INSURANCE
Linkage of Risk, Capital and Financial Management
CAS Annual Meeting
Aaron Halpert, ACAS, MAAA
Leslie R. Marlo, FCAS, MAAA
November 12, 2007
AUDIT & ADVISORY – ACTUARIAL SERVICES
Table of Contents

Why Linkage?

Linkage – What Is It?

Benefits

Challenges

The Real World

Just Starting Out?
1
Why Linkage?
Why Linkage?

Regulatory

Solvency II

Financial Services Authority – Individual Capital Assessments

International Association of Insurance Supervisors

Rating Agencies

Shareholders / Boards of Directors

Strategy

Transparency
3
Linkage – What Is It?
4
Linkage – What Is It?
HOLISTIC STATE – RISK ADJUSTED VALUE MANAGEMENT
P
RISK
rs
lde
ho
ce
are
an
Sh
orm
erf
Ca
pit
al
Ma
Co
rke
st
ts
of
Ca
pit
al
FINANCIAL
Capital adequacy
Solvency/Economic
Capital
Rating Agency/Regulators
CAPITAL
Risk management – the discipline by which an
organization identifies, assesses, controls, measures
and monitors various risks and opportunities for the
purpose of achieving the entity’s strategic and
economic objectives.
Capital management – the discipline by which an
organization manages the capital requirements
needed to satisfy regulatory and rating agency
requirements as well as management tolerance for
risk, economic constraints, and performance
objectives for the overall organization including the
deployment of the capital to the individual business
units.
Financial management – the discipline by which an
organization evaluates its performance utilizing riskadjusted measures which reflect returns, capital
consumption and volatility on an overall and
individual business unit basis.
5
Linkage – What Is It?
6
Benefits
Benefits

Improving the understanding of risks and true costs of such risks to the organization

Impact on capital, on financial performance

Ability to measure the contribution of business units and functions to the overall organization in a
consistent manner

Embedding linkage into the overall organization, with enhanced insights into risks and rewards

Education and communication

Reducing volatility in cash flows, capital needs, financial returns commensurate with risks
assumed  theoretical?

Satisfying stakeholders by creating balance between growth, desired returns and risks in a
transparent manner

Increasing management accountability by linking risks taken with value received
8
Challenges
9
Challenges

Cultural change

Buy-in from senior management, from risk owners

Defining the risk appetite of the organization

Resource constraints

Time and money

Technology

No common approach in industry for measuring risk or measuring performance

Integration of multiple capital requirements  regulatory, rating agency, management
10
The Real World
11
The Real World

Effective Practices


Development of Corporate Oversight Committee

Senior management commitment to implementation

The top-down perspective
Development of Framework

Consistent terminology and definitions

Risk appetite, performance measures
12
The Real World

Effective Practices (continued)


Risk identification and assessment

Includes risk aggregation

Models / methods likely quantitative and qualitative
Actual Linkage

Economic capital

Risk adjusted financial metrics

Consistency
13
The Real World

Effective Practices (continued)

Education and Communication


Encouraging a risk-aware environment
Monitoring

Periodic status reports

Triggers for action
14
Just Starting Out?
15
Just Starting Out?

Buy-in and direction from senior management and Board of Directors


All levels with opportunities to shape the process
A well-defined framework that links risk, capital and financial management

Standardization

Monitoring

Certain components of the process are already in place

Keep it simple

Be aware of best practices but realize there are no right answers
16
Questions / Comments
17
Presenters’ contact details
Aaron Halpert, ACAS, MAAA
KPMG LLP
(212) 872-6881
ahalpert@kpmg.com
Leslie R. Marlo, FCAS, MAAA
KPMG LLP
(610) 341-4802
lmarlo@kpmg.com
www.kpmg.com
The information contained herein is of a general nature and is not intended to address the circumstances of any
particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no
guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future.
No one should act on such information without appropriate professional advice after a thorough examination of the
particular situation.
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