The next step in building a DFA model is to decide which factors to allow to vary and which to project deterministically. Remembering that a model is a simplified version of reality, one must resist attempting to recognize every risk or forecast every possibility. However, the model should incorporate only the most relevant factors. Insurer assets generally consist of bonds, equities, mortgages or mortgage-backed securities, and premium balances, as well as assorted other categories. Bond value is affected by interest rates and default rates.
Equities change with market movements.
Mortgages, in addition to being affected by interest rates and default, are also affected by prepayment patterns. Although many other factors could affect asset value, the most important factors to model are interest rates, default risk, mortgage prepayment patterns, and stock market movements. Liabilities differ by type of insurer. For property-liability insurers, the primary liabilities are loss reserves, loss adjustments expense reserves, and unearned premium reserves. Thus, forecasting the value of future loss payments is important.