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Embedding DFA for RBC to create business value Grand Millennium Sukhumvit Bangkok Hotel, Bangkok 23rd September 2011 Michael Fung Managing Director & Actuary, Ultimate Risk Solutions www.ultirisk.com

Agenda • • •

Risk Based Capital Beyond DFA model: enhancing decision making process to create value Practical aspects

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Risk Based Capital Beyond DFA model: enhancing decision making process to create value Practical aspects

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Risk Based Capital Regime •

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Many insurance markets around the world are moving towards risk based capital regulatory regime ‒ USA ‒ Canada and Australia ‒ ICA in the United Kingdom ‒ Swiss Solvency Test ‒ Solvency II in Europe Asia ‒ Singapore, Indonesia, Malaysia, Korea Thailand is currently implementing RBC, first RBC report to be submitted early next year

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Rating Agencies and ERM

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Rating agencies increasingly focus on a company’s Enterprise Risk Management in their rating process Analysts also dedicate a reasonable amount of time to understand a company’s internal models

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Agencies’ Economic Capital Model • A.M. Best Company: Best’s Capital Adequacy Ratio (BCAR) • Standard & Poor’s: S&P’s Capital Adequacy Ratio (CAR) • Fitch Ratings: PRISM Capital Model • Moody’s Investor Service: Rating predictor model supplemented by Moody’s internally developed or existing regulatory model capital metrics

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Risk Based Capital Modelling Process •

The process of calculating the Capital an insurer requires to have in excess of its liabilities, based on the amount risk has taken, at a given time horizon

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This process must allow for: ‒ the existing assets and liabilities of the Company, and ‒ the expected new business that it may write during the given time horizon

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The economic environment in which the insurers operates may also take into account 7

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Risk Based Capital Embedding DFA model: enhance decision making process to create value Practical aspects

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Uses of DFA model • Essential tools for business planning and ERM

• Once built it can recalibrate to re-run on a regular basis

• Modelling for:

Underwriting and Pricing Rating Agencies & Regulatory Compliance

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Reinsurance design Risk taking strategy Asset allocation Communication with regulators on Solvency ‒ M&A ‒ … and many more

Risk taking Strategy

Economic Capital Model Capital Allocation & Performance Measure

Risk Transfer Design

Investment Management

• Explore correlation and

diversification of all kinds 9

DFA Modelling as a Business Process • Practical DFA model tends

Collection of data required for modelling

to incorporate:

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Insurance & Reinsurance Catastrophes Investment activities Taxation Dependencies Accounting statements Cashflow reports

Use results for intended business purpose

Data Analysis

• Cyclical process to reflect Model and Business reality

Presentation Date

Validate model and produce results

Consultant's Name

Build the model

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DFA and Risk Management

Presentation Date

Consultant's Name

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Risk Based Capital Beyond DFA model: enhancing decision making process to create value Practical aspects

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Enterprise Risk Management • More and more companies emphasize about risk management in •

their annual reports in light of the implementation of more riskbased regulatory regimes Analysts may look more closely at: ‒ How company develop their risk management processes/ framework ‒ How risk awareness is embedded into the company culture ‒ Risk modelling / risk measurement / risk monitoring ‒ How risks are transfer, retain, avoid or mitigated ‒ How a firm set its risk objectives, for instance: • risk-based performance measurement • risk appetite • risk-based capital allocation • risk-based decision making

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Practical aspects •

Set objectives for the DFA analysis and business targets

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Clear and objective risk quantification process

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Risk awareness / risk management culture

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Communicate with different stakeholders

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Do not under-estimate the time required for modelling process

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Choose your software carefully 14

Thank you!

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