02-588-3049 mswiener/zvi.html 16-oct-06 zvi wiener [email protected] risk management in...
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02-588-3049http://pluto.mscc.huji.ac.il/
~mswiener/zvi.html16-Oct-06
Risk Management in Insurance
© Zvi Wiener, 2006
RM Insurance slide 2
The School of Business Administration
The Hebrew University of Jerusalem.
The Barbara and Richard Rosenberg fund.
PRMIA - The Professional Risk Managers’ International Association, www.prmia.org
The Ministry of Finance.
© Zvi Wiener, 2006
RM Insurance slide 3
The goal of the conference
An in depth discussion of risk management and
measurement methods in the insurance industry.
Roadmap of future developments
Presenters from Canada, France, UK, Israel.
Regulators, Academia, Insurance companies.
Today (16-Oct): presentations
Tomorrow (17-Oct): panel (discussion with Q&A)
© Zvi Wiener, 2006
RM Insurance slide 4
Financial Intermediaries
Banks, exchanges, mutual funds, brokers, insurance
companies, pension funds, …
Typically take money and promise something in the
future.
As soon as assets and liabilities are not identical
there is risk involved.
Appropriate measuring and managing of the risks is
the key role of the financial intermediaries.
Regulators: BoI, ISA, MOF.
© Zvi Wiener, 2006
RM Insurance slide 5
IAIS
International Association of Insurance Supervisors
1. Roadmap for a common structure and common standards for the assessment of insurer solvency.
2. A new framework for insurance supervision: Towards a common structure and common standards for the assessment of insurance solvency.
3. Towards a common structure and common standards for the assessment of insurer solvency: cornerstones for the formulation of regulatory financial requirements.
© Zvi Wiener, 2006
RM Insurance slide 6
© Zvi Wiener, 2006
RM Insurance slide 7
© Zvi Wiener, 2006
RM Insurance slide 8
Situation in Israel
A variety of traditional insurance products.
New protected (guaranteed) investment plans.
Annuities, pensions (DB, DC).
Credit market.
Investments in illiquid assets.
High concentration of local risks.
Investment management.
Underdeveloped securitization.
© Zvi Wiener, 2006
RM Insurance slide 9
Insurance (including pensions)
Crossroad of actuarial approach to liabilities,
accounting reporting principles, and
managing financial assets according to market (economic) rules.
© Zvi Wiener, 2006
RM Insurance slide 10
What is Risk?“Risk – the chance of something happening that will have an impact upon objectives. It is measured in terms of consequences and likelihood.”
“Risk management is as much about identifying opportunities as avoiding or mitigating losses.”
Risk is a combination of exposure to risk factors and volatility of these factors.
© Zvi Wiener, 2006
RM Insurance slide 11
Is risk bad?
Risk is the main source of profits!
It should be
measured
understood
managed
© Zvi Wiener, 2006
RM Insurance slide 12
How to manage risk?
Keep enough capital to cover potential losses.
Buy a reinsurance.
Match assets and liabilities.
Diversify.
Transfer (cat bonds).
Hedge market and credit risks by using advanced financial instruments.
© Zvi Wiener, 2006
RM Insurance slide 13
Main Steps
Identify risk
Quantify risk
Decide on hedging or mitigation of risk
Execute the decision
© Zvi Wiener, 2006
RM Insurance slide 14
Main Steps
Identify risk
Quantify risk
Decide on hedging or mitigation of risk
Execute the decision
© Zvi Wiener, 2006
RM Insurance slide 15
Approaches to Measuring Risk
SPAN method – used by exchanges, traders
Standardized approach – RBC, CAD
Rating agencies – PD, LGD
VaR, T-VaR – economic capital,
fair value, embedded value, DAC, ERM.
© Zvi Wiener, 2006
RM Insurance slide 16
Main Choices
Horizon – one year, 10 days in banking
Definition of Capital - GAAP, economic, regulatory
Measure of Risk – risk of ruin, VaR, T-VaR
Main risks to include – market, credit, insurance, …
Quantification method – stress, Monte Carlo, factors
Aggregation – additive, correlations, stochastic
© Zvi Wiener, 2006
RM Insurance slide 17
Risk
2 4 6 8 10 12 14
0.02
0.04
0.06
0.08
0.1
0.12
0.14
mean
st. dev
VaR95%
T-VaR95%
losses
probabilities
© Zvi Wiener, 2006
RM Insurance slide 18
Major Types of Risks
Market
Underwriting
Credit
Operational
Liquidity
© Zvi Wiener, 2006
RM Insurance slide 19
Aggregation of Risks
2 4 6 8 10 12 14
0.02
0.04
0.06
0.08
0.1
0.12
0.14
-6 -4 -2 2 4 6
0.1
0.2
0.3
0.4
0
5
10 0
2
4
6
8
10
0
0.02
0.04
0.06
0
5
10
-2 0 2 4 6 8 10
0
2
4
6
8
10
© Zvi Wiener, 2006
RM Insurance slide 20
Insurance versus banking
Banks started the process earlier, have internal models for some risks.
Financial side is similar.
Insurance has a significant component of actuarial exposure which is difficult to measure and it can be hardly mitigated.
Extreme events can be hardly estimated.
© Zvi Wiener, 2006
RM Insurance slide 21
Important
The change is NOT technical, but involves senior management of insurance companies.
It is NOT enough to appoint a risk manager and to buy a software.
Investment decisions, new products, the use of capital, pricing, embedded options – all this should be based on risk assessment.
© Zvi Wiener, 2006
RM Insurance slide 22
Insurance Risk Management