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RISK MEASUREMENT AND CAPITAL MANAGEMENT SEMINAR

European Perspective on DFAEuropean Perspective on DFACasualty Actuarial SocietyCasualty Actuarial SocietyRisk and Capital Management SeminarRisk and Capital Management SeminarWashington, DCWashington, DC

Jean-Pierre Berliet

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Perspective on Risk and Capital Perspective on Risk and Capital Management in EuropeManagement in Europe

Leading European insurers have begun to develop group risk models

Development of risk models has accelerated in anticipation of regulatory mandates:

FSA European Commission

Group risk models in Europe are designed to address comparatively complex situations

Multi-currency / Multi-national Multi-entity Multi-line Banc-assurance

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Large Insurers and Reinsurers with Large Insurers and Reinsurers with Risk ModelsRisk Models

ING* Swiss Re* RSA

AXA* IF-Sampo (P/C)* Aegon

Allianz* Tapiola Mutual* ZFS

Munich Re* Suomi Life* etc…

CGNU* Nordea*

*Surveyed by European Commission

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Characteristics of Risk Models of Characteristics of Risk Models of Large Insurers and ReinsurersLarge Insurers and Reinsurers

Virtually all models are aggregate models Degree of completion of the models varies from draft/prototype

to “operational” Companies are taking a continuous improvement approach to

model development The sophistication of risk measurement varies significantly

Formulaic (S&P / RBC factors) Statistical simulation DFA

There are as many approaches as there are companies

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One Large Group is Building its One Large Group is Building its Model on DFA InfrastructureModel on DFA Infrastructure

Effort initiated several years ago Life and P/C activities Multi-entity Multi-currency Multi-year time horizon for new business

More entities are included each year in DFA analysis Extension to performance measurement is planned

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Most European Companies Have Not Most European Companies Have Not Built DFA Risk ModelsBuilt DFA Risk Models

Efficient DFA tools were not available when the pioneers developed the first models

Many companies have chosen to develop simpler statistical models

Less costly More transparent Easier to use and maintain Well established in banking Less onerous data requirements

As a result, existing risk model cannot measure risk created by dynamic links across risk factors

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Impact of Regulatory Developments on Impact of Regulatory Developments on Risk Models of European InsurersRisk Models of European Insurers

Larger Insurers will be required to have “risk models” Regulators will leave considerable discretion to

insurers about: Model architecture Methodology Tools

Regulatory changes appear “DFA blind” Best practices will continue to evolve rapidly

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Other Applications of Other Applications of DFA in EuropeDFA in Europe

DFA is gaining ground for decision analysis in Europe Capital adequacy ALM/Asset allocation Reinsurance analysis Product development/Pricing Planning support

Insurers are building in house capabilities and using external providers (consultants, brokers, asset managers, etc…)

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Emerging DFA ApplicationsEmerging DFA Applications

Determination of the impact of risk on financial statements

DFA extensions of statistical risk models can help manage the volatility of reported financial results

DFA Insights are important for the evaluation of risk management strategies

ALM/Asset allocation Reinsurance Capital structure Product development

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What does the European Experience What does the European Experience Suggest?Suggest?

DFA usage will grow because: Simpler statistical risk models cannot provide some of the

answers that management needs New regulations will provide a capital requirement

advantage to companies that have robust risk models Key DFA growth areas are likely to be:

Linkage of statistical risk models and financial statements Financial evaluation of alternative strategies

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Thank YouThank You

Jean-Pierre Berliet

jean-pierre.berliet@ey.com