Business and financial services for property & casualty insurance companies
Enterprise Risk Management Framework
For Small to Mid-Sized Property & Casualty Insurance Companies
Presented by
Joseph F. Morris CPA, MBA
jmorris@pcicStrategies.com
215-901-0334
Learning Goals
 Recent Regulatory Developments
 2013 Holding Company Registration Statement on Governance and
Internal Controls
 2014 Form F (Enterprise Risk Management Report)
 2015 Own Risk Solvency Assessment
 2016 Corporate Governance Annual Filing (Proposed)
 Expectations of Rating Agencies
 Definition and Benefits of ERM Framework
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Learning Goals (continued)
 Creating a Risk-Aware Culture
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Setting Tone at the Top
Defining Risk Profile, Risk Appetite and Risk Tolerance Levels
Roles and Responsibilities
Reporting and Monitoring
 Determining Key Risk Factors
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Five Categories of Risk
Risk Tolerance Parameters
Controls or Monitoring Activities
Issues for Remediation
Risk Factor Dashboard
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ERM – Regulatory Developments
 NAIC’s Solvency Modernization Initiative and Risk-Focused
Financial Examinations
 2013 Annual Registration Statement Includes:
– “the insurer’s board of directors oversees corporate governance and internal
controls and that the insurer’s officers or senior management have approved,
implemented and continue to maintain and monitor corporate governance
and internal control procedures.”
 2014 Form F (Enterprise Risk Management Report)
 2015 Own Risk Solvency Assessment (ORSA)
 2016 Corporate Governance Annual Filing (Proposed)
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ERM – Regulatory Developments (continued)
2014 Form F (Enterprise Risk Management Report)
 Filed annually by ultimate controlling person
 No size exemption
 “Enterprise Risk in ten areas
 “Enterprise Risk” is defined as: “Any activity, circumstance, event or
series of events involving one or more affiliates of an insurer that, if not
remedied promptly, is likely to have a material adverse effect upon the
financial condition or liquidity of the insurer or its insurance holding company
system…”
 If no response, must indicate “To the best of its knowledge and
belief, Registrant has not identified enterprise risk subject to this
disclosure.”
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ERM – Regulatory Developments (continued)
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2014 Form F (Enterprise Risk Management Report)
Material developments regarding strategy, internal audit findings,
compliance or risk management;
Acquisition or disposal of insurance entities;
Changes of shareholders exceeding 10% or more of voting securities;
Developments in investigations, regulatory activities or litigation;
Business plan and summarized strategies for next 12 months;
Identification of material concerns raised by supervisory college;
Identification of capital resources and material distribution patterns;
Identification of any negative movement with rating agencies;
Information on corporate or parental guarantees;
Identification of any material development that could adversely affect
the company.
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ERM – Regulatory Developments (continued)
2015 Own Risk and Solvency Assessment Model Law
 Insurers with less than $500 million in gross written
premium and insurance groups with less than $1 billion in
gross written premium are exempt;
 Requires insurers to maintain a risk management framework
and complete an ORSA Summary Report;
 ORSA Summary Report:
 Section 1 – Description of the Insurer’s Risk Management Framework
 Section 2 – Insurer’s Assessment of Risk Exposure
 Section 3 – Group Assessment of Risk Capital and Prospective Solvency
Assessment
 Additional Information – organization chart, basis of accounting, signature
of chief risk officer
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ERM – Regulatory Developments (continued)
2016 Corporate Governance Annual Filing Model Law
 Provide a summary of an insurer’s corporate governance
structure, policies and practices
 No size exemption
 Annual Filing:
 Section 1 – Description of Corporate Governance Framework
 Section 2 – Description of Board of Directors; and Committee
Policies and Practices
 Section 3 – Description of Management Policies and Practices
 Section 4 – Description of Management and Oversight of Critical
Risk Areas
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A.M. Best: ERM in the Rating Evaluation Process
Business
Profile
Operating
Performance
Enterprise Risk Management is the
common thread that links balance
sheet strength, operating
performance, and business profile
Balance Sheet
Strength
Source: A. M. Best Company
9
A.M. Best ERM Expectations
 All insurers need to establish an ERM framework
 ERM capabilities should be proportionate to risk profile of
insurer
 Insurers need to establish firm-wide risk tolerance metrics
 Insurers need to have their own view of capital adequacy
 A low risk profile and high ERM capability will produce a ratings
“lift”
 Leading insurers are utilizing stochastic-based capital modeling
to better support risk-reward decisions
Business
and Financial
Source:
A. M. Best
CompanyServices for Property and Casualty Insurance Companies
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What is an ERM Framework?
Enterprise Risk
Management Framework
Establish
Risk-Aware
Culture
Identify
Measure
Manage &
Mitigate
Risks
Measure
Enterprise
Risk and
Risk
Correlation
A disciplined process to systematically identify measure
and manage various types of risk
Source: A. M. Best Company
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Benefits of Enterprise Risk Management Framework
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Maximize value to the organization’s various stakeholders
Manage exposure to earnings and capital volatility
Ensures future capital levels exceed required regulatory capital
Create a risk-aware culture that encourages risk-taking
Develop consistent metrics to measure risk and to establish risk
tolerance levels
 Assign roles and responsibilities to board, Sr. management and others
 Maintain excellent rating from rating agencies
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Enterprise Risk Management
Risk-Aware Culture
ERM – Risk Aware Culture
ERM Tone Established by Board of Directors and Senior Management
 ERM roles and responsibilities clearly defined
 Define risk profile, risk appetite and risk tolerance parameters
 Mission, Strategic Planning and ERM documents shared with all
employees
 Executive compensation includes achievement of risk management
objectives
 Financial results and risk management initiatives reviewed with
employees
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ERM – Risk Aware Culture (continued)
ERM Roles and Responsibilities
 Board establishes Risk Committee as oversight function
 Senior Management is responsible for identification, measurement,
monitoring and communication of risk goals, metrics and activities
 Chief Risk Officer is responsible for leading ERM activities within
company
Reporting of Enterprise Risk Management Activities
 Quarterly reporting of ERM metrics and activities to Risk Committee
of Board of Directors via ERM Dashboard
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ERM Terminology
What is Risk Profile?
A narrative description of the parameters for
executing the company’s business strategy
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ERM Terminology
What is Risk Appetite?
The boundary level of uncertainty a company is
willing to assume given the corresponding reward
associated with the risk
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Risk Profile and Risk Appetite Examples
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External Environment
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 Regulatory
 Legal/Judicial
 Economic
 Industry Competition
Capital Management
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 Financial Ratings
 Access to Capital
 Debt and Holding Company
Structure
 Capital Adequacy
Balance Sheet
 Loss Reserves
 Investment Portfolio
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Written Premium Profile
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 Line of Business, Geographic,
Product, Class of Business,
Agency Concentration
 Limits of Liability
 Coverage
Reinsurance Profile
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 Reinsurance Credit Quality
 CAT Exposure
 Per Risk Retentions
Operational Profile
 Underwriting & Claim Practices
 IT Performance, Data Quality &
Business Continuity and Recovery
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ERM Terminology
What is Risk Tolerance Level?
The financial metrics that establish thresholds for
levels of risk that the company is willing to accept
in order to accomplish its strategic objectives.
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Risk Tolerance Level Examples
Enterprise-Wide Risk tolerance Levels
 Economic Capital Model: Probability of Ruin at 99.5% VaR, OneYear Out
 Best Capital Adequacy Ratio, One Year Out to Achieve/Maintain ARating
 NAIC Risk Based Capital Greater Than 300
 Net Written Premium to Surplus ratio of Less than 1.5 to1
 No Greater Than a 10% Loss of Capital From all Risk Factors in Any
One Year
 Holding Company Debt to Total Capitalization Ratio
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Risk Tolerance Level Examples
Individual Risk Tolerance Levels
 Net of Reinsurance Underwriting per Risk Retention Equal to 5%
or Less of Capital (net of tax).
 Loss and LAE Reserves Set at or Above Mid-Point of Actuarial
Range of Estimates
 No Greater than a 5% Loss of Capital in Any One Year Due to a
100 Basis Change in Interest Rates
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Identification, Measuring and Monitoring
Key Risk Factors
Primary Causes of Financial Impairment
U.S. Property/Casualty – Primary Causes of Financial Impairment (1969-2012)
Affiliate problems
8.0%
Catastrophe losses
7.1%
Reinsurance failure
3.1%
Significant change in
business
Miscellaneous
3.5%
8.4%
Investment problems
(overstated assets)
Alleged fraud
6.6%
7.2%
Deficient loss
reserves/Inadequate
pricing
43.4%
Rapid growth
12.6%
Note: Exhibit % are based on companies where the cause of impairment was identif ied.
Source: A.M. Best data & research
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Key Risk Factor Categories - Definitions
 Credit - exposure from all potential creditors including agents, reinsurers,
bond issuers and insureds
 Market – exposure to liquidity events, asset/liability mismatches and risks
in investment portfolios due to changes in interest rates, equity prices and
exchange rates
• Underwriting – exposure from underwriting insurance products including:
product development, regulation, loss reserves, pricing metrics and
catastrophic events
• Operational – exposure to management change, business interruption,
fraud, data capture and security, claim handling and employee retention
and other operating activities
• Strategic – exposure to economic downturn, industry competition, rating
agencies and availability of capital
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Categories of Key Risk Factors
Credit
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Bond Issuer Default/Downgrade
Agency/policyholder credit risk
Reinsurer default
Sovereign
Currency
Market
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Liquidity events
Asset / Liability Matching
Interest Rate Risk
Common Stock Market Price
Reinvestment
Underwriting
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Product Development
Regulatory
Catastrophic Event
Loss Reserve
Loss Experience
Pricing
Operational
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Data Capture/Data Security
Agency Automation
Management Change/Employee Turnover
Fraud/Financial Controls
Claim Handling
Delegation of Underwriting Authority
Financial Reporting
Strategic
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A. M. Best Downgrade
Industry Competition
Economic Downturn
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Reputational
Capital Availability
Competitor technology Advances
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Frequent
Occasional
Often
8
9
10
4
11
2
5
6
1
7
12
3
Remote
Low
Possible
Probability
Probable
High
ERM Key Risk Factors – Heat Map
< 1%
Low
1 – 5%
5 – 10%
10 – 15%
15 – 20%
>20%
Severity of Event (% of Surplus)
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High
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ERM – #1 Risk Factor: Pricing Dashboard
Will be Included in Live Presentation
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Is Your Company Capable of Managing Key Risks?
Industry Operating Practices
Best Operating Practices
Pricing - No price monitoring reports
New business and renewal price monitoring reports
track manual and discretionary price changes
Loss Reserves - Calendar Year Loss Ratio/Loss
Reserve Adequacy Reviewed Annually by Outside
Actuary
Accident Year Loss Ratios/ Loss Reserve Adequacy
Reviewed Quarterly Internally and Annually by
Outside Actuary
CAT Management - Determined annually by
reinsurance broker
Property Values Managed Monthly in Concentrated
Territories
Claims Best Practices - No written claims best
practices and no claim audit process
Written Claims Best Practices and Claim Files
Audited Monthly
Investment Portfolio - Risk Metrics not calculated
Investment Manager Monitors Risk Metrics of
Investment Portfolio and Meets with Board
Investment Committee Quarterly
Financial Forecasts – one-year budgets are created
for operating statements only
Three-Year Financial Forecasts prepared including
operating statements, balance sheets and RBC and
BCAR ratios
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Enterprise Risk Management Framework
Risk Identification
Financial Goals &
Capital
Management
Risk Measurement
Risk-Aware Culture
Risk Profile
Risk Tolerance
Roles/Responsibilities
ERM Process
Business Strategies
& Operating
Practices
Risk Controls,
Monitoring Activities &
Reporting
Integrate ERM Process into Standard Operating Practices of Company
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Joseph F. Morris, CPA, MBA Bio
Joseph F. Morris, CPA, MBA, has over thirty-four years of
insurance industry experience. Prior to founding P&C Insurance
Company Strategies, LLC, Mr. Morris was President of Stonecreek
Specialty Underwriters, LLC. Previously, Mr. Morris was President
and CEO of James River Insurance Company from 2008 until 2010 after
serving as President and CEO of The Philadelphia Contributionship, the oldest insurance
company in the United States. Mr. Morris also held several positions with United America
Indemnity, Ltd. (UAI) including President, President & CEO Penn-America, UAI’s excess &
surplus lines subsidiary, and SVP and CFO of Penn-America. Mr. Morris began his insurance
career at Reliance Insurance Company where, over a twenty-one year career, he held a number
of financial and operating positions.
Mr. Morris has been a member of the Board of Directors of The Insurance Society of
Philadelphia since 1989 and was its Chairperson in 1997-1999.
Joseph F. Morris
jmorris@pcicstrategies.com
215-901-0334
www.pcicstrategies.com
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Disclaimer of Warranties
The content of this webinar and the presentation
materials have been prepared by P&C Insurance
Company Strategies, LLC (PCIC Strategies) “as is”, for
informational purposes only and without warranties of
any kind, either express or implied. PCIC Strategies
disclaims all warranties including but not limited to
warranties of title, implied warranties of merchantability,
fitness for a particular purpose, compatibility, security,
accuracy, reliability or infringement.
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