Based on the distributions associated with the models, values are randomly selected and used to calculate a large number of potential outcomes. The entire distribution of these outcomes is then available for analysis. If this proportion is considered too high, then changes in operations or current financial position can be made to reduce this value to an acceptable level. Thus, stochastic simulation provides much more information than scenario testing. Under scenario testing, the result indicates only whether an insurer is, or is not, in a viable position if a certain event or series of events were to occur.
Stochastic simulation provides information about the likelihood of an entire range of outcomes.
Thus, DFA is generally based on stochastic simulation. The risks that insurers face can be categorized into two components balance sheet and operations. Balance sheet risks affect the value of assets and liabilities. Increases in interest rates, for instance, reduce the value of bonds. Adverse loss development increases the value of loss reserves.