysis
1572:Benefit
1559:Digesta
1495:History
1229:Actuary
1185:Weather
1175:Tuition
1165:Takaful
1093:Deposit
1023:Vehicle
392:where
131:level).
98:outputs
65:future
36:hazards
1448:Serbia
1408:Profit
1280:Broker
1206:policy
1018:Travel
1003:Marine
910:Boiler
884:Surety
728:Dental
710:Health
556:random
459:= the
54:, and
1544:Guild
1438:India
1433:China
1302:Claim
1108:Group
1088:Cyber
1066:Crime
1032:Other
965:Title
930:Flood
215:risks
32:risks
1517:§234
1239:Risk
1209:and
1071:Crop
935:Home
829:Bond
775:Life
560:mean
281:The
203:and
81:and
1211:law
1150:Pet
1672::
1523:;
1519:;
1515:;
632:^
604:^
261:.
75:,
58:.
50:,
46:,
42:,
1574:/
1256:/
685:e
678:t
671:v
534:t
530:r
504:)
499:t
495:r
488:b
485:(
482:a
421:t
417:r
403:a
397:b
376:t
372:W
368:d
360:t
356:r
347:+
344:t
341:d
337:)
332:t
328:r
321:b
318:(
315:a
312:=
307:t
303:r
299:d
193:.
155:.
141:.
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