Property Casualty Aspects Of ERM - Blackburn

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Risk issues at property/casualty companies arise from fundamentally different risk drivers from those that affect life insurers. Non-Life ERM is far from just a clone of life-side ERM. While risk managers may employ concepts like duration, the treatment objective can be significantly different from common understandings and involve complex analyses of going-concern considerations, cash-flow volatility and liquidity issues. In addition P/C risk management critically focuses upon tail events and extreme outcomes and the intricate funding thereof.
This presentation approaches risk management from the unique perspective of the general insurer, highlighting key methodological differences and recent advances in risk identification and quantification. A close look at prevailing risk metrics and presentation approaches is also provided.

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Property Casualty Aspects Of ERM - Blackburn

  1. 1. Property / Casualty Aspects of ERM Reserve Risk for Property-Casualty Insurers <ul><li>Presented by </li></ul><ul><li>Wayne Blackburn, FCAS, MAAA </li></ul><ul><li>Principal and Consulting Actuary </li></ul>April 30, 2009 ERM Symposium Page based on Title Slide from Slide Layout palette. Design is 3_Title without graphic. Title text for Title or Divider pages should be 36 pt titles/28 pt for subtitles . PRESENTER box text should be 22pt. DATE text box is not on master and can be deleted. The date should always be 18 pts.
  2. 2. Loss and Loss Adjustment Expense Reserves for P/C Insurer (or Reinsurer) Basic Definitions <ul><li>The amount held by a property-casualty insurer’s to cover all future payments on insured claims that have already occurred as of a specified accounting date. </li></ul><ul><ul><li>Depending on the type of business, a large portion of the reserves will be associated with claims that have occurred but aren’t known to the insurer at the time of valuation. </li></ul></ul><ul><li>On the balance sheet: </li></ul><ul><ul><li>Loss and loss adjustment expense (LAE) reserves are net of reinsurance </li></ul></ul><ul><ul><li>Usually not discounted for the time value of money </li></ul></ul>April 30, 2009 Page based on Title and Text from Slide Layout palette. Design is 1_Title with photo Subtitles are Part of Title Field, then Modified Manually (see next page)
  3. 3. An ERM Review for a P/C Insurer is Pointless Without Serious Consideration to the Variability of Loss Reserve Outcomes <ul><li>On most P/C insurers balance sheets, the loss and LAE reserve approaches or exceeds the surplus of the company. </li></ul><ul><li>The future loss and LAE cashflows that the insurer has established the reserve for are subject to significant uncertainty. </li></ul><ul><ul><li>There is no one set formula for estimating P/C reserves. Actuarial indications and methodology along with management booking decisions must be revisited at each valuation date. </li></ul></ul><ul><li>In hindsight, a large proportion of P/C insurer insolvencies are due to inadequate loss and LAE reserves. </li></ul>April 30, 2009 Page based on Title and Text from Slide Layout palette. Design is 1_Title with photo Subtitles are Part of Title Field, then Modified Manually (see next page)
  4. 4. What are the sources of reserve uncertainty? <ul><li>Uncertainty inherent in the claim liability itself. How many claims will be reported? When will the claims will be reported? How much loss and LAE will be paid for any open or yet to be reported claim? And, what is the cashflow of these payments? </li></ul><ul><li>Uncertainty in the actuarial estimation process. Reserves are established based on the varying results of different methods. And, are the projection parameters for methods, which are usually based on average levels of historical loss emergence, applicable to future loss emergence? </li></ul><ul><li>Uncertainty of legal environment. Future precedent setting cases, changes in coverage interpretations, changes in benefit levels. </li></ul>April 30, 2009 Page based on Title and Text from Slide Layout palette. Design is 1_Title with photo Subtitles are Part of Title Field, then Modified Manually (see next page)
  5. 5. For ERM purposes, we seek the variability of outcomes, not the variability of actuarial estimates <ul><li>Standard practice for a P/C actuary is to provide a reserve estimate based on different indications from a variety of projection methods. The variance of these indications does not establish a distribution for future possible outcomes. </li></ul><ul><li>Furthermore, when forming a dynamic financial / ERM model for a P/C company the actuary will want to simulate cashflows not just reserve variability. </li></ul>August 5, 2009 Page based on Title and Text from Slide Layout palette. Design is 1_Title with photo Subtitles are Part of Title Field, then Modified Manually (see next page)
  6. 6. Quantifying Reserve Risk Example of Measuring the Variability of Reserve Outcomes <ul><li>General Liability Occurrence business </li></ul><ul><li>Historic development triangles of paid and incurred losses (focusing on paid losses for this example) </li></ul><ul><li>Net of reinsurance </li></ul><ul><li>Estimate a distribution of reserve outcomes using a simulation technique. The simulation process recreates 10,000 versions of data based on the actual historic loss data and the indicated variability of the loss emergence from that data. </li></ul>August 5, 2009 Page based on Title and Text from Slide Layout palette. Design is 1_Title with photo Subtitles are Part of Title Field, then Modified Manually (see next page)
  7. 7. Projected Variability of Runoff General Liability Reserves Reviewing historical variability loss data ($000s) April 30, 2009 Subtitles are Part of Title Field, then Modified Manually (see next page) Basic historical paid loss emergence (exposure year by maturity triangle format) Scaled residual terms following from a static payment model Uncertainty of loss emergence beyond maturity time frame of compiled data, too. “tail risk” Page based on Title and Text from Slide Layout palette. Design is 01_Title with photo.
  8. 8. Projected Variability of Runoff General Liability Reserves April 30, 2009 Subtitles are Part of Title Field, then Modified Manually (see next page) Tabular results based on 10,000 simulations of future loss cashflows ($000s) Expected mean that might be used to book reserves as of year-end 2007 Outcome distribution that needs to be considered for risk management Page based on Title and Text from Slide Layout palette. Design is 01_Title with photo.
  9. 9. Projected Variability of Runoff General Liability Reserves April 30, 2009 Subtitles are Part of Title Field, then Modified Manually (see next page) Page based on Title and Text from Slide Layout palette. Design is 01_Title with photo.
  10. 10. Most P/C insurers have multiple lines of business <ul><li>Basic process: perform this type of analysis for each line / segment of business. Aggregate reserve distribution derived from correlated sums of individual line of business distribution estimates. </li></ul><ul><li>Try to estimate correlation from comparing historical loss cashflows between lines of business. </li></ul><ul><li>Reasonably dissimilar lines of business will yield narrower aggregate distributions (% variation from mean) than any single line of business which quantifies the benefit to reserve risk of diversification. </li></ul>April 30, 2009 Page based on Title and Text from Slide Layout palette. Design is 1_Title with photo Subtitles are Part of Title Field, then Modified Manually (see next page)
  11. 11. Practitioner’s point of view on quantifying reserve risk <ul><li>When using historic data for modeling avoid smoothing over “outliers” unless clearly incorrect data compilation. </li></ul><ul><li>Try to compile as many years of historic data as possible. </li></ul><ul><li>Do not forget a source of uncertainty stated earlier – changes in legal environment. </li></ul><ul><ul><ul><li>Extremely difficult to quantify. </li></ul></ul></ul><ul><ul><ul><li>Goes back to items (1) and (2) above, a long history of data has a better chance of exhibiting “real world” aberrations. </li></ul></ul></ul>April 30, 2009 Page based on Title and Text from Slide Layout palette. Design is 1_Title with photo Subtitles are Part of Title Field, then Modified Manually (see next page)
  12. 12. Connections Between Reserve Risk and Underwriting Risk April 30, 2009 Subtitles are Part of Title Field, then Modified Manually (see next page) Indicated loss ratio variability following from the prior example <ul><li>“ Best estimate” reserve indications are usually dependent on prior pricing indications (expected loss ratios). </li></ul><ul><ul><li>And these expected loss ratios are by no means certain. </li></ul></ul>Page based on Title and Text from Slide Layout palette. Design is 01_Title with photo.

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