Integrating financial risk

models into your business

Peter England PhD

ERM and Financial Modelling Seminar

EMB and The Israeli Association of Actuaries

Tel-Aviv Stock Exchange, December 2009

© 2008 EMB. All rights reserved. Slide 1

Moving to Solvency II
New prescribed standard calculation
methodology - (SCR) for solvency
and minimum capital requirements
(MCR)
Option to calculate solvency capital
through full or partial internal model
Internal models need regulatory
approval
Formal ‘tests’ to prove that any
internal model is fit for purpose and
embedded into the business
© 2008 EMB. All rights reserved. Slide 2
Own Risk and Solvency Assessment
(ORSA) based on the firm’s risk
appetite, reported to the regulator and
used in strategic decision-making
Supervision of cross border insurance
groups by a ‘lead’ regulator, liaising
with the other relevant national
regulators
Formal actuarial and risk
management functions
Public disclosure of key solvency
information
The Responsibilities of the Board

What the Board really needs to know: What the Board really wants to know:
Its responsibilities Value
Regulatory expectations – current In absolute terms, as well as ratios
and emerging
Economic value added/Shareholder
How the regulations apply to the value added
company
Over time
Drivers and sources of insurance
As a result of strategic decisions
company risk
“Embedded” value
Regulatory and rating agency
capital requirements Requires a non-life “EV”?
The interaction of risk management
and risk measurement “Value” is the missing link in internal
The cost of doing business vs the models
benefits of doing good business
© 2008 EMB. All rights reserved. Slide 3
Internal Models Hints and Tips

Client Case Studies 2005-2009

Key Messages

© 2008 EMB. All rights reserved. Slide 4

Key Messages

Ensure management structure reflects “ownership” of risk

Senior “sponsor” for ERM required
Reorganise if necessary (create CRO position?)
Create risk committee? (with very senior people)
Must report to the Board (buy-in is essential)
Board education may be required in risk management techniques
Communicate, communicate, communicate (keep it simple)
Underwriters
Accountants
Risk managers
Actuaries
Underwriter support
Catastrophe modellers
Reinsurance managers
The Board!

© 2008 EMB. All rights reserved. Slide 5

Key Messages

Budget: Software, hardware, people, time

Manage expectations (up or down)
Multi-phased approach (it may take years to get where you want to be)
Some things may not be as easy as hoped: compromise
Focus on value as well as risk
Value protection/sustainment
Value creation
Think about uses
Think about key summary outputs
Create a “dashboard”?

© 2008 EMB. All rights reserved. Slide 6

Example Uses

Capital setting and solvency See:

Regulatory
Rating agency
Capital allocation
Performance and value measurement
Planning (strategic and operational)
Reinsurance analysis and optimisation
RSA investor presentation on capital
management
– http://www.rsagroup.com/rsa/pages/i
r/investorpresentations?year=2007&
by=date&order=DESC
Scor Swiss Solvency Test book

Portfolio “optimisation” – http://www.scor.com/www/index.php

?id=433&L=2
Acquisition strategy
Investment analysis and decisions
Aggregate/exposure management

© 2008 EMB. All rights reserved. Slide 7

Conclusions

Insurers who will thrive under Solvency II will be those who embrace the
reforms, not as the cost of doing business, but to harness the benefits of
doing good business…
Otherwise the costs will outweigh the benefits

What are the immediate actions required?

Initiate Board level discussion on the implementation strategy for Solvency II
Nominate the individual to be responsible for the Solvency II implementation
Review the benefits case between an internal model and the standard formula
approach and make a decision on the future direction
Start to assemble a project team with representation from finance, actuarial, risk and IT
Initiate a gap analysis to define the key requirements and identify the scope of work
required to meet your future objectives as a first step of the implementation plan

© 2008 EMB. All rights reserved. Slide 8

Contact us

EMB
Saddlers Court
64-74 East Street
Epsom
Surrey KT17 1HB
T +44 (0)1372 751060
F +44 (0)1372 751061
www.emb.com

This presentation is confidential and is intended for clients and professional contacts of EMB. The information and opinions contained in this
presentation are for general information purposes only. They do not constitute professional advice, and should not be relied on or treated as a substitute
for specific advice relevant to particular circumstances. EMB does not accept or assume any liability, responsibility or duty of care for any loss which
may arise from reliance on information or opinions published in this publication or for any decision based on it.
EMB would be pleased to advise on how to apply the principles set out in this presentation to your specific circumstances.
Copyright © 2009. EMB Consultancy LLP. All rights reserved. EMB refers to the international actuarial, consulting and software practice carried on by
EMB Consultancy LLP, EMB Software Management LLP, EMB Software Limited and their directly or indirectly affiliated firms or entities, partnerships or
joint ventures, each of which is a separate and distinct legal entity.

© 2008 EMB. All rights reserved. Slide 9