107th mid-atlantic mutual advantage convention enterprise risk management framework
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107th Mid-Atlantic Mutual Advantage Convention Enterprise Risk Management Framework For Small to Mid-Sized Property & Casualty Insurance Companies Presented by Joseph F. Morris CPA, MBA President & CEO, American European Insurance Group, Inc. Why Companies Have Not Implemented ERM?. - PowerPoint PPT PresentationTRANSCRIPT
107th Mid-Atlantic Mutual Advantage Convention
Enterprise Risk Management Framework
For Small to Mid-Sized Property & Casualty Insurance Companies
Presented byJoseph F. Morris CPA, MBA
President & CEO, American European Insurance Group, Inc.
Why Companies Have Not Implemented ERM?
It’s not required
I’ve been managing risks my entire career; form over substance
I see no benefits
I view ERM as adding time and expense
ERM is operating by committee
Why do I need to involve the Board?; It’s management’s responsibility to manage risks
My company is too small; ERM is only for large companies
I understand the theory, but how do you put it into practice?
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Learning Goals
Recent Regulatory Developments
Expectations of Rating Agencies
Enterprise Risk Management Framework
Definition and Benefits
Creating a Risk-Aware Culture
Determining Key Risk Factors
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ERM – Regulatory Developments
2013 Annual Registration Statement Includes:– “the insurer’s board of directors oversees corporate governance and
internal controls and that the insurer’s officers or senior management have approved, implemented and continue to maintain and monitor corporate governance and internal control procedures.”
2014 Form F (Enterprise Risk Management Report)
2015 Own Risk Solvency Assessment (ORSA)
2016 Corporate Governance Annual Filing (Proposed)
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A.M. Best: ERM in the Rating Evaluation Process
Busines
s Profile
Operating Performance
Balance
Sheet
Strength
Enterprise Risk Management is the common thread that links balance
sheet strength, operating performance, and business profile
Source: A. M. Best Company
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A.M. Best ERM Expectations
All insurers need to establish an ERM framework ERM capabilities should be proportionate to risk profile of
insurer Insurers need to establish firm-wide risk tolerance metrics Insurers need to have their own view of capital adequacy A low risk profile and high ERM capability will produce a ratings
“lift” Leading insurers are utilizing stochastic-based capital modeling
to better support risk-reward decisions
Source: A. M. Best Company 6
Enterprise Risk Management Framework
What is an ERM Framework?
Enterprise RiskManagement Framework
A disciplined process to systematically identify measure and manage various types of risk
Establish Risk-Aware
Culture
Identify Measure
Manage & Mitigate
Risks
Measure Enterprise Risk and
Risk Correlation
Source: A. M. Best Company
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Benefits of Enterprise Risk Management Framework
Maximize value to the organization’s various stakeholders Manage exposure to earnings and capital volatility Ensures future capital levels exceed regulatory and rating agency
required capital levels Create a risk-aware culture that encourages risk-taking Develop consistent metrics to measure risk and to establish risk
tolerance levels Assign roles and responsibilities to board, Sr. management and others Maintain excellent rating from rating agencies
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Enterprise Risk ManagementRisk-Aware Culture
ERM – Risk Aware Culture
ERM Tone Established by Board of Directors and Senior Management
ERM roles and responsibilities clearly defined Define risk profile, risk appetite and risk tolerance parameters Mission, Strategic Planning and ERM documents shared with all
employees Executive compensation includes ERM objectives / results Financial results and risk management initiatives reviewed with
employees
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ERM Tone Established by Board of Directors and Senior Management
ERM Terminology
What is Risk Profile?
A narrative description of the parameters for executing the company’s business strategy
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ERM Terminology
What is Risk Appetite?
The boundary level of uncertainty a company is willing to assume given the corresponding reward
associated with the risk
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Risk Profile and Risk Appetite Examples
External Environment
Regulatory Legal/Judicial Economic Industry Competition
Capital Management
Financial Ratings Access to Capital Debt and Holding Company
Structure Capital Adequacy
Balance Sheet
Loss Reserves Investment Portfolio
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Written Premium Profile
Line of Business, Geographic, Product, Class of Business, Agency Concentration
Limits of Liability Coverage
Reinsurance Profile
Reinsurance Credit Quality CAT Exposure Per Risk Retentions
Operational Profile
Underwriting & Claim Practices IT Performance, Data Quality &
Business Continuity and Recovery
ERM Terminology
What is Risk Tolerance Level?
The financial metrics that establish thresholds for levels of risk that the company is willing to accept
in order to accomplish its strategic objectives.
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Risk Tolerance Level Examples
Enterprise-Wide Risk tolerance Levels
Economic Capital Model: Probability of Ruin at 99.5% VaR, One-Year Out
Best Capital Adequacy Ratio, One Year Out to Achieve/Maintain A- Rating
NAIC Risk Based Capital Greater Than 300
Net Written Premium to Surplus ratio of Less than 1.5 to1
No Greater Than a 10% Loss of Capital From all Risk Factors in Any One Year
Holding Company Debt to Total Capitalization Ratio
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Risk Tolerance Level Examples
Individual Risk Tolerance Levels
Net of Reinsurance Underwriting per Risk Retention Equal to 5% or Less of Capital (net of tax).
Loss and LAE Reserves Set at or Above Mid-Point of Actuarial Range of Estimates
No Greater than a 5% Loss of Capital in Any One Year Due to a 100 Basis Change in Interest Rates
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Identification, Measuring and Monitoring
Key Risk Factors
Primary Causes of Financial Impairment
Deficient loss reserves/Inadequate
pricing43.4%
Rapid growth12.6%
Alleged fraud7.2%
Investment problems (overstated assets)
6.6%
Miscellaneous8.4%
Significant change in business
3.5%
Reinsurance failure3.1%
Catastrophe losses7.1%
Affiliate problems8.0%
U.S. Property/Casualty – Primary Causes of Financial Impairment (1969-2012)
Note: Exhibit % are based on companies where the cause of impairment was identif ied. Source: A.M. Best data & research
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Key Risk Factor Categories - Definitions
Credit - exposure from all potential creditors including agents, reinsurers, bond issuers and insureds
Market – exposure to liquidity events, asset/liability mismatches and risks in investment portfolios due to changes in interest rates, equity prices and exchange rates
• Underwriting – exposure from underwriting insurance products including: product development, regulation, loss reserves, pricing metrics and catastrophic events
• Operational – exposure to management change, business interruption, fraud, data capture and security, claim handling and employee retention and other operating activities
• Strategic – exposure to economic downturn, industry competition, rating agencies and availability of capital
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Categories of Key Risk Factors
Credit Market
Bond Issuer Default/Downgrade Agency/policyholder credit risk Reinsurer default Sovereign Currency
Liquidity events Asset / Liability Matching Interest Rate Risk Common Stock Market Price Reinvestment
Underwriting Operational
Product Development Regulatory Catastrophic Event Loss Reserve Loss Experience Pricing
Data Capture/Data Security Agency Automation Management Change/Employee Turnover Fraud/Financial Controls Claim Handling Delegation of Underwriting Authority Financial Reporting
Strategic
A. M. Best Downgrade Industry Competition Economic Downturn
Reputational Capital Availability Competitor technology Advances
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Frequent
Probable
Often
Occasion
al
Possible
Remote
< 1% 1 – 5% 5 – 10% 10 – 15% 15 – 20% >20%
Low Severity of Event (% of Surplus) High
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11
9
8
6
7
4 5
2
3
10
1
L
ow
Pro
bab
ilit
y
H
igh
ERM Key Risk Factors – Heat Map
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ERM – #1 Risk Factor: Pricing Dashboard
Description of Risk: The Company may not price its policies adequately in order to produce acceptable loss ratios.
Oversight:
ERM Committee
Board Committee
Frequency of Oversight:
Quarterly
Quarterly
Risk Owner:
VP - Underwriting
Risk Tolerance Level:
(1) Achieve a 6.2% renewal rate level increase over expiring.
(2) New and renewal policies written with average RMF of .85.
Risk Score:
(1) June 30, 2013 – 7.2%
(2) June 30, 2013 - .86 renewals; .80 new business
Monitoring or Control Activity:
1. All ISO filed manual rate changes are reviewed & analyzed by actuary and discussed at rate committee before adoption.
2. Underwriters are given pricing goals at beginning of year and required to document every file with explanations for use of discretionary pricing credits.
3. Underwriting quality assurance process in place to review 25 policies per underwriter per quarter.
Date and Result of Testing Monitoring or Control Activity:
1. Tested successfully on May 15, 2013
2. Goals discussed with each underwriter by January 10, 2013.
3. Results of all UQAP completed quarterly and an overall summary distributed to management – completed on July 31, 2013.
Control Effectiveness:
1. Medium
2. Medium
3. High
Severity of Event (Low 1 to High 6)
4Frequency of Event (Low 1 to High 6)
5Issues for Remediation:
The Company does not have the capability to produce pricing reports indicating renewal rate level change and RMF charged for new and renewal policies. An IT project has been created to address this remediation issue.
Status – – June 30, 2013 All monitoring controls are operating effectively. Producing pricing reports is a key issue to ensure that this risk is being properly mitigated and managed at the individual underwriter level and on an aggregate book of business basis.
Change from Last Quarter
Status – September 30, 2013 Change from Last Quarter
Status – December 31, 2013 Change from Last Quarter
Status – March 30, 2014 Change from Last Quarter
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Is Your Company Capable of Managing Key Risks?
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Industry Operating Practices Best Operating Practices
Pricing - No price monitoring reportsNew business and renewal price monitoring reports
track manual and discretionary price changes
Loss Reserves - Calendar Year Loss Ratio/Loss Reserve Adequacy Reviewed Annually by Outside Actuary
Accident Year Loss Ratios/ Loss Reserve Adequacy Reviewed Quarterly Internally and Annually by
Outside Actuary
CAT Management - Determined annually by reinsurance broker
Property Values Managed Monthly in Concentrated Territories
Claims Best Practices - No written claims best practices and no claim audit process
Written Claims Best Practices and Claim Files Audited Monthly
Investment Portfolio - Risk Metrics not calculatedInvestment Manager Monitors Risk Metrics of
Investment Portfolio and Meets with Board Investment Committee Quarterly
Financial Forecasts – one-year budgets are created for operating statements only
Three-Year Financial Forecasts prepared including operating statements, balance sheets and RBC and
BCAR ratios
Enterprise Risk Management Framework
Integrate ERM Process into Standard Operating Practices of Company
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Risk Identification
Risk Measurement
Risk Controls, Monitoring Activities & Reporting
Business Strategies &
Operating Practices
Financial Goals & Capital
ManagementRisk-Aware Culture
Risk Profile
Risk Tolerance
Roles/Responsibilities
ERM Process
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Joseph F. Morris, CPA, MBA, has over thirty-four years of insurance industry experience. Prior to
founding P&C Insurance Company Strategies, LLC, Mr. Morris was President of Stonecreek Specialty Underwriters, LLC. Previously, Mr. Morris was President and CEO of James River Insurance Company from 2008 until 2010 after serving as President and CEO of The Philadelphia Contributionship, the oldest insurance company in the United States. Mr. Morris also held several positions with United America Indemnity, Ltd. (UAI) including President, President & CEO Penn-America, UAI’s excess & surplus lines subsidiary, and SVP and CFO of Penn-America. Mr. Morris began his insurance career at Reliance Insurance Company where, over a twenty-one year career, he held a number of financial and operating positions.
Mr. Morris has been a member of the Board of Directors of The Insurance Society of Philadelphia since 1989 and was its Chairperson in 1997-1999.
Joseph F. Morris, CPA, MBA Bio
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Disclaimer of Warranties
The content of the presentation materials has been prepared by P&C Insurance Company Strategies, LLC (PCIC Strategies) “as is”, for informational purposes only and without warranties of any kind, either express or implied. PCIC Strategies disclaims all warranties including but not limited to warranties of title, implied warranties of merchantability, fitness for a particular purpose, compatibility, security, accuracy, reliability or infringement.
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