Dynamic Financial Analysis for Multinational Insurance Companies

Global insurance/reinsurance companies can gain significant advantages by implementing an enterprise risk management system. The major goals are: increase long-term profitability, reduce enterprise risks, and identify the firm's optimal capital structure. Profitability depends upon evaluating uncertainties as a function of a set of common factors across the enterprise. The system takes up all major decisions: identifying optimal liability-driven asset strategies, expanding/contracting insurance lines and pricing policies, constructing sound reinsurance treaties, and setting the firm's capital structure. To implement risk management in global companies, this chapter presents a decentralized system. It describes a series of case studies in which the dynamic financial analysis (DFA) system can improve decision making. Prominent examples include: asset allocation strategies, selection of business activities to increase or decrease, the structure of reinsurance treaties, and the company's degree of leverage (gearing). Since many of these decisions interact with each other, it suggests that the full system be run in an integrated fashion. It shows that the DFA system can be implemented in large, decentralized companies by extending existing capital allocation policies. The scenario approach lends itself well to the decentralized management, common in most multinational financial organizations.