Why Business Simulations

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Why Business Simulations?

• Agent-based models in the cause of business

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The challenge for business in the Information
AgeCombine the complication of traditional
business with modern complexity science to
capture the feel of the modern information-age
marketplace.
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An example of a complex/complicated business
situationThe Mexican Peso Crisis of 1994/95 and
its propagation to the rest of Latin America
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Complex, Adaptive Systems

• Stock markets
• Road-traffic networks
• Evolutionary ecosystems
• Supermarkets
• National economies
• Health-care delivery systems
• Communications networks
• Insurance industry

5
Football World

• Space playing field
• Agents players
• Information behavior of nearby players
• Interaction blocking, tackling, kicking, etc.

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Fingerprints of Complexity

• medium-sized number of agents
• intelligent and adaptive
• local information

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Strategic Business Simulation is an effective
tool for managing in Complex/Complicated
environments.

• Collection and codification of the expert
  knowledge and the knowledge embedded in corporate
  and external databases.
• Communication provides a common language and
  experience.
• Training cheaper, safer, and faster than
  on-the-job training
• Stress Testing and Hedging a tool for robust
  management (forecasting is difficult in complex
  environments, so simulators are less useful as a
  prediction tool).
• Marketing help the customer understand how your
  product helps them.
• Product Design understand how new products
  interact with the marketplace.

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Requirements for Effective Strategic Business
Simulation

• Realistic Must have the general look and feel
  of the business in its consumer, competitive,
  economic and regulatory environment.
• User Driven Must address real business issues.
• Accessible Runs on the same desktop machines as
  the user uses for everyday management - in a
  Windows or NT environment
• Easy to use No manual required.
• Fast development time - 3 months.
• Fast run time - few minutes
• Cost effective

9
An example of the processTHE INSURANCE WORLD
CONSORTIUM

• Insurance World is a consortium of
  Reinsurance/Insurance Companies that have banded
  together with scientists associated with the
  Santa Fe Institute to try and understand the
  effects of natural catastrophes on the Insurance
  Industry.

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Participants

• ERNST AND YOUNG
• SWISS RE
• ZURICH / CENTRE RE
• GRIEG FESTER
• EMPLOYERS RE
• ACE
• CAT LTD
• WINTERTHUR
• Santa Fe Institute
• Marsh and McLennan
• Los Alamos National Laboratory
• Wrigley Environmental Institute
• Roger D. Jones and Associates, Inc. / Intelligize

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What questions does the Insurance World
Consortium want to answer?

• How do frequency, magnitude, and geographical
  distribution of natural catastrophes affect the
  profitability of Insurance/Reinsurance companies?
• How is risk spread among the companies?
• What is the affect of various pricing strategies
  on the industry as a whole and on individual
  companies?
• How do the consumers affect the risk of the
  companies?
• What affect does the availability of capital have
  on risk?
• What are the conditions for the formation of new
  companies?
• What are the conditions for bankruptcy?
• What is the affect of marketing strategies?
• What is the affect of the structure of
  Insurance/Reinsurance contracts?
• And many other questions

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How did the Insurance World Consortium seek to
address these questions?

• The Insurance/Reinsurance companies and the
  scientists entered into a year-long iterative
  process to develop a software tool, the Insurance
  World Simulator, that was designed to help
  business decision makers gain an intuition for
  the complexities of the interactions in the
  industry.

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What does the Insurance World Simulator simulate?
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What are the processes that are modeled in the
Insurance World Simulator?
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Insurance World SimulatorThe business simulator
for the Catastrophe Industry

• Enterprise management in a rapidly changing
  world.
• Complexity-based business simulations - Strategic
  decision support

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Insurance World is a paradigm for World Class
innovation.

• Client driven technology development
• Clients come to understand possibilities in
  available technologies
• Consultants receive an education in internal
  workings of clients and their industries
• Trust is developed among participants
• Proprietary projects follow
• Consultants and Clients gain reputation as World
  Class Innovators