Risk Modelling for Alternative Risk Transfer

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Risk Modelling for Alternative Risk Transfer

• 8th September

Eddie McLaughlin ALARM Conference
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Agenda - Risk Modelling for ART

• What is ART / ARF and why is it used?
• How do we model and quantify risk?
• Risk Modelling and ART Framework
• ART and Risk Modelling examples
• Suitability for ALARM participants?

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What is ART and why is it used?
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The Role of Risk Financing

• The use of financial and insurance techniques
  to protect the assets, cashflow or key objectives
  of an organisation against loss through the
  manifestation of risk

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What is A.R.T (F).?
Financing
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Reasons for considering ART

• Imposition of high deductibles
• Lack of availability of a particular coverage or
  at a reasonable price
• The need for a better solution than an existing
  off-the-shelf product
• There is a need to demonstrate insurance cover

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How do we model and quantify risk?
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How do we quantify risk?
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Risk modelling - key components

• Volatility measurement
• Monte-carlo simulation
• Other e.g. Actuarial techniques

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Risk modelling - volatility

• Volatility is riskiness or uncertainty
• Variability around the mean
• The higher the volatility, the greater the
  uncertainty or riskiness
• Usually measured by standard deviation (or
  Coefficient of variation)

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Risk modelling - Monte Carlo simulation

• Substituting a single value for a range of
  possibilities as represented by a probability
  distribution
• Select a distribution and its parameters for
• Loss Frequency
• Loss Severity
• Run simulation (consider various programme
  alternatives)
• Analyse the results
• 
  

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Modelling loss frequency
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Modelling loss severity - Actual vs Fitted Losses
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Risk Modelling and ART Framework
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Risk modelling and ART framework

• Assess market and regulatory requirements
• Identify key budget volatility measures
• use risk register if available
• Determine desired outcome
• (create problem and success statements)
• Determine major stakeholders

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Risk modelling and ART framework (continued)

• Determine major hurdles
• Create decision making criteria
• Assemble all credible data and model the risk
• Structure potential solutions

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ART and Risk Modelling Examples
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Loss portfolio transfers

• What are they?
• Why use them?
• Applications
• Large self-insured retentions
• Issues
• data availability
• NPV of liabilities (insurance transfer cost) vs
  current reserve level

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Fund evaluations

• The fundamentals
• What will be the historic policy years ultimate
  settlement position?
• What will the retained loss costs for the current
  and the forthcoming policy year?
• How does this compare to the current fund reserve
  ?

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Risk pooling

• What is it?
• Applications / benefits
• Savings on Insurance Costs
• Selection of risks (common underwriting
  framework)
• Risk Control / sharing of RM experiences
• Supplement to conventional markets
• Issues
• Initial start up costs
• Potential additional fund requirements
• Equitable rating structures?
• Reliance on investment income
• Changes to risk e.g. Housing stock transfers, PPP
  PFI

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Applicability of risk modelling and ART for ALARM
participants
???
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Risk Modelling for Alternative Risk Transfer

• 8th September

Eddie McLaughlin ALARM Conference