Dynamic Financial Analysis : Classification, Conception, and Implementation

Dynamic financial analysis (DFA) models an insurance company’s cash flow inorder to forecast assets, liabilities, and ruin probabilities, as well as full balancesheets for different scenarios. In the last years DFA has become an important toolfor the analysis of an insurance company’s financial situation. Furthermore it is avaluable instrument for solvency control, which is now becoming quite importantas the dynamics of the insurance market increase. The following article considersthree aspects: First, we discuss the reasons why DFA is of special importance today.Second, we classify DFA in the context of asset liability management and analyzeits fundamental concepts. As a result, we identify several implementationproblems that have not yet been adequately considered in the literature, and thereforeour third aspect is a discussion of these areas. In particular we consider thegeneration of random numbers and the modeling of nonlinear dependencies in aDFA framework.