giro conference october 2011 henry johnson, jerome kirk, … · giro conference october 2011 henry...
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© 2010 The Actuarial Profession www.actuaries.org.uk
GIRO conference October 2011Henry Johnson, Jerome Kirk, Karen Seidel, Matt Gold – Lloyd’s
Workshop C8
- Lloyd’s Update
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Agenda
• Three speakers today (plus me)– Matt Gold – Karen Seidel– Jerome Kirk
• Solvency II update– Central workstream
– Scope, Governance and change, ORSA, link to syndicate models
– Actuarial function– Syndicate workstream
• BAU update– Current issue & Interim results– Year End process
1© 2010 The Actuarial Profession www.actuaries.org.uk
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Lloyd’s Solvency 2 programme is on track and progressing within published timescales
• Syndicate dry run process is on schedule• Majority of agents meeting the majority of deadlines• Close monitoring of Red and Pink agents continues
• Key syndicate deliverables are crucial for the Lloyd’s Internal Model (LIM) development
• First full calibrated run of LIM to calculate a robust SCR• Key for our evidencing of the internal model requirements• Working towards an end April submission to the FSA
• FSA has commenced their pre-application reviews of the LIM
2© 2010 The Actuarial Profession www.actuaries.org.uk
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Our model includes or supports our key solvency and capital activities
Lloyd’sCorporation
Lloyd’sCorporation
Lloyd’s TP Review
Governance & AssuranceGovernance & Assurance
SyndicatesSyndicates
Risk Monitoring & ORSARisk Monitoring & ORSALloyd’s Internal ModelLloyd’s Internal Model
SBF
Syndicate SCR Benchmark
Allocate member capital
LIM CCKLCM
Risk appetite monitoring and capital planning
Corporation Operational Risk management
Op scenario analysis
Lloyd’s Society SCR
Lloyd’s Society Economic Capital
Other risk & capital reports
Emerging risk management
Review and monitoring of syndicate TPs
LIM Reporting
LIRM (inc ESG)
Syndicate SCR Review
Par
amet
eris
atio
n P
roce
ss
External Disclosure
SFCR
RTS
Quantitative Reporting
External DisclosureExternal Disclosure
SFCR
RTS
Quantitative Reporting
Lloyd’s Risk Governance Framework
Internal Audit & Independent Review – assurance on processes and controls
Para
met
eris
atio
nSyndicate Reporting
Solvency II reports
Feedback into Risk Strategy and Risk Appetite
Feedback into Internal Model development
Feedback
Syndicate Business Planning
Internal Risk Reporting
Lloyd’s ORSA
Lloyd’s Risk Reports
DATASRC: Syndicate risk monitoring
CRC: Corporation Risk Monitoring
FRC: Financial Risk Monitoring
LRC
: Ris
k O
vers
ight
Syndicate Returns
SCR
Technical Provisions
Set capital uplifts
Syndicate operations
Syndicate performance monitoring
Strategy & Risk Appetite
Syndicate Internal Models
Review and Approve SBFs
Lloyd’s Strategy & Risk Appetite
Set Franchise Standards
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We have set out how the LIM will be governed …
4© 2010 The Actuarial Profession www.actuaries.org.uk
LIM IT and Systems
Central Fund(LIM CCK,
PARM)
LIM Manager
LIM Operating Board
Data Standards Management
Qualitative Standards Management
Catastrophe Risk
Management (LCM)
Syndicate Capital (ICP)
Investment Risk
Management (LIRM)
Syndicate Review
Operational Risk
LIM Change Board
LIM operations
ERC
Franchise Board FB LIM Sub-Group
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… and how our Change process will operate …
5© 2010 The Actuarial Profession www.actuaries.org.uk
Change Process
ERC
LIM Change Board
LIM Manager
LIM Operating Board
Data Standards Management
Qualitative Team
LIM IT and Systems
Franchise Board
FSA
LIM Component TeamsInitiate the changeRaise the changeReason for changePossible impacts
Assessment of change -Required changeAssess as major / minorReport to LOB
Major/Minor considerations1. Quant impact on SCR/FAL2. Number of components affected3. Complexity of change4. Impact on the 6 tests
Is it a change?---
Approve assessmentImplement agreed Minor changesEscalate not-agreed Minor changes and all Major Changes to ERC/FB for sign off
Approve assessmentSign -off following Major model change, and resolve other escalated issues
Re-approval (for Major changes)
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… and how the LIM is integrated within our ORSA process
6© 2010 The Actuarial Profession www.actuaries.org.uk
ORSA Process
LIMModel
tests, inc. use and
validation
Risk management and
monitoring• Risk governance• Reporting and MI
Risk appetite• Setting risk appetite and tolerances
Lloyd’s strategy• Definition of strategic goals and objectives
Solvency assessment
• Assessing the adequacy of member and central assets against requirements
Capital setting• Setting member and central regulatory and economic capital requirements
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LIM Supports our risk and capital framework
ORSA element
Lloyd’s strategy
• LIM supports our key activities to ensure a sound capitalunderstanding and allows Lloyd’s to demonstrate capital advantages
Risk Appetite
Risk Management
Capital Setting
Solvency Assessment
• LIM supports the measurement and monitoring of key risk appetite metrics to ensure we know where we are in relation to risk
• LIM provides further understanding of the key risks we face so we can implement effective risk management tools
• LIM supports both member level capital setting and central fund capital assessments in a transparent and robust way
• LIM provides a robust measurement of the state of the market
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Linking the central and syndicate models
8© 2010 The Actuarial Profession www.actuaries.org.uk
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Presentation name 00 July 20059
LIM High Level Model Structure
Synd 1
Synd 2
Synd 3
Synd 85
Produce syndicate results
Member A
Member B
Member X
Central Fund
Allocate to Members
Calculate hit on Central
Fund
Simulate losses
RG n
Asset risk and returns from LIRM
Member allocation from MCAT
PTF FAL CF
Risk G
roups
RG 1
RG 2
RG 3
Simulated Attritional losses
Catastrophe losses from LCM
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Presentation name 00 July 200510
LIM CCK - Overview
Phase A Phase B Phase C Phase D Phase E1 2
p
p
n
n
Attritional risk
Event risk (catastrophe risk)
Event claims
Attritional claims
p
Total claims
=
+
n
n
n
p
p
1n
t
2n0
t
2 31 Central fund assetsp
n
99.5th percentile(Capital requirement)
Risk types
Members
Syndicates
Allocate Metrics
Management information for
example:% chance of
market combined loss
ratio exceeding
110%
Deficit by syndicate
Deficit by member
Hit on Central Fund
Phase ASimulate losses
Phase BClaims
Phase CSyndicate level P&L,
BS
Phase DMember level P&L,
BS
Phase ECapital requirement
• Solvency capital requirement• Allocation of capital requirement to risk types, members, syndicates
• Discounted cash flows• Risk margin• SII profit and loss account and balance sheet
• RI credit risk• Op & Group risk
• Attritional and event claims at future time periods
• Reinsurance• Correlation between attritional and event claims
• Calibration to syndicate stats
• Allocation of deficit to members
• Impact of deficit on members’FAL and callable layer
• SII balance sheet specific to central fund assets
• Op & Group risk
• Natural catastrophe claims
• Other event claims
• Asset values• Yield curves• Bad debt on assets
CatModel
Treasury Model
• Attritional risk drivers• Dependence between risks• Preparation for catastrophe risk aggregation with attritional risk
• Syndicate noise
Nominal cash flows
Discounted cash flows
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LIM CCK Input from LCM
• 10,000 event scenarios by Synd-YoA-Event– 5 perils
– (US WS incl GOM, US EQ, Eur WS, JP WS, JP EQ)
– Cross syndicate dependency– In force view supplied by syndicates– Projected forwards and split by Yoa
(Proposed Year, Proposed Year -1, Proposed Year -2)
• Mapping to risk groups• Mapping to currencies (USD, ...)
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Phase B – Syndicate Claims
1. Calculate mean total net loss, for each synd-yoa-rg-ccy– Net prem * mkt avg Net ULR * payment pattern– Scale to syndicate’s mean total net loss (submitted by synd-yoa)
2. Calc mean attr net claim = mean total net loss - mean cat loss (from LCM)
3. Simulate attr claims– Mean attr claim * claim volatility * syndicate noise
4. Simulate total net claim = sim attr claim + sim cat claim, using rank matching
5. Calibrate resulting distribution to mean and 99.5% net insurance loss for each syndicate, by applying a factor to attritional losses
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The Actuarial Function at Lloyd’s
13© 2010 The Actuarial Profession www.actuaries.org.uk
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… and both must meet Solvency II standards
Both Lloyd’s and syndicates will require an Actuarial Function
Lloyd’s ActuarialFunction
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Syndicate Actuarial Functions
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Actuarial Function requirements are split into three areas
• Technical Provisions
– including supporting data
• Underwriting
• Reinsurance
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And will require (annual) formal report to the Board
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Actuarial Function (1)- Technical Provisions
• Requirements are:– coordinate the calculation of technical provisions;– ensure the appropriateness of the methodologies and underlying models
used as well as the assumptions made in the calculation of technical provisions;
– assess the sufficiency and quality of the data used in the calculation of technical provisions;
– compare best estimates against experience;– inform the administrative, management or supervisory body of the
reliability and adequacy of the calculation of technical provisions;– oversee the calculation of technical provisions in the cases set out in
Article 82;
• Lloyd’s have been testing the requirements over the summer…
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… and have seen that the impact is significant …
Source: y/e 2010 SRD and May 2010 TP submissions
Note: excludes some syndicates so that a like for like comparison can be made
Note: Solvency II TPs include estimated risk margin of 10%
50%
55%
60%
65%
70%
75%
80%
85%
90%
95%
100%
Current basisnet reserves
as at year-end2010
Removal of100% UPRrequirementand marginsfor prudence
Inclusion ofincepted future
premiums
Inclusion ofuninceptedcontracts
Change ofexpense basis
Allowance forbinary events
Discountingcredit
Inclusion ofrisk margin*
Solvency II nettechnical
provisions asat year-end
2010
Source of change in reserves
% c
hang
e in
rese
rves
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…and need to look closely at the overall impact on the balance sheet
Analysis of Technical Provisions and Impact on Balance Sheet (£m)
Current Basis
Solvency II Basis
Change from Current Basis
%change
Net Technical Provisions 35,422 28,123 (7,299) (21%)
Net Premium Debtors * (2,612) (238) 2,375 (91%)
Deferred Acquisition Costs (2,348) - 2,348 (100%)
Net technical provisions less premium debtors and DAC 30,462 27,885 (2,577) (8%)
Note: table above shows liabilities with a positive sign and assets with a negative sign* Net premium debtors are calculated as insurance and intermediary recoverables less reinsurance accounts payable
Market Total
• “Real” impact is much lower allowing for asset movements– direct impact on Solvency position– Need to ensure consistency with any Internal Model
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What does this mean for the future of SAOs?
• Can potentially see the future of SAOs going one of three ways:– an SAO based on the TP’s for solvency purposes– no opinion to be given– an opinion on a financial reporting basis and map this
across to solvency figures • Not decided and there are many considerations /
interested parties. For example:– auditors– actuaries / profession– Lloyd’s / FSA– international regulators
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Actuarial Function (2)- Underwriting
• Doc 29/09 outlines: The actuarial function’s opinion on underwriting policy must include the following issues, at a minimum:
“Sufficiency of premiums to cover future losses.”“Considerations regarding inflation, legal risk, changes in mix, anti-selection
and adequacy of bonus-malus systems implemented in specific lines of business”
• Lloyd’s Minimum underwriting standard state:
“Managing agents are expected to have appropriate pricing methodologies which are transparent and consistent for each class of business. This is to
ensure that the syndicates they manage generate sufficient premiums in the aggregate to achieve the planned levels of profitability in the business plan
approved by Lloyd's.”
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Actuarial Function (3)- Reinsurance
• Doc 29/09 outlines: The actuarial function’s opinion on underwriting policy must include the following issues, at a minimum:
“The adequacy of significant reinsurance arrangements. Expected cover under stress scenarios in relation to underwriting policy.
The adequacy of the calculation of technical provisions arising from reinsurance.”
• Lloyd’s Minimum underwriting standard state: The managing agent should regularly review its reinsurance arrangements to ensure that:
“All significant risks related to the arrangements, and the residual risks borne by the firm, have been identified.
Appropriate risk mitigation techniques have been applied to manage and control those risks. There is full and regular analysis of the effect of the reinsurance plan on its exposure to
insurance risk, its underwriting strategy and business plan, and its ability to meet regulatory obligations.
Specific consideration has been given to the risks associated with the use of shared reinsurance arrangements.”
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Syndicate review update
22© 2010 The Actuarial Profession www.actuaries.org.uk
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Overall, the syndicate dry run has seen good progress over the summer
• Additional guidance published by Lloyd’s– Final Application Pack, Validation Report and ORSA
• Approx 150 model walkthrough sessions held to date– joint meetings with FSA in many cases
• Further evidence templates submitted by agents• Quantitative submissions on technical provisions, QIS5 and
SCRs• And still significant work until the end of the year…….
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…the level of the Standard Formula acts as a reminder of the importance of model approval
Note: excludes some syndicates for illustration purposes
SCR vs ICA Comparison
ICA
SCR
- SF Rerun vs. 2011 ICA (215%)
- QIS5 SCR vs. 2010 ICA (244%)
- QIS4 SCR vs. 2008 ICA (157%)
- Current (100%)
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Half Year results
26© 2010 The Actuarial Profession www.actuaries.org.uk
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Source: Lloyd’s pro forma basis, 1) Technical account 2) Return on syndicates’ assets, members’ funds at Lloyd’s and central assets 3) Non-technical account
£m June 2010 June 2011 % chg Dec 2010Gross written premiums 13,490 13,534
8,546
(6,697)
(2,987)
(1,138)
548
(107)
(697)
113.3%
22,592
Net earned premiums 8,285
0
3
24
Net operating expenses1 (2,775) 8 (5,939)
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(8)
(42)
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17,111
Net incurred claims (5,403) (10,029)
Underwriting result 107 1,143
Investment return 2 597 1,258
Other income / expenses3 (76) (206)
Profit before tax 628 2,195
Combined ratio 98.7% 93.3%
We have reported a loss in the first half which is heavily impacted by…
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366
2,749
2,252
1,841
546
57
4,192
1,592
174314
3,395
270
869
565
122
256402
678
0
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
4,500
1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Lloyd’s Major claims: Net Ultimate Claims (£m)
Indexed to June 2011
… unprecedented half year catastrophe claims…
Source: Lloyd’s pro forma basis
£242m - H1 Average
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… which may not necessarily develop to historic patterns ...
Source: Lloyd’s QMR & Xchanging data
Chilean EQ Development (Gross)
0%
20%
40%
60%
80%
100%
1 3 5 7 9 11 13 15 17 19Month
Incu
rred
/Ulti
mat
e
Hurricane benchmark Chile Earthquake benchmark
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Combined ratios
2010H1
… elsewhere have seen little movement in other elements of the combined ratio
2011 H1
Source: Lloyd’s pro forma basis
80%90%
100%110%120%130%140%
Accident year Major losses Prior year reservemovements
Calendar year
(5.5%)
86.4%
113.3%32.4%
80%90%
100%110%120%130%140%
Accident year Major losses Prior year reservemovements
Calendar year
86.2%
98.7%(4.6%)17.1%
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31© 2010 The Actuarial Profession www.actuaries.org.uk
Note: PTF – Syndicate Premium Trust Funds; FAL - Members’ Funds at Lloyd’s
IR: 2.4% 0.9% 1.6% 1.3% 1.1%
Investments in the first half were “modest”
Source: Lloyd’s pro forma financial statements, 30 June 2011
INVESTMENT RETURN
-100
0100
200
300400
500
600
700800
900
H1 07 H1 08 H1 09 H1 10 H1 11
£m
PTF FAL Central assets
-
2,298
2,925
3,099
2,490
2,756
0
5,000
10,000
15,000
20,000
25,000
Dec 2007 Dec 2008 Dec 2009 Dec 2010 Jun 20110
500
1,000
1,500
2,000
2,500
3,000
3,500
Members' balance (surplus)
Members' funds at Lloyd's(FAL)
Central assets (excludingcallable layer)
Solvency surplus
Source: Society of Lloyd’s financial statements
14,46115,264
19,121
But solvency coverage and central assets are now at record levels
17,357
Balance Sheet (£m)Solvency (£m)
19,121
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Current Issues and Year End timetable
33© 2010 The Actuarial Profession www.actuaries.org.uk
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Looking forward to year-end
• The catastrophe losses will impact the year-end• No new reserving “hot topics” have emerged …• …. but last year’s do remain
– UK Motor
– Italian Hospitals
– Casualty and the cycle
• Monitoring and understanding reserving remains vital
– at the same time as transitioning to the new regime
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Year-end - submission dates - reminder
• Please submit two copies of the SAO report– one of which must be a hard copy, electronic copies are
encouraged– reports to Jerome Kirk, Market Reserving & Capital, G5,
Lloyd’s, One Lime Street, EC3M 7HA, – submit electronic copies via email to [email protected]
Submission DeadlineUS Trust Fund SAOs 13 February 2012
Worldwide SAOs 23 February 2012
SAO Reports 30 March 2012 or earlier
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Wrap up and Questions
36© 2010 The Actuarial Profession www.actuaries.org.uk
• Central and syndicate level Solvency II projects are progressingwell– And are closely intertwined: BOTH must succeed– Many requirements of the Actuarial Function should already
exist• Half Year results reflected the risks taken at Lloyd’s• Current issues and year end timetable: no major changes
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GIRO conference October 2011�Henry Johnson, Jerome Kirk, Karen Seidel, Matt Gold – Lloyd’sAgendaLloyd’s Solvency 2 programme is on track and progressing within published timescalesOur model includes or supports our key solvency and capital activitiesWe have set out how the LIM will be governed …… and how our Change process will operate …… and how the LIM is integrated within our ORSA processLIM Supports our risk and capital frameworkLinking the central and syndicate modelsLIM High Level Model StructureLIM CCK - OverviewLIM CCK Input from LCMPhase B – Syndicate ClaimsThe Actuarial Function at Lloyd’s… and both must meet Solvency II standardsActuarial Function requirements are split into three areas Actuarial Function (1)�- Technical Provisions… and have seen that the impact is significant ……and need to look closely at the overall impact on the balance sheetWhat does this mean for the future of SAOs? �Actuarial Function (2)�- UnderwritingActuarial Function (3)�- ReinsuranceSyndicate review updateOverall, the syndicate dry run has seen good progress over the summer …the level of the Standard Formula acts as a reminder of the importance of model approvalHalf Year resultsWe have reported a loss in the first half which is heavily impacted by…… unprecedented half year catastrophe claims…… which may not necessarily develop to historic patterns ...… elsewhere have seen little movement in other elements of the combined ratioBut solvency coverage and central assets are now at record levelsCurrent Issues and Year End timetableLooking forward to year-endYear-end - submission dates - reminderWrap up and Questions