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Risk Management Insurance Company Best Practices

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Best practice Can readily identify risk limits for credit, market and ... Best practice Stress test credit, market and insurance risks ... – PowerPoint PPT presentation

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Title: Risk Management Insurance Company Best Practices


1
Risk Management - Insurance CompanyBest Practices
  • David Ingram, FSA, FRM, PRM
  • Milliman Risk Management

2
Bank Risk Management Best Practices
  • Group of 30 Report 1993
  • FRB Field Audit Manual (1994)
  • Bank of England Report 1995
  • Basel Interest Rate Risk Management (1997)
  • Counterparty Risk Management Policy Group 1999
  • OSFI Standards of Sound Business Practices

3
1. Board Senior Management are Responsible for
Risk Management
  • Best practice
  • CRO has regular private meeting with Board Risk
    Management Committee
  • Standard practice
  • Management has annual RM report to board
  • Basic practice
  • No Board involvement in RMexcept for extreme
    problems

4
2. Senior management understands all firm
activities and understands the basis of the Risk
Management system
  • Best practice CEO can explain risks and RM
    system of the company
  • Standard practice CFO can explain risks and RM
    system of company
  • Basic practice Individual risk specialists are
    the only ones who can explain risks and RM
    systems of the company

5
3. Authority and responsibility are clearly
defined, risk measurement and management are
independent from risk taking functions
  • Best practice Independent RM function
    responsible for risk measurement and enforcement
    of risk limits
  • Standard practice Dotted line relationships of
    risk management officers
  • Basic practice RM is totally integrated in
    operating areas

6
4. All material risks are identified and
measured, exposures are aggregated and management
attends to largest exposures
  • Best practice Single, clear enterprise wide
    Risk Report with name exposure list that includes
    credit, reinsurance, market indices
  • Standard practice Single compilation of Risk
    Reports from business units
  • Basic practice scattered risk reports from
    business units

7
5. There are risk limits for all material risks
and a system for enforcing the limits is part of
an internal control system that is relevant to
the risks of the firm
  • Best practice Can readily identify risk limits
    for credit, market and insurance risks and
    consistent rationale for limits and have an
    active control system for each
  • Standard practice Has separate clear limits for
    most significant risks and a regular process for
    monitoring compliance.
  • Basic practice Has limits for most significant
    risks and some processes for monitoring
    compliance.

8
6. The firm has staff with sufficient expertise
to perform the risk management functions and
adequate systems support
  • Best practice Has experts and back-ups for risk
    measurement and risk management functions
  • Standard practice Has an expert for risk
    measurement/management
  • Basic practice Relies on outside expertise for
    risk measurement /or management

9
7. Risk surplus is allocated to business units
and products and is used for capital budgeting
purposes
  • Best practice Calculates Economic Capital using
    company models. Capital usage of activities is a
    major factor in decision making.
  • Standard practice Uses Rating Agency / RBC
    formulas with modifications. Capital is
    allocated, but capital usage is rarely considered
    in decisions.
  • Basic practice Uses RBC formulas without
    modification. Looks at capital position in time
    for analysts visit. Capital not allocated.

10
8. Stress testing is a part of the risk
management process
  • Best practice Stress test credit, market and
    insurance risks
  • Standard practice Stress test interest rate
    risks
  • Basic practice NY 7 are only stress tests

11
9. New products and ventures trigger
consideration of potential new risks and new risk
management procedures
  • Best practice Risk analysis is a primary
    component of new product review review is
    completed prior to go - no go decision on
    product
  • Standard practice Risk analysis is a component
    of product development but rarely impacts on go
    no go decision
  • Basic practice Ad hoc risk analysis of new
    products

12
10. Financial reporting allows management to view
the risk adjusted returns of business units,
products and activities
  • Best practice Use IMR style reserves to
    accumulate release risk premiums that the
    reserving system does not recognize
  • Standard practice RAROC style ROE is key
    financial target using risk capital as part of
    equity.
  • Basic practice no risk adjustment

13
11. Product pricing and rate setting reflects the
risk adjusted return
  • Best practice Risk Adjusted return targets for
    unusually high or low risk activities in addition
    to cost of risk surplus
  • Standard practice Cost of risk surplus is
    primary risk adjustment
  • Basic practice All pricing is for expected
    costs only with no (or ad hoc) adjustment for
    risk surplus or unusual risk levels

14
12. The firm has a process for quickly resolving
identified risk management weaknesses
  • Best practice Makes improvements to RM systems
    procedures before they are required or common.
    Always seeking ways to improve processes and
    understand weaknesses.
  • Standard practice Makes improvements as they
    become common practices.
  • Basic practice Makes improvements to RM
    practices as they are required.

15
Risk ManagementEvolving Practices
  • CRO Position Organizing for RM
  • Use of CTE rather than VaR as a primary risk
    measure (aka CVaR, Tail VaR)
  • Use of Company Model Economic Capital
  • RAROC with continuously updated Economic Capital
  • General Stochastic Approach to Risk Assessment
    for Insurance Products
  • Variable Products Concentration
  • Regime Switching model for capturing equity
    market tail risk
  • Financial Market view of Variable Products
    benefits risks
  • Hedging programs for Variable Products benefits
    risks

16
Risk Mapping
  • AM Best
  • November 1, 2004

17
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18
ERM is Daunting
  • To large companies
  • wondering how to get started
  • To small companies
  • do not think that they have the resources to do
    ERM
  • Risk Mapping is a process that can be used in
    both situations

19
Risk Mapping
  • Process used in many industries and government
    entities throughout the world
  • Also known as Heat Map
  • Used by larger companies as a first step in a
    major Risk Management effort
  • Used by smaller companies as their primary Risk
    Management program

20
Risk Mapping Best Practices
  • Board Senior Management are Responsible for
    Risk Management
  • Senior management understands all firm
    activitiesand understands the basis of the Risk
    Management system
  • Authority and responsibility are clearly
    definedand risk measurement and management are
    independent from risk taking functions
  • All material risks are identified and
    measuredExposures are aggregated and management
    attends to largest exposures
  • There are risk limits for all material risks and
    a system for enforcing the limits that is part of
    an internal control system that is relevant to
    the risks of the firm
  • The firm has staff with sufficient expertise to
    perform the risk management functions and
    adequate systems support

21
Risk Mapping Best Practices
  • Board Senior Management are Responsible for
    Risk Management
  • Senior management understands all firm
    activitiesand understands the basis of the Risk
    Management system
  • Authority and responsibility are clearly
    definedand risk measurement and management are
    independent from risk taking functions
  • All material risks are identified and
    measuredExposures are aggregated and management
    attends to largest exposures
  • There are risk limits for all material risks and
    a system for enforcing the limits that is part of
    an internal control system that is relevant to
    the risks of the firm
  • The firm has staff with sufficient expertise to
    perform the risk management functions and
    adequate systems support

22
Risk Mapping Best Practices
  • Board Senior Management are Responsible for
    Risk Management
  • Senior management understands all firm
    activitiesand understands the basis of the Risk
    Management system
  • Authority and responsibility are clearly
    definedand risk measurement and management are
    independent from risk taking functions
  • All material risks are identified and
    measuredExposures are aggregated and management
    attends to largest exposures
  • There are risk limits for all material risks and
    a system for enforcing the limits that is part of
    an internal control system that is relevant to
    the risks of the firm
  • The firm has staff with sufficient expertise to
    perform the risk management functions and
    adequate systems support

23
Risk Mapping Best Practices
  • Board Senior Management are Responsible for
    Risk Management
  • Senior management understands all firm
    activitiesand understands the basis of the Risk
    Management system
  • Authority and responsibility are clearly
    definedand risk measurement and management are
    independent from risk taking functions
  • All material risks are identified and
    measuredExposures are aggregated and management
    attends to largest exposures
  • There are risk limits for all material risks and
    a system for enforcing the limits that is part of
    an internal control system that is relevant to
    the risks of the firm
  • The firm has staff with sufficient expertise to
    perform the risk management functions and
    adequate systems support

24
Risk Mapping Best Practices
  • Board Senior Management are Responsible for
    Risk Management
  • Senior management understands all firm
    activitiesand understands the basis of the Risk
    Management system
  • Authority and responsibility are clearly
    definedand risk measurement and management are
    independent from risk taking functions
  • All material risks are identified and
    measuredExposures are aggregated and management
    attends to largest exposures
  • There are risk limits for all material risks and
    a system for enforcing the limits that is part of
    an internal control system that is relevant to
    the risks of the firm
  • The firm has staff with sufficient expertise to
    perform the risk management functions and
    adequate systems support

25
Risk Mapping Best Practices
  • Risk surplus is allocated to business units and
    products and is used for capital budgeting
    purposes
  • Stress testing is a part of the risk management
    process
  • New products and ventures trigger consideration
    of potential new risks and new risk management
    procedures
  • Financial reporting allows management to view the
    risk adjusted returns of business units, products
    and activities.
  • Product pricing and rate setting reflects the
    risk adjusted return.
  • The firm has a process for quickly resolving
    identified risk management weaknesses

26
Risk Mapping Best Practices
  • Risk surplus is allocated to business units and
    products and is used for capital budgeting
    purposes
  • Stress testing is a part of the risk management
    process
  • New products and ventures trigger consideration
    of potential new risks and new risk management
    procedures
  • Financial reporting allows management to view the
    risk adjusted returns of business units, products
    and activities.
  • Product pricing and rate setting reflects the
    risk adjusted return.
  • The firm has a process for quickly resolving
    identified risk management weaknesses

27
Risk Mapping Best Practices
  • Risk surplus is allocated to business units and
    products and is used for capital budgeting
    purposes
  • Stress testing is a part of the risk management
    process
  • New products and ventures trigger consideration
    of potential new risks and new risk management
    procedures
  • Financial reporting allows management to view the
    risk adjusted returns of business units, products
    and activities.
  • Product pricing and rate setting reflects the
    risk adjusted return.
  • The firm has a process for quickly resolving
    identified risk management weaknesses

28
Risk Mapping Best Practices
  • Board Senior Management are Responsible for
    Risk Management
  • Senior management understands all firm
    activitiesand understands the basis of the Risk
    Management system
  • Authority and responsibility are clearly defined
  • All material risks are identified and exposures
    are aggregated and management attends to largest
    exposures
  • New products and ventures trigger consideration
    of potential new risks and new risk management
    procedures
  • The firm has a process for quickly resolving
    identified risk management weaknesses

29
Risk Mapping Project
  • Install Risk Mapping Process
  • Quarterly Review of Risk
  • Annual Risk Report
  • Risk Management Advisor

30
A. Installing Risk Mapping
  • Risk Identification
  • Risk Assessment
  • Prioritization
  • Risk Responsibility
  • Risk Monitoring
  • Risk Plan

31
1. Risk Identification
  • Start with AAA and COSO risk lists
  • Divide into broad categories
  • Operational
  • Marketing
  • Product
  • Investment
  • Select actual risks in each area

32
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33
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34
2. Risk Assessment
  • Frequency Severity
  • Existing Risk Transfer
  • Existing Risk Management
  • Controls Limits
  • May refine risk list as part of this step

35
3. Prioritization
36
4. Risk Responsibility
  • For Each Important Risk identify
  • Senior Manager Responsible
  • Manager in charge of transfer program or
    management program
  • Person responsible for monitoring

37
Risk Responsibility Chart
38
5. Risk Monitoring Management
  • Monitoring
  • Volume Report
  • Loss Report
  • Exception Report
  • Managing
  • Transfer
  • Limit
  • Offset
  • Retain

39
Monitoring Managing
40
6. Risk Plan
  • Planned Changes to
  • Responsibilities
  • Monitoring
  • Transfer
  • Management
  • Controls Limits
  • Concentrate on improvements relating to High
    Priority Risks

41
Risk Plan
42
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43
B. Quarterly Review of Risk
  • Identify External Risk changes
  • Identify Internal Risk changes
  • Assess Plan Progress
  • Review Monitoring Reports
  • Modify Plan if needed

44
Annual Risk Report
  • Written Report to Management
  • Optional
  • Oral Report to Board
  • Oral Report to Rating Agency
  • Summary Material for Annual Report

45
Annual Risk Report
  • General Description of Risks to Industry,
    Products Markets
  • Description of Company Risks
  • Summary of Risk Assessment Priorities
  • Statement of Risk Responsibilities
  • Statement of Risk Transfer Risk Management
    Programs in place
  • Summary of Prior year Risk Plan Actions Taken
  • Summary of Risk Monitoring Reports
  • Recommendation for next years Risk Plan

46
  • David Ingram, FSA, FRM, PRM
  • Risk Management Consulting

One Pennsylvania Plaza, 38th Floor New York, NY
10119 212 279 7166 david.ingram_at_millliman.com
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