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
Are you part of the “Big
Picture?”
or
Are you “silo bound?”
How do you
• Estimate reserves
• Model risk & capital
• Make rates
Without seeing the “big picture?”
(New?) ERM Reserving Questions
• Risk allocation?
(New?) ERM Reserving Questions
• Risk allocation?
• Reinsurance?
(New?) ERM Reserving Questions
• Risk allocation?
• Reinsurance?
• Ratemaking assumptions?
(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?
•
•
•
•
•
•
•
•
(New?) ERM Capital Modeling
Questions
Loss reserve adequacy?
Risk allocation?
Reinsurance?
Ratemaking assumptions?
Marketing program?
Underwriting guidelines?
Predictive modeling?
Underwriting cycle position?
Aggregate Loss Distribution
& Implied Capital
Loss Amount
Value at Risk
T
V
a
R
0.0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
Cumulative Probability
0.8
0.9
Risk Measurement & (Cost of)
Capital Allocation by Line, etc.
Amount
Diversification Benefit
Standalone
CMP
HO
Auto
Cat
Multiline
Optimize Mix of Capital and Reinsurance
Relative Costs
Net Cost
of
Reinsurance
Cost of
Capital
Investment
Income
Income Tax
Deduction
(New?) ERM Ratemaking Questions
• Capital allocation?
(New?) ERM Ratemaking Questions
• Capital allocation?
• Cost of capital?
(New?) ERM Ratemaking Questions
•
•
•
•
•
•
•
•
Capital allocation?
Cost of capital?
Reinsurance?
Loss reserve adequacy?
Marketing program?
Underwriting guidelines?
Underwriting cycle position?
Predictive modeling?
Underwriting Cycle Position
Pricing Risk
• Competitors’ actions
• Changes in terms and conditions
– Coverage provisions
– Exposure measurement
– Limits
– Deductibles
– Prices
• Policyholder selection
Confidence Interval Around the
Target Combined Ratio
1
Cumulative Probability
0.8
0.6
Target Combined
Ratio (104%)
CDF
0.4
0.2
0
0
20
40
60
80
100
Combined Ratio (%)
120
140
160
180
Marketing/Underwriting Strategy
Reflect Risk in Planning Change
Required Capital
Growing the Business
Prospect 1
Prospect 2
Existing
Standalone
Standalone
Standalone
Total
Total
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
What
is
ERM?
ERM
is the
“Big Picture”
Are You Part
of the
“Big Picture?”
or
Do You Want to be
Part of the
“Big Picture?”