CASUALTY ACTUARIAL SOCIETY DYNAMIC FINANCIAL ANALYSIS BUSINESS PLANNING AND FINANCIAL MODELS Carl J. Leo, ACAS, MAAA OMNI Insurance Group

FEATURES OF AN EFFECTIVE PLANNING SYSTEM u Communication Instrument u Coordination Mechanism u Control Device u Motivational Tool u Improved Decision Making u Full and Substantive Involvement

FINANCIAL PLANNING MODELS u A formal statement of expectations regarding sales, expenses and other financial transactions u A planning tool for the coordination, integration and evaluation of segment plans u A control mechanism for measuring performance and variances on critical success factors u Not intended to be an accurate predictor, but a tool for planning

FINANCIAL MODELS - APPLICATIONS u Financial Forecasting and Analysis u Construction of Pro Forma Financial Statements and Results u Development of Operating Plans and Budgets u Evaluation of Performance u Guidance on Strategic and Operational Decision Making u Measuring Risk and Uncertainty u Tax/Investment Planning

FINANCIAL MODELS - COMPONENTS u Financial Variables (e.g. revenue, expense, investment income, cash, taxes) u Input Variables and Performance Variables u Policy Variables (decision/control variables) u Deterministic or Stochastic u Mathematical / Structural Relationships u Input Parameters (e.g. expected loss payout)

FINANCIAL MODELS - SUCCESS FACTORS u Operations well understood by developers u Input data readily accessible u Development and application involves corporate management u Input and output in convenient formats u Understandable, relatively simple u Ample allowance for judgmental inputs u Reasonably validated u Well documented u Can be flexibly updated or modified

REVIEW & EVAL OBJECTIVES & GOALS DEVELOP PLANS REVIEW & EVAL EXECUTE PLANS MEASURE PERFORMANCE REVIEW & EVAL

KNOWN / PLANNED CHANGES SALES / PREMIUM PROJECTION INCURRED LOSS PROJECTION EXPENSE PROJECTION CASH FLOW PROJECTION INVESTMENT INCOME PROJECTION INITIAL PRO FORMA FINANCIALS

PLANS & INTENDED ACTIONS PREM, LOSS EXPENSE, INV INC PROJECTIONS PREMIUM / REVENUE PLAN INITIAL PRO FORMA FINANCIALS OPERATING PLAN FINANCIALS EARNED PREM UNEARNED PREM PREM RECEIPTS INCURRED LOSS PAID LOSS LOSS RESERVES EXPENSE BUDGET INVESTMENT INCOME

ABC INS CO - PROJECTED WRITTEN POLICIES

ABC INS CO - PROJECTED WRITTEN PREMIUM

ABC INS CO - PROJECTED LOSS RATIOS

ABC INS CO - PROJECTED EXPENSES

ABC INS CO - PROJECTED CASH FLOW

ABC INS CO - PROJECTED INVESTMENT INCOME

ABC INS CO - PROJECTED BALANCE SHEET

ABC INS CO - PROJECTED INCOME STATEMENT