rob kingsley, rpx, vice president zoë rico, aon, regional ...€¦ · zoë rico, aon, regional...

HOW TO USE RISK

QUANTIFICATION TOOLSRob Kingsley, RPX, Vice President

Zoë Rico, Aon, Regional Director

Stephanie Vogel, Aon, Director

Risk Quantification

Pitfalls of Unsupported Decisions

Perceptions Motivations Group Dynamics

Personality Traits Reasoning

Selective Memory

Framing Effects

Selective Attention

Anchoring Effects

Hindsight

Overconfidence

Illusion of Control

Wishful Thinking

Positive Illusions

Premature Harmony

Obedience

Conformity

Anonymity

Attention to Shared Evidence

Psychological Safety

Decision Styles

Comfort Zones

Habitual Frames

Content Selectivity

Nonregressive Predictions

Primary and Recency

Inability to Reason Probabilistically

Attribution Errors

Confirming Evidence

Status Quo

Why Do We Use Models?• Attempt to estimate an unknown to make a better decision

• Simplification of reality to help us understand characteristics of a system

• Useful when it is prohibitive or impossible to observe/test directly

• Important characteristics: Accuracy, Clarity, Flexibility, Efficiency

RealityModel

How Can We Use Models?

Support

Premium

Negotiations

Satisfy

Concerns of

Key

Stakeholders

Reduce Total

Expected

Costs

Manage

Financial

Volatility

Evaluate

Investment

Decisions

Establish

Unpaid

Liability

Estimate

Validate

Operating

Assumptions

I Don’t Have Any Data!• External Data Sources

• Cyber (Advisen, NetDiligence, Ponemon, Verizon, Bloomberg…)

• National Fire Protection Association – Property

• Global Terrorism Database –Terrorism

• Public Financial Data

• US Government sites

• FDA

• Google

• YouTube (really!)

• Expert Input

• Scenario workshops to better understand risk

• Expert interviews

• BI Studies

• Engineering Reports

• Broker insights

• Related clients

• AGRC/Benfield/Hewitt colleagues

• Friends/Family (really!)

What Can We Model?Insurable risk models

Portfolio Results

Macro-economic models

What Kind of Model Should We Use?

Model Development

• Expected Value– Mean, average– Most financial forecasts convey the

expected value– Point estimate to represent all potential

outcomes– Does not convey idea of risk

• Variance– Alternative is standard deviation– Describes how far events deviate from

the expected value

• Mean and Variance– Completely describes risk for symmetric

distribution

• Sometimes used for comparing options

Volatility Measures

Model Development

• Risks and opportunities often not symmetric

– Losses bounded below by zero

– Total cost of risk insured risk bounded below by transfer costs

– Rewards bounded below by investment amounts (theoretically unbounded below if additional dollars are continually pumped into a losing investment)

• Skewed distributions

– Not symmetric

– “Fat tails” or “Black Swan”

– The average is no longer at the median (e.g. 50th percentile)

– Same mean and variance can produce different results

Advanced Volatility Measures

0

0.5

1

1.5

2

2.5

-2 0 2 4 6 8

10

12

14

16

18

How to Interpret Information from Your Actuary - Demo

Applying Risk Models and Decision Frameworks

• By leveraging the modelling architecture you can accomplish the following

– Evaluate a wide spectrum of insurance structure options

– Integrate the impact of various hedging strategies

– Develop both tactical (single risk) and strategic (portfolio of risks) diagnostics

– Evaluate non-insurable risks

– Provide an objective view of the risk reward trade-off associated with risk decisions

– Translate the complex modelling process into meaningful financial metrics

Implementing Risk Models and Decision Frameworks

• Focus on the most significant risks

– Largest exposures

– Largest premium spends

• Incorporate relevant exposure drivers

– Commodity prices

– Foreign Exchange

– Demand

• Enhancing Reserve Studies for Low Frequency/High Severity potential risks

• Allow the framework to expand the risk perspective

– Interest rates

– Pension risk

– Operational risk (supply chain)

– Political risk

• Begin to account for all aspects of TCOR that can impact financing decisions

– Risk control investment

– Claims handling

– Asset investment