tail risks - how does a ceo think about them?
TRANSCRIPT
Tail Risks – How does a CEO think about them?
10th September 2013
Bronek Masojada
Hiscox Ltd
Business Motivation
Create a business which serves customers distinctively with specialist insurance/reinsurance products in a way which maximises return on equity within a well defined risk appetite
2
Maintain Balance
3
Products + Profits
Risk +Returns
Maintain Balance
4
Products + Profits
Risk +Returns
Maintain Balance
5
Products + Profits
Risk +Returns
Maintain Balance
6
Products + Profits
Risk +Returns
A few beliefs
• A model will never fully reflect the real world
• We cannot run our businesses without models
• Individuals will always seek to game the system
• More data and/or analysis doesn't always help you understand a risk
• You can have too much of a good thing
7
There are limits to how well a model can ever reflect real life
8
Boxplot and whisker diagram of modelledHiscox Ltd net loss (US$m) June 2013
Mean industry loss US$bn
Industry loss returnperiod and peril
Lower 5%- upper 95% range
Modelled mean loss
Hur
rican
e K
atrin
a $5
0bn
mar
ket l
oss
21 y
ear
retu
rn p
erio
d
Hur
rican
e A
ndre
w $
56bn
mar
ket l
oss
25 y
ear
retu
rn p
erio
d
Nor
thrid
ge Q
uake
$24
bn m
arke
t los
s 40
yea
r re
turn
per
iod
Sup
erst
orm
San
dy -
$20
bn m
arke
t lo
ss, 7
yea
r re
turn
per
iod
1987
J $
10bn
mar
ket l
oss
15 y
ear
retu
rn p
erio
d
Lom
a P
rieta
Qua
ke $
6bn
mar
ket l
oss
15 y
ear
retu
rn p
erio
d
JP EQ – Japanese earthquakeUS EQ – United States earthquakeEU WS – European windstormUS WS – United States windstorm
2011
Toh
oku
Qua
ke $
25bn
mar
ket l
oss,
45
yea
r re
turn
per
iod
5-10 year 10-25 year 25-50 year 50-100 year 100-250 year
01 02 05 19 04 07 09 39 19 18 14 69 38 32 19 103 66 40 26 160
His
cox
Ltd
loss
(U
S$m
)
9
Do people game the system?
10
Confusing mysteries with puzzles
Puzzles are attractive because they come to clean conclusions. Puzzles can always be solved if you just pay attention to the right information, which is all there for you.
Unfortunately, many of the big problems that we face are not puzzles, but rather mysteries. Mysteries are messy, and the methods that solve puzzles don’t work for mysteries, and they might actually make them worse.
Open Secrets by Malcolm Gladwell
11
Hiscox focus – No single class overwhelms
Total Group controlled income for 2012 100% = £1,792m
Global errors and omissions
Large property
Marine and energy
Tech and media errors and omissions
Specialty – kidnap and ransom, contingency, personal accident
Local errors and omissionsand commercial
Art and private client
Specialty – terrorism, specie, political risks, aerospace
Reinsurance 28%
18%
3%
14%
5%8%
10%
2%
7%
5%
Small property
12
Done well – create a symbiotic relationship
Profit generator
Value creator
Profit generator
Value creator
• Larger premium, catastrophe exposed
• Shrinks and expands according to rates
• Excess profits allow investment in retail development
Internationally traded lines
• Steady premium growth
• Pays dividends
• Brand builds strong market position
• Profits act as additional capital
Local specialty lines
13
Managing the tail
1
Micro and Process Focus
• Individual, business unit, and executive authorities and limits
• Business plan and business process review and performance
• Day to day risk management processes
• Process for identifying new risks, dealing with them and triaging them into business as usual
1
Macro and Strategic Focus
• Regular reviews of the top 10 risks in the business
• Discussion and debate on business unit and overall organisations strategy and ambitions
• What happens when the Capital models or risk controls fail?
• Grey swan brainstorming and thinking – 1 in 10 to 1 in 50.
• Thematic reviews
Rationale
• Avoid a focus on controls and processes as the sole determinants of effective governance in an organisation
• Manage scale of information flows
• Focus on bigger issues means that gaming becomes harder
Manage the tail
14
Maintain Balance
15
Products + Profits
Risk +Returns
Maintain Balance
16
Products + Profits
Risk +Returns
Maintain Balance
17
Products + Profits
Risk +Returns
Maintain Balance
18
Products + Profits
Risk +Returns
Achieve Balance
19
Products + Profits
Risk +Returns
Tail Risks – How does a CEO think about them?
10th September 2013
Bronek Masojada
Hiscox Ltd