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ERM Roundtable Where Are We?

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

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ERM Roundtable Where Are We?

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

  2. CAS ERM Definition • Process • Assess • Control • Exploit • Finance • Monitor risk • Holistic treatment of risk • Senior management function • Upside and downside

  3. ERM “Drivers” • 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

  4. Underwriting Risk Model (URM) Experience • “Missionary work” • Why change? • Senior management commitment • Priority item • Clear objectives • Adequate resources • Start small

  5. 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

  6. Value Statement Economic Capital Risk Parameters Risk Allocation Reinsurance Risk Analysis URM Pricing Risk Combined Ratios Interest Rate Risk

  7. ERM

  8. CAS Spring Meeting May 2005 ERM EvaluationsInsurance Sector David Ingram Director Enterprise Risk Management Financial Services Ratings

  9. S&P’s Evaluation of ERM Strategic Risk Management Extreme Events Management Risk & Economic Capital Models Risk Control Processes Risk Management Culture

  10. Competitive Position Management & Corporate Strategy Operating Performance Capitalization Liquidity Investments Financial Flexibility ERM within the S&P Rating Profile ERM Stronger

  11. ERM ERM within the S&P Rating Profile Competitive Position Management & Corporate Strategy Operating Performance Capitalization Liquidity Investments Financial Flexibility Stronger

  12. ERM within the S&P Rating Profile Competitive Position Management & Corporate Strategy Operating Performance Capitalization Liquidity Investments Financial Flexibility ERM Stronger

  13. ERM is a new organizing concept For looking at a collection of issues we have always covered ERM will apply to all insurers globally ERM evaluation will be tailored to the risks of each insurer ERM will recognize all the risk management of the insurer even if the company does not do “ERM”!!! ERM will be reflected in insurer ratings Importance of ERM will vary among companies – just as every other factor does ERM will be a new section in the ratings report ERM is not a new Capital Model ERM is not primarily concerned with looking at an insurer’s Economic Capital Model ERM – Key Points

  14. ERM

  15. Value Creation Value Management Capital Costs Return on Risk Portfolio of Enterprise Risks Portfolio of Capital Resources Capital Adequacy How much capital do I need? Risk and Capital Management What type of capital do I need? Capital Structure Risk Structure Economic Capital 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

  16. 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?

  17. Value creation can come from optimizing the capital structure of the firm • Reinsurance optimization

  18. ERM

  19. ERM in Reinsurance Industry • Hold-to-maturity, levered portfolio of long-dated, 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

  20. 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

  21. Threats to Reinsurance Industry • Business: • Mega cat ($100B) • Concentration of risk (~mercury at the topof the food chain) • Structural: • Underwriter incentive comp plans • Ease of entry, undifferentiated product • Optimism and overconfidence (Morton Lane:the perfume of the premium overwhelms thestink of the risk)

  22. ERM

  23. Where is the CAS Today? • Centennial Goal • ERM Symposium • Risk Management Section • New VP position • ERM Vision • ERM Institute International (ERM-II)

  24. Where Should theCAS be Going?

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