RISK MEASUREMENT AND
CAPITAL MANAGEMENT
SEMINAR
!@#
European Perspective on DFA
Casualty Actuarial Society
Risk and Capital Management Seminar
Washington, DC
Jean-Pierre Berliet
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Perspective on Risk and Capital
Management in Europe
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Leading European insurers have begun to develop group risk
models
Development of risk models has accelerated in anticipation of
regulatory mandates:
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FSA
European Commission
Group risk models in Europe are designed to address
comparatively complex situations
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Multi-currency / Multi-national
Multi-entity
Multi-line
Banc-assurance
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Large Insurers and Reinsurers
with Risk Models
ING*
AXA*
Allianz*
Munich Re*
CGNU*
Swiss Re*
IF-Sampo (P/C)*
Tapiola Mutual*
Suomi Life*
Nordea*
RSA
Aegon
ZFS
etc…
*Surveyed by European Commission
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Characteristics of Risk Models of
Large Insurers and Reinsurers
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Virtually all models are aggregate models
Degree of completion of the models varies from draft/prototype
to “operational”
Companies are taking a continuous improvement approach to
model development
The sophistication of risk measurement varies significantly
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Formulaic (S&P / RBC factors)
Statistical simulation
DFA
There are as many approaches as there are companies
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One Large Group is Building its
Model on DFA Infrastructure
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Effort initiated several years ago
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Life and P/C activities
Multi-entity
Multi-currency
Multi-year time horizon for new business
More entities are included each year in DFA analysis
Extension to performance measurement is planned
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Most European Companies Have
Not Built DFA Risk Models
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Efficient DFA tools were not available when the
pioneers developed the first models
Many companies have chosen to develop simpler
statistical models
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Less costly
More transparent
Easier to use and maintain
Well established in banking
Less onerous data requirements
As a result, existing risk model cannot measure risk
created by dynamic links across risk factors
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Impact of Regulatory Developments on
Risk Models of European Insurers
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Larger Insurers will be required to have “risk models”
Regulators will leave considerable discretion to
insurers about:
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Model architecture
Methodology
Tools
Regulatory changes appear “DFA blind”
Best practices will continue to evolve rapidly
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Other Applications of
DFA in Europe
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DFA is gaining ground for decision analysis in Europe
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Capital adequacy
ALM/Asset allocation
Reinsurance analysis
Product development/Pricing
Planning support
Insurers are building in house capabilities and using
external providers (consultants, brokers, asset
managers, etc…)
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Emerging DFA Applications
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Determination of the impact of risk on financial
statements
DFA extensions of statistical risk models can help
manage the volatility of reported financial results
DFA Insights are important for the evaluation of risk
management strategies
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ALM/Asset allocation
Reinsurance
Capital structure
Product development
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What does the European
Experience Suggest?
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DFA usage will grow because:
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Simpler statistical risk models cannot provide some of the
answers that management needs
New regulations will provide a capital requirement
advantage to companies that have robust risk models
Key DFA growth areas are likely to be:
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Linkage of statistical risk models and financial statements
Financial evaluation of alternative strategies
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Thank You
Jean-Pierre Berliet
jean-pierre.berliet@ey.com
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