Risk Management A CRO’s Perspective Jim Attwood Chief Risk Officer January 2010
Content • Context and background • Risk Management Framework • Does Dynamic Financial Analysis add value for Asian insurers/reinsurers? 2
Context and Background 3
Context - ACR • Asia Capital Re is a non-life reinsurer based in Singapore, with offices in a number of Asian cities – Started in 2006 – Conventional and Retakaful operations – Around 250 staff across all entities – Shareholders funds approaching USD1bn • Our focus is Asian business • Leveraging on our core competencies and experience on underwriting, ACR’s key focus is on underwriting activities – Adopted a conservative investment approach to diversify volatility from underwriting 4
Context - Jim Attwood • One of the “founders” • Director of board of ACR Group • Member of six person management team • Chief Risk Officer • Appointed Actuary Fortunate position of having been accorded a real voice within the company; and not all “risk managers” have this opportunity (or is it a “curse”?) 5
What’s Risk? Expected Chance/ • Red and Green line represent two Outcome Probability theoretical risks • Clearly the variability of red and green are different • Green has less variability than red; typically this constitutes less risk Two questions a. Green cannot result in loss; does this mean “no risk”? If the “expected outcome” is the b. same, which is best; red or green? Loss Gain 6
The Answers? a. My personal view is there is risk in “green” on the previous page – Risk arises from the chance of an outcome worse than the expected outcome – But it really depends on risk appetite of stakeholders – Many accounting standards would define this as “no risk” Which is better? – not enough information b. – Some may place a higher value on the high gain potential – A simple example o If scale was +/-USD100, perhaps upside is attractive because downside is not so bad o If scale was +/- USD100 bn, perhaps downside becomes overwhelming the consideration – More about this later 7
Defining your “Risk Space” Universe of risks and profit opportunities Asian Non Asian Underwriting Underwriting Risks/ Risks/ Opportunities Opportunities Investment Risks/Opportunities First step is to “strategically” decided in which “risk space” you will operate 8
Guardian of the “Risk Space” • Risk space is set at high level (Board and shareholders) for key reasons – Optimization of shareholder value – Long term value (shareholder value) not always equal to short term profit – Eg some “value” comes from focus and uniqueness of ACR’s “in Asia for Asia” branding • At the micro level there are many profit opportunities at the boundary of the Risk Space – What’s in and what’s out? • Need to be constantly vigilant to maintain the integrity of the Risk Space 9
Inherent “Principal - Agent” Risk • Principal-Agent risk* is a term used to describe the risk emanating from a misalignment of the interests between; – The Principal (stakeholders, shareholders) and – The Agent (management and staff) • Insurance losses can result from good risk decisions – It’s the very nature of the business we are in and the reason for the existence of our industry – The opposite also applies • Compensation structures typically reward profits – Loss can (sometimes) be excused as “bad luck” – Hence management/staff will have a preference for risk taking – Remember red and green; which is better? * Source: Joint Risk Section, Society of Actuaries / Canadian Institute of Actuaries / Casualty Actuarial 10 Society, December 2009, A New Approach to Managing Operational Risk
The point ? • The point is we really need to understand the risk appetite of the stakeholders including goals, aspirations and timeframe. 11
Risk Management Framework 12
Shareholder Value Price to Book Value of Share = Book Value X Multiple • Typical method of valuation for insurance and reinsurance industry • Price to book value depends on many factors including profitability, branding, corporate governance etc • Risk Management should be aligned with shareholder value – Protect book value AND – Protect Price to book Multiple 13
P/B comparison of R/I players Global reinsurers P/B ratio Asia reinsurers P/B ratio P/B P/B 4.5 4.5 Average Average 1.2 4.0 4.0 3.5 3.5 1.1 2.95 3.0 3.0 2.5 2.5 1.90 2.0 2.0 1.34 1.25 1.21 1.5 1.13 1.06 1.5 1.06 1.02 0.98 1.00 0.99 0.91 0.89 0.89 0.74 1.0 1.0 0.61 0.38 0.5 0.5 0.0 0.0 Average Asia insurers P/B ratio P/B 1.9 4.5 Differences emphasize the 4.0 3.34 3.5 2.94 2.58 importance of guarding the 3.0 2.14 2.5 2.05 1.98 2.0 “risk space” 1.17 1.17 1.13 0.85 1.5 1.0 0.5 0.0 Source: Bloomberg, Price as at 26/11/2009, BV latest available in 2009 14
Risk Identification • First step is typically a brainstorming and preparation of a “risk register” • Essentially identifying a long list of risks facing the organization 15
Risk Register • Long list of risks – Description – Categorization – Example – Controls – Probable Maximum Loss – Likelihood – Impact – Priority 16
Risk Register • Long list of risks Natural catastrophe risk – Description – Categorization – Example – Controls – Probable Maximum Loss – Likelihood – Impact – Priority 17
Risk Register • Long list of risks Examples – Description • Insurance risk • Market Risk – Categorization • Credit Risk • Operational Risk – Example • Strategic Risk • Liquidity Risk – Controls Some argue that categorization is – Probable Maximum Loss important, since perhaps risk management techniques can be similar – Likelihood for items in a similar grouping – Impact We are not convinced this is that – Priority important (other than communication with others), and prefer to consider each risk on its own features 18
Risk Register • Long list of risks 7.0 magnitude EQ in Taipei, depth 3km – Description – Categorization – Example – Controls – Probable Maximum Loss – Likelihood – Impact – Priority 19
Risk Register • Long list of risks Maybe one or numerous controls eg – Description • Product features o Event limits – Categorization • Limit on the amount of business written – Example • Purchase of retrocession or reinsurance – Controls – Probable Maximum Loss – Likelihood – Impact – Priority 20
Risk Register • Long list of risks Dollar amount. – Description But what event to consider – Categorization • Worst case ? (Possible maximum loss) – Example • Something bad but not totally unreasonable? (Probable Maximum – Controls Loss) • Something scientific? (1:200 year – Probable Maximum Loss worst case) – Likelihood Ideally we would like severity distributions rather than scenarios, but – Impact this is often very spurious. – Priority So; high degree of judgment being introduced which is a risk in itself 21
Risk Register • Long list of risks We should be dealing with rare events – Description Likelihood of PML – Categorization (From a practical perspective there – Example should be no such thing as a high frequency “risk” that has a significant – Controls effect on the business – else business would not be sustainable) – Probable Maximum Loss So; perhaps can estimate mean, but – Likelihood again gets spurious for very rare events (less the 1:50 frequency) – Impact – Priority 22
Risk Register • Long list of risks We like to think about impact in terms of – Description high/medium/low for each of: • Balance Sheet/Book Value – Categorization • Profit & Loss • Ability to trade – Example Some risks have no immediate monetary – Controls impact but influence reputation or other soft aspect and hence impede ability to – Probable Maximum Loss trade. – Likelihood Examples • Loss of key person/people – Impact • Loss of credit rating – Priority 23
Risk Register • Long list of risks Other than acting as a general check list, – Description the main point of the risk register in my view is to facilitate priority setting – Categorization Priority generally depends net severity – Example and impact – Controls Useful communication tools for management discussion and clarifying – Probable Maximum Loss organizational risk appetite – Likelihood – Impact – Priority 24
More on “Impact” Price to Book Value of Share = Book Value X Multiple Underwriting Branding Risk Management Performance Investment Results Corporate Assets Build-up Governance HR Practices IT Infrastructure “Book Value” and “Ability to trade” are particular critical for shareholder value 25
Consistent Definition of Impact High Impact Medium Impact Low Impact Over 10% loss of Between 5% and 10% Under 5% loss in Book Value Book Value loss of Book Value Book Value Significant loss of Loss of business, and Ability to Less than 1 months business, more than 6 between 1 to 6 to recover trade months to recover months to recover Annual More than 1 year’s Over 25% of 1 year’s Under 25% of 1 year’s earnings expected earnings earnings Profit & Loss * Figures for illustration only 26
Recommend
More recommend
