etc.venues St.Paul’s, LondonCriteria Review Seminar 4 November 2015 3 14:15 Welcome Greg Carter,...

Criteria Review Seminar

etc.venues St.Paul’s, London

04 November 2015


Criteria Review Seminar 4 November 2015 2

Greg Carter

Managing Director, Analytics,

A.M. Best Europe – Rating Services Ltd.

Welcome

Agenda – Criteria Review

Seminar


14:15 Welcome

Greg Carter,

Managing Director, Analytics

14:30 Mock Rating Committee

and Vote

Mahesh Mistry,

Director, Analytics and members of

A.M. Best’s Analytical Team

15:15 Stochastic-based Best’s Capital

Adequacy Ratio (BCAR)

Mathilde Jakobsen,

Associate Director, Analytics

15:45 Enterprise Risk Management (ERM)

and Risk Impact Worksheets

Ghislain Le Cam


16:15 Close

Disclaimer


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profits), even if AMB is advised in advance of the possibility of such damages, resulting from the use of or inability to use, any such information. The credit

ratings, financial reporting analysis, projections, and other observations, if any, constituting part of the information contained herein are, and must be

construed solely as, statements of opinion and not statements of fact or recommendations to purchase, sell or hold any securities, insurance policies,

contracts or any other financial obligations, nor does it address the suitability of any particular financial obligation for a specific purpose or purchaser.

Credit risk is the risk that an entity may not meet its contractual, financial obligations as they come due. Credit ratings do not address any other risk,

including but not limited to, liquidity risk, market value risk or price volatility of rated securities. NO WARRANTY, EXPRESS OR IMPLIED, AS TO THE

ACCURACY, TIMELINESS, COMPLETENESS, MERCHANTABILITY OR FITNESS FOR ANY PARTICULAR PURPOSE OF ANY SUCH RATING OR

OTHER OPINION OR INFORMATION IS GIVEN OR MADE BY AMB IN ANY FORM OR MANNER WHATSOEVER. Each credit rating or other opinion

must be weighed solely as one factor in any investment or purchasing decision made by or on behalf of any user of the information contained herein, and

each such user must accordingly make its own study and evaluation of each security or other financial obligation and of each issuer and guarantor of, and

each provider of credit support for, each security or other financial obligation that it may consider purchasing, holding or selling.

Disclaimer


US Securities Laws explicitly prohibit the issuance or maintenance of a credit rating where a person involved in the

sales or marketing of a product or service of the CRA also participates in determining or monitoring the credit rating, or

developing or approving procedures or methodologies used for determining the credit rating.

No part of this presentation amounts to sales / marketing activity and A.M. Best’s Rating Division employees

are prohibited from participating in commercial discussions.

Any queries of a commercial nature should be directed to A.M. Best’s Market Development function.



Mahesh Mistry

Director, Analytics,


Mock Rating Committee

and Vote


• A.M. Best rating actions determined by a Rating Committee

• Rating actions include:

– affirmations

– upgrades and downgrades

– initial ratings

– placement of ratings under review

• Responsible analyst produces rating package and proposes rating action

• Rating Committee deliberates on the proposed action and determines the rating action

Mock Rating Committee and Vote Introduction


• Voting quorum – minimum of six standing members, including at least two senior members

• Voting order:

– Responsible analyst and team leader

– All other members in reverse order of seniority

• Simple majority vote is acceptable for the approval of any rating action

• Chair of the Rating Committee can break a tie or refer the decision to a higher committee

• Voting members must have no conflicts of interest, but must have relevant experience and have passed compliance requirements

Mock Rating Committee and Vote Voting


Mock Rating Committee and Vote Rating Process

Strong Operating Performance Builds

Balance Sheet Strength

Weak Operating Performance Erodes


Date of last

balance

sheet

Present Future

Operating Performance and Business Profile

Leading Indicators of the Future Balance Sheet

Ba

lan

ce

Sh

ee

t S

tre

ng

th

Time

BCAR Guideline

Business Profile Drives

Strong and Sustainable

Operating Performance

Introduction BMF Insurance Company


• New rating for a subsidiary of an already rated group

• Recommendation: stand-alone assessment of ‘a’, stable outlook

ERM

Adequate

Good Business

Profile

Stable Operating Performance

Solid Risk-Adjusted Capitalisation

and


Note: ERM = Enterprise Risk Management

Business Profile - BMF Insurance Company Overview


• Domiciled in a small European country

• Country Risk Tier 1 – stable operating environment

• BMF Insurance Company (BMF) established 70 years ago and is owned 100% by Windermere Insurance Group (UK) plc

• Good competitive position:

– third-largest insurer in its country of domicile

– in-depth knowledge and experience of the local market


• Well diversified insurance portfolio by line of business

Business Profile - BMF Insurance Company Business split

6% 5% 6%

34% 36% 37%

40% 38% 40%

11% 15% 11% 9% 6% 6%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2012 2013 2014

PA and Health Motor and Third-Party LiabilityFire and Property MarineMisc


• GWP increased by 11% during 2014, driven by increase in motor and property business

• High competition in local market

• Planned growth driven by higher volume and moderate rate increases

Business Profile - BMF Insurance Company Gross Written Premium (GWP) development

0

50

100

150

200

250

300

350

400

450

500

2010 2011 2012 2013 2014 2015e 2016e

EUR

mill

ion

s

Gross Written Premium Net Written Premium


• Geographically concentrated, only writing local business

• Plans to open a branch in a neighbouring country in 2016 to diversify geographically

• Growth of 10 - 15% expected over each of the next three years, includes growth via new branch

• New branch represents execution risk

Business Profile - BMF Insurance Company Business plans


• Business profile supports the recommendation:

– Good market position, competitive advantage

– Strong brand recognition

– Diverse product offering

– Offset by geographical concentration

– Diversification via branch comes with execution risk

Business Profile - BMF Insurance Company Summary


• Strong risk-adjusted capitalisation, as measured by the BCAR model

• Risk-adjusted capitalisation is supported through:

– Good internal capital generation

– Conservative investment profile

– Good credit quality of reinsurers

• Comfortably meets local solvency requirements

BCAR 2013 2014 2015e 2016e 2017e

Standard 180% 204% 185% 183% 185%

CAT Stress 172% 197% 178% 178% 180%

Market average 160% 167%

Balance Sheet Strength - BMF Insurance Company Capitalisation


• Historically: significant exposure to Peripheral European Sovereign Debt

• De-risked portfolio in 2014, leading to improvement in risk-adjusted capitalisation

Balance Sheet Strength - BMF Insurance Company Investments

42% 41%

62%

30% 28%

7%

20% 23% 21%

6% 4% 5%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2012 2013 2014

Fixed income Peripheral European Sovereign Debt

Public Equity Mutual funds

Property


• Reserves are reviewed by an internal actuary quarterly and by an external actuary annually

• Small margin in held reserves over external actuaries best estimate

• Loss triangles for the past 10 years indicate stability

• Modest reserve releases in each of the past three years

Balance Sheet Strength - BMF Insurance Company Reserving


• Reinsurance includes both proportional and non-proportional arrangements

• 92% of reinsurers are rated “A-” or above

• Limited cat risk in local market, earthquake risk is borne by state reinsurer

Balance Sheet Strength - BMF Insurance Company Reinsurance


• Balance sheet strength is supportive of the recommended rating

• Solid risk-adjusted capitalisation

• Good internal capital generation to support planned growth

• Investment risk has reduced

• Stable reserve development

• Limited CAT risk

• Comprehensive reinsurance with high quality panel

Balance Sheet Strength - BMF Insurance Company Summary


• Good return on equity, averaging 12% over the last five years

Operating Performance - BMF Insurance Company Overall performance

16

-11

19 20 21 22 23

7

7

7 6 3 5

6

-2

2

4 2

-3

1 1

-15

-10

-5

0

5

10

15

20

25

30

35

2010 2011 2012 2013 2014 2015e 2016e

EUR

mill

ion

s

Technical profit Investment Income Fair Value gains


• Diverse product range has supported stable underwriting performance

• Combined ratios average 93% over the past five years

Operating Performance - BMF Insurance Company Underwriting

40%

50%

60%

70%

80%

90%

100%

2010 2011 2012 2013 2014

Loss

rat

io

PA and Health Motor and Third-Party Liability

Fire and Property Marine

Misc


2010 2011 2012 2013 2014 2015e 2016e

BMF Combined ratio 91% 105% 93% 94% 92% 93% 96%

Market average 92% 103% 95% 95% 94%

Operating Performance - BMF Insurance Company Underwriting

• Combined ratio better than market in last three years

• Expected to increase in 2016 due to higher expenses of new branch


• Investment yield reduced due to sale of high-risk assets

• Reinvestment rate reducing year on year – currently 2.5%

Operating Performance - BMF Insurance Company Investment income

2010

2011 2012

2013

2014 2015

2.0%

2.2%

2.4%

2.6%

2.8%

3.0%

3.2%

3.4%

3.6%

3.8%

Investment Yield


• Operating performance is supportive of the recommended rating

– Stable underwriting performance

– Modest investment income reflective of low-risk strategy

– Generally outperforms peers

Operating Performance - BMF Insurance Company Summary


Enterprise Risk Management BMF Insurance Company


Recommendation: a standalone assessment of ‘a’, stable outlook

Summary BMF Insurance Company

Supporting factors Offsetting factors

Good business profile in local market

Geographically concentrated

Well diversified by line of business

Execution risk associated with planned expansion

Solid risk-adjusted capitalisation

Stable underwriting performance

Vote: BMF Insurance Company

1. a+

2. a

3. a-


a+ a a-

0% 0%0%


1. a+

2. a

3. a-


a+ a a-

0% 0%0%

Considerations for rating enhancement BMF Insurance Company


Implicit support

• Level of integration

• Brand name

• Contribution to earnings

• Contribution to growth

Explicit support

• Financial guarantee

• Reinsurance support

Rating Enhancement Ownership - BMF Insurance Company


• BMF is owned 100% by Windermere Insurance Limited (UK) Plc (Windermere)

• Windermere acquired BMF in 2004

• Windermere has operations in the UK and Continental Europe

• Windermere is rated as ‘aa-’ with a stable outlook by A.M. Best


Windermere Insurance Group (UK) Plc

Windermere Insurance Limited (UK)

BMF Insurance Company (Europe)

Windermere Insurance (Poland)

Rating Enhancement Structure - BMF Insurance Company

Rated ‘aa-’ stable

Recommended ‘a+’ stable

Rated ‘aa-’ stable


Recommendation of one-notch of rating enhancement Published rating of ‘a+’ with a stable outlook

Rating Enhancement Summary - BMF Insurance Company

Support factors Offsetting factors

Shared IT and HR systems Does not carry the Windermere brand name

Shared pricing tools No financial guarantee or net worth maintenance agreement from Group

Good level of oversight and monitoring controls from Windermere

No reinsurance support from Group

Group earnings: contributes 15% and will be the driver of Group’s growth in Europe


1. aa-

2. a+

3. a


aa- a+ a

0% 0%0%

(full rating enhancement)

(one notch, recommendation)

(no rating enhancement)

Q & A


Mahesh Mistry

Director, Analytics,


Mock Rating Committee

and Vote



4 November 2015 36

Stochastic-based BCAR (Best’s Capital Adequacy Ratio)

Mathilde Jakobsen

Associate Director, Analytics, A.M. Best


Agenda

• The role of BCAR in the rating process

• Current BCAR approach

• Proposed BCAR approach

• Overview of planned changes (US P&C BCAR)

• Application of new BCAR in the rating process

• Updated timeline

4 November 2015 37


The Role of BCAR in the Rating

Process

4 November 2015

• Best’s Capital Adequacy Ratio (BCAR) provides an overall view of risk-based capitalisation

• Separate BCAR models for different areas – including the US P&C, US Life and the Universal BCAR model

• BCAR is used as a global benchmarking tool

38


The Role of BCAR in the Rating

Process

4 November 2015



Business Prof i le

Country Risk

Enterprise Risk Management

Rating

39

Current BCAR Approach

• Output is single BCAR score, determined as:

• ‘What-if’ BCAR scores also produced, e.g. CAT stressed BCAR

4 November 2015 Criteria Review Seminar 40 4 November 2015 40

BCAR SCORE = TOTAL ADJUSTED CAPITAL

NET REQUIRED CAPITAL

NET REQUIRED CAPITAL*

+ (B1) Fixed-Income Securities

+ (B2) Equity Securities

+ (B3) Interest Rate

+ (B4) Credit

+ (B5) Loss Reserves

+ (B6) Net Written Premium

+ (B7) Off Balance Sheet Risks

- COVARIANCE


Current BCAR Approach

4 November 2015

TOTAL ADJUSTED CAPITAL

+ Shareholders’ funds

+ Adjustments made to ensure a more economic and comparable basis for capital adequacy

+ Deduction of one net tax adjusted probable maximum loss

BCAR SCORE = TOTAL ADJUSTED CAPITAL / NET REQUIRED CAPITAL

*Net required capital = SQRT [(B1)²+(B2)²+(B3)²+(0.5*B4)² +[(0.5*B4)+B5)]²+(B6)² ] + B7

41


New BCAR - Caveat

4 November 2015

• US P&C is the first model developed

• The application of changes to the Universal BCAR model is a work in progress

• A.M. Best’s view of risk will be the same in all models

42

2015 Insurance Market Briefing - Europe

New BCAR Approach

• Look and feel of the model will be similar – structure maintained where possible

• The risk factors will be generated using stochastic simulations from probability curves – with company specific adjustments

• BCAR scores will be shown at five confidence levels

• Underlying calculations are different

• Ratio calculation has changed

• Application does change



New BCAR Approach

• Utilising VaR risk metrics

– Ensures a consistent risk metric across different model components

– Reasonable tail issues still covered

• Consistent confidence intervals across risks

– 98% 99% 99.5% 99.8% 99.9%

• BCAR scores will be shown at these confidence levels



New BCAR Approach

4 November 2015

• Time horizon for risk factors

• Ratings reviewed at least annually

Ultimate 10 Years 1 Year

Reserve risk Bond defaults Common stocks

Premium risk Reinsurer impairments

45

NET REQUIRED CAPITAL*

+ (B1) Fixed-Income Securities

+ (B2) Equity Securities

+ (B3) Interest Rate

+ (B4) Credit

+ (B5) Loss Reserves

+ (B6) Net Written Premium

+ (B7) Off Balance Sheet Risks

+ (B8) Catastrophe Exposure

- COVARIANCE


New BCAR Approach

4 November 2015

AVAILABLE CAPITAL

+ Shareholders’ funds

+ Adjustments made to ensure a more economic and comparable basis for capital adequacy

BCAR SCORE = (AVAILABLE CAPITAL – NET REQUIRED CAPITAL)

/ AVAILABLE CAPITAL

*Net required capital = SQRT [(B1)²+(B2)²+(B3)²+(0.5*B4)² +[(0.5*B4)+B5)]²+(B6)² ] + B7 + B8

46


New BCAR Approach

4 November 2015 47

• Current BCAR Calculation (ratio to NRC)

Potential Scores: Low of 0.0 to Max of 999.9 Want BCAR > 100.0

• Planned BCAR Calculation (ratio to Available Capital)

Potential Scores: Low of -999.9 to Max of 100.0 Want BCAR > 0.0


Overview of Planned Changes (US P&C)

Bonds & Equities

Use Economic Scenario Generator

Update bond default risk factors – Reflect duration of company’s bond portfolio (SRQ) – Reflect asset quality of company’s bond portfolio (SRQ)

– Reflect volatility in bond default assumptions (stochastic portion – tied to ESG)

– Only defaults occurring in first 10 years are considered – Offset default with recovery on defaults (varies by rating)

– Net defaulted amounts are present valued

Update common stock risk factors – Reflect type of stocks held by company (SRQ – Beta)

– Reflect volatility (stochastic portion – tied to ESG)




Interest Rate Risk

Use Economic Scenario Generator

Update risk charges for interest rate risk – Simulated 10,000 potential one-year changes in interest rates

– Measured at various VaR levels

– Range from 210 to 310 basis points

– Reflect duration of company’s fixed income portfolio (SRQ)

– Reflect liquidity need using greater of gross PML or 10% of assets




Reinsurance

Update reinsurance credit risk factors – Reflect type of recoverable (paid, unpaid, upr) – Reflect rating of each reinsurer (Schedule F/S and ratings data)

– Reflects concentration risk (how many reinsurers) – Reflect duration of recoverables (can go out 30 years) – Reflects partial recovery when reinsurer impaired

– Simulates 10,000 impairment scenarios for each reinsurer • Only uses impairments occurring in first 10 years

• Uncollected amounts are present valued


Criteria Review Seminar Criteria Review Seminar

Update P&C underwriting factors

– Create industry UW loss and adverse development probability curves • 21 Schedule P lines and 4 size categories (VS,S,M,L) • 84 Industry probability curves (each) for premiums and loss reserves

– Use company NPW and loss reserve size (by line) to select industry probability curve

• Use company profitability (by line) to adjust NPW curve • Use company volatility (by line) to adjust loss reserve curve

– Simulate 10,000 UW profit/loss scenarios and reserve development scenarios for each line

– Reflect diversification across lines based on total NPW and loss reserves • Use one of 4 industry correlation matrices • Based on size (VS,S,M,L)


P&C Premium & Reserves

4 November 2015 4 November 2015 51 51


Update natural catastrophe approach

– Per occurrence

– Total all perils

– Measured at various VaR levels

– Risk added to Net Required Capital

– Will continue stress test approach

– Will stress higher VaR levels if concerned with tail risk

– Reinstatement premium and tax adjustments remain

– Terrorism and other stress tests remain


Natural Catastrophe




Catastrophe Stress Test

If a cat loss occurs, what would the BCAR scores look like?

1 - Reduce Available Capital • 1-in-100 year net PML from per occurrence all perils combined • Reinstatement premium and tax adjustments remain

2 - Increase recoverables by 40% of ceded loss • From 1-in-100 year PML from per occurrence all perils combined • Adjust credit risk factors if needed

3 - Increase net loss reserves by 40% of pretax net PML • From 1-in-100 year PML from per occurrence all perils combined

4 - See how far BCAR scores drop at all confidence levels

4 November 2015 53 53


Application of BCAR in the Rating Process What are the new BCAR scores telling us?

You always need to look to the right


VaR Target 98% 99% 99.5% 99.8% 99.9%

BCAR (A) 40 25 10 (15) (20)

BCAR (B) 20 15 10 5 (5)

BCAR (C) 50 35 20 (35) (70)


Application of BCAR in the

Rating Process • Changes in BCAR approach affects the broader credit methodology,

Best’s Credit Rating Methodology (BCRM)

– New BCAR score calculation

– View of capital adequacy at different VaR confidence levels rather than a single score

• BCRM update will provide clarity on how the new BCAR output (with scores displayed at five VaR confidence levels) will be considered in the rating evaluation


Updated Timeline

• Q1 2016 – likely release for public comment of US P&C BCAR draft Criteria and draft BCRM update

– Company BCAR output will be shared with rated entities

• Later 2016 – likely release for public comment of US Life/Health and Universal draft BCAR criteria and models

– Company BCAR output will be shared with rated entities

• Comment period will include updates

• Comment period will be extended to cover the release of all BCAR models to ensure consistent application of the new BCAR approach across all ratings

56 4 November 2015 Criteria Review Seminar 4 November 2015 4 November 2015 56 56

4 November 2015 Criteria Review Seminar

Updated Timeline – Next Steps

• What must happen before US P&C BCAR criteria procedure is released for public comment?

– Complete the update of BCRM

– Complete the initial review of the Life and Non-US BCARs

– Complete all internal training on the US P&C model and the application of BCAR

– A.M. Best will need to be comfortable that the change in application and the implications of the new BCAR on all industries is understood (Life/Health and Non-Life; US and Non-US)


Further Information

A.M. Best webinars on the new BCAR (from April, May and October 2015) provide further information and can be found here:

www.ambest.com/conferences/webinars.asp

Criteria Review Seminar 58 4 November 2015

http://www.ambest.com/conferences/webinars.asp


Q & A

4 November 2015 59

Stochastic-based BCAR (Best’s Capital Adequacy Ratio)

Mathilde Jakobsen

Associate Director, Analytics, A.M. Best



4 November 2015 60

A.M. Best’s Approach to

Risk Management

Ghislain Le Cam, CFA



A.M. Best Rating Methodology –

Key rating components

4 November 2015 61



Business Profile

Rating

Insurance Company Financial Strength

Enterprise Risk

Management

+

Country Risk


Risk Management in the Rating

Evaluation Process

4 November 2015 62

“A.M. Best believes that risk management is the common thread that links balance sheet strength, operating performance and business profile” (Risk Management and the Rating Process for Insurance Companies)

Business Profile



Risk Management = (Identify + Understand + Measure + Manage) Risk


Best’s Capital Adequacy Ratio (BCAR)

and Enterprise Risk Management (ERM)

4 November 2015 63

Exposure to Earnings and Capital Volatility

BCAR

Low High

Weak Risk Management

Strong Risk Management

BCAR Guidelines


Risk Management:

A wide spectrum

4 November 2015 64

• Wide spectrum of tools, techniques, approaches to risk management

• Differences in geographic and product complexity / diversity, as well as management team skill sets and mind sets, must be considered – Approaches range from a traditional “silo”

mentality to an integrated ERM platform with ICM, with many hybrids in between

– Companies may migrate from one approach to another over time as their profile, skill set and the business environment changes

• Bottom line: a company’s process should fit its profile and provide a stable, sustainable operating platform, in good times and in bad


A.M. Best:

A practical approach

4 November 2015 65

• Risk management capability viewed in light of a company’s risk profile

• A.M. Best wants companies to “show me” how their risk and capital management process provides a stable, sustainable operating platform that can weather the storm year after year

• Risk management is not a box ticking exercise


A.M. Best’s

evolving approach

4 November 2015 66

• Best’s Supplemental Rating Questionnaire (SRQ) questions on Enterprise Risk Management (ERM) added in 2011

• Risk impact worksheet rolled out in 2012, updated in 2015

• ERM discussions during the annual rating meeting:

– Risk appetite

– Risk tolerances

– Risk limits

• More focused rating committee discussions on risk management and the impact on ratings


SRQ: Questions

4 November 2015 67

• Serves as a consistent starting point for the discussion of risk management

• Covers:

– Risk culture

– Risk identification / measurement / monitoring

– EC models / use test


Risk Impact Worksheet

• Product & Underwriting Risk

• Reserving Risk

• Concentration Risk

• Reinsurance Risk

• Financial Flexibility

• Investment Risk

• Macroeconomic/Outside Influences

• Management

• Operational Risk

• Risk Appetite/Stress Testing

• Summary

4 November 2015 68


Risk Impact Worksheet – Illustration

4 November 2015 69


Questions addressed at Rating

Meetings

4 November 2015 70

• What is the role of the board and senior management in your risk management framework?

• What is your risk appetite?

• Has your organisation established and communicated any risk management objectives to your employees, and other stakeholders?

• How does your organisation encourage good risk-based decision making?

• What tools does your organisation use to determine required capital?


What should insurers share with

A.M. Best?

4 November 2015 71

Insurers should provide whatever materials they feel will help us understand how their organisation defines and strives for strong risk management

• Demonstrate how you identify, understand, measure and manage risk

• Sample reports used by the board, senior management, etc.

• De-briefing on how risk tools were used to make a strategic or tactical decision… the USE TEST!

• Internal or external assessments of your overall process, or components of your process

• ORSA evaluation documents


Enterprise Risk Management:

Impact on Ratings

4 November 2015 72

A.M. Best rating committee discussion

What is the impact of Risk Management on the company’s rating? Need to know two things:

Company’s risk management

capability

Company’s risk

profile


Risk management

4 November 2015 73

HIGH RISK

MODERATE RISK

LOW RISK

MINIMAL RISK

Risk Profile Risk Management

Capability

A company’s risk management capability needs to meet its risk profile

Superior

Strong

Good

Weak

Negative Rating Factor / Potentially Higher Capital

Requirements


Risk Management

4 November 2015 74

HIGH RISK

MODERATE RISK

LOW RISK

MINIMAL RISK

Risk Profile Risk Management

Capability

Superior

Strong

Good

Weak

Positive Rating Factor / Potentially Lower Capital

Requirements

A company’s risk management capability needs to meet its risk profile

Characteristics for Low Risk Profile

• Low volatility in earnings and capital

• Favourable regulatory / judicial environment

• Low severity claims / low limit policies

• Limited competition / stable pricing

• Standardised / unchanging coverages

• Low leverage measures

• Strong reinsurance protection

• Strong financial flexibility

• High liquid / stable investments

• Stable economic environment

• Strong data capture / quality


Low Risk Profile

4 November 2015 75

HIGH RISK

MODERATE RISK

LOW RISK

MINIMAL RISK

Risk Profile


High Risk Profile

4 November 2015 76

HIGH RISK

MODERATE RISK

LOW RISK

MINIMAL RISK

Risk Profile Characteristics for High Risk Profile

• High volatility in earnings and capital

• Unfavourable regulatory / judicial environments

• High severity / low frequency claims

• High policy limits / excess layers

• Strong competition / inadequate pricing

• New / changing / complex coverages and products

• High leverage measures

• Weak / no reinsurance protection

• Weak / no financial flexibility

• Illiquid / volatile / complex investments

• Unstable / multiple economic environments

• Weak data capture / quality


Risk Management

4 November 2015 77

Risk Management

Capability Superior

Strong

Good

Weak

Good traditional risk management (silos): • Market risk • Credit risk • UW risk • Operational risk • Strategic risk

Good capital management: • Earnings • Debt market • Equity market • Good knowledge of BCAR

Good management and management info:

• Good decision making • Traditional metrics • Reliable projections • Risk aware culture

Limited ERM Capabilities

Characteristics of Good RM Capability


Risk Management

4 November 2015 78

Characteristics of Superior RM Capability

• Superior traditional risk management

• Superior capital management

• Superior management and management information

• Superior ERM capabilities: – Corporate wide risk-aware culture

– Experienced CRO / ERM committee

– Well-quantified risk appetite / risk tolerance

– Superior risk identification / quantification / mitigation / monitoring / controls

– Superior knowledge of correlations Across lines of business Across risk categories Superior economic capital model Decisions based on risk metrics Compensation based on risk metrics Frequent “what if…?” scenario testing

Superior

Strong

Good

Weak

Risk Management

Capability


ERM:

A Story of Two Companies

4 November 2015 79

COMPANY A COMPANY B COMPANY C

Risk appetite Not defined Defined and communicated to the

whole company Clear risk objectives linked to strategy

Monitoring None

R&A annually Monthly risk reviews and quarterly

results Frequent updates allow

corrective action

Escalation CRO in place reporting to CFO CRO with direct access to CEO and BoD Easy escalation of ERM breaches

Models utilised None – depend on reinsurance brokers Catastrophe model

Capital model Asset allocation

Ability to evaluate risks assumed

Remuneration Not linked to ERM Part of bonus of key employees linked

to risk appetite ERM becomes part of

daily business


Q & A

4 November 2015 80

A.M. Best’s Approach to

Risk Management

Ghislain Le Cam, CFA



etc.venues St.Paul’s, London

04 November 2015

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