sesión 7 evaluación de riesgo y administración xxi asamblea anual de assal xi conferencia sobre...
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Sesión 7Evaluación de Riesgo y Administración
XXI Asamblea Anual de ASSALXI Conferencia sobre Regulación y Supervisión de Seguros en
América Latina y Seminario de Capacitación IAIS-ASSAL
Santiago Chile, 21 de Abril de 2010
Takao Miyamoto, Secretaría de la IAIS
English
2
Agenda
1. Control Activities
2. Objective Setting
3. Risk Identification– Major Risks
4. Risk Assessment
5. Planning and Execution– Strategies– Some Examples
Risk Management Process
3
Set objective
Set objective
Identify risks
Identify risks
Monitor risks
Monitor risks
Assess risks
Assess risks
Plan & ExecutePlan &
Execute
Change of business
environment
Control activities (corporate
governance)
Risks
Control Activities
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Ideal control environment Real control environment with many holes
(Source) J.Reason “Swiss Cheese Metaphor”
Risks
Huge loss
– Some holes from active failures– Some holes due to latent
conditions– Overconfidence in defense walls
Defense by– Defense wall?– Simple luck?
Chain reaction of failures
Objective Setting
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• Starting point of risk management and business strategy
– Initiatives of board and/or senior management– Also input from business units
• Two key features– Risk appetite: risks insurers are (are not) willing to accept
in pursuit of value/profit– Risk tolerance: acceptable level of variation around
value/profit targets
• Both quantitative and qualitative terms are used.
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Agenda
1. Control Activities
2. Objective Setting
3. Risk Identification– Major Risks
4. Risk Assessment
5. Planning and Execution– Strategies– Some Examples
Risk Identification
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Underwriting (Insurance)
Typical category
– Risks assumed through insurance contracts insurers underwrite
– Line of business: fire, marine, automobile, earthquake, death, injury etc.
– Types: pricing, product design, claims, economic environment, policyholder behavior etc.
Features
Credit
– Inability or unwillingness of counterparty to fully meet on/off-balance sheet contractual financial obligations
– Source: default, downgrade, migration, spread, settlement, sovereign etc.
– Relatively smaller for insurers compared to banks
Risk Identification
8
Market
Typical category
– Volatility and uncertainty of market value of assets/liabilities
– Variables: stock price, interest rate, foreign exchange rate, commodity price etc.
Features
Liquidity
– Obliged to procure funds (e.g. by liquidating assets) under unfavorable terms as financial obligations fall due
– In worst case, unable to settle financial obligations
Operational– Risk of loss resulting from inadequate or
failed internal process, people, system, external events etc.
Example
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(Source) The Geneva Association “Systemic Risk in Insurance”
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Agenda
1. Control Activities
2. Objective Setting
3. Risk Identification– Major Risks
4. Risk Assessment
5. Planning and Execution– Strategies– Some Examples
Risk Assessment
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High
HighLow
Low
Severity
Frequency
Earthquake
IT system trouble Daily share
price change
• Two factors in assessing impact of risk– Frequency (likelihood/probability of occurrence)– Severity (loss size in case accident occurs)
• Risk map – more intuitive/simple method– Useful for classification– Most risk may not be so simple as to be classified this way
Example
Risk Assessment
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• More quantitative/statistical method– Mean (1st order), Variance/Standard Deviation (2nd order),
Skewness (3rd order) etc.– Value at Risk (VaR): possible maximum loss over a
specific time horizon (e.g. 1 year) at specific confidence level (e.g. 99%)
– Tail Value at Risk (TVaR): average VaR beyond a specific confidence level
Probability
Loss
Mean
VaR (e.g. 99%)
TVaR (e.g. 99%)
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Agenda
1. Control Activities
2. Objective Setting
3. Risk Identification– Major Risks
4. Risk Assessment
5. Planning and Execution– Strategies– Some Examples
Planning and Execution
14
Two concepts• Risk (loss) control
– Intended to change characteristics (e.g. frequency and severity) of risks themselves
– e.g. insurers conduct promotional activities against car theft (=> reduce frequency of car theft)
– e.g. insures ask installation of sprinklers (=> mitigate severity of fire)
• Risk (loss) finance– Financial preparing for loss resulting from existence of risk– Necessary regardless of risk/loss control activity (no risk is
impossible)
Tools of Risk Management - Overview
15
Risk (Loss) Control
X
Prevent Mitigate
Risk Management
Avoid
Exploit (Expand or Diversify)
Retain
Transfer
Risk (Loss) Finance
Frequency Severity
Reduce
Risk Control
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Avoid
Strategy
– Avoid underwriting certain product line or market segment
– Because it is (unlikely to be) unprofitable, too risky, lower priority area
– But does not mean no cost – opportunity cost exists
Features
Reduce– Take lesser amount of particular risk– Because risk amount is approaching
insurer’s appetite and capacity
Exploit(Expand or Diversify)
– Particular risk may work as hedge to overall risk exposures
– Possibly intentionally take particular risk for diversification effect
Risk Finance
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Strategy Features
Transfer
– e.g. reinsurance (traditional)– e.g. derivatives, securitisations (ART:
alternative risk transfer)– But create another risk (counterparty
credit risk)
Retain
– Simply retain particular risk– Because insurer is confident to manage
risk and has capacity– May need outside finance: borrowing,
commitment line, new capital etc.
Example - Reinsurance
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• Advantages– Reduce and control risk profile– Manage/stabilise financial result– Create new capacity– Gain product expertise– Gain underwriting advice
• Types (in terms of procedure)– Treaty/Automatic: automatically reinsured based on pre-
determined agreements and conditions– Facultative: whether to reinsure is decided for each case
• Types (in terms of risk sharing structure)– Proportional: quota share, surplus etc.– Non-proportional: excess of loss, aggregate, stop loss etc.
Example - Reinsurance
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Insurer (retained)
Reinsurer (ceded)
Insurer (retained)
Reinsurer (ceded)
Shared in fixed proportion(amount changes)
Amount over specified level is ceded(proportion changes)
Insurer (retained)
Reinsurer (ceded)
Insurer or another reinsurer
With upper limit
• Structure of risk sharing– Unit: per event, per risk, aggregate in certain time etc.– Based on: amount insured, loss etc.– Combination of reinsurances is applied to reach desirable
risk profile.
Example - Securitisation
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• Example: Cat (catastrophe) bond– Use capacity of capital market (capacity may not be
enough in insurance market)– Diversification due to low correlation with other asset
classes (from investors’ perspective)
(Source) Munich Re “Insurance-linked securities (ILS) market update”
