Evaluating Empire’s Financial Risk

After large catastrophes, such as the events of Sept. 11, 2001, many insurance executives are shocked to find their firms' exposure is sometimes much greater than expected.

Although Empire Fire and Marine Insurance Companies, a member of the Zurich Financial Services Group, was not overexposed to the 9/11 attacks, it knew it could do a better job at estimating its financial position and evaluating certain risks. In fact, Empire had begun implementing a pilot of New York-based DFA Capital Management Inc.'s Dynamic Financial Management (DFM) solution in 2000 to help it better mitigate risk, realize savings on reinsurance premiums through more accurate modeling, price product effectively and improve overall capital management, according to Steve Rand, president and chief executive officer, Empire.

Working Smarter, Not Harder

"We needed a tool to help us improve our decision-making process for reinsurance and other treaties," Rand says. "DFA helps us make better decisions."

Empire decided to seek a better alternative to its existing processes of evaluating financial data. In the past, Empire had to rely on the only tools that it had available-desktop applications and spreadsheets that relied on limited datasets-to evaluate metrics that are critical to the insurance business.

"We had current processes but we felt they were not cohesive," says Deanna L. Crist, senior actuarial analyst, Empire. "We felt that DFA would help us bring all the useful information together. We didn't have anything in house that could do that, and that is why we started a pilot with DFA."

Empire needed a way to study the company's entire financial condition and then project that condition into the future. In order to be accurate, the estimates had to take into account a number of variables, including future cash-flow estimates from operations and investments simulated under a range of economic, financial and market conditions.

Empire involved actuarial, financial accounting and IT staff in the implementation of the DFM solution in order to make sure all the necessary groups and processes were included, according to Crist.

The longest part of the implementation process involved reformatting, reprioritizing and reloading data into a new data warehouse that stores data for DFM, which took approximately five months, Crist reports. "When compared to the initial construction, I suspect that now it will take less than a month to update the model on our own for use in other areas," she adds.

And the initial implementation, which was ready in 2001, gave Empire immediate payback, explains Rand. "There is no question that it saved us money," Rand says. "We may have kept a few treaties at year-end 2001. We did not renew them and DFA provided us a lot of backing. DFM showed us the possibility of payback on two reinsurance treaties and the prediction of the future relative to the costs. There were at least two reinsurance treaties that we decided not to purchase near the end of 2001 based on analysis" from the system.

"It is a valuable tool to be able to make decisions on reinsurance with complex variables, including surplus, expense and history," Rand adds. "That type of information is almost impossible to see manually."

Fringe Benefits

Not only is Empire using DFM to help it make better decisions, but actuaries are leveraging DFM for other uses, according to Crist. "DFA has provided us with another advantage with the data warehouse," she says. "We have used the data warehouse in a couple of other projects. The data management tools are good for handling large amounts of information. Analysis that used to take us weeks now takes a couple of days."

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Case Study Closeup

COMPANY:

Empire Fire and Marine, Omaha, a Zurich North America ($10.9 billion in premiums) company.

LINES OF BUSINESS:

Specialty P&C insurance.

TECHNOLOGY:

DFA Capital Management's (New York) Dynamic Financial Management solution.

CHALLENGE:

Better evaluate financial data to predict risk.

Greg MacSweeney is editorial director of InformationWeek Financial Services, whose brands include Wall Street & Technology, Bank Systems & Technology, Advanced Trading, and Insurance & Technology. View Full Bio