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Traditional Actuarial Roles – Putting It All Together in an ERM
(and EOM) Framework
CAS Spring Meeting
June 18, 2007
John Kollar,
Russ Bingham, Hartford Financial Services
Gene Connell, Erie Insurance
CAS Centennial Goal (Refreshed)
• Advance their expertise in– pricing– reserving– capital modeling
• Leverage their skills in risk analysis
• Become recognized as experts in the evaluation of enterprise risk
How do you
• Estimate reserves
• Model risk & capital
• Make rates
Without seeing the “big picture?”
(New?) ERM Reserving Questions
• Risk allocation?
• Reinsurance?
• Ratemaking assumptions?
• Marketing program?
(New?) ERM Reserving Questions
• Risk allocation?
• Reinsurance?
• Ratemaking assumptions?
• Marketing program?
• Underwriting guidelines?
(New?) ERM Reserving Questions
• Risk allocation?
• Reinsurance?
• Ratemaking assumptions?
• Marketing program?
• Underwriting guidelines?
• Predictive modeling?
(New?) ERM Reserving Questions
• Risk allocation?
• Reinsurance?
• Ratemaking assumptions?
• Marketing program?
• Underwriting guidelines?
• Predictive modeling?
• Underwriting cycle position?
Loss Reserve (Unpaid Claim) Estimates
• New Approaches– Stochastic methods– Bayesian estimates– Benchmarking– Confidence intervals
• Fair Value Accounting– Discounted reserves– Market Value Margin– Convergence of FASB to IASB
(New?) ERM Capital Modeling Questions
• Loss reserve adequacy?
• Risk allocation?
• Reinsurance?
• Ratemaking assumptions?
• Marketing program?
• Underwriting guidelines?
• Predictive modeling?
• Underwriting cycle position?
0.0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9
Cumulative Probability
Lo
ss A
mo
un
t
Aggregate Loss Distribution& Implied Capital
Value at Risk
TVaR
Risk Measurement & (Cost of) Capital Allocation by Line, etc.
CMP HO Auto Cat Multiline
Am
ou
nt
Diversification Benefit
Standalone
Optimize Mix of Capital and Reinsurance Relative Costs
Net Cost ofReinsurance
Cost of Capital
Investment Income
Income Tax Deduction
(New?) ERM Ratemaking Questions
• Capital allocation?
• Cost of capital?
• Reinsurance?
• Loss reserve adequacy?
• Marketing program?
• Underwriting guidelines?
• Underwriting cycle position?
• Predictive modeling?
Underwriting Cycle PositionPricing Risk
• Competitors’ actions
• Changes in terms and conditions– Coverage provisions– Exposure measurement– Limits– Deductibles– Prices
• Policyholder selection
Confidence Interval Around the Target Combined Ratio
0
0.2
0.4
0.6
0.8
1
0 20 40 60 80 100 120 140 160 180
Combined Ratio (%)
Cu
mu
lati
ve
Pro
ba
bili
ty
CDFTarget Combined
Ratio (104%)
Marketing/Underwriting StrategyReflect Risk in Planning Change
Growing the Business
Standalone Standalone Standalone Total Total
Req
uir
ed C
apit
al
Prospect 1Prospect 2Existing
Predictive Modeling• Use of other information (beyond rating
variables) to more accurately rate a policy– Increased profits– Reduced risk– Lower capital
• Inability to select better policies and compete with other insurers results in adverse selection– Losses or reduced profits– Increased downside risk– Higher capital
Common ERM Issues (Questions)• Loss reserve adequacy
• Capital adequacy and cost
• Risk/capital allocation
• Reinsurance
• Ratemaking assumptions
• Marketing program
• Underwriting guidelines
• Predictive modeling
• Underwriting cycle
“Standard” ERM Issues• Communication
– Clear & complete
• Responsibility/authority– Objectives & resources
• Data Quality– Accuracy, credibility, variability
• Quantification– Model building & parameterization
Robust Analysis of an Enterprise’s Risks (ERM) is
Essential to Sound:
• Ratemaking
• Loss Reserving
• Capital Modeling