IABA -Enterprise Risk Management –P&C Perspective · DC Trivia: How many bathrooms are in the...
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1 July 28 th 2017 Derek Cedar, FCAS, CERA IABA - Enterprise Risk Management – P&C Perspective
Transcript of IABA -Enterprise Risk Management –P&C Perspective · DC Trivia: How many bathrooms are in the...
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July 28th 2017 Derek Cedar, FCAS, CERA
IABA - Enterprise Risk Management – P&C Perspective
DC Trivia: How many bathrooms are in the White House?
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2 # of bathrooms
Average Household
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Copyright © 2017 The Travelers Indemnity Company. All rights reserved.
DC Trivia: How many bathrooms are in the White House?
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2 35!
AverageHousehold
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• There are also 132 rooms, 412 doors, 147 windows, 28 fireplaces, 8 staircases, and 3 elevators.
-https://www.whitehouse.gov/about/inside-white-house
ERM Output – Measuring and Attributing Risk
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$1000 Loss
Expected Loss
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Copyright © 2017 The Travelers Indemnity Company. All rights reserved.
ERM Output – Measuring and Attributing Risk
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$1000 Loss
Expected Loss
$0
ERM Output – Measuring and Attributing Risk
ReallyBad Stuff
Risk Capital line$1000 Loss
Expected Loss
$0
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Fund w/Capital
ERM job is to understand the “really bad stuff”
and have enough $ to withstand
Losses can be greater or less than expected1
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Outline / Learning Objectives
• My Journey• Quick History of ERM• Capital Modeling – Why and How
• Including shameless CAS plug
• Types of P&C Risk• Puzzle• Q&A
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MyJourney(insixpicturesorless)
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Enterprise Risk Management FrameworkERM is Iterative
External environment; Internal ERM process; Corporate culture
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Types of Economic Capital Models
1. Regulatory – Risk Based Capital (RBC)• Protect Policyholders
2. Rating Agency – AM Best Standard & Poor’s• Inform Lenders
3. Company Internal Models• Various Stakeholders
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Travelers Cyber Experience…
40+YearsofCapitalModeling– increasecomplexityandunderstanding
1970sRuleofthumb
(Premium/Surplus,Reserve/Surplus)
1990sRegulatoryModels
(RBC/Formulabased)
SolvencyIICapitalModels/
Stochastic
Capital Modeling History
Early2000sRatingAgencyModels
(BCAR,S&Petc./Formulabased)
TravelersCapitalModeling/Stochastic
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Economic Capital Models
• Takes into account the organization’s risk profile
• A strong model provides key metrics for capital and risk decisions across the organization:
– capital adequacy– risk management strategies– financial performance– pricing– business strategies– determining relative risk and reward
• Scope, complexity and use of models varies widely across industry
Economic Capital is a measure of the capital an organization requires to survive or meet a business objective over a given timeframe at a selected confidence level
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Enterprise Risk Management Framework
Identify, evaluate, and quantify risks and their correlations and dependencies from all sources across an organization
Ensure implementation of risk management strategies that leverage risk knowledge to achieve appropriate risk and return tradeoffs inline with organization’s values and goals
Two Primary Goals
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CapitalModelingWhyisitImportant?
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Long-Term Financial Strategy
Create Shareholder ValueBy delivering return on equity shares Over Time
RETURNEQUITY
The Return / or Income has 3 Components:
1. Underwriting Profit = Premium - Loss – Expense2. Investment Income on Premium3. Investment Income on Equity
Back to the Basics
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CAS SOAReturn on Equity Example
DIFFERENT ROE?!?!?
SAME RESULTS!?!?
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CAS
Combined Ratio = 94%à U/W = 6%
Investment Income Rate = 4%
RoE = 24 %
Return on Equity Example
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Oh Yeaahhhhh!!! CAS IS GREAT!
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SOA
Combined Ratio = 94%à U/W = 6%
Investment Income Rate = 4%
RoE = 10 %
Return on Equity Example
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Uh oh! Not Good.
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CAS
U/W = 6%
II Rate = 4%
RoE = 24 %
SOA
U/W = 6%
II Rate = 4%
RoE = 10 %
Return on Equity Example
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CAS
U/W = 6%
II Rate = 4%
RoE = 24 %
SOA
U/W = 6%
II Rate = 4%
RoE = 10 %
Return on Equity Example
WHY?!?!?23
Magic Lever…?????
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Magic Lever…Equity Allocation!!
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CAS
U/W II on Premium
P/E II on Equity
Pre-Tax 6% 4% 3:1 4%After-Tax 4% 3% 3:1 3%
RoE = (4% + 3%) * 3 + 3% = 24%
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SOA
U/W II on Premium
P/E II on Equity
Pre-Tax 6% 4% 1:1 4%After-Tax 4% 3% 1:1 3%
RoE = (4% + 3%) * 1 + 3% = 10%
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CAS
U/W = 6%
II Rate = 4%
RoE = 24 %
P/E = 3:1
SOA
U/W = 6%
II Rate = 4%
RoE = 10 %
P/E = 1:1
Return on Equity Example
THAT’S WHY!!!28
ERM Output – Measuring and Attributing Risk
ReallyBad Stuff
Risk Capital line$1000 Loss
Expected Loss
$0
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Fund w/Capital
ERM job is to understand the “really bad stuff”
and have enough $ to withstand
Losses can be greater or less than expected1
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RisksthatP&CInsurersFace“ReallyBadStuff”
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Enterprise Risk Management Framework
Identify, evaluate, and quantify risks and their correlations and dependencies from all sources across an organization
Ensure implementation of risk management strategies that leverage risk knowledge to achieve appropriate risk and return tradeoffs inline with organization’s values and goals
Two Primary Goals
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Major Risks to Property Casualty Insurers
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Asbestos
Reinsurance
Reserves
Investments
Financial Disruption
Economic Downturn
Exchange Rates
Inflation
Legal / Mass Torts
Regulation Competition
Ratings downgrade
Technology
Relationship
Mergers & Acquisitions
Employee
Accounting / Tax
Pricing
Historically, risk teams were silos….
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CAT
Risk
Asset
Risk
Pricing
Risk
Credit
Risk
Finance
Risk
Reserve
Risk
Now, ERM is the Farm!
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Economic Capital Model (ECM) – Diversification
TRV ECM Today – ADVISETM software from ConningFor each simulated path, economic conditions affect insurance cash flows, which affect cash demands to be met by invested assets priced in those same economic conditions.
InvestmentsInsurance
GEMSGeneral Economy and Market Simulator
Funds to Invest
Pay Claims
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Economic Scenario Generator: History & Forecast for CPI
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Economic Capital Model (ECM) – 6 Major Risk Buckets
OngoingReserves
RunoffReservesNon-modeled
Asset
Non-CAT
CAT
• Reserve Risk: may underestimate our balance sheet liabilities– Unanticipated economic, social or tort inflation
• Underwriting Risk: our plan accident year results could be worse than expected– CAT: actual CAT losses for the plan year can vary significantly from expected average annual loss (AAL)– Non-CAT: current accident year losses can vary significantly from expected frequencies and severities– Unanticipated economic, social or tort inflation– Underwriting Cycle: rates could fall below expectations
• Invested Asset Risk: our invested assets can have different market values and default expectations from current market estimates
– Interest rate risk, credit risk
• Reinsurance Asset Risk: reinsurance recoverables may be over-valued due to unanticipated changes in default expectations of reinsurance counterparties and/or unanticipated coverage disputes
– Credit risk, Coverage dispute risk
• Non-Modeled Risks: are difficult to model stochastically and are included as an additional percentage adjustment.
– Examples include: Pensions, Strategic Risk, Reputational Risk, etc
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Travelers ECM - Reserve Risk
Loss Variability
Carried Reservesby Accident Year
Payout Patterns
Inflation Impacts
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Finally: How do we measure risk?
• Mean and variance - CV
• VaR –Value at Risk
• TVar – Tail Value at Risk
• Co-TVar –correlated risk outcome attributed to its components
• Identifying Risk Tolerance: Earnings Risk vs. Solvency Risk
Required Capital
99% TVaR
Reference Outcome
99% VaR
Earnings Risk
Outcome
Types of Economic Capital Models
1. Required Capital and Allocation for Pricing
2. RI Optimization
3. Stress Testing
4. ORSA – Own Risk and Solvency Reporting
5. Tax and Investment Analysis
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Puzzle“9dots”
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Connect all of Dots…
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…Using just 4 lines?
Connect all of Dots…
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…Using just 4 lines or less
Connect all of Dots…
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…Using just 3 lines?
Connect all of Dots…
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…Using just 3 lines
Connect all of Dots…
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…Using just 1 line!?!?
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Think outside the box and Model Limitations
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QA
