Presentation is loading. Please wait.

Presentation is loading. Please wait.

AAMGA / A.M. Best / Lloyd’s Conference - London 25 September 2014 Enterprise Risk Management Rating Analysis & Industry Best Practices Stefan Holzberger.

Similar presentations


Presentation on theme: "AAMGA / A.M. Best / Lloyd’s Conference - London 25 September 2014 Enterprise Risk Management Rating Analysis & Industry Best Practices Stefan Holzberger."— Presentation transcript:

1 AAMGA / A.M. Best / Lloyd’s Conference - London 25 September 2014 Enterprise Risk Management Rating Analysis & Industry Best Practices Stefan Holzberger Managing Director, Analytics - EMEA

2 AAMGA / A.M. Best / Lloyd's Conference - London Disclaimer 25 September 20142 © AM Best Company (AMB) and/or its licensors and affiliates. All rights reserved. ALL INFORMATION CONTAINED HEREIN IS PROTECTED BY COPYRIGHT LAW AND NONE OF SUCH INFORMATION MAY BE COPIED OR OTHERWISE REPRODUCED, REPACKAGED, FURTHER TRANSMITTED, TRANSFERRED, DISSEMINATED, REDISTRIBUTED OR RESOLD, OR STORED FOR SUBSEQUENT USE FOR ANY SUCH PURPOSE, IN WHOLE OR IN PART, IN ANY FORM OR MANNER OR BY ANY MEANS WHATSOEVER, BY ANY PERSON WITHOUT AMB’s PRIOR WRITTEN CONSENT. All information contained herein is obtained by AMB from sources believed by it to be accurate and reliable. Because of the possibility of human or mechanical error as well as other factors, however, all information contained herein is provided “AS IS” without warranty of any kind. Under no circumstances shall AMB have any liability to any person or entity for (a) any loss or damage in whole or in part caused by, resulting from, or relating to, any error (negligent or otherwise) or other circumstance or contingency within or outside the control of AMB or any of its directors, officers, employees or agents in connection with the procurement, collection, compilation, analysis, interpretation, communication, publication or delivery of any such information, or (b) any direct, indirect, special, consequential, compensatory or incidental damages whatsoever (including without limitation, lost profits), even if AMB is advised in advance of the possibility of such damages, resulting from the use of or inability to use, any such information. The credit ratings, financial reporting analysis, projections, and other observations, if any, constituting part of the information contained herein are, and must be construed solely as, statements of opinion and not statements of fact or recommendations to purchase, sell or hold any securities, insurance policies, contracts or any other financial obligations, nor does it address the suitability of any particular financial obligation for a specific purpose or purchaser. Credit risk is the risk that an entity may not meet its contractual, financial obligations as they come due. Credit ratings do not address any other risk, including but not limited to, liquidity risk, market value risk or price volatility of rated securities. NO WARRANTY, EXPRESS OR IMPLIED, AS TO THE ACCURACY, TIMELINESS, COMPLETENESS, MERCHANTABILITY OR FITNESS FOR ANY PARTICULAR PURPOSE OF ANY SUCH RATING OR OTHER OPINION OR INFORMATION IS GIVEN OR MADE BY AMB IN ANY FORM OR MANNER WHATSOEVER. Each credit rating or other opinion must be weighed solely as one factor in any investment or purchasing decision made by or on behalf of any user of the information contained herein, and each such user must accordingly make its own study and evaluation of each security or other financial obligation and of each issuer and guarantor of, and each provider of credit support for, each security or other financial obligation that it may consider purchasing, holding or selling.

3 Enterprise Risk Management AAMGA / A.M. Best / Lloyd's Conference - London 25 September 20143 Risk profile versus risk management capability How Enterprise Risk Management can make a difference Enterprise Risk Management in the rating process

4 AAMGA / A.M. Best / Lloyd's Conference - London pic ERM - A Hot Topic 25 September 20144 Insurance and reinsurance undertakings shall have in place an effective risk-management system comprising strategies, pro­cesses and reporting procedures necessary to identify, measure, monitor, manage and report, on a continuous basis the risks, at an individual and at an aggregated level, to which they are or could be exposed, and their interdependencies. Source: SII Directive - Article 44 - Risk Management

5 AAMGA / A.M. Best / Lloyd's Conference - London Enterprise Risk Management Rating Analysis & Industry Best Practices Enterprise Risk Management in the Rating Process 25 September 20145

6 AAMGA / A.M. Best / Lloyd's Conference - London Rating Analysis Overview 25 September 20146 Balance Sheet Strength Operating Performance Business Profile Enterprise Risk Management + Country Risk Rating Insurance Company Financial Strength

7 AAMGA / A.M. Best / Lloyd's Conference - London25 September 20147 Strong Operating Performance Builds Balance Sheet Strength Weak Operating Performance Erodes Balance Sheet Strength Date of last balance sheet Present Future Operating Performance and Business Profile Leading Indicators of the Future Balance Sheet Balance Sheet Strength - Time - BCAR Guideline Business Profile Drives Strong and Sustainable Operating Performance Rating Analysis Overview

8 AAMGA / A.M. Best / Lloyd's Conference - London25 September 20148 BCAR Exposure to Earnings and Capital Volatility LowHigh ERM & Capital Requirements Will consider allowing insurers to maintain lower BCAR levels relative to the guideline for its rating if they demonstrate: Superior traditional risk management fundamentals Superior capital management and financial flexibility Strong ERM characteristics Strong EC modeling capabilities Weak Risk Management Strong Risk Management BCAR Guidelines

9 AAMGA / A.M. Best / Lloyd's Conference - London ERM - Definition 25 September 20149 ERM is the process through which insurers identify, quantify and manage risk on an enterprise-wide, holistic basis; it takes into consideration the individual risks at hand, as well as any correlations and inter-dependencies of risk across the organization. Three key areas: culture ● identification and management ● measurement Three key areas: culture ● identification and management ● measurement

10 AAMGA / A.M. Best / Lloyd's Conference - London ERM – A Practical Approach 25 September 201410 Risk management capability is viewed in light of the company’s risk profile Risk management capability is viewed in light of the company’s risk profile A.M. Best wants companies to show us how their risk and capital management process provides a stable, sustainable operating platform that can weather challenging times Risk management is not a box ticking exercise

11 AAMGA / A.M. Best / Lloyd's Conference - London Enterprise Risk Management Rating Analysis & Industry Best Practices Risk Profile versus Risk Management Capability 25 September 201411

12 AAMGA / A.M. Best / Lloyd's Conference - London ERM Capabilities 25 September 201412 Risk Culture Risk Identification and Controls: –Risk Dashboards –Scenario Testing Risk Measurement: –Correlations –Capital Modelling –Risk-Based Decisions Risk Appetite: –Well-Quantified Risk Tolerances Market Risk Credit Risk Underwriting Risks: –Pricing (attritional loss ratio) –Cat losses (PMLs; cat loads) –Reserves Non-Financial Risks: –Strategic (business plan) –Operational –Off-Balance Sheet Traditional Risk ManagementEnterprise Risk Management Overall Risk Management Capability

13 AAMGA / A.M. Best / Lloyd's Conference - London A.M. Best’s Approach to Risk Management 25 September 201413 impact What is the impact of a company’s Risk Management on its rating? Need to know two things: Company’s risk management capability Company’s risk profile

14 AAMGA / A.M. Best / Lloyd's Conference - London Risk Profile Assessment 25 September 201414 Investments Liquidity Financial Flexibility Volatility in Earnings and Capital Concentrations Data Quality Credit Quality of Reinsurance Ceded Leverage/Potential Disputes Reinsurance Program Management Philosophy Line of Business Correlations Policy Limits Product / Coverage Changes Competitive Environment Legislative/Regulatory Environment Judicial Environment Economic Environment Growth

15 AAMGA / A.M. Best / Lloyd's Conference - London A.M. Best’s Approach to Risk Management 25 September 201415 SUPERIOR Risk Management Capability Risk Management Capability RM Capability Exceeds Risk Profile RM Capability Shortfall Relative to Risk Profile LOWMODERATEHIGH LOW MODERATE HIGH Risk Profile WEAK RM Adequate For Risk Profile RM Adequate For Risk Profile

16 AAMGA / A.M. Best / Lloyd's Conference - London25 September 201416 Risk Profile Risk Management Capability A company’s risk management capability needs to meet its risk profile Negative Rating Factor / Potentially Higher Capital Requirements A.M. Best’s Approach to Risk Management

17 AAMGA / A.M. Best / Lloyd's Conference - London25 September 201417 Risk Profile Risk Management Capability A company’s risk management capability needs to meet its risk profile Positive Rating Factor / Potentially Lower Capital Requirements A.M. Best’s Approach to Risk Management

18 AAMGA / A.M. Best / Lloyd's Conference - London Risk Profile 25 September 201418 Low Risk Profile Characteristics of a Low Risk Profile Low volatility in earnings and capital Low severity claims / low limit policies Limited competition / stable pricing Low leverage measures Strong reinsurance protection Strong financial flexibility Highly liquid / stable investments Stable economic environment Strong data capture / quality

19 AAMGA / A.M. Best / Lloyd's Conference - London Risk Profile 25 September 201419 High Risk Profile Characteristics of a High Risk Profile High volatility in earnings and capital High severity claims High policy limits / excess layers Strong competition / inadequate pricing High leverage measures Weak financial flexibility Illiquid / volatile / complex investments Unstable economic environment Weak data capture / data quality

20 AAMGA / A.M. Best / Lloyd's Conference - London25 September 201420 Risk Management Capability E&S Market Exhibits Strong ERM Characteristics of Strong Risk Management Capability Dynamic capital management Corporate wide risk aware culture Well quantified risk appetite & risk tolerance Identify, quantify, monitor & control risks Internal economic capital model Identifying correlations Compensation based on risk metrics Frequent deterministic scenario testing

21 AAMGA / A.M. Best / Lloyd's Conference - London ERM Questions: Risk Appetite 25 September 201421 What is your risk appetite? How frequently is it revised? What happens if it is breached? How is it cascaded to your business units? How does it relate to risk tolerances and risk limits? Risk Appetite

22 AAMGA / A.M. Best / Lloyd's Conference - London25 September 201422 ERM Questions for E&S Insurers How is the credit risk of your MGAs or TPAs monitored? –Review of premium trust funds – segregated accounts –Audited financial statements – going concern opinion How are risks associated with delegated u/w authority handled? –Pricing, coverage, manuscript endorsements, exclusions, data quality, fraud –Underwriting audits, IT systems How confident are you that your MGA is sourcing quality business? –Ranking in MGA office –MGA compensation arrangement: volume based or profit share

23 AAMGA / A.M. Best / Lloyd's Conference - London25 September 201423 ERM Questions for E&S Insurers What is the data quality, timeliness and reliability for setting loss reserves & IBNR post event? –Track record of loss adjusters –Pre-arranged team of loss adjusters for catastrophe response Are risks associated with outsourced claims handling identified? –Leakage, fraud, salvage & subrogation, regulatory requirements –Are you a key client for the TPA What mechanism ensures proper and timely premium collection? –Automated web portal –Real time data or monthly bordereaux

24 Some of these threats are also opportunities for the industry. To provide governments, industry and individuals enhanced risk transfer opportunities. AAMGA / A.M. Best / Lloyd's Conference - London ERM can Protect Insurer Solvency 25 September 201424 1. Risk Management Shortfall – Loss Reserving and Pricing 2. Model Error 3. Emerging Underwriting Risks 3 Key Threats and How They are Managed Through ERM

25 AAMGA / A.M. Best / Lloyd's Conference - London 1. Risk Management Shortfall 25 September 201425 a mismatch is created between risk appetite and risk management capability. This leads to excessive risk taking and sudden, unanticipated losses that impair the insurer Threat More of a company-by-company issue today But with capital model and risk metric standardisation the potential exists for an industry-wide view on risk that fails to identify emerging threats to the balance sheet

26 AAMGA / A.M. Best / Lloyd's Conference - London Risk Management Shortfall 25 September 201426 Poor Risk Management leads to under reserving –Failure to identify loss trends –Providing unintended coverage Reserving Snapshot Vicious Cycle: Inadequate reserving leads to false sense of underwriting profit which leads to underpricing Uncertainty around financial strength –Lost business partners and distributions sources –Rating triggers Rapid spiral toward insolvency Reserve charges lead to loss of credibility

27 AAMGA / A.M. Best / Lloyd's Conference - London Risk Management Shortfall 25 September 201427 Deficient loss reserves: –BCAR contemplates loss reserving trends –Industry and company specific trends contrasted –Capital factors well-developed –Discount applied conservatively Reserving Snapshot A.M. Best’s Analysis Third-party and in-house actuarial reports Advanced pricing models –Multivariate pricing –Telematics More granular underwriting data Reserving Snapshot

28 AAMGA / A.M. Best / Lloyd's Conference - London Risk Management Shortfall 25 September 201428 Poor ERM leads to under pricing –Unaware of technical rate –Throwing in free coverage IT systems inadequate to price risks and monitor performance Underwriting controls weaken as business expands Pricing Snapshot Risk of under pricing reduced through improved risk management, data quality, policy wording and caps imposed on long-tail liability lines Movement of rates, exposures, terms & conditions Monitor accident year performance Peer analysis Capital charge for excessive growth A.M. Best’s Analysis

29 AAMGA / A.M. Best / Lloyd's Conference - London 2. Model Error 25 September 201429 capital management is driven by risk modelling that underestimates extreme scenarios that can impair insurer balance sheets Threat Taking too much diversification credit Getting the PMLs wrong and blowing out of the top end of reinsurance protection Danger that event scenarios in models are not rigorous enough (e.g. financial markets shock)

30 AAMGA / A.M. Best / Lloyd's Conference - London Model Error 25 September 201430 What should insurers consider? Risk of placing too much reliance on economic capital models Be aware of un-modeled perils Consider PMLs as a range and not as the number Don’t disregard more basic metrics such as TIV, zonal aggregates and gross underwriting leverage How are insurers handling these risks? Using multiple models –Challenging the models Developing their own risk models Rigorous model validation process Management and Board Reverse stress testing / deterministic scenarios (realistic disaster scenarios) Back-testing post event

31 AAMGA / A.M. Best / Lloyd's Conference - London 3. Emerging Underwriting Risk 25 September 201431 Source: The Geneva Association – Annual Report 2013/14 ‘The Geneva Association has highlighted the changing nature of liability insurance. [The Liability Project] was initiated in 2013 in recognition that unexpected liability loss conditions were the leading causes of every industry crisis of the past 30 years.’ Companies fail to detect emerging loss exposure before extensive business is underwritten leading to class action level claims emergence Threat

32 AAMGA / A.M. Best / Lloyd's Conference - London Emerging Underwriting Risk 25 September 201432 Cyber Risk Considered by many to be the underrated risk¹ Opportunities abound –Cloud computing –Social media –On-line financial transactions –Electronic personal information Cybercrime costs global economy estimated USD 575bn annually² Forms of attack –Theft –Fraud –Hacking –Sabotage Risk and opportunity as an insurance product ¹Source Aon Risk Solutions: Underrated Threats² McAfee & Centre for Strategic International Studies

33 AAMGA / A.M. Best / Lloyd's Conference - London Emerging Underwriting Risk 25 September 201433 Source: The Geneva Association – Risk Management Newsletter No. 54 June 2014 Solar Storms What would a 1:200 year solar storm do to the power supply? Power failure estimates range from 16 days to 1 – 2 years Potential economic costs between USD 600bn to USD 2.6tr

34 AAMGA / A.M. Best / Lloyd's Conference - London Emerging Underwriting Risk 25 September 201434 Insurer Actions Better data quality & ERM –Early detection system Tightening of policy wording to reduce potential for unintended coverage Better communication between underwriters and claims adjustors Soft Market Dangers Loosening terms and conditions –Free coverage thrown in –E.g. cyber, terrorism –Exclusions and sublimits removed

35 AAMGA / A.M. Best / Lloyd's Conference - London.Thank You 25 September 201435

36 AAMGA / A.M. Best / Lloyd’s Conference - London 25 September 2014 Enterprise Risk Management Rating Analysis & Industry Best Practices Stefan Holzberger Managing Director, Analytics - EMEA


Download ppt "AAMGA / A.M. Best / Lloyd’s Conference - London 25 September 2014 Enterprise Risk Management Rating Analysis & Industry Best Practices Stefan Holzberger."

Similar presentations


Ads by Google