Practical approaches to the Own Risk and Solvency Assessment Casualty Actuaries in Europe (CAE) Spring meeting May 31 st 2013 Caspar Richter, CEO, Actuary

Practical approaches to theOwn Risk and Solvency Assessment

Casualty Actuaries in Europe (CAE)Spring meeting May 31st 2013

Caspar Richter, CEO, Actuary [email protected]

Examples of tables of contents

Risk identification

Stress test and scenariosPlanning for the future

Brush up on legislation

2 Copyright SolvencyTool

AgendaTitle: Practical approaches to ORSADuration: 50 minutes


ORSAA few questions

How many have read the ORSA guidelines from EIOPA?How many have participated in doing an ORSA?How many have done it several years?…I hope at least to give you some inspiration!


ORSAInitial thoughtsPersonal statement

A personal point of view:

Establish your governance system and risk management setupGet your processes and reporting for this up and runningNow ORSA should be a short document summarizing all this at

the end of the year


ORSAReporting structureExample of contents

1. Executive summary

2. General setupa) Company structure and ORSA approachb) Strategy and business model (main products, distribution channels, growth plans etc.)c) Risk identification and risk management

3. New and expired risks and incidents during the year

4. Own Risk and Solvency Assessmenta) Basic own funds and solvency capital requirement as at 31st Dec 2012b) Stress tests and scenario analysesc) Reverse stress tests

5. Performance of ORSA related processes during the yeara) Compliance with predefined risk limitsb) Compliance with other risk management setup

6. Expectations for the future (3-5 years)a) Capital targetb) Capital and risk planning (projections of BOF, SCR and MCR)c) Contingency planning

7. Conclusion and actions


Risk identification




AgendaTitle: Practical approaches to ORSADuration left: 45 minutes

7

Risk identification

Copyright SolvencyTool

Typically used to provide documentation for the risk management process. Strengthens the forward-looking perspective

Step 1Identify

Bottom-up

Risk owners identify emerging risks and expired

risks

Risk owners evaluate risks about to expire

Step 2Select

Top-down

AMSB chooses important risks for the company /

group

Step 3Assess

Bottom-up

Risk owners assess the important risks (qualitative

assessment and possible quantitative as well)

Chief Risk Officer selects final assessment of all risks

Step 4Approve

Top-down

AMSB approves important risks and their assessment

Typical process to update the risk register and get support for ORSA

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Risk identification


Typically used to provide documentation about the risk management process. Strengthens the forward-looking perspective

Some risk managers establish links for each risk to Solvency II model, organisation, risk owners etc.

In internal risk committees risk owner decide on a common understanding of the risk matrix (likelihood and severity)

Risk register

9

Risk identification


Typically used to provide documentation about the risk management process. Strengthens the forward-looking perspectiveDiscussion in risk committees can be very important to get the full pictureBasis: Risk identification spring 2012 (01-02-2012 - 28-02-2012) (Published)

Risk: Too many manual processes

Risk description: In the financial division there are several manual processes without automatic and independent control. Control procedures should be improved to minimize the risk of human errors.

CRO responsible Risk owner Risk owner

Responsible John Doe Christian Armstrong David Schulz

Probability Likely Unlikely Possible

Probability percent

Impact Small Medium Medium

Impact amount (Gross) 0 0 0

Impact amount (Net) 0 0 0

Rating

Priority Medium Medium Medium

Module for model Operational

Sub model

Risk accepted

Risk significant for board

Risk reduction necessary

Risk reduction implemented

Implementation date

Description of risk reduction action

Involve risk owners Listen to opinions Discuss aspects on

probability and severity Get consensus Reevaluate existing risks Identify emerging risks

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Risk identification


Typically used to provide documentation about the risk management process. Strengthens the forward-looking perspectiveDemonstrate that new risks are identified and necessary action is taken











Risk identification






Stress test and scenariosA short list of possibilitiesFurther explanations on slides to come

Sensitivity of parameters or assumptions Taylor series of the SCR Historical incidents and losses Use of market data

Example of approaches

Stress test 1 Stress test 2 Stress test 3 …

Combination 1 of stress tests Combination 2 of stress tests …

Stress tests Scenarios as simple aggregation

What are the implications?• BOF below capital target• BOF below SCR• BOF below MCR

Or reverse stress testing• What can cause insolvency?• Certain combinations?• Certain events?


Stress test and scenariosSensitivity of parameters or assumptionsSimple lists

Risk Event Impact

Claim frequency increased Loss = 10% of earned premiums 133 mEUR

Run-off losses Loss = 5% of tech. provisions 56 mEUR

Large losses Loss = 3% of earned premiums 40 mEUR

Nat. CAT Basis: Market loss of 1,338 mEUR 23 mEUR

…

Comments• Involve AMSB in this• Take historical experience into consideration• Use partial internal model if relevant


Stress test and scenariosTaylor series of the SCRSimple explanation of changes

Risk Amount FactorBSCR 1.531.652 100,0%SCRop 100.000 100,0%Adj -250 100,0%SCR 1.631.402

Risk Amount Factor SCRmkt SCRdef SCRlife SCRhealth SCRnlSCRmkt 150.001 41,5% 100% 25% 25% 25% 25%

SCRdef 100.000 60,6% 25% 100% 25% 25% 50%

SCRlife - 12,4% 25% 25% 100% 25% 0%

SCRhealth 500.000 37,3% 25% 25% 25% 100% 0%

SCRnl 1.300.000 92,1% 25% 50% 0% 0% 100%

SCRint 25.000 100,0%Diversification -518.349 BSCR 1.531.652

Solvency Capital Requirement:

Taylor series:Changes in SCROp and Adj have 100% effect on SCR

Level 1

Level 2

Basic Solvency Capital Requirement:

Taylor series:

𝑆𝐶𝑅=𝐵𝑆𝐶𝑅+𝑆𝐶𝑅𝑂𝑝+𝐴𝑑𝑗

𝐵𝑆𝐶𝑅=√∑𝑖 , 𝑗

𝐶𝑜𝑟𝑟 𝑖 , 𝑗×𝑆𝐶𝑅𝑖×𝑆𝐶𝑅 𝑗+𝑆𝐶𝑅𝐼𝑛𝑡

𝐹𝑎𝑐𝑡𝑜𝑟 𝑖=(∑𝑗 𝐶𝑜𝑟𝑟 𝑖 , 𝑗×𝑆𝐶𝑅𝑗 )/(𝐵𝑆𝐶𝑅−𝑆𝐶𝑅 𝐼𝑛𝑡¿)¿


Stress test and scenariosTaylor series of the SCRSimple explanation of changes

Further remarks:

The SCR calculation is hierarchical Factors are relative to a parent Factors could be multiplied up through the modules Thereby changes could be explained directly by e.g.

variations in claim provisions, premiums etc.

And contributions are additive!

Market risks Q1 2013 Q2 2013 Change % Effect on SCR

Interest 68.687 52.215 -16.472 33% -5.436

Equity 6.592 6.421 -172 9% -15

Property 4.694 4.688 -6 22% -1

Spread 37.169 34.323 -2.846 23% -655

Concentration 0 0 0 0% 0

Currency 13.506 14.218 711 16% 114

Counter-cyclical premium 0 0 0 0% 0

Total -5.993

Example of use of Taylor series for market risk

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Stress test and scenarios


Historical losses or near missesLink them to the solvency II modules and risk identificationResults of SCR calculation should be compared with historical data

Loss identification

Loss identification spring 2012 (01-02-2012 - 28-02-2012) (Published)

CRO responsible Loss Loss description Date of loss Estimate of total gross loss

Was loss an identified risk

Description of loss reduction action Loss was reduced

Large claims

John Doe Mass accident On a small commercial business there w as an accident with a machine. 7 people w ere involved.

03-02-2011 800.000

Reinsurance programme covered the claim.

John Doe Industrial f ire Fire on a big pow erplant causing huge property damage and loss of profit claims.

14-06-2010 11.000.000

The loss w as covered by reinsurance.

John Doe Windstorm There w as a minor w indstorm in 2010 causing losses across the country.

15-01-2010 7.500.000

Increased claim frequency

John Doe Increase in thefts The number of burglaries in private homes have increased over the past years and reached a maximum in 2009.

01-07-2009 6.000.000

Premiums increased

Reinsurers

John Doe Reinsurer bankrupt Utopia Re w ent bankrupt and the company had to clean cut a few treaties.

01-02-2009 250.000

Assets losing value

John Doe Loss on equities Financial crisis in 2008 / 2009 caused a severe decrease in the value of equities.

01-03-2009 8.000.000

Limit in total amount of equities. Change of investment guidelines.

John Doe Loss on CDO's Financial crisis in 2008 / 2009 caused a severe decrease in the value of CDO's.

01-03-2009 100.000

No more uncommon investment types w ill be used in the future.











Risk identification






Planning for the futureCapital and risk planningContingency plans

Current year Year + 1 Year + 2 Year + 3 Year + 4 Year + 5

BOF before dividends

Dividends

Basic own funds

Capital target

SCR

Green SCR limit

Yellow SCR limit

Red SCR limit

MCR

Comments: A few examples of capital target:

(1 + loading) * SCR SCR + buffer Factor * Earned premiums

Capital target should reflect the risk appetite defined by AMSB and the stress and scenario testing

Projections could be made by simple scaling or by use of expected development in most important risk drivers


Planning for the futureRisk appetite from top level to bottomEstablish key risk indicators

• Risk appetite: Create 3 limits on top level• Green, yellow and red limit for SCR

Simple approach to risk appetite and key risk indicators

• Apply limits for all modules by use of factor• Simple way to construct indicators that

single risks are increasing more than accepted

• Specific actions can be initiated if respectively green, yellow or red limit is exceeded

• Contingency plans are hereby made concrete and far more practical on a detailed level

Key risk indicator for each of the modules:Green: Below low limitYellow: Between low and middle limitRed: Between middle and high limitBlack: High limit is exceeded











Risk identification





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General considerations• Guideline 1: Principle of proportionality• Guideline 2: Role of the administrative, management or supervisory body

(top-down approach)• Guideline 3: Documentation

– ORSA policy;– Record of each ORSA;– Internal report on ORSA; and– ORSA supervisory report.

EIOPA Final Report on Public Consultation No. 11/008 On the Proposal for Guidelines On Own Risk and Solvency Assessment

25




Observations• Adapt ORSA according to the

complexity of your company• Involve the senior management

and the board• Secure audit trails and internal

procedures and write a report

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ORSA policy• Guideline 4: ORSA policy includes at least

– a description of the processes and procedures in place to conduct the ORSA including how the forward-looking perspective is addressed;

– consideration of the link between the risk profile, the approved risk tolerance limits and the overall solvency needs;

– information on:• (i) how stress tests, sensitivity analyses or reverse stress testing are to be performed and how often they are to

be performed;• (ii) data quality requirements; and• (iii) the frequency and timing for the performance of the (regular) ORSA and the circumstances which would

trigger the need for an ORSA outside the regular timescales.


27




Observations• Explain how ORSA is forward-

looking• Risk tolerance limits should be

included• Explain what triggers an ORSA

outside the regular timescale

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Record of ORSA• Guideline 5: Appropriately evidenced and documented internally

Internal report• Guideline 6: Make sure that relevant people receive information on ORSA

results


29




Observations• Remember to inform internally

about the results of ORSA

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Performance of ORSA• Guideline 7: Valuation and recognition• Guideline 8: Assessment of the overall solvency needs• Guideline 9: Forward-looking perspective• Guideline 10: Regulatory capital requirements• Guideline 11: Technical provisions• Guideline 12: Deviations from the assumptions underlying the SCR

calculation• Guideline 13: Link to the strategic management process and decision

making framework• Guideline 14: Frequency of ORSA


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Observations• Consider how the overall

solvency needs should be assessed

• Check for deviations from assumptions underlying the SCR

• Be sure to link business strategy and ORSA

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Group specificities of the ORSA• Guideline 15: Scope of the group ORSA• Guideline 16: Reporting to the supervisory authorities• Guideline 17: Assessment of overall solvency needs• Guideline 18: General rule for group ORSA• Guideline 19: Specific requirements for a single ORSA document covering

the participating insurance or reinsurance undertaking or the insurance holding company and any subsidiary in the group

• Guideline 20: Internal model users• Guideline 21: Integration of related third-country insurance and re-

insurance undertakings


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Observations• Consider if separate ORSA reports

should be written for each company in the group or if one could do the job

• Make sure to take into consideration the actual ability to move basic own funds from one company to another in the group

• Use internal model results


End of presentationTitle: Practical approaches to ORSAQuestions are welcome

Thank you

Contact details:Caspar Richter, CEO, Actuary [email protected]+45 6086 3604

Documents

Practical approaches to the Own Risk and Solvency Assessment Casualty Actuaries in Europe (CAE) Spring meeting May 31 st 2013 Caspar Richter, CEO, Actuary