Transcript The global operator: tools for managing risk on a

The global operator: tools for managing risk on a
worldwide scale
Marc Paasch, Head of Marsh Risk Consulting Europe
Caroline Woolley, EMEA Risk Practices, Marsh
9 October 2013
Analytics in Risk Management
Marsh Analytical Platform (MAP)
Optimizing your risk-based decision making
Marc Paasch, Head of Marsh Risk Consulting Europe
9 October 2013
2013 POWER FORUM
SECURITY OF SUPPLY
22 July 2015
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Excellence in Risk Management Survey
Strategic Use of Data and Analytics
Given the advance of data
availability and aggregation, nearly
three-quarters of Excellence survey
respondents said their organizations
need to conduct deeper analysis on
their risk-related data.
• The majority of C-Suite and risk
76% of Power and Utilities
respondents said their
organizations need to conduct
deeper analysis on their risk related
data
professional respondents said the
most significant use of data is to
inform decisions about specific
risks.
• C-Suite responses highlighted the
need for more strategic uses of
data and analytics to support
corporate strategy
• Data analysis aligned with tests
that will support the organization’s
overall risk strategy will help risk
professionals close the gap
between being a cost center and
a strategic thought center
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Analytics in Risk Management
What does Risk Quantification bring to the process?
CORE GOALS: Bring Value and Science to the Risk Transfer/Mitigation
Equation
Determine financial risk tolerance levels
• Essential to know overall risk tolerances before one can evaluate risk mitigation
strategies
Understand likelihood and magnitude of potential loss scenarios
• Through simulation and scenario modeling ranges of outcomes will be calculated and
form the basis of how to determine value of risk mitigation strategies
Evaluate Risk Mitigation Options
• Link financial studies with loss potentials to derive client specific valuations of potential
risk mitigation strategies
• Use this analysis to determine optimal risk mitigation strategies that not only provide
best return on investment but also meet senior management goals and needs
• Understand when it is beneficial to utilize the carrier’s balance sheet as opposed to
your own
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MAP: Risk Finance Optimization
5 Step Approach
STEP 4: Design and Evaluate Alternative
STEP 1: Risk Tolerance Analysis
• Establish Risk Tolerance Thresholds
Structures
ECOR
TCOR ($)
IMPLIED RISK
CHARGE
STEP 2: Build Loss Distributions
RETAINED
LOSS
INSURED
LOSS
PREMIUM
RETAINED
LOSSES
UNINSURE
D LOSS
CURRENT
STRUCTURE
IMPLIED RISK
CHARGE
PREMIUM
RETAINED
LOSSES
OPTION A
IMPLIED RISK
CHARGE
PREMIUM
RETAINED
LOSSES
OPTION B
STEP 5: View Structures in Context of Overall
Portfolio
TCOR
BY LINE OF BUSINESS
$ LOSS
STEP 3: Gain Understanding of TCOR
$ LOSS
UNINSURED
LOSS
IMPLIED RISK
CHARGE
UNINSURE
D LOSS
LAYER 2
RETENTION
PROBABILITY
INSURANCE
PROGRAM
OTHER LINES
D&O
PREMIUM
OTHER CASUALTY
RETAINED
LOSSES
LAYER 3
PREMIUM
LAYER 1
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IMPLIED RISK
CHARGE
RETAINED
LOSSES
INSURED
LOSS
RETAINED
LOSS
PROPERTY
OPTION A
WC
TCOR
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MAP: Risk Finance Optimization
Step 2: Building Gross Loss Distributions
Evaluating Limits of Insurance:
• Calculated Mean:
– Average simulated loss year = $5,635,840
• Calculated Standard Deviation:
– Amount of certainty around calculated
mean (high figure indicates less certainty)
– 1 Standard Deviation = $22,456,872
• Understanding Percentiles:
– Percentiles indicate the proportion of
simulated loss years below each threshold
- Example: 95% of simulated next year
losses below $9,019,882
• Return Periods:
– The number of years can be calculated by
for any percentile:
- # of years = 1/(1-Percentile)
- Example: 1 in a 100 years: 100 = 1/(199%)
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MAP: Risk Finance Optimization
Step 3: Retained Losses
Modeling Retained
Losses:
• Gross/Ground-up losses
labeled as “No Insurance”
• Retained Losses are
defined as losses within
the Retention + Losses
excess of insurance
• Higher Retention options
cause:
– Higher Expected
(Mean) Loss
– Higher Volatility of
Losses:
- Higher Standard
Deviation
- Higher Coefficient of
Variation
- Greater Tail
Exposure
• Note: Premiums are
excluded from chart
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MAP: Risk Finance Optimization
Step 3: Design and Evaluate Alternative Insurance Structures
Understanding Structure Performance:
• Adding Premiums allows the comparison of
‘dollars out the door’ between structures
• Determine when current structure “pays off”
– The current retention ‘pays off’ between
the 95th and 96th percentile
– Corresponds to about once every 20-25
years
• The ‘change’ column shows the dollar
difference at each percentile
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MAP: Risk Finance Optimization
Step 3: Design and Evaluate Alternative Insurance Structures
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MAP: Risk Finance Optimization
Step 5: Total Cost of Risk (TCOR)
Definitions:
• For each program structure considered, TCOR
is estimated as the sum of:
–
–
–
–
Expected Retained Losses
Expected Premium
Implied Risk Charge
Other Administrative Costs such as broker
commissions, collateral expenses, etc.
• The Implied Risk Charge is a proxy for the costs
associated with retained loss volatility. Based
on three components for each structure:
1. Expected retained losses in excess of mean
retained loss (this is the theoretical amount
of capital that should be set aside to absorb
unfavorable retained loss outcomes).
2. Cost of capital (based on WACC, adjusted
by RADR).
3. Duration of liabilities (used to release capital
over time).
• The risk charge calculated using
the stream of theoretical capital
charges resulting from (1)*(2) over
the duration of (3), discounted at
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the cost of capital in (2).
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Analytics in Risk Management
Conclusions
• Understand Your Risk
– Complete Risk Quantification of full range of loss outcomes
– Reflecting
- Your unique risk profile and loss history
- Marsh’s Loss Library, risk expertise, quantification tools
• Actionable Decision Support
– Substantiation around risk transfer/retention strategies
– Optimal risk transfer inflection points
– Holistic Portfolio View
– Risk Decision Framework spanning across entire hazard risk spectrum exist
– Comparison to Risk Tolerance Thresholds and impacts on Key Performance
Indicators (KPIs)
Risk Financing Optimization
(RFO)
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Benchmarking
CAT Modeling
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Marsh Analytics Platform
Case Study #1 – Captive Program Optimization
Issue:
In conjunction with upcoming property program renewal, power sector
client is seeking to optimize the use of its captive, reduce risk transfer
price volatility, and evaluate efficiency using of alternative reinsurance
market and capital market capacity for both “all risk” and NATCAT
perils.
Solution: Using client provided data including detailed engineering reports,
NATCAT loss modeling, historical loss data, and historical program
structure and premium data, Marsh has provided a proposal to model
the client’s property risk profile on a portfolio basis. Outputs from the
modeling project will enable the client to:
• Optimize capital allocation decisions (i.e. captive retention vs. risk
transfer)
• Optimize property program structure (i.e. layer structure,
mechanics, premiums)
• Leverage premium negotiations with traditional insurance markets
• Access alternative risk transfer capacity (i.e. CAT Bonds, treaty
reinsurance,…)
• Validate premium allocation model and assumptions
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Marsh Analytics Platform
Case Study #2 – Excess Liability Program Assessment
Issue:
Utility client facing significant budget pressure needed to
evaluate and justify excess liability program cost, program
structure, and value of existing trading relationships. Key driver
behind for assessment was ongoing program cost volatility
associated with prior rate increases and budgeted future rate
increases.
Solution:
Using Marsh loss data library and client historical loss data,
Marsh conducted an RFO study of client’s excess liability risk
profile. Marsh also provided a Risk Bearing Capacity analysis.
RFO included loss distributions to assess program limits and
retentions. Scope of study also analyzed pricing efficiency of
the primary layer and each excess layers.
Analysis enabled risk manager to quantitatively assess the
utility’s risk profile, validate the efficiency of program pricing,
and establish premium credit targets for alternative retentions
levels.
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Natural Catastrophes
Caroline Woolley, EMEA Risk Practices, Marsh
9 October 2013
2013 POWER FORUM
SECURITY OF SUPPLY
22 July 2015
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The Global Operator
Agenda
• NAT CAT Pack
– Best practice for Risk Management and Transfer
– NAT CAT Check list
• UN International Strategy for Disaster Reduction (UNISDR)
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Natural Catastrophes
Increased frequency and severity…
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Natural catastrophes – introduction
2012 worldwide catastrophe activity
• In 2011, the Asia-Pacific region accounted for around 73% of the total
insured catastrophe activity
• In 2012, the US accounted for the majority of global insured loss at 86%
• Economic v insured losses
*
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*Includes large
nat cat and man made losses
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Source: Guy Carpenter
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Natural Catastrophes
Narrow the gap
• Insured v Uninsured losses (stats from Munich Re)
– Katrina (2005) – Insured loss $62.2bn Total Loss $125bn
– Japan (2011) – Insured loss $40bn Total loss $210bn
– Thailand (2011) – Insured loss $16bn Total loss $43bn
– Sandy (2012) – Insured loss $30bn Total loss $65bn
– US 64% of total losses are Insured
– Europe it is only 16%
• Reasons include
– Exclusions (Japan)
– No insurance
– Unavailable insurance
– Restricted insurance
– No reinsurance
– Underinsurance
– Emerging risks
– Claims disputes
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Natural catastrophes
NAT CAT Pack
•
Our view of best practice in relation
to natural catastrophe risk
management and transfer
• Approach
• Risk identification
• Risk measurement
• Risk improvements
• Risk treatment
• Full spectrum from data collection,
business continuity management
through to claims
• Includes property sustainability and
resilience
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Natural Catastrophes
Spectrum
• NAT CAT Risk Map
• Natural Hazards and Catastrophe Modelling
• Supply Chain Risk Management
• Business Continuity Management
• Business Interruption Insurance Reviews
• Updates - Guy Carpenter CAT Central
• Placement – including Bowring Marsh: Global Property
• Insurance Claims Preparation
• Property Sustainability -Green Buildings
• UNISDR
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Natural catastrophes
NAT CAT approach
Modelling process own locations:
• NAT CAT Risk Map Package – Complete
overview to identify exposures, NAT CAT
zoning for all locations, using CS Stars
technology and the NATHAN database.
• Vulnerability – The extent of damage to
property at a given event intensity. How
robust are your assets?
• NAT CAT modelling – Modelling of specific
locations using AIR/RMS – likelihood of
events to establish loss estimates and limits
• Risk financing – What proportion of the loss
is retained by the company and what
proportion is (or should be) insured?
Supply chain
– NAT CAT Risk Map Package Review of
risk for key suppliers NAT CAT zoning
information
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NAT CAT Risk Map
• Latest part of the NAT CAT Pack
• Collaboration with CS Stars using
Risk Goggles
• First step – overview of all
exposures
• This is an interactive map of
clients complete portfolio of
assets, including suppliers
locations where appropriate. From
a single view you can see all
property risk data, and now this
includes NAT CAT hazard
exposures.
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Natural Catastrophes
The market’s current and future use of CAT models
Where are the markets now?
• All major insurers are modeling extensively in either AIR or RMS. Few are using both
• Insurers are desperate for quality exposure data
• Poor exposure data will be modeled conservatively (worst case outcomes)
Where are the markets heading?
• Insurers will need to model all accounts
– Regulatory demands and rating agency requirements
– Reinsurance cover
• Poorly modeled accounts - higher insurer expenses
– Increase in reserves/decrease in available capital
– Increased reinsurance costs
• Higher insurer expenses - Increased premiums and reduced capacity
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Supply chain risk management
•
Damage and non damage
•
Traditional PD/BI policies
– Extension clauses
– Damage only
– First tier only
– Restrictions
•
Supply chain cover
– Non damage BI/supply chain
policy development
– Zurich, AIG, Munich Re,
Allianz…
– Supply chain assessments
– Captive approach
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Claims
• Wide area damage – very different approach
• Orient Express case – BI loss due to the event or the damage?
• Lessons learned – Definitions, 72 hour clause, Underinsurance
• Help through the claim process and offer support and guidance
• Assistance with pre-loss advice and post-loss assistance
• Forensic Accounting & Claims Services (FACS) team ensure the burden of the
insurance claim is minimised
• Focal point is the recovery of business, not the insurance claim
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Property Sustainability
• Collaboration between property and
environmental practices
• Part of the sustainability series of
discussion papers
• Rebuild in an environmentally friendly
way and insurers pay
• Green building and resilient repairs
clauses
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NAT CAT Check List
CHECKLIST
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NAT CAT PORTFOLIO OVERVIEW
 
DATA AND VALUES CHECK/UPDATE
 
NAT CAT MODELLING
 
SUPPLY CHAIN REVIEW
 
BUSINESS CONTINUITY MANAGEMENT
 
ENVIRONMENTAL IMPAIRMENT ASSESSMENT
 
RISK TRANSFER
 
CLAIMS SUPPORT
 
ONGOING – FEEDBACK/REAL TIME ALERTS
 
The NAT CAT Pack is the Marsh view of best practice in relation to natural catastrophe (Nat Cat) risk management and transfer.
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NAT CAT PORTFOLIO OVERVIEW
Map your complete portfolio of assets, including
suppliers’ and customers’ locations, showing all
your property risk data, including natural hazard
zone. Identify hot spots for further review and
identify maximum limits required for NAT CAT
risk transfer.
 
STATUS
 
 
Stage incomplete
Stage commenced but room for improvement
Stage complete and full information available
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DATA AND VALUES CHECK/UPDATE
Complete property surveys and establish property
values (full COPE data), with vulnerability
assessments and environmental assessment
(e.g. BREEAM) for the hot spots.
STATUS
Establish business interruption (BI) values and
check basis of declarations. Quantify potential
losses under maximum foreseeable and mitigated
loss scenario (utilising BCM results).
STATUS
Must be up to date, in line with policy
requirements and summarised in a form suitable
for submissions.
STATUS
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 
 
Stage incomplete
COPE: Construction, occupancy, public and private
fire protection and exposure.
Stage commenced but room for improvement
BREEAM: BRE Environmental Assessment Method
Stage complete and full information available
 
BCM: Business continuity management
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UNISDR
Making cities more resilient to natural hazards
• Partner of the United Nations International Strategy for Disaster Reduction
(UNISDR) supporting Resilient Cities campaign.
• Aspects of relationship
– City member
- Becoming resilient
- Contributions to community
– City advisor
- Risk management
- Insurance expertise
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