Transcript ERM Roundtable Where Are We? CAS Spring Meeting May 8, 2006 John Kollar, ISO Dave Ingram, S&P Steve Lowe, Tillinghast Don Mango, Guy Carpenter.

ERM Roundtable
Where Are We?
CAS Spring Meeting
May 8, 2006
John Kollar, ISO
Dave Ingram, S&P
Steve Lowe, Tillinghast
Don Mango, Guy Carpenter
CAS ERM Definition
• Process
 Assess
 Control
 Exploit
 Finance
 Monitor risk
• Holistic treatment of risk
• Senior management function
• Upside and downside
ERM “Drivers”
•
•
•
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Improved corporate governance
Consolidation
Financial services convergence
Globalization
 Intl. Assoc. of Insurance Supervisors (IAIS)
 Basel II/Solvency II
 Intl. Accounting Standards Board (IASB)
• Risk management evolution
Underwriting Risk Model (URM)
Experience
• “Missionary work”
 Why change?
• Senior management commitment
 Priority item
 Clear objectives
 Adequate resources
 Start small
Underwriting Risk Model (URM)
Experience
• Availability & quality of data
 Less is easier
• Coordination of functions
• Risk integration
• ERM
 A lot of potential
 Long way to go
Value Statement
Risk
Parameters
Risk
Analysis
Pricing
Risk
Economic
Capital
Risk
Allocation
URM
Interest
Rate Risk
Reinsurance
Combined
Ratios
ERM
ERM Evaluations
Insurance Sector
CAS Spring Meeting
May 2005
David Ingram
Director
Enterprise Risk Management
Financial Services Ratings
S&P’s Evaluation of ERM
Strategic Risk Management
Risk Management Culture
11/7/2015
9
Overall ERM Evaluation
45 companies
Excellent
7%
Weak
9%
Adequate
60%
11/7/2015
10
Strong
24%
ERM within the S&P Rating
Profile
Competitive Position
Management & Corporate Strategy
Operating Performance
Capitalization
Liquidity
Investments
Financial Flexibility
ERM
11/7/2015
Stronger
11
ERM within the S&P Rating
Profile
Competitive Position
Management & Corporate Strategy
Operating Performance
Capitalization
Liquidity
Investments
Financial Flexibility
ERM
11/7/2015
Stronger
12
ERM within the S&P Rating
Profile
Competitive Position
Management & Corporate Strategy
Operating Performance
Capitalization
Liquidity
Investments
Financial Flexibility
ERM
11/7/2015
Stronger
13
ERM – Key Points
1. ERM is a new organizing concept
– For looking at a collection of issues we have always covered
2. ERM will apply to all insurers globally
3. ERM evaluation will be tailored to the risks of each
insurer
4. ERM will recognize all the risk management of the
insurer
•
even if the company does not do “ERM”!!!
5. ERM will be reflected in insurer ratings
•
Importance of ERM will vary among companies – just as
every other factor does
6. ERM will be a new section in the ratings report
7. ERM is not a new Capital Model
•
ERM is not primarily concerned with looking at an insurer’s
Economic Capital Model
ERM
ERM Value Framework
Maximize value
by relating a
firm’s decisions
on the risks it
takes to the
decisions on the
capital it uses to
finance its
business
Reconciles
actuarial and
corporate
finance
perspectives
© 2006 Towers Perrin
Value
Creation
Capital
Costs
Return
on Risk
Value
Management
Portfolio of
Enterprise
Risks
Risk
Structure
Capital Adequacy
Risk and
Capital
Management
How much
capital do I
need?
Portfolio of
Capital
Resources
Capital
Structure
What type
of capital do
I need?
Economic
Capital
Value creation can come from
optimizing the structure of the risk portfolio
 Capacity-based pricing of catastrophe exposure
 Marginal return on marginal capital
 Asset allocation strategy
 Is risk minimized by matching bond maturities to the
expected cash flows of Workers Compensation
claims?
 Is risk minimized by matching the assets by
currency to liabilities by currency?
© 2006 Towers Perrin
Value creation can come from
optimizing the capital structure of the firm
 Reinsurance optimization
Choosing Best Retention for Contract With $1 Million Limit
40%
Cost of Capital
35%
Too much "trading of dollars"
Too far out "of the money"
30%
25%
20%
15%
10%
5%
0%
0
1000
2000
3000
4000
Retention ($ Millions)
© 2006 Towers Perrin
5000
6000
ERM
ERM in Reinsurance Industry
• Hold-to-maturity, levered portfolio of longdated, illiquid, OTC derivatives on untraded
underlyings
• Less transparency than primaries (one layer
removed)
• More volatility (we take the tails)
• Global platforms, Diversified offerings 
Complex organizations
• Significant model and parameter risk
ERM in Reinsurance Industry
• Munich Re, Swiss Re, Allianz, Zurich, Hartford
have large risk organizations with significant
actuarial leadership
– But they probably need large risk organizations!
• “Franchise” of a reinsurer = non-public
information purchased @ UW results, stored in
minable format, used to build proprietary
forecast models
– Appalling data quality and no data transfer standards
• Compare with banking and lending
– See www.fpml.com
Threats to Reinsurance Industry
• Business:
– Mega cat ($100B)
– Concentration of risk (~mercury at the top
of the food chain)
• Structural:
– Underwriter incentive comp plans
– Ease of entry, undifferentiated product
– Optimism and overconfidence (Morton Lane:
the perfume of the premium overwhelms the
stink of the risk)
ERM
Where is the CAS Today?
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•
•
•
•
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Centennial Goal
ERM Symposium
Risk Management Section
New VP position
ERM Vision
ERM Institute International (ERM-II)
Where Should the
CAS be Going?