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Future Pathways Fresh perspectives from actuaries of the future
Wellington, 24 March 2014 Auckland, 25 March 2014
Future Pathways Fresh perspectives from actuaries of the future
Adding value to Capital Management Anita Samu, Finity Isabella Hou, Vero Insurance New Zealand Ltd
Agenda
• Introduction to Capital Why do we need it?
Regulatory requirements
• Capital and Risk Appetite Creating the link
Finding the right balance
• Dynamic Financial Analysis A general insurance tool for strategic decision making
Why do we need capital?
Because sometimes things don’t go quite as planned
Regulatory Capital
• Protect policyholders interest
• Prescribed method
• Risk based
Regulatory Capital
• Protect policyholders interest
• Prescribed method
• Risk based
Return on Capital
• A dollar of profit does not equal a dollar of profit
• Riskier business requires more capital
• More capital requires more profit
How much capital should a company hold?
-
50
100
150
200
Capital Holdings
Regulatory Minimum
How much capital should a company hold?
-
50
100
150
200
Capital Holdings
Additional Capital
Regulatory Minimum
How much capital should a company hold?
-
50
100
150
200
Capital Holdings
Additional Capital
Regulatory Minimum
It’s a balancing act!
Setting capital targets
Define the risk appetite
“A clear statement of the degree of risk the company is willing and able to take”
Determine the level of capital that is consistent with this risk appetite
Examples: Risk Appetite Statement
1. To hold sufficient capital to be able to withstand two 1 in 200 year natural hazard events without falling below the minimum regulatory capital requirement.
2. To hold sufficient capital such that the probability of regulatory solvency capital falling below the minimum requirement is 1%.
What is Dynamic Financial Analysis？ • Stochastic models
• Random inputs
• Distribution of output
16
Distribution of Profits
Budget
Key components of DFA
17
Underwriting Risk
Reserving Risk
Catastrophe Risk
Reinsurance Structure
Asset Mix and Strategy
Credit Risk
Operational Risk
Dependency Structure
Economic Scenarios
Simulation Engine
P&L
Cashflows
Balance Sheet
x10k
18
What can DFA be used for?
DFA
RI Structure, Pricing & Allocation
Investment Strategy
P&L Volatility Regulatory
Capital (APRA)
Risk Appetite New Business
Strategies Impact
Capital Targets & Allocation
Actuaries adding value
• Growing interest in capital modelling
• From compliance to active
Questions?