MBCi Insurance RM
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Transcript of MBCi Insurance RM
RISK MANAGEMENT INTHE INSURANCE
INDUSTRY
Harokhava Aliaksandra, Halada Martin
2008: The largest government bailout of a private company in theUS history
Sources: http://www.propublica.org/special/government-bailouts, http://www.ritholtz.com/blog/2013/01/the-true-cost-of-the-aig-bailout/
> 180 000 000 000 USD bailoutby the US Treasury and the Federal Reserve
Agenda
1 Insurance companies at a glance
2 Main risks
3 Risk management
4 New challenges for risk management in insurance
5 Innovation in insurance
Agenda
1 Insurance companies at a glance
2 Main risks
3 Risk management
4 New challenges for risk management in insurance
5 Innovation in insurance
Business model of the insurance companies
Insurance company
Reinsurancecompanies
Investments
Insurance compaies make money from the insurance premiums and investment returns
Insurance companies’ business model is quite risky…
Sources: https://www.allianz.com/v_1426595532000/media/investor_relations/en/results_reports/annual_report/ar2014/ar2014_group.pdf ,http://www.vig.com/fileadmin/web/Investor_Relations/Annual_Reports/Group_Annual_Reports/150414_-_VIG_Group_Annual_Report_2014_Internet__final_.pdf ,http://www.generali.com/info/download-center/risultati.html#2014
Loss ratio, %
Combined ratio, %
in selected countries, %
ROE, %
all data for the whole Group, 2014
105%
97%
66%
Romania
120%
94%
66%
USA
94%
67%
113%
Latin America
10% 11% 13%
…. that is why they diversify their income sources
Income split, %
Balance sheet structure
Sources: companies’ Annual Reports and IFRS Financial statements for 2014
all data for the whole Group, 2014
13%
87%Other income
Net earned premiums
34%
66%
27%
73%
Equity 12%
Other 25%
Reserves63%
Other32%
Investments68%
Equity 8%
Other35%
Reserves58%
Other25%
Investments75%
Equity 5%Other15%
Investments85%
Other18%
Reserves77%
…. and tend to invest in rather safe fixed-income securities
Investment structure, %
AFS assets structure, %
Sources: companies’ Annual Reports and IFRS Financial statements for 2014
all data for the whole Group, 2014
34%
66%Financial instrumentsAvailable for sale
Other
96%
4%
65%
35%
8%4%
19%
52%
17%
Other
Equity securities
Corporate bonds
Other fixed income
Government bonds
5%
45%
8%
41%
11%11%
10%5%
64%88% fixedincome
securities92% 85%
Agenda
1 Insurance companies at a glance
2 Main risks
3 Risk management
4 New challenges for risk management in insurance
5 Innovation in insurance
Insurance companies face a number of risks:
Underwriting
Operational
Credit
Liquidity
Market
Strategic risk
Others
Different business segments are exposed to all abovementioned risk categories.The Asset Management business segment is mainly exposed to the market, creditand operational risk.
Sources: insurance companies’ Annual Reports
Underwriting and Operational risks are determined both by
the external environment and the internal operations
Underwritingrisk
Risk of a loss on the underwriting activity.Key challenge: difficult predictability, changing demographics. Normally higherfor the P&C insurance.• Property-Casualty insurance businesses are exposed to premium risk
related to the current year’s new and renewed business as well as reserverisks related to the business in force. Premium risk is subdivided into naturalcatastrophe risk, terror risk and non-catastrophe risk.
• Underwriting risks in Life/Health operations (biometric risks) includemortality, disability, morbidity, and longevity risks.
Increasing role of the actuaries
Operational risk
Risk resulting from the errors in business processes, controls or projectscaused by technology, employees, organisation or external factors,including legal and compliance risk, but excluding the losses from strategic andreputational risk.
Sources: insurance companies’ Annual Reports, The Actuary
Credit and Liquidity risks are related mainly to the
investments portfolios
Credit risk
Liquidity risk
Quantifies the potential loss due to a deterioration of thesituation of a counterparty against which claims exist.First of all concerns sovereigns to which insurance company hasexposure. Treatment of sovereign is partly regulated by Solvency II.
The risk that an Insurance company may not have sufficientassets that can be liquidated at a short notice to satisfy itspayment obligations. Can arise primarily if there are mismatches inthe timing of cash-flows on the asset and liability side.
Sources: insurance companies’ Annual Reports
Market risk is mostly represented by the interest rate risk,
Srategic risk – by changing regulatory environment
Risk of changes in the value of investments caused by unforeseenfluctuations in interest rate curves, share prices and currency rates, andthe risk of changes in the market value of real estate and participations.• Generally Includes interest rate, inflation, credit spread, equity, real estate
and currency risks.• Normally higher for the Life/Health isurance.
Market risk
Strategic risk
Risks arising from changes in the economic environment, case law, orthe regulatory environment.Includes also unexpected negative change in the company’s value arisingfrom the adverse effect of management decisions regarding businessstrategies and their implementation.Strategic controls are carried out by monitoring respective business target.
Sources: insurance companies’ Annual Reports
Quantifying the risk
Allocated Risk according to Internal Risk profile
4.1805.1465.32111.311
11.018 38.42728.102
Tax Total
18.291
Market Credit Underwriting Business Operational Diversification
Base capitalization ratio
Interest rate up by 0,5%
Combined scenario
205%
199%
191%
Interest rate down by 0,5%
179%
158%
-17%170%
Equity prices up by 30%
Equity prices down by 30%
Allianz Group: Solvency II regulatory capitalization ratios, different scenarios
Sources: Allianz’s Annual Report 2014, http://www.bain.com/Images/BB_Solvency_II.pdf
Agenda
1 Insurance companies at a glance
2 Main risks
3 Risk management
4 New challenges for risk management in insurance
5 Innovation in insurance
Risk management structure - Vienna Insurance Group
example
Source: http://www.vig.com/en/vig/strategy/risk-management.html
Risk assessment
Historical simulation
Value at risk (VaR)
Collective models
Aggregate models
Stress analysis or stochastic modelling techniques
Source: http://www.actuaries.org/EVENTS/Seminars/New_Delhi/Chapters/page-112to133.pdf
Solvency assessment
Source: https://www.kpmg.com/US/en/IssuesAndInsights/ArticlesPublications/Documents/solvency-II.pdf
Solvency II
Source: https://www.kpmg.com/US/en/IssuesAndInsights/ArticlesPublications/Documents/solvency-II.pdf
Risk mitigation strategies
Risk reduction
Risk integration
Risk diversification
Risk hedging
Risk transfer
Source: http://www.actuaries.org/EVENTS/Seminars/New_Delhi/Chapters/page-112to133.pdf
Risk mitigation - Hedging
Options
Futures
Source: https://www.pwc.com/us/en/audit-assurance-services/valuation/publications/assets/pwc-risk-management-and-insurance-hedging.pdfhttp://www.vig.com/fileadmin/web/Investor_Relations/Annual_Reports/Group_Annual_Reports/150414_-_VIG_Group_Annual_Report_2014_Internet__final_.pdfhttp://www-111.aig.com/AIG_Internet/AIG_2014_Annual_Report.pdf
Risk mitigation - Transfer
Indemnification reinsurance
Used to reduce volatility, uncertainty and extreme event risk
Reinsurance contracts specify which party holds actuarial reserves for the business being reinsured
Subject to regulation and supervision similar to that applied to direct writing companies
Source: http://www.actuaries.org/LIBRARY/Papers/Global_Framework_Insurer_Solvency_Assessment-members.pdf
Enterprise risk management in insurance
Source: http://www.mckinsey.com/client_service/financial_services/latest_thinking/insurance
Agenda
1 Insurance companies at a glance
2 Main risks
3 Risk management
4 New challenges for risk management in insurance
5 Innovation in insurance
New challenges for the risk management in insurance
Tightening regulations
Political changes
Changes in the market environment (e.g. low interest rates)
Cyber threats
Changing world of risk
New challenges squeeze additionally insurers’ margins.As a result, M&A activity is increasing to solve this issue.
Sources: http://www.mckinsey.com/insights/financial_services/what_drives_insurance_operating_costs, http://www.swissre.com
Terrorist attacks: a limited and short-term impact on the stock price
Sources: http://finance.yahoo.com
All data as of November 17th 2015
Agenda
1 Insurance companies at a glance
2 Main risks
3 Risk management
4 New challenges for risk management in insurance
5 Innovation in insurance
Innovation in insurance
New types of insurance (e.g. cyber risk insurance)
Digital innovation (e.g. SaaS solutions)
Telematics (Health-tracking wearable devices)
Mobile phone insurance
Big data
Bancassurance (e.g. Allianz with Erste)
Sources: Allianz’s Annual Report, http://www2.deloitte.com/us/en/pages/strategy/solutions/d-rive-powered-by-deloitte-mobile-telematics-solution-for-auto-insurers.html,http://www.prnewswire.com/news-releases/digital-innovation-in-insurance-market-insights-2015-report-520129841.html
Thank you for your attention!Stay safe.