The Own Risk and Solvency Assessment (ORSA) requirements are the key element of the Pillar 2 qualitative risk management requirements. The purpose of an “own risk assessment” by each company is to prove the appropriateness of the standard formula or internal model results if the company has applied for a certified internal model. While the Pillar 1 solvency capital requirement is calculated on a one-year basis to show that a company has enough capital to avoid insolvency through the end of the year in a 1-in-200 year event, the focus in Pillar 2 ORSA is the forward-looking assessment of solvency capital adequacy. Companies need to provide a projection of the risk and capital position for the entire planning period (at least three years), which has to be consistent with the business case balance sheet and profit and loss projection. The aim of ORSA is to demonstrate that there is an adequate level of capital available to support the business plan for a longer period. Based on this planning projection of the risk and capital position, (re)insurers need to define meaningful stress tests and scenarios to show they would be adequately capitalized in adverse scenarios as well. If a company would face solvency issues in certain stress scenarios, it needs to show it has countermeasures in place in order to reach the strategic targets of the corporate and risk strategy again.
Posts Tagged ‘modeling’
One purpose of enterprise risk management (ERM) is to help (re)insurers determine how much capital is needed to support the risks they assume (subject to risk tolerance). Instead of segmenting portfolios and handling each peril on a standalone basis, a robust ERM methodology would use a holistic approach to risk and capital management where threats are identified and monitored, all action plans are developed and risks are measured.
Guy Carpenter Announces MetaRisk® 8.1, the Latest Version of its Premier Economic Capital Modeling Tool Suite
The modeling of emerging and casualty catastrophe risks remains challenging and the models continue to vary in their approach, level of development and industry acceptance. With the potential scenarios numerous, diverse and constantly changing, there is no single model or approach that could contemplate all of them. Furthermore, the various disaster scenarios with which carriers are being increasingly confronted needs to be prioritized and synthesized within their enterprise risk management framework. By their very definition, there may be limited data on hand on which to base any modeling. As a result, much of the industry continues to rely on multiple models and actuarial approaches that encompass model applications, probable maximum loss (PML) estimates, realistic disaster scenarios, experience and exposure ratings to create a broad set of scenarios and deterministic views.
Once the risks have been identified and ranked, the next step is how to quantify the likely impact on the financial results of the firm. The first and most obvious question is what available quantification techniques are available for each risk on the list. This will depend on the availability of relevant data and commercially produced models.
Loss reserves are arguably one of the most difficult risks to estimate and monitor. In fact, inadequate pricing and deficient loss reserves have been the leading cause of property/casualty company impairments. According to A.M. Best, from 1969 to 2009 they triggered approximately 40 percent of all impairments - four times more than those emanating from natural catastrophes (1). There are many uncertainties in managing long-tailed, heavily legislated lines of business that can be triggered from emerging risks. Unforeseen inflation and anticipated legislative changes over a 10 to 30 year period present many demands. In order to prepare for emerging risk scenarios, future trends and related uncertainties need to be explicitly identified, contemplated and estimated.
Casualty (re)insurers do not cover standalone emerging risks. A product defect (with recall) or a latent bodily injury resulting from new technological nano-products or Unmanned Aerial Systems risks, could lead to class action lawsuits and ultimately large liability claims including products liability as well as professional liability. This emergent reality, however, is difficult to address. A carrier would need to identify and model several possible epicenters of a liability chain reaction and follow their rapidly spreading implications throughout a portfolio. Without new powerful casualty modeling capabilities as well as highly granular data on the products and subcomponents that each of their insureds manufacture and sell globally, this process would be time-consuming, impossible to complete and likely to miss key threats and underlying exposures.
The impacts to society from changes in longevity and life expectancy will be wide-ranging and incredibly difficult issues to grapple with. A 2012 International Monetary Fund (IMF) study revealed that if individuals lived three years longer than expected the cost of aging could increase by 50 percent. This translates to 50 percent of 2010 gross domestic product (GDP) in advanced economies and 25 percent of 2010 GDP in emerging economies. Globally that amounts to tens of trillions of US dollars. The United Nations expects the aggregate expenses of the elderly will double over the period between 2010 and 2050. The figure below shows the projected trend of rising life expectancy to continue in all regions of the globe regardless of economic advancement.
New Products Revealed as Biggest Growth Opportunity for (Re)Insurers in 2016, According to Annual Guy Carpenter Survey
New products represent the biggest growth opportunity for (re)insurers in the year ahead, according to a survey released today by Guy Carpenter. The fourth annual survey polled insurance and reinsurance executives at the 2015 Property Casualty Insurers Association of America (PCIAA) Annual Meeting, held in Hollywood, Florida. Designed to identify what (re)insurance professionals believe to be the leading opportunities and threats to growth, this year’s survey examines which areas are most in need of innovation as well as the emerging risks respondents believe will impact their plans for growth in 2016.