Company EnterpriseCompany EnterpriseRisk Management & Stress TestingRisk Management & Stress Testing
Case StudyCase Study
moderated by
Joe Petrelli Sr.President, Demotech, Inc.
presented by
Anya KutsinaDirector, U.S. RE Analytics / Ultimate Risk Solutions
Implementing Implementing
ERM and DFAERM and DFA
UtilizingUtilizing
Risk ExplorerRisk Explorer
The Importance of ERM for an Insurance Company
Why this topic is relevant
Evolution from RM to ERM
Industry Challenges
What is DFA?
Analyzing DFA results
Solvency Testing
Structure of a DFA model
URS DFA Application Suite
AgendaAgenda
Case Study: Lake George P&C Company Lines of Business
Assets
Reinsurance Structure
Viewing Simulation Results
Comparison of Reinsurance Programs
Analysis of the Company’s Equity position under different scenarios.Cost / Benefit Analysis
Conclusion - Q&A
Agenda Agenda (cont’d)(cont’d)
Why this topic is relevantWhy this topic is relevant The source of origination for ERM, DFA
concepts Risk Management process is the foundation
for Enterprise Risk Management
Static (deterministic) Financial Analysis is the foundation for Dynamic Financial Analysis
Evolution of both from original concepts
Dynamic Financial Analysis
The definition of RiskThe definition of Risk
Evolution of Risk Management
Any event that presents Any event that presents the possibility of loss or the possibility of loss or danger to organizations or danger to organizations or peoplepeople
Uncertainty – dealing with Uncertainty – dealing with the unknown and the unknown and uncertainty of outcomesuncertainty of outcomes
Risk Management: the original Risk Management: the original conceptconcept
Risk Management is a process for managing the uncertainty created from unexpected, unintended or accidental events
A process for making decisions that will minimize the impact of risk
The original focus was primarily on “Pure Risks”
Evolution of Risk Management
Evolution from RM to ERMEvolution from RM to ERM
Enron and other scandals prompted Congress to call for more financial controls
Calls for even greater corporate governance resulted in Sarbanes-Oxley Act of 2002
Government and regulatory authorities responded by creating the Committee of Sponsoring Organizations (COSO) of the Treadway Committee
Rating organizations such as AM Best include it in their analysis
Evolution of Risk Management
ERM – Holistic ManagementERM – Holistic Managementof Riskof Risk
Enterprise risk management is driven by the concept that one cannot effectively protect the whole organization without analyzing all factors that influence financial outcomes.
Risk is viewed across the entire enterprise
Evolution of Enterprise Risk Management
The Focus of ERMThe Focus of ERM It considers the impact of “speculative, It considers the impact of “speculative,
economic or business risks” on entity economic or business risks” on entity as well as “pure risks” as well as “pure risks”
ERM incorporates each of ERM incorporates each of management’s decisions with respect to management’s decisions with respect to riskrisk
Who is in charge of risk at your Who is in charge of risk at your company? How is it managed?company? How is it managed?
Who has the role of Chief Risk Officer?Who has the role of Chief Risk Officer?
ERM — General Concepts
Regulatory Inquiries
I.e. Stress Testing
Reinsurance Optimization
Strategic Asset Allocation
Capital Allocation
Performance Measurement
Business Mix
Pricing Decisions
Mergers and Acquisitions
Dynamic Financial Analysis
DFA applicationsDFA applications
Dynamic Financial AnalysisDynamic Financial Analysis
ERM Tools
Scenario testing – projects business results under Scenario testing – projects business results under selected deterministic scenarios into the future. selected deterministic scenarios into the future. Results based on such scenario are valid only for Results based on such scenario are valid only for this specific scenario.this specific scenario.
Stochastic simulation (DFA) – thousands of different Stochastic simulation (DFA) – thousands of different scenarios are generated stochastically allowing for scenarios are generated stochastically allowing for the full probability distribution of important output the full probability distribution of important output variables, like surplus, written premium, loss ratiosvariables, like surplus, written premium, loss ratios..
Setting the Time HorizonSetting the Time Horizon The first step used to compare different strategies is to
apply a fixed time horizon
In the Insurance industry a projection period of five to ten years seems to be a reasonable choice simulate to determine the long term effects of a
chosen strategy simulated values are less reliable over a longer
projection period
ERM Tools - Dynamic Financial Analysis
Analyzing DFA ResultsAnalyzing DFA Results
Return measure (e.g. expected surplus)
Risk measure (e.g. expected policyholder deficit)
Efficient strategy –– if there is no one with lower risk at the same level of return, or higher return at the same level of risk
Dynamic Financial Analysis
Solvency TestingSolvency Testing Financial position of company is evaluated from the
perspective of regulators, agents and insureds
Quantify in probabilistic terms whether the company will be able to meet its commitments in the future
DFA provides a range of results regarding the anticipated Surplus of the company
Dynamic Financial Analysis
What isWhat is ??
Portfolio risk management
Risk modeling
Reinsurance/retro-cession analysis
Risk-based capital calculation
Cash flow testing and financial planning (Statutory and GAAP)
Dynamic Financial Analysis
FUNCTIONALITYFUNCTIONALITY
Dynamic Financial Analysis
Evaluating Ceded Reinsurance/ Evaluating Ceded Reinsurance/ Retrocession ProgramsRetrocession Programs
Handle any complexity
Easy to design alternative programs
Analyse the impact on: Capital requirement
Profit RAROC
Reinsurance cost allocation
Dynamic Financial Analysis
RBC and Capital AllocationRBC and Capital Allocation
Compare Capital alternatives:
Varying risk assumption Varying reinsurance or
investment strategies
Measure ROE for any portfolio segmentation
Dynamic Financial Analysis
Case StudyCase Study
Conclusion - Conclusion - Basic ERM ComponentsBasic ERM Components
Dynamic Financial AnalysisDynamic Financial Analysis