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2014 PAMIC Financial Management Seminar
Enterprise Risk Management Presentation
Jeff Pratt – Director FP&ASeptember 30, 2014
What is Enterprise Risk Management?
Different Stakeholders / Different Opinions
Pre-Cursors – RBC, Capital Adequacy, DFA
Different Definitions
Initially – Select Rating Agencies
Currently – All Rating Agencies and Regulators
Penn National Insurance ERM start-up timeline
July 2006 – Initial ERM Committee Meeting Held
March 2007 – Initial Risk Tolerances Developed
July 2007 – Incident Log Started
August 2007 – Scorecard Development Started
November 2007 – First Presentation to Board
Primary Purpose of ERM
To assure that the Company properly allocates its capital to seize appropriate business opportunities and identifies and mitigates underwriting, investment, financial or operational risks that approach or exceed acceptable risk tolerance levels.
Why do we think ERM is important?
ERM Supports Good Corporate Governance
Good Business Practice To Understand Risks And Opportunities That Exist Throughout The Organization
Rating Agencies Are Requiring It
Role of the Board of Directors
Knowledge and understanding of corporate risks
Communicate Board support of ERM to the organization
Assure that corporate risk taking is in line with Board expectations
Authorize ERM Committee to implement as outlined in Policy Statement
Review and approve changes to the ERM Policy Statement annually
Annual Board Report
Updates on risks previously identified
Identification of emerging risks
Significant items that relate to the management of risk and capital
Recommended changes to the ERM Policy Statement
Current Risks
Separated into four Risk Categories
•Strategic•Underwriting•Investment•Operational
Total of twenty nine defined risks
Keeping an eye out for emerging risks
Typical ERM Program Components
ERM Policy
Risk Framework
Risk Appetite
Risk Tolerance
Risk Monitoring
Standard & Poor’s Risk FrameworkCredit Interest Insurance Operational
Asset Default Interest Rates Underwriting IT Systems
Counterparty: Interest Spreads Pricing Continuity
Reinsurers Optionality Cycle Management Environmental
Derivative Catastrophe Regulation
Banks Market Reserving Compliance
Brokers Equities Claims Management Fraud
Dealers Foreign Exchange Terrorism
TPAs Real Estate Personnel
Change Management
Distribution
Outsourcing
Reputation
AM Best Risk FrameworkCredit Market Underwriting Operational Strategic
Default Equities UW Process Monetary Competition
Downgrade Other Assets Pricing Reporting Demographics
Disputes Currency Reserves Legal Publicity
Settlement Concentration Product Design Distribution Rating
Sovereign Basis Basis IT Systems Demands
Concentration Reinvestment Frequency Regulatory Regulatory Capital
Liquidity Severity Training Availability
ALM Lapse Turnover Technological
Interest Rates Longevity Data Capture
Mortality/Morbidity
Optionality
Concentration
Economy
Other Important Considerations for ERM
Risk Management Culture
Prospective Risk Management
Financial Models Used
Financial Models Supporting ERM
Deterministic Models•Project financial results based upon assumptions, e.g.
•Inflation rates
•Interest rates
•Stock market results
•Rate changes
•Loss reserve performance
•Useful for testing sensitivity to economic and other changes
Stochastic Models•Model the full range of possible financial results
•Produces a statistical distribution of financial results
What do we do with ERM data?
Address Identified Risk Tolerance Breaches
Rank Risks
Use Modeled Results In Planning
Supports Reinsurance Purchases
Disclosures to Regulators and Rating Agencies
Allocate Capital
2014 PAMIC Financial Management Seminar
Enterprise Risk Management Presentation
Jeff Pratt – Director FP&ASeptember 30, 2014