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Jean-Pierre Berliet

European Perspective on DFA Casualty Actuarial Society Risk and Capital Management Seminar Washington, DC. Jean-Pierre Berliet. Perspective on Risk and Capital Management in Europe . Leading European insurers have begun to develop group risk models

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Jean-Pierre Berliet

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  1. European Perspective on DFACasualty Actuarial SocietyRisk and Capital Management SeminarWashington, DC Jean-Pierre Berliet

  2. Perspective on Risk and Capital Management in Europe • Leading European insurers have begun to develop group risk models • Development of risk models has accelerated in anticipation of regulatory mandates: • FSA • European Commission • Group risk models in Europe are designed to address comparatively complex situations • Multi-currency / Multi-national • Multi-entity • Multi-line • Banc-assurance

  3. Large Insurers and Reinsurers with Risk Models ING * Swiss Re* RSA AXA* IF-Sampo (P/C)* Aegon Allianz* Tapiola Mutual* ZFS Munich Re* Suomi Life* etc… CGNU* Nordea* *Surveyed by European Commission

  4. Characteristics of Risk Models of Large Insurers and Reinsurers • Virtually all models are aggregate models • Degree of completion of the models varies from draft/prototype to “operational” • Companies are taking a continuous improvement approach to model development • The sophistication of risk measurement varies significantly • Formulaic (S&P / RBC factors) • Statistical simulation • DFA • There are as many approaches as there are companies

  5. One Large Group is Building its Model on DFA Infrastructure • Effort initiated several years ago • Life and P/C activities • Multi-entity • Multi-currency • Multi-year time horizon for new business • More entities are included each year in DFA analysis • Extension to performance measurement is planned

  6. Most European Companies Have Not Built DFA Risk Models • Efficient DFA tools were not available when the pioneers developed the first models • Many companies have chosen to develop simpler statistical models • Less costly • More transparent • Easier to use and maintain • Well established in banking • Less onerous data requirements • As a result, existing risk model cannot measure risk created by dynamic links across risk factors

  7. Impact of Regulatory Developments on Risk Models of European Insurers • Larger Insurers will be required to have “risk models” • Regulators will leave considerable discretion to insurers about: • Model architecture • Methodology • Tools • Regulatory changes appear “DFA blind” • Best practices will continue to evolve rapidly

  8. Other Applications of DFA in Europe • DFA is gaining ground for decision analysis in Europe • Capital adequacy • ALM/Asset allocation • Reinsurance analysis • Product development/Pricing • Planning support • Insurers are building in house capabilities and using external providers (consultants, brokers, asset managers, etc…)

  9. Emerging DFA Applications • Determination of the impact of risk on financial statements • DFA extensions of statistical risk models can help manage the volatility of reported financial results • DFA Insights are important for the evaluation of risk management strategies • ALM/Asset allocation • Reinsurance • Capital structure • Product development

  10. What does the European Experience Suggest? • DFA usage will grow because: • Simpler statistical risk models cannot provide some of the answers that management needs • New regulations will provide a capital requirement advantage to companies that have robust risk models • Key DFA growth areas are likely to be: • Linkage of statistical risk models and financial statements • Financial evaluation of alternative strategies

  11. Thank You Jean-Pierre Berliet jean-pierre.berliet@ey.com

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