English
Sesión 7
Evaluación de Riesgo y Administración
XXI Asamblea Anual de ASSAL
XI Conferencia sobre Regulación y Supervisión de Seguros en
América Latina y Seminario de Capacitación IAIS-ASSAL
Santiago Chile, 21 de Abril de 2010
Takao Miyamoto, Secretaría de la IAIS
Agenda
1. Control Activities
2. Objective Setting
3. Risk Identification
–
Major Risks
4. Risk Assessment
5. Planning and Execution
–
–
Strategies
Some Examples
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Risk Management Process
Set
objective
Monitor
risks
Change of
business
environment
Identify
risks
Control activities
(corporate
governance)
Plan &
Execute
Assess
risks
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Control Activities
Ideal control environment
–
–
–
Risks
Some holes from active failures
Some holes due to latent
conditions
Overconfidence in defense walls
Chain reaction of failures
Huge loss
Real control environment
with many holes
Risks
Defense by
–
Defense wall?
–
Simple luck?
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(Source) J.Reason “Swiss Cheese Metaphor”
Objective Setting
•
Starting point of risk management and business
strategy
–
–
•
Two key features
–
–
•
Initiatives of board and/or senior management
Also input from business units
Risk appetite: risks insurers are (are not) willing to accept
in pursuit of value/profit
Risk tolerance: acceptable level of variation around
value/profit targets
Both quantitative and qualitative terms are used.
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Agenda
1. Control Activities
2. Objective Setting
3. Risk Identification
–
Major Risks
4. Risk Assessment
5. Planning and Execution
–
–
Strategies
Some Examples
5
Risk Identification
Typical category
Features
–
Underwriting
(Insurance)
–
–
–
Credit
–
–
Risks assumed through insurance
contracts insurers underwrite
Line of business: fire, marine,
automobile, earthquake, death, injury etc.
Types: pricing, product design, claims,
economic environment, policyholder
behavior etc.
Inability or unwillingness of counterparty
to fully meet on/off-balance sheet
contractual financial obligations
Source: default, downgrade, migration,
spread, settlement, sovereign etc.
Relatively smaller for insurers compared
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to banks
Risk Identification
Typical category
Features
–
Market
–
–
Liquidity
–
–
Operational
Volatility and uncertainty of market value
of assets/liabilities
Variables: stock price, interest rate,
foreign exchange rate, commodity price
etc.
Obliged to procure funds (e.g. by
liquidating assets) under unfavorable
terms as financial obligations fall due
In worst case, unable to settle financial
obligations
Risk of loss resulting from inadequate or
failed internal process, people, system,
external events etc.
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Example
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(Source) The Geneva Association “Systemic Risk in Insurance”
Agenda
1. Control Activities
2. Objective Setting
3. Risk Identification
–
Major Risks
4. Risk Assessment
5. Planning and Execution
–
–
Strategies
Some Examples
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Risk Assessment
•
Two factors in assessing impact of risk
–
–
•
Frequency (likelihood/probability of occurrence)
Severity (loss size in case accident occurs)
Risk map – more intuitive/simple method
–
–
Useful for classification
Most risk may not be so simple as to be classified this way
Example
High
Earthquake
Severity
IT system
trouble
Low
Low
Daily share
price change
Frequency
High
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Risk Assessment
•
More quantitative/statistical method
–
–
–
Mean (1st order), Variance/Standard Deviation (2nd order),
Skewness (3rd order) etc.
Value at Risk (VaR): possible maximum loss over a
specific time horizon (e.g. 1 year) at specific confidence
level (e.g. 99%)
Tail Value at Risk (TVaR): average VaR beyond a specific
confidence level
Probability
Mean
VaR (e.g. 99%)
TVaR (e.g. 99%)
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Loss
Agenda
1. Control Activities
2. Objective Setting
3. Risk Identification
–
Major Risks
4. Risk Assessment
5. Planning and Execution
–
–
Strategies
Some Examples
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Planning and Execution
Two concepts
• Risk (loss) control
–
–
–
•
Intended to change characteristics (e.g. frequency and
severity) of risks themselves
e.g. insurers conduct promotional activities against car
theft (=> reduce frequency of car theft)
e.g. insures ask installation of sprinklers (=> mitigate
severity of fire)
Risk (loss) finance
–
–
Financial preparing for loss resulting from existence of risk
Necessary regardless of risk/loss control activity (no risk is
impossible)
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Tools of Risk Management - Overview
Risk Management
Risk (Loss)
Control
Frequency X Severity
Prevent
Mitigate
Risk (Loss)
Finance
Retain
Transfer
Avoid
Reduce
Exploit
(Expand or Diversify)
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Risk Control
Strategy
Features
–
Avoid
–
–
Reduce
Exploit
(Expand or
Diversify)
Avoid underwriting certain product line
or market segment
Because it is (unlikely to be) unprofitable,
too risky, lower priority area
But does not mean no cost – opportunity
cost exists
–
–
Take lesser amount of particular risk
Because risk amount is approaching
insurer’s appetite and capacity
–
Particular risk may work as hedge to
overall risk exposures
Possibly intentionally take particular risk
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for diversification effect
–
Risk Finance
Strategy
Features
–
–
Retain
–
–
–
Transfer
–
Simply retain particular risk
Because insurer is confident to manage
risk and has capacity
May need outside finance: borrowing,
commitment line, new capital etc.
e.g. reinsurance (traditional)
e.g. derivatives, securitisations (ART:
alternative risk transfer)
But create another risk (counterparty
credit risk)
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Example - Reinsurance
•
Advantages
–
–
–
–
–
•
Types (in terms of procedure)
–
–
•
Reduce and control risk profile
Manage/stabilise financial result
Create new capacity
Gain product expertise
Gain underwriting advice
Treaty/Automatic: automatically reinsured based on predetermined agreements and conditions
Facultative: whether to reinsure is decided for each case
Types (in terms of risk sharing structure)
–
–
Proportional: quota share, surplus etc.
Non-proportional: excess of loss, aggregate, stop loss etc.
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Example - Reinsurance
•
Structure of risk sharing
–
–
–
Unit: per event, per risk, aggregate in certain time etc.
Based on: amount insured, loss etc.
Combination of reinsurances is applied to reach desirable
risk profile.
Insurer or
another reinsurer
Reinsurer
(ceded)
Reinsurer
(ceded)
Reinsurer
(ceded)
Insurer
(retained)
Insurer
(retained)
Insurer
(retained)
Shared in fixed proportion Amount over specified
(amount changes)
level is ceded
(proportion changes)
With upper limit
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Example - Securitisation
•
Example: Cat (catastrophe) bond
–
–
Use capacity of capital market (capacity may not be
enough in insurance market)
Diversification due to low correlation with other asset
classes (from investors’ perspective)
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(Source) Munich Re “Insurance-linked securities (ILS) market update”
Questions and Answers
Thank you very much!
www.iaisweb.org
takao.miyamoto@bis.org
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