Enterprise Risk Management For Insurance Companies Jack R

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Enterprise Risk Management For Insurance Companies

• Jack R. Buchmiller
• Supervising Risk Management Specialist
• NYS Insurance Department

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Overview of New York State Insurance
DepartmentOne of the most experienced U.S.
financial regulators

• 1851 New York State Banking Department (NYSBD)
• 1859 New York State Insurance Department
  (NYSID)
• 1863 Office of the Comptroller of the Currency
  (OCC)
• 1871 National Association of Insurance
  Commissioners (NAIC)
• 1913 Federal Reserve System (Fed)
• 1930 Bank for International Settlements (BIS)
• 1932 -- Federal Housing Finance Board (FHFB)
• 1933 Federal Deposit Insurance Corporation
  (FDIC)
• 1934 Securities and Exchange Commission (SEC)
• 1938 National Association of Securities Dealers
  (NASD)
• 1970 -- National Credit Union Administration
  (1934 - Bureau of Federal Credit Unions)
• 1974 Commodities Futures Trading Commission
  (CFTC)
• 1974 ERISA Pension Benefit Guaranty
  Corporation (PBGC)
• 1989 Office of Thrift Supervision (FHLB Board
  1932)
• 1992 -- Office of Federal Housing Enterprise
  Oversight (OFHEO)
• 2008 -- Federal Housing Finance Agency (FHFA
  OFHEO FHFB)
• 2010 Various mandates under Frank Dodd
  legislation.

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ERM

• Everyone has a plan until they get punched in
  the mouth. -- Mike Tyson
• Its the punch you dont see that knocks you
  out. -- old boxing adage
• But if you dont have a plan, the punch youre
  not going to see will land much sooner!

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Regulatory View on ERM

• ERM How we think about ERM
• Rating agencies role
• NY Insurance Dept update
• Integration with Risk-focused exams
• Transparency and accountability
• Future of ERM - principles based approach

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ERM What is it?
The capability to consistently identify,
measure, aggregate and manage risk exposures
within predetermined tolerance guidelines across
the entire organization.

• Definition

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ERM Our View

• Typical Structure

CEO
BOD
Risk Committee
ERM Headed by CRO
CFO
Market Risk
Credit Risk
Operational Risk
Insurance Risk
Corporate Governance
Economic Capital
Disaster Plan/Bus Continuity
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ERM Our View

• Market risk, equity risk, interest rate risk,
  assets/liability management, annuities
  (especially guaranteed), and measurements
  thereof.
• Credit risk invested assets, counterparties
  (derivative, sec lending, etc.), reinsurers,
  etc.
• Operational Risk most insurers are addressing
  (similar to risk-focused exam methodology).
• Insurance risks pricing, underwriting.
• Economic capital model true risks and
  allocate capital accordingly (Graham Dodds
  voting versus weighing machine).
• Business continuity/disaster preparedness
  includes physical security, pandemic impact,
  disaster scenarios, evacuation drills, tested
  hot-sites, back-up and recovery, etc.
• Corporate Governance-most likely to be found
  under the CFO as it relates to SOX and internal
  controls over financial reporting.

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ERM Our View

• ERM aggregates all of the above risks and
  identifies areas of overlapping or correlated
  risks.
• Overlapping Holding bonds issued by the same
  company that provides reinsurance. Munis issued
  by municipality hit by cat event.
• Correlated for life insurance, a pandemic flu
  and investment losses.

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ERM Our View

• We want to give companies credit for strong
  risk management by integrating ERM into the
  risk-focused exam process.
• By virtue of the risk-focused exam process a less
  intrusive exam should result for companies with
  strong risk management. (Not that were ever
  intrusive!)

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Rating agencies role

• We met with the rating agencies early on in their
  development of assessing ERM and how they
  translate that assessment into their rating
  process
• We continue to keep current with their
  initiatives
• We have a similar interests in promoting ERM
• They publish their ERM assessments
• A good source of background info to know company
  and identify key activities and inherent risks in
  planning the exam
• Rating agencies as the de facto regulator (a
  letter grade instead of pass/fail).

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Rating agencies role

• Rating agency evaluations of an insurers ERM
  typically breaks down the assessment of ERM into
  specific categories such as Risk Culture, Risk
  measurement and monitoring, Emerging Risk
  Management, Economic Capital Models, and
  Strategic Risk Management.
• An insurer's ERM practices are usually rated
  using some scale, i.e., weak, adequate, strong,
  excellent, etc. They then incorporate those
  assessments into their overall rating process.

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NY Insurance Dept Update

• The NY Insurance Dept. has met with our larger
  domestic insurers to gauge their status of
  implementing ERM.
• We have found ERM to be in various stages of
  development from a full blown robust function to
  the beginning stages of development. (We prefer
  full blown!)

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NY Insurance Dept update

• We are engaged in formal assessments of the ERM
  function at several insurers.
• We have established evaluation criteria and
  developed an audit/exam program to assess the ERM
  function.
• We will assess how well the ERM function
  aggregates risks across key activities.
• Specifically, the Department will implement a
  process of evaluating a companys ability to
  identify, measure, aggregate, and manage risk
  exposures within predetermined guidelines, across
  all of the companys activities.

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Integration with Risk-focused exams

• ERM generally consists of the following functions
  and accordingly the evaluation program is broken
  down into the following ten sections
• Overall ERM Structure - including risk governance
• Operational Risk
• Market Risk
• Asset/liability management risk(s)
• Credit risk
• Liquidity risk
• Insurance Risks specific to Property, Life and
  Health
• Economic Capital
• Business Continuity/Disaster Preparedness
• Extreme Event Risk

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Integration with Risk-focused exams

• We will incorporate our assessment of the ERM
  function into our current examination process.
• ERM efforts of a company will be
  utilized/realized in the risk-focused exam
  process.
• Future exams may only consist of an evaluation
  of ERM, and if a robust function is found, that
  may be the extent of the exam.

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Future Regulatory Approach to ERM

• Efforts towards the development of national
  standards on risk
• Solvency II, Pillar 1 - Capital, Pillar 2 ERM -
  reqd, Pillar 3 - Disclosure/transparency
• Corporate Governance Sub-group of the Principles
  Based Reserving WG-chaired by Lou Felice of NYSID
• NAIC participation with the IAIS in developing
  the Guidance Paper on Enterprise Risk Management
  for Capital Adequacy and Solvency Purposes

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Regulatory Approach to ERM

• Steps towards the development of national
  standards on risk.
• For example, principles-based reserve
  requirements for VAGLB's (NAIC's Life and Health
  Actuarial Task Force).

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Regulatory Approach to ERM

• Steps towards the development of national
  standards on risk
• U.S. insurers use regulatory or statutory capital
  benchmarks rather than Economic Capital, however
  some use it for capital allocation.
• On July 10, 2007, the European Commission
  published its proposals for the Solvency II
  directive but deferred the planned implementation
  date to 2012.

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Regulatory Approach to ERM

• Steps towards the development of national
  standards on risk
• The EU's Solvency II project aims to bring
  regulatory capital requirements for insurance
  companies more in line with their true risks.

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Regulatory Approach to ERM

• Economic Capital?
• RBC vs. Economic Capital example
• Importance of ERM if we allow economic capital.
• RBC has arguably worked well-hard to criticize.
• Criticism is RBC does not reflect true risks.

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Regulatory Approach to ERM

• According to a Tillinghast Survey
• External pressures are raising the bar for risk
  management globally. While most companies
  globally (78) cite "good business practice" as
  the principal driver for their current risk
  management efforts, rating agency considerations
  are a significant factor for North Americans
  (72) whereas changes in insurance solvency
  regulations are a major driver for European Union
  insurers

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• One of Murphys Laws
• Mother Nature favors the hidden flaw.
• Buchmillers Caveat
• but human nature seeks it out.
• And, therefore, so should ERM!

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Questions?