Enterprise Risk Management for Insurance [Read-Only]

Enterprise Risk Enterprise Risk Management in InsuranceSubrahmanyam MunagalaSubrahmanyam MunagalaProduct Manager Insurance Risk SolutionsSAS Institute

Copyright © 2008, SAS Institute Inc. All rights reserved.Copyright © 2006, SAS Institute Inc. All rights reserved. Company confidential - for internal use only

E t i Ri k M tEnterprise Risk Management

Regulatory compliance

Credit ratingEconomic capital

Enterprise Risk

management Strategic l i &planning & capital

management

Performance management

Product design & pricing

Asset –liability

management

Copyright © 2009, SAS Institute Inc. All rights reserved. Company Confidential - For Internal Use Only


CAPITALMANAGEMENTRISK

MANAGEMENTMANAGEMENT

FINANCIALMANAGEMENT

PERFORMANCEMANAGEMENT



CAPITALMANAGEMENTRISK

MANAGEMENTMANAGEMENT

FINANCIALMANAGEMENT




CAPITALRISK CAPITALMANAGEMENT

RISKMANAGEMENT

INTEGRATION

FINANCIALMANAGEMENT


Copyright © 2008, SAS Institute Inc. All rights reserved.

B i B fitBusiness Benefits• Optimizing business strategies on the basis of risk-capital-return trade off leads to

selection of most suitable strategiesIncrease return on capital

selection of most suitable strategies• Allocation of capital to profitable business leads to better quality growth• Creates flexibility to reallocate capital and risk capacity for emerging opportunities• Linking risk and performance promotes risk culture and value generation

Reduce volatility

• Ongoing monitoring of risks faced by the company and active management of those risks will reduce volatility.

• Proactive management of exposures will result in careful selection of risks, within the appetite of management.A ti i t i k ith f d l ki l i d iti t t d i k• Anticipate risks with forward looking analysis and mitigate unwanted risks

Improve competitivity

• Better management of risks and allocation of risk based capital charges results in lower premiums and higher sales

• Optimization of investments strategy results in better investment performance and p p y p gy phigher returns to policyholders

• Hedging investment/insurance risks leads to better performance

Comply with regulation• Ability to hold risk capital that is economically necessary, avoiding dilution of value

when capital is idleComply with regulation when capital is idle• Reduce cost of compliance

Create good market • Good credit rating improves the relative availability and price of debt• Improved story for analysts and investors will enhance relative investment case and


gperception

Improved story for analysts and investors will enhance relative investment case and reduce share price discount

• Reduce cost of interaction with regulators

E t i Ri k M t F d tiEnterprise Risk Management - Foundation

Organization &

Governance

Operational implementation


F d ti Ri k A l ti & th d lFoundation – Risk Analytics & methodology

Comprehensive risks

• Comprehensive coverage

• Newer risks like liquidity, operational, reputation and other business risks

Market consistent l ti

• Market consistent methods – taking into account value of embedded options, management actions, risk transfer arrangement, taxes etc.

• Replicating portfoliosConsistency with financial reporting IFRS/embedded valuevaluation • Consistency with financial reporting – IFRS/embedded value approaches

• Run off and going concern basis

• Factor basedRange of risk analyses

• Factor based• Stress testing – single risk factor and combined risk factor testing• Stochastic simulation

• Variance co variance approach

Diversification• Variance co-variance approach• Joint distribution of risk factor e.g. Copulas• Stochastic simulation• Judgment!


g

F d ti Ri k A l ti & th d lFoundation – Risk Analytics & methodology

Risk models• Vendor models• Model building frameworkRisk models • Model life cycle management• Validation of models

Risk measure• Intuitive, simple, difficulty of computation and ease of understanding

and coherent• Value at risk (VaR)• Value at risk (VaR)• Expected short fall/T-VaR

Time horizon • One year• Multi-year


F d ti O ti l I l t tiFoundation – Operational Implementation• Integrated consistent complete reliable and available

Data

• Integrated, consistent, complete, reliable and available

• External data

• Quality - appropriateness, completeness and accuracy

P d d f d t lit t• Process and procedures for data quality management

• Robust analytical capability• Flexible for future changes

Systems• Flexible for future changes• Scalable• Easy to implement and use• Integratedg

Internal reporting• Availability of right information , at right time to right people• Varied information needs of people across organizationp g• End-user empowerment

Culture• Management decisions to consider risk• Top down push to develop strong risk culture


Culture • Top down push to develop strong risk culture

Foundation Organization and GovernanceFoundation – Organization and Governance

Policies• Written policies – risk management policy, risk appetite

• Clear and concise

• Regular review the adequacy of policies and controls

Fit d i t f k l

People

• Fit and proper requirements for key personnel

• Training

• Dedicated resource allocation

• Risk based performance measurement and rewards

Process• Clear allocation of responsibilities

• Comprehensive and consistent risk management


Foundation Organization and GovernanceFoundation – Organization and Governance

Monitoring and t l

• Link risk and business strategies

• On going monitoring of risk adjusted performance indicatorscontrol g g g j p

• Management interventions – triggers/alerts

• Business units – own and control risk at origination

• Risk function – facilitate and oversee effective implementation of risk

Governance management

• Internal audit - independence assurance

• Compliancep


Software – Critical enablerC h i d h i f k f i ll i k Comprehensive and cohesive framework for managing all risks

Robust risk data platform – data model and data management processes

Open and flexible system for progressively adopting evolving risk analysisanalysis

Risk analytical tools to disseminate risk information

Good model management

Single solution for valuation, risk capital modeling and financialSingle solution for valuation, risk capital modeling and financial planning

Vendors with strong vision, commitment and proven solutions


g , p

Software Solution – End Vision

BUSINESS PLANNING

PERFORMANCE MANAGEMENTMANAGEMENT

RISK CAPITAL ASSESSMENT

DATA MANAGEMENT

Integrated Software SolutionIntegrated Software SolutionOperational Data Sources Policy Underwriting Claims Reinsurance Investment Commissions

Reporting Management reports Regulatory compliance Pre-built and ad hoc Dash boards Commissions

Products General Ledger Risk factors (external data)

Dash boards

Data Mart Risk analysis results Risk analysis

assumptions Traceability to source

Standardisation

Data integration Data quality Traceability to source

data

q y

Governance

Security

Comprehensive risks Risk models Scenario testing/simulation

Risk Analytics

Data Foundation

Security Auditability


Risk aggregation & diversification Regulatory, economic and

rating agency capital models

Data Foundation

Single version of truth Historical data (warehouse) Solution marts

Software Solution – End Vision PERFORMANCE MANAGEMENT


BUSINESS PLANNING

Underwriting Risk

DATA MANAGEMENT

Commission Management

Underwriting Risk

• Policy

• Reinsurance

• Claims

• External data

Product

Investment

Policy Management

External data

Market Risk

• Investments

• Market data

Claim

Product

RI

Policy

Claims Management

Operational Risk

• Events

• Loss reports

Account

C t

Asset Management

Credit Risk

• Loss reports

• Loss history

Customer

General Ledger

Key Risk Indicators

• Counterparties

• Credit ratings

• Credit risk exposuresDATA MANAGEMENT

Reinsurance

CRM

• KRI data bank

• Benchmarks



BUSINESS PLANNING

DATA MANAGEMENT


AggregationALM

Market RiskUnderwriting Risk Credit Risk

Operational

Risk Factor & Dependency

Models

Portfolio Replication

Market Risk

Underwriting Risk Life Insurance

P&C Insurance Credit Risk Risk

Scenario Generator

DATA MANAGEMENT

Losses PremAsset Exposures Insurance Exposures Credit exposures Operational Losses

Market DataMarket Data

Data warehouse

AssetMgmt

PolicyMgmt

ClaimsMgmt

General Ledger Market Data

Replicating PortfoliosReplicating PortfoliosRisk neutral/real world

scenarios

Cash flow

Liability model Asset model

Portfolio Construction

Cash flow 0

Cash flow 1

0

Cash flow 1

Configure Analysis

Liability Model

Cash flow 1

Cash flow 2Model

1

Cash flow 2m

ulat

ion

mul

atio

n

Asset Model

Cash flow 2 portfolio

Cash flow

2

Cash flow

Sim Sim

Cash flow n

Cash flow ...Optimize Portfolio

Cash flown

...Candidate securities

Assess Results



BUSINESS PLANNING

BUSINESS PLANNING

DATA MANAGEMENT

BUSINESS PLANNING

PricingStrategic PlanningCapital AllocationRI Optimization Investment Planning


AggregationALM

Market RiskUnderwriting Risk Life

Underwriting Risk P&C Insurance

Credit RiskOperational

Risk


Models


S i

DATA MANAGEMENT

gInsurance Scenario

Generator


Market Data

Data warehouse

AssetMgmt

PolicyMgmt

ClaimsMgmt




BUSINESS PLANNING

DATA MANAGEMENT

BUSINESS PLANNINGBUSINESS PLANNING

PricingStrategic PlanningCapital AllocationRI Optimization Investment Planning PERFORMANCE MANAGEMENT


AggregationALM

Risk strategy

Market Risk Underwriting Risk Life

Underwriting Risk P&C Insurance

Credit RiskOperational

Risk


Models


S i

Risk Based Performance Monitoring

Dashboards and reports

DATA MANAGEMENT

Risk Life Insurance

Scenario Generator


Market Data

Data warehouse

AssetMgmt

PolicyMgmt

ClaimsMgmt


I l t ti St tImplementation Strategy

Data Foundation

Goal – to create an enterprise data platform – an integrated, consistent and reliable source



Risk Analytics

Data Foundation

Goal – to model risks faced by companies and determine risk capital requirements



Planning & decision support

Risk Analytics

Planning & decision support

Data Foundation


Goal – to embed risk capital models in business planning and decision making

I l t ti St tImplementation StrategyRisk Adjusted Risk Adjusted

Performance managementPerformance management

Planning & decision supportPlanning & decision support

Risk Analytics

Data Foundation


Q tiQuestions

Contact me for any late thoughts or questionssubbu munagala@sas [email protected]


Copyright © 2008, SAS Institute Inc. All rights reserved.Copyright © 2006, SAS Institute Inc. All rights reserved.

Documents

Enterprise Risk Management for Insurance [Read-Only]