Be An Actuary – In London

Presented by: Kyle Mrotek

Presented on: October 27, 2005

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Agenda

Insurance in London

Individual Capital Assessment

Exams

Q&A

Resources

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Insurance in London

History Growth of global shipping and commerce

(17th Century) Great Fire of London (1666) Lloyd’s Coffee House (1688) Edmund Halley (1693) Joseph Dodson (1756) Modern insurance corporations develop

(17th / 18th Century)

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Insurance in London Presently

Global insurance marketplace• Estimated 10% to 15% of world’s GWP on

industrial risksTop 10 Companies by 2004 Revenues

Rank Insurers Reinsurers

1 Allianz Munich Re Group

2 AXA Swiss Re Group

3 ING Group Berkshire Hathaway Re Group

4 AIG Employers Re Group

5 Assicurazioni Generali Hannover Re Group

6 Berkshire Hathaway Lloyd’s

7 Aviva Allianz Re Group

8 Munich Re Group SCOR Re Group

9 Nippon Life Insurance Converium Group

10 ZFS PartnerRe Group

Number with London Operations 10 10

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Insurance in LondonPresently

“London Market”• Components

– (Re)insurance companies– Lloyd’s– Marine Protection and Indemnity Clubs (P&I Clubs)

• Risks covered by Lloyd’s

30%

23%20%

15%

7% 3% 2%

Reinsurance (30%) Third-Party Liability (23%)Fire & Other Damage to Property (20%) Marine, Aviation & Transport (15%)Motor (7%) Accident & Health (3%)Other (2%)

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Insurance in London

Unique risks insured by Lloyd’s Celebrity body parts (legs, toes,faces, weight

gain) Britney concert tour Satellites Accidental death by Russian sputnik Hole-in-one insurance

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Insurance in London Presently

Lloyd’s• Who insures with Lloyd’s?

– Lloyd’s syndicates insure the world’s leading businesses:» 93% of Dow Jones Industrial Average companies» 94% of FTSE 100 companies» 82% of Fortune Top 50 European companies» 85% of Fortune 500 US companies» Top 7 pharmaceutical companies» Top 20 global banks

• Comparison of InsurersEntity 2004 Written PremiumsLloyd’s $22.2 billion (£14.7 billion)Northwestern Mutual $10.7 billionAmerican Family $6.3 billionCUNA $1.7 billion

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Insurance in London

Structure of Lloyd’s Structure – society of members, both corporate

and individual, who underwrite in syndicates on whose behalf professional underwriters accept risk

Capital – provided by outside investors Central fund Three-year accounting

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Insurance in London

Structure of Lloyd’s

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Insurance in London

Role of actuary Pricing / reserving Lloyd’s syndicate opinions Reinsurance to close (RITC) – A reinsurance

agreement under which members of a syndicate for a year of account to be closed are reinsured by members who comprise that or another syndicate for a later year of account against all liabilities arising out of insurance business written by the reinsured syndicate

Commutations Mergers & Acquisitions Capital adequacy modelling Very little health insurance work

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Insurance in London

Capital adequacy modelling Individual Capital Assessment (ICA) Financial Services Authority (FSA) Probability of insolvency over a 1-year time

horizon is no greater than 1 in 200 Dynamic Risk Model (DRM) of 2 of the major

risks – Insurance and Market risks Non-modelled (excluded) risks need to be

assessed separately Combine capital requirements for risk factors

allowing for diversification benefits

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FSA Risk Types – Defining Capital Requirements

Capital

Credit

Market

LiquidityGroup

Insurance

Operational

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Risk Assessment for ICA Purposes

• Insurance Risk:­ Adequate premiums, pricing methodology, deterioration of reserves,

catastrophes • Market Risk:

­ Adverse movements in assets (both capital & interest)• Credit Risk:

­ Reinsurance, intermediaries, quality of counterparties and off balance sheet transactions

• Liquidity Risk: ­ Low liquidity of assets when required

• Operational Risk:­ Administration, compliance, event, fraud, governance, strategic and

technological risks• Group Risk:

­ Insolvency/credit downgrading of parent, removal of guarantee, compulsory dividends, performance guarantees, contagion …

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Determining the ICA Based onRisk Assessment

Estimate correlations between risk areas and determine aggregate capital requirement

Dynamic Risk Model

Individual Capital Assessment

InsuranceRisk

CreditRisk

MarketRisk

OperationalRisk

LiquidityRisk

GroupRisk

AdditionalRisk

Consider

Benchmarks

Loss History

Consider

MaximumCash-flow

ContingencyPlans

Consider

CapitalStructure

ContagionRisk

Consider

ConcentrationRisk

SystemControlsCapital requirement

for Insurance and Market Risk

Consider

Counterparties

Off BalanceSheet Items

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DRM Overview

• Excel spreadsheet with VB add-insExcel spreadsheet with VB add-ins

• Projects on a stochastic basis expected cash-flows for 5 Projects on a stochastic basis expected cash-flows for 5 years from the valuation date in respect of:years from the valuation date in respect of:

– business in-force and asset holdingsbusiness in-force and asset holdings

– planned future business (for next 5 years)planned future business (for next 5 years)

• DRM is run for (say) 10,000 scenarios based on DRM is run for (say) 10,000 scenarios based on realistic assumptions for the mean and variance of loss realistic assumptions for the mean and variance of loss ratios, claim payment patterns, future investment ratios, claim payment patterns, future investment returns and expensesreturns and expenses

• Additional assets required to cover liabilities and Additional assets required to cover liabilities and deficits emerging at the 99.5deficits emerging at the 99.5thth percentile (over 1 year) is percentile (over 1 year) is the required capital for that scenariothe required capital for that scenario

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Outline of Process

SimulateResults

Sample fromDistributions

Model Insuranceand AssetPortfolio

Gross, and Net Results, in Financial Accounting Framework

Loss distributionsPremiumsBalance Sheet

Generate random numberObtain value from distribution

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DRM Flow

LOB 1Business characteristics

and patterns

LOB 3Business characteristics

and patterns

LOB 2Business characteristics

and patternsFinancialCalculator

Starting Balance Sheet

Corporate Elements

Reinsurance Investment

Capital Mix Taxes

Years 1-5 Financial Results

•Balance Sheet•Income Statement

AnalyserMeasures of

•Risk•Return

Capital Requirement

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Exam System Passing all exams “qualified” actuary UK governing bodies

Institute of Actuaries – English / Welsh actuarial governing body

Faculty of Actuaries – Scottish Institute / Faculty largely merged

Exam “bits and pieces” Average time to qualification = 5 years All exams offered twice annually Sittings September and April College course work can lead to exam exemptions About 15 exams

• Communications exam

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Exam System

Designation: FIA (Fellow of the Institute of Actuaries) or FFA (Fellow of the Faculty of Actuaries

FIA / FFA designation allows practice in any actuarial discipline

Last exam either Investment, GI, Life or Pension

Reciprocity with SOA and CAS

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Q&A

Lloyd’s

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Resources

www.actuaries.org.uk

www.iii.org

www.lloyds.com