US Re URS Presentation

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Company EnterpriseRisk Management Stress
TestingCase Study
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moderated byJoe Petrelli Sr.President,
Demotech, Inc.presented byAnya
KutsinaDirector, U.S. RE Analytics / Ultimate
Risk Solutions
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Implementing ERM and DFA Utilizing Risk Explorer
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Agenda

• The Importance of ERM for an Insurance Company
• Why this topic is relevant
• Evolution from RM to ERM
• Industry Challenges
• What is DFA?
• Analyzing DFA results
• Solvency Testing
• Structure of a DFA model
• URS DFA Application Suite

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Agenda (contd)

• Case Study Lake George PC Company
• Lines of Business
• Assets
• Reinsurance Structure
• Viewing Simulation Results
• Comparison of Reinsurance Programs
• Analysis of the Companys Equity position under
  different scenarios.Cost / Benefit Analysis
• Conclusion - QA

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Why this topic is relevant
Dynamic Financial Analysis

• The source of origination for ERM, DFA concepts
• Risk Management process is the foundation for
  Enterprise Risk Management
• Static (deterministic) Financial Analysis is the
  foundation for Dynamic Financial Analysis
• Evolution of both from original concepts

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The definition of Risk
Evolution of Risk Management

• Any event that presents the possibility of loss
  or danger to organizations or people
• Uncertainty dealing with the unknown and
  uncertainty of outcomes

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Risk Management the original concept
Evolution of Risk Management

• Risk Management is a process for managing the
  uncertainty created from unexpected, unintended
  or accidental events
• A process for making decisions that will minimize
  the impact of risk
• The original focus was primarily on Pure Risks

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Evolution from RM to ERM
Evolution of Risk Management

• Enron and other scandals prompted Congress to
  call for more financial controls
• Calls for even greater corporate governance
  resulted in Sarbanes-Oxley Act of 2002
• Government and regulatory authorities responded
  by creating the Committee of Sponsoring
  Organizations (COSO) of the Treadway Committee
• Rating organizations such as AM Best include it
  in their analysis

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ERM Holistic Managementof Risk
Evolution of Enterprise Risk Management

• Enterprise risk management is driven by the
  concept that one cannot effectively protect the
  whole organization without analyzing all factors
  that influence financial outcomes.
• Risk is viewed across the entire enterprise

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The Focus of ERM
ERM General Concepts

• It considers the impact of speculative, economic
  or business risks on entity as well as pure
  risks
• ERM incorporates each of managements decisions
  with respect to risk
• Who is in charge of risk at your company? How is
  it managed?
• Who has the role of Chief Risk Officer?

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Dynamic Financial Analysis
ERM Tools

• Scenario testing projects business results
  under selected deterministic scenarios into the
  future. Results based on such scenario are valid
  only for this specific scenario.
• Stochastic simulation (DFA) thousands of
  different scenarios are generated stochastically
  allowing for the full probability distribution of
  important output variables, like surplus, written
  premium, loss ratios.

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Setting the Time Horizon
ERM Tools - Dynamic Financial Analysis

• The first step used to compare different
  strategies is to apply a fixed time horizon
• In the Insurance industry a projection period of
  five to ten years seems to be a reasonable choice
• simulate to determine the long term effects of a
  chosen strategy
• simulated values are less reliable over a longer
  projection period

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Analyzing DFA Results
Dynamic Financial Analysis

• Return measure (e.g. expected surplus)
• Risk measure (e.g. expected policyholder deficit)
• Efficient strategy if there is no one with
  lower risk at the same level of return, or higher
  return at the same level of risk

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Solvency Testing
Dynamic Financial Analysis

• Financial position of company is evaluated from
  the perspective of regulators, agents and
  insureds
• Quantify in probabilistic terms whether the
  company will be able to meet its commitments in
  the future
• DFA provides a range of results regarding the
  anticipated Surplus of the company

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Dynamic Financial Analysis
DFA applications

• Regulatory Inquiries
• I.e. Stress Testing
• Reinsurance Optimization
• Strategic Asset Allocation
• Capital Allocation
• Performance Measurement
• Business Mix
• Pricing Decisions
• Mergers and Acquisitions

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What is
Dynamic Financial Analysis
?

• Portfolio risk management
• Risk modeling
• Reinsurance/retro-cession analysis
• Risk-based capital calculation
• Cash flow testing and financial planning
  (Statutory and GAAP)

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Dynamic Financial Analysis

FUNCTIONALITY
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Evaluating Ceded Reinsurance/ Retrocession
Programs
Dynamic Financial Analysis

• Handle any complexity
• Easy to design alternative programs
• Analyse the impact on
• Capital requirement
• Profit
• RAROC
• Reinsurance cost allocation

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RBC and Capital Allocation
Dynamic Financial Analysis

• Compare Capital alternatives
• Varying risk assumption
• Varying reinsurance or investment strategies
• Measure ROE for any portfolio segmentation

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Case Study
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Probability of insolvency 2.5
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Probability of insolvency 4.7
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Probability of insolvency 9.6
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Probability of insolvency 16
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High Investment Grade
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Low Investment Grade
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Conclusion - Basic ERM Components
Dynamic Financial Analysis