Dynamic financial analysis (DFA) is method for assessing the risks of an insurance company using a holistic model as opposed to traditional actuarial analysis, which analyzes risks individually.
Specifically, DFA reveals the dependencies of hazards and their impacts on the insurance company's financial well being as a whole such as business mix, reinsurance, asset allocation, profitability, solvency, and compliance.
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 outputs effectively is of great importance.
Furthermore, outputs from DFA could help managers identify strengths and weaknesses of the following areas.
[2] DFA consists of the following 3 parts:[2] Careful calibration is required to ensure the accuracy of the scenarios and the correlations among business models.
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.
The stochastic part is purely random; it can either help the current interest rate deviate from its long term mean or the reverse.