enterprise risk management seminar san francisco, california april 2001

ENTERPRISE RISK MANAGEMENT SEMINAR

SAN FRANCISCO, CALIFORNIA

APRIL 2001

Shawna Ackerman, FCAS,MAAA

MHL/Paratus Consulting Ltd.

ERM Process Identify the question(s) Identify Risks Risk Measurements Formulate Strategies to limit risk Implement Strategies Monitor Results And repeat…

ERM ProcessProvide a reasonable representation of

the insurer/company/enterprise operation and its expected outcome given: Economic assumptions Environment assumptions Company risks, goals and assumptions

Identify the Question(s)

1. Market Expansion/Growth

2. Capital Setting

3. Dealings with Ratings Agencies

4. Insurance / Reinsurance

5. Capital Allocation

Identify Risks

1. Interest Rate Risk

2. Credit Risk

3. Products

4. Regulatory / Political / Legal

5. Financial

6. Business

Risk Measurements Profitability measures

Combined ratio Income ROI or ROE Surplus (SAP and GAAP)

Regulatory measures Premium to surplus Change in surplus

Others

Risk Measurements The metric used should match the

question. Growth – ROE, change in surplus,

premium to surplus Rating Agencies – Maximize ROE subject

to surplus constraints Insurance / Reinsurance – reduced ROE

volatility

Tools

Quantitative Dynamic Financial Analysis

Financial Engineering

Qualitative Identify risk in processes

Quantitative

Qualitative

ToolsWhy deterministic models may not tell

you everything you need to know. Potential interactions need to be

considered. Need to understand the range of

possibilities and their likelihood (Risk).

Tools

Why deterministic models may not tell you everything you need to know. All variables are not definite. Extremes may not be taken into

consideration.

Examples of Stochastic VariablesLoss ratios (frequencies and severities)Catastrophic eventsCompetitive position Investment yields Inflation ratesOthers

Identify the Question(s)

1. Market Expansion/Growth Example

Identify the Risks1. Pricing

Underwriting Cycle Jurisdictional Risk Competition New business penalty

2. Loss reserve development3. Catastrophe4. Investment

Risk Measurements1. ROE

2. Premium to Surplus

3. Surplus growth

No increase in Growth

D e n s ity: R O E [1 ]

0

5 0

1 0 0

1 5 0

2 0 0

2 5 0

3 0 0

3 5 0

- 0 .0 2 0 .0 0 0 .0 2 0 .0 4 0 .0 6 0 .0 8 0 .1 0 0 .1 2 0 .1 4 0 .1 6

R a n g e

De

ns

ity

R O E[1 ]

10% increase in Growth

D e ns it y: R O E [1]

0

50

100

150

200

250

300

350

400

-0 .08 -0 .06 -0 .04 -0 .02 0 .00 0 .02 0 .04 0 .06 0 .08 0 .10 0 .12 0 .14 0 .16

Ran ge

De

ns

ity

R OE[1 ]