Transcript Monthly Written Premiums

107th Mid-Atlantic Mutual Advantage
Convention
Enterprise Risk Management Framework
For Small to Mid-Sized Property & Casualty Insurance Companies
Presented by
Joseph F. Morris CPA, MBA
President & CEO, American European Insurance Group, Inc.
Why Companies Have Not Implemented ERM?
 It’s not required
 I’ve been managing risks my entire career; form over substance
 I see no benefits
 I view ERM as adding time and expense
 ERM is operating by committee
 Why do I need to involve the Board?; It’s management’s
responsibility to manage risks
 My company is too small; ERM is only for large companies
 I understand the theory, but how do you put it into practice?
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Learning Goals
 Recent Regulatory Developments
 Expectations of Rating Agencies
 Enterprise Risk Management Framework
 Definition and Benefits
 Creating a Risk-Aware Culture
 Determining Key Risk Factors
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ERM – Regulatory Developments
 2013 Annual Registration Statement Includes:
– “the insurer’s board of directors oversees corporate governance and
internal controls and that the insurer’s officers or senior management
have approved, implemented and continue to maintain and monitor
corporate governance and internal control procedures.”
 2014 Form F (Enterprise Risk Management Report)
 2015 Own Risk Solvency Assessment (ORSA)
 2016 Corporate Governance Annual Filing (Proposed)
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A.M. Best: ERM in the Rating Evaluation Process
Business
Profile
Operating
Performance
Enterprise Risk Management is the
common thread that links balance
sheet strength, operating
performance, and business profile
Balance Sheet
Strength
Source: A. M. Best Company
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A.M. Best ERM Expectations
 All insurers need to establish an ERM framework
 ERM capabilities should be proportionate to risk profile of
insurer
 Insurers need to establish firm-wide risk tolerance metrics
 Insurers need to have their own view of capital adequacy
 A low risk profile and high ERM capability will produce a ratings
“lift”
 Leading insurers are utilizing stochastic-based capital modeling
to better support risk-reward decisions
Source: A. M. Best Company
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Enterprise Risk Management Framework
What is an ERM Framework?
Enterprise Risk
Management Framework
Establish
Risk-Aware
Culture
Identify
Measure
Manage &
Mitigate
Risks
Measure
Enterprise
Risk and
Risk
Correlation
A disciplined process to systematically identify measure
and manage various types of risk
Source: A. M. Best Company
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Benefits of Enterprise Risk Management Framework
 Maximize value to the organization’s various stakeholders
 Manage exposure to earnings and capital volatility
 Ensures future capital levels exceed regulatory and rating agency
required capital levels
 Create a risk-aware culture that encourages risk-taking
 Develop consistent metrics to measure risk and to establish risk
tolerance levels
 Assign roles and responsibilities to board, Sr. management and others
 Maintain excellent rating from rating agencies
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Enterprise Risk Management
Risk-Aware Culture
ERM – Risk Aware Culture
ERM Tone Established by Board of Directors
ERM
Tone Established by Board of
and Senior
Management
Directors and Senior Management
 ERM roles and responsibilities clearly defined
 Define risk profile, risk appetite and risk tolerance parameters
 Mission, Strategic Planning and ERM documents shared with all
employees
 Executive compensation includes ERM objectives / results
 Financial results and risk management initiatives reviewed with
employees
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ERM Terminology
What is Risk Profile?
A narrative description of the parameters for
executing the company’s business strategy
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ERM Terminology
What is Risk Appetite?
The boundary level of uncertainty a company is
willing to assume given the corresponding reward
associated with the risk
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Risk Profile and Risk Appetite Examples

External Environment

 Regulatory
 Legal/Judicial
 Economic
 Industry Competition
Capital Management

 Financial Ratings
 Access to Capital
 Debt and Holding Company
Structure
 Capital Adequacy
Balance Sheet
 Loss Reserves
 Investment Portfolio

Written Premium Profile

 Line of Business, Geographic,
Product, Class of Business,
Agency Concentration
 Limits of Liability
 Coverage
Reinsurance Profile

 Reinsurance Credit Quality
 CAT Exposure
 Per Risk Retentions
Operational Profile
 Underwriting & Claim Practices
 IT Performance, Data Quality &
Business Continuity and Recovery
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ERM Terminology
What is Risk Tolerance Level?
The financial metrics that establish thresholds for
levels of risk that the company is willing to accept
in order to accomplish its strategic objectives.
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Risk Tolerance Level Examples
Enterprise-Wide Risk tolerance Levels
 Economic Capital Model: Probability of Ruin at 99.5% VaR, OneYear Out
 Best Capital Adequacy Ratio, One Year Out to Achieve/Maintain ARating
 NAIC Risk Based Capital Greater Than 300
 Net Written Premium to Surplus ratio of Less than 1.5 to1
 No Greater Than a 10% Loss of Capital From all Risk Factors in Any
One Year
 Holding Company Debt to Total Capitalization Ratio
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Risk Tolerance Level Examples
Individual Risk Tolerance Levels
 Net of Reinsurance Underwriting per Risk Retention Equal to 5%
or Less of Capital (net of tax).
 Loss and LAE Reserves Set at or Above Mid-Point of Actuarial
Range of Estimates
 No Greater than a 5% Loss of Capital in Any One Year Due to a
100 Basis Change in Interest Rates
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Identification, Measuring and Monitoring
Key Risk Factors
Primary Causes of Financial Impairment
U.S. Property/Casualty – Primary Causes of Financial Impairment (1969-2012)
Affiliate problems
8.0%
Catastrophe losses
7.1%
Reinsurance failure
3.1%
Significant change in
business
Miscellaneous
3.5%
8.4%
Investment problems
(overstated assets)
Alleged fraud
6.6%
7.2%
Deficient loss
reserves/Inadequate
pricing
43.4%
Rapid growth
12.6%
Note: Exhibit % are based on companies where the cause of impairment was identif ied.
Source: A.M. Best data & research
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Key Risk Factor Categories - Definitions
 Credit - exposure from all potential creditors including agents, reinsurers,
bond issuers and insureds
 Market – exposure to liquidity events, asset/liability mismatches and risks
in investment portfolios due to changes in interest rates, equity prices and
exchange rates
• Underwriting – exposure from underwriting insurance products including:
product development, regulation, loss reserves, pricing metrics and
catastrophic events
• Operational – exposure to management change, business interruption,
fraud, data capture and security, claim handling and employee retention
and other operating activities
• Strategic – exposure to economic downturn, industry competition, rating
agencies and availability of capital
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Categories of Key Risk Factors
Credit





Bond Issuer Default/Downgrade
Agency/policyholder credit risk
Reinsurer default
Sovereign
Currency
Market





Underwriting






Product Development
Regulatory
Catastrophic Event
Loss Reserve
Loss Experience
Pricing
Liquidity events
Asset / Liability Matching
Interest Rate Risk
Common Stock Market Price
Reinvestment
Operational







Data Capture/Data Security
Agency Automation
Management Change/Employee Turnover
Fraud/Financial Controls
Claim Handling
Delegation of Underwriting Authority
Financial Reporting
Strategic



A. M. Best Downgrade
Industry Competition
Economic Downturn



Reputational
Capital Availability
Competitor technology Advances
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Frequent
Occasional
Often
8
9
10
4
11
2
5
6
1
7
12
3
Remote
Low
Possible
Probability
Probable
High
ERM Key Risk Factors – Heat Map
< 1%
Low
1 – 5%
5 – 10%
10 – 15%
15 – 20%
>20%
Severity of Event (% of Surplus)
High
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ERM – #1 Risk Factor: Pricing Dashboard
Description of Risk: The Company may not price its policies adequately in order to produce acceptable loss
ratios.
Oversight:
Frequency of Oversight:
ERM Committee
Quarterly
Board Committee
Quarterly
Risk Owner:
Risk Tolerance Level:
Risk Score:
VP - Underwriting
(1) Achieve a 6.2% renewal rate level increase over
expiring.
(1) June 30, 2013 – 7.2%
(2) New and renewal policies written with average
RMF of .85.
(2) June 30, 2013 - .86 renewals; .80 new
business
Monitoring or Control Activity:
Date and Result of Testing Monitoring or Control Activity:
Control Effectiveness:
1.
All ISO filed manual rate changes are reviewed & analyzed
by actuary and discussed at rate committee before
adoption.
1.
Tested successfully on May 15, 2013
1.
Medium
2.
Underwriters are given pricing goals at beginning of year
and required to document every file with explanations for
use of discretionary pricing credits.
2.
Goals discussed with each underwriter by January 10, 2013.
2.
Medium
3.
3.
Underwriting quality assurance process in place to review
25 policies per underwriter per quarter.
Results of all UQAP completed quarterly and an overall
summary distributed to management – completed on July 31,
2013.
3.
High
Issues for Remediation:
4
Severity of Event (Low 1 to High 6)
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Frequency of Event (Low 1 to High 6)
The Company does not have the capability to produce
pricing reports indicating renewal rate level change and
RMF charged for new and renewal policies. An IT
project has been created to address this remediation
issue.
Status – – June 30, 2013 All monitoring controls are operating effectively. Producing pricing reports is a key issue to ensure that this risk is being properly
mitigated and managed at the individual underwriter level and on an aggregate book of business basis.
Change from Last Quarter
Status – September 30, 2013
Change from Last Quarter
Status – December 31, 2013
Change from Last Quarter
Status – March 30, 2014
Change from Last Quarter
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Is Your Company Capable of Managing Key Risks?
Industry Operating Practices
Best Operating Practices
Pricing - No price monitoring reports
New business and renewal price monitoring reports
track manual and discretionary price changes
Loss Reserves - Calendar Year Loss Ratio/Loss
Reserve Adequacy Reviewed Annually by Outside
Actuary
Accident Year Loss Ratios/ Loss Reserve Adequacy
Reviewed Quarterly Internally and Annually by
Outside Actuary
CAT Management - Determined annually by
reinsurance broker
Property Values Managed Monthly in Concentrated
Territories
Claims Best Practices - No written claims best
practices and no claim audit process
Written Claims Best Practices and Claim Files
Audited Monthly
Investment Portfolio - Risk Metrics not calculated
Investment Manager Monitors Risk Metrics of
Investment Portfolio and Meets with Board
Investment Committee Quarterly
Financial Forecasts – one-year budgets are created
for operating statements only
Three-Year Financial Forecasts prepared including
operating statements, balance sheets and RBC and
BCAR ratios
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Enterprise Risk Management Framework
Risk Identification
Financial Goals &
Capital
Management
Risk-Aware Culture
Risk Measurement
Risk Profile
Risk Tolerance
Roles/Responsibilities
ERM Process
Business Strategies
& Operating
Practices
Risk Controls,
Monitoring Activities &
Reporting
Integrate ERM Process into Standard Operating Practices of Company
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Joseph F. Morris, CPA, MBA Bio
Joseph F. Morris, CPA, MBA, has over thirty-four years of
insurance industry experience. Prior to founding P&C Insurance
Company Strategies, LLC, Mr. Morris was President of Stonecreek
Specialty Underwriters, LLC. Previously, Mr. Morris was President
and CEO of James River Insurance Company from 2008 until 2010 after
serving as President and CEO of The Philadelphia Contributionship, the oldest insurance
company in the United States. Mr. Morris also held several positions with United America
Indemnity, Ltd. (UAI) including President, President & CEO Penn-America, UAI’s excess &
surplus lines subsidiary, and SVP and CFO of Penn-America. Mr. Morris began his insurance
career at Reliance Insurance Company where, over a twenty-one year career, he held a number
of financial and operating positions.
Mr. Morris has been a member of the Board of Directors of The Insurance Society of
Philadelphia since 1989 and was its Chairperson in 1997-1999.
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Disclaimer of Warranties
The content of the presentation materials has been
prepared by P&C Insurance Company Strategies, LLC
(PCIC Strategies) “as is”, for informational purposes only
and without warranties of any kind, either express or
implied.
PCIC Strategies disclaims all warranties
including but not limited to warranties of title, implied
warranties of merchantability, fitness for a particular
purpose, compatibility, security, accuracy, reliability or
infringement.
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