Transcript US Re / URS Presentation
Company Enterprise Risk Management & Stress Testing Case Study
moderated by
Joe Petrelli Sr.
President, Demotech, Inc.
presented by
Anya Kutsina Director, U.S. RE Analytics / Ultimate Risk Solutions
Implementing ERM and DFA Utilizing Risk Explorer
Agenda
The Importance of ERM for an Insurance Company
Why this topic is relevant Evolution from RM to ERM Industry Challenges What is DFA?
Analyzing DFA results Solvency Testing Structure of a DFA model URS DFA Application Suite
Agenda
(cont’d)
Case Study: Lake George P&C Company
Lines of Business Assets Reinsurance Structure Viewing Simulation Results Comparison of Reinsurance Programs Analysis of the Company’s Equity position under different scenarios.
Cost / Benefit Analysis
Conclusion - Q&A
Dynamic Financial Analysis
Why this topic is relevant
The source of origination for ERM, DFA concepts
Risk Management process is the foundation for Enterprise Risk Management Static (deterministic) Financial Analysis is the foundation for Dynamic Financial Analysis
Evolution of both from original concepts
Evolution of Risk Management
The definition of Risk
Any event that presents the possibility of loss or danger to organizations or people
Uncertainty – dealing with the unknown and uncertainty of outcomes
Evolution of Risk Management
Risk Management: the original concept
Risk Management is a process for managing the uncertainty created from unexpected, unintended or accidental events
A process for making decisions that will minimize the impact of risk
The original focus was primarily on “Pure Risks”
Evolution of Risk Management
Evolution from RM to ERM
Enron and other scandals prompted Congress to call for more financial controls
Calls for even greater corporate governance resulted in Sarbanes-Oxley Act of 2002
Government and regulatory authorities responded by creating the Committee of Sponsoring Organizations (COSO) of the Treadway Committee
Rating organizations such as AM Best include it in their analysis
Evolution of Enterprise Risk Management
ERM – Holistic Management of Risk
Enterprise risk management is driven by the concept that one cannot effectively protect the whole organization without analyzing all factors that influence financial outcomes.
Risk is viewed across the entire enterprise
ERM — General Concepts
The Focus of ERM
It considers the impact of “speculative, economic or business risks” on entity as well as “pure risks”
ERM incorporates each of management’s decisions with respect to risk
Who is in charge of risk at your company? How is it managed?
Who has the role of Chief Risk Officer?
Dynamic Financial Analysis
DFA applications
Regulatory Inquiries
I.e. Stress Testing
Reinsurance Optimization
Strategic Asset Allocation
Capital Allocation
Performance Measurement
Business Mix
Pricing Decisions
Mergers and Acquisitions
ERM Tools
Dynamic Financial Analysis
Scenario testing – projects business results under selected deterministic scenarios into the future. Results based on such scenario are valid only for this specific scenario.
Stochastic simulation (DFA) – thousands of different scenarios are generated stochastically allowing for the full probability distribution of important output variables, like surplus, written premium, loss ratios .
ERM Tools - Dynamic Financial Analysis
Setting the Time Horizon
The first step used to compare different strategies is to apply a fixed time horizon
In the Insurance industry a projection period of five to ten years seems to be a reasonable choice
simulate to determine the long term effects of a chosen strategy
simulated values are less reliable over a longer projection period
Dynamic Financial Analysis
Analyzing DFA Results
Return measure (e.g. expected surplus)
Risk measure (e.g. expected policyholder deficit)
Efficient strategy – if there is no one with lower risk at the same level of return, or higher return at the same level of risk
Dynamic Financial Analysis
Solvency Testing
Financial position of company is evaluated from the perspective of regulators, agents and insureds
Quantify in probabilistic terms whether the company will be able to meet its commitments in the future DFA provides a range of results regarding the anticipated Surplus of the company
Dynamic Financial Analysis
What is
Portfolio risk management
Risk modeling
Reinsurance/retro-cession analysis
Risk-based capital calculation
Cash flow testing and financial planning (Statutory and GAAP)
?
Dynamic Financial Analysis
FUNCTIONALITY
Dynamic Financial Analysis
Evaluating Ceded Reinsurance/ Retrocession Programs
Handle any complexity
Easy to design alternative programs
Analyse the impact on:
Capital requirement Profit RAROC Reinsurance cost allocation
Dynamic Financial Analysis
RBC and Capital Allocation
Compare Capital alternatives:
Varying risk assumption Varying reinsurance or investment strategies
Measure ROE for any portfolio segmentation
Case Study
Dynamic Financial Analysis
Conclusion - Basic ERM Components