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Enterprise Risk Enterprise Risk Management in InsuranceSubrahmanyam MunagalaSubrahmanyam MunagalaProduct Manager Insurance Risk SolutionsSAS Institute
Copyright © 2008, SAS Institute Inc. All rights reserved.Copyright © 2006, SAS Institute Inc. All rights reserved. Company confidential - for internal use only
E t i Ri k M tEnterprise Risk Management
Regulatory compliance
Credit ratingEconomic capital
Enterprise Risk
management Strategic l i &planning & capital
management
Performance management
Product design & pricing
Asset –liability
management
Copyright © 2009, SAS Institute Inc. All rights reserved. Company Confidential - For Internal Use Only
E t i Ri k M tEnterprise Risk Management
CAPITALMANAGEMENTRISK
MANAGEMENTMANAGEMENT
FINANCIALMANAGEMENT
PERFORMANCEMANAGEMENT
Copyright © 2009, SAS Institute Inc. All rights reserved. Company Confidential - For Internal Use Only
E t i Ri k M tEnterprise Risk Management
CAPITALMANAGEMENTRISK
MANAGEMENTMANAGEMENT
FINANCIALMANAGEMENT
PERFORMANCEMANAGEMENT
Copyright © 2009, SAS Institute Inc. All rights reserved. Company Confidential - For Internal Use Only
E t i Ri k M tEnterprise Risk Management
CAPITALRISK CAPITALMANAGEMENT
RISKMANAGEMENT
INTEGRATION
FINANCIALMANAGEMENT
PERFORMANCEMANAGEMENT
Copyright © 2008, SAS Institute Inc. All rights reserved.
B i B fitBusiness Benefits• Optimizing business strategies on the basis of risk-capital-return trade off leads to
selection of most suitable strategiesIncrease return on capital
selection of most suitable strategies• Allocation of capital to profitable business leads to better quality growth• Creates flexibility to reallocate capital and risk capacity for emerging opportunities• Linking risk and performance promotes risk culture and value generation
Reduce volatility
• Ongoing monitoring of risks faced by the company and active management of those risks will reduce volatility.
• Proactive management of exposures will result in careful selection of risks, within the appetite of management.A ti i t i k ith f d l ki l i d iti t t d i k• Anticipate risks with forward looking analysis and mitigate unwanted risks
Improve competitivity
• Better management of risks and allocation of risk based capital charges results in lower premiums and higher sales
• Optimization of investments strategy results in better investment performance and p p y p gy phigher returns to policyholders
• Hedging investment/insurance risks leads to better performance
Comply with regulation• Ability to hold risk capital that is economically necessary, avoiding dilution of value
when capital is idleComply with regulation when capital is idle• Reduce cost of compliance
Create good market • Good credit rating improves the relative availability and price of debt• Improved story for analysts and investors will enhance relative investment case and
Copyright © 2009, SAS Institute Inc. All rights reserved. Company Confidential - For Internal Use Only
gperception
Improved story for analysts and investors will enhance relative investment case and reduce share price discount
• Reduce cost of interaction with regulators
E t i Ri k M t F d tiEnterprise Risk Management - Foundation
Organization &
Governance
Operational implementation
Copyright © 2009, SAS Institute Inc. All rights reserved. Company Confidential - For Internal Use Only
F d ti Ri k A l ti & th d lFoundation – Risk Analytics & methodology
Comprehensive risks
• Comprehensive coverage
• Newer risks like liquidity, operational, reputation and other business risks
Market consistent l ti
• Market consistent methods – taking into account value of embedded options, management actions, risk transfer arrangement, taxes etc.
• Replicating portfoliosConsistency with financial reporting IFRS/embedded valuevaluation • Consistency with financial reporting – IFRS/embedded value approaches
• Run off and going concern basis
• Factor basedRange of risk analyses
• Factor based• Stress testing – single risk factor and combined risk factor testing• Stochastic simulation
• Variance co variance approach
Diversification• Variance co-variance approach• Joint distribution of risk factor e.g. Copulas• Stochastic simulation• Judgment!
Copyright © 2009, SAS Institute Inc. All rights reserved. Company Confidential - For Internal Use Only
g
F d ti Ri k A l ti & th d lFoundation – Risk Analytics & methodology
Risk models• Vendor models• Model building frameworkRisk models • Model life cycle management• Validation of models
Risk measure• Intuitive, simple, difficulty of computation and ease of understanding
and coherent• Value at risk (VaR)• Value at risk (VaR)• Expected short fall/T-VaR
Time horizon • One year• Multi-year
Copyright © 2009, SAS Institute Inc. All rights reserved. Company Confidential - For Internal Use Only
F d ti O ti l I l t tiFoundation – Operational Implementation• Integrated consistent complete reliable and available
Data
• Integrated, consistent, complete, reliable and available
• External data
• Quality - appropriateness, completeness and accuracy
P d d f d t lit t• Process and procedures for data quality management
• Robust analytical capability• Flexible for future changes
Systems• Flexible for future changes• Scalable• Easy to implement and use• Integratedg
Internal reporting• Availability of right information , at right time to right people• Varied information needs of people across organizationp g• End-user empowerment
Culture• Management decisions to consider risk• Top down push to develop strong risk culture
Copyright © 2009, SAS Institute Inc. All rights reserved. Company Confidential - For Internal Use Only
Culture • Top down push to develop strong risk culture
Foundation Organization and GovernanceFoundation – Organization and Governance
Policies• Written policies – risk management policy, risk appetite
• Clear and concise
• Regular review the adequacy of policies and controls
Fit d i t f k l
People
• Fit and proper requirements for key personnel
• Training
• Dedicated resource allocation
• Risk based performance measurement and rewards
Process• Clear allocation of responsibilities
• Comprehensive and consistent risk management
Copyright © 2009, SAS Institute Inc. All rights reserved. Company Confidential - For Internal Use Only
Foundation Organization and GovernanceFoundation – Organization and Governance
Monitoring and t l
• Link risk and business strategies
• On going monitoring of risk adjusted performance indicatorscontrol g g g j p
• Management interventions – triggers/alerts
• Business units – own and control risk at origination
• Risk function – facilitate and oversee effective implementation of risk
Governance management
• Internal audit - independence assurance
• Compliancep
Copyright © 2009, SAS Institute Inc. All rights reserved. Company Confidential - For Internal Use Only
Software – Critical enablerC h i d h i f k f i ll i k Comprehensive and cohesive framework for managing all risks
Robust risk data platform – data model and data management processes
Open and flexible system for progressively adopting evolving risk analysisanalysis
Risk analytical tools to disseminate risk information
Good model management
Single solution for valuation, risk capital modeling and financialSingle solution for valuation, risk capital modeling and financial planning
Vendors with strong vision, commitment and proven solutions
Copyright © 2008, SAS Institute Inc. All rights reserved.
g , p
Software Solution – End Vision
BUSINESS PLANNING
PERFORMANCE MANAGEMENTMANAGEMENT
RISK CAPITAL ASSESSMENT
DATA MANAGEMENT
Integrated Software SolutionIntegrated Software SolutionOperational Data Sources Policy Underwriting Claims Reinsurance Investment Commissions
Reporting Management reports Regulatory compliance Pre-built and ad hoc Dash boards Commissions
Products General Ledger Risk factors (external data)
Dash boards
Data Mart Risk analysis results Risk analysis
assumptions Traceability to source
Standardisation
Data integration Data quality Traceability to source
data
q y
Governance
Security
Comprehensive risks Risk models Scenario testing/simulation
Risk Analytics
Data Foundation
Security Auditability
Copyright © 2008, SAS Institute Inc. All rights reserved.
Risk aggregation & diversification Regulatory, economic and
rating agency capital models
Data Foundation
Single version of truth Historical data (warehouse) Solution marts
Software Solution – End Vision PERFORMANCE MANAGEMENT
RISK CAPITAL ASSESSMENT
BUSINESS PLANNING
Underwriting Risk
DATA MANAGEMENT
Commission Management
Underwriting Risk
• Policy
• Reinsurance
• Claims
• External data
Product
Investment
Policy Management
External data
Market Risk
• Investments
• Market data
Claim
Product
RI
Policy
Claims Management
Operational Risk
• Events
• Loss reports
Account
C t
Asset Management
Credit Risk
• Loss reports
• Loss history
Customer
General Ledger
Key Risk Indicators
• Counterparties
• Credit ratings
• Credit risk exposuresDATA MANAGEMENT
Reinsurance
CRM
• KRI data bank
• Benchmarks
Software Solution – End Vision PERFORMANCE MANAGEMENT
RISK CAPITAL ASSESSMENT
BUSINESS PLANNING
DATA MANAGEMENT
RISK CAPITAL ASSESSMENT
AggregationALM
Market RiskUnderwriting Risk Credit Risk
Operational
Risk Factor & Dependency
Models
Portfolio Replication
Market Risk
Underwriting Risk Life Insurance
P&C Insurance Credit Risk Risk
Scenario Generator
DATA MANAGEMENT
Losses PremAsset Exposures Insurance Exposures Credit exposures Operational Losses
Market DataMarket Data
Data warehouse
AssetMgmt
PolicyMgmt
ClaimsMgmt
General Ledger Market Data
Replicating PortfoliosReplicating PortfoliosRisk neutral/real world
scenarios
Cash flow
Liability model Asset model
Portfolio Construction
Cash flow 0
Cash flow 1
0
Cash flow 1
Configure Analysis
Liability Model
Cash flow 1
Cash flow 2Model
1
Cash flow 2m
ulat
ion
mul
atio
n
Asset Model
Cash flow 2 portfolio
Cash flow
2
Cash flow
Sim Sim
Cash flow n
Cash flow ...Optimize Portfolio
Cash flown
...Candidate securities
Assess Results
Software Solution – End Vision PERFORMANCE MANAGEMENT
RISK CAPITAL ASSESSMENT
BUSINESS PLANNING
BUSINESS PLANNING
DATA MANAGEMENT
BUSINESS PLANNING
PricingStrategic PlanningCapital AllocationRI Optimization Investment Planning
RISK CAPITAL ASSESSMENT
AggregationALM
Market RiskUnderwriting Risk Life
Underwriting Risk P&C Insurance
Credit RiskOperational
Risk
Risk Factor & Dependency
Models
Portfolio Replication
S i
DATA MANAGEMENT
gInsurance Scenario
Generator
Losses PremAsset Exposures Insurance Exposures Credit exposures Operational Losses
Market Data
Data warehouse
AssetMgmt
PolicyMgmt
ClaimsMgmt
General Ledger Market Data
Software Solution – End Vision PERFORMANCE MANAGEMENT
RISK CAPITAL ASSESSMENT
BUSINESS PLANNING
DATA MANAGEMENT
BUSINESS PLANNINGBUSINESS PLANNING
PricingStrategic PlanningCapital AllocationRI Optimization Investment Planning PERFORMANCE MANAGEMENT
RISK CAPITAL ASSESSMENT
AggregationALM
Risk strategy
Market Risk Underwriting Risk Life
Underwriting Risk P&C Insurance
Credit RiskOperational
Risk
Risk Factor & Dependency
Models
Portfolio Replication
S i
Risk Based Performance Monitoring
Dashboards and reports
DATA MANAGEMENT
Risk Life Insurance
Scenario Generator
Losses PremAsset Exposures Insurance Exposures Credit exposures Operational Losses
Market Data
Data warehouse
AssetMgmt
PolicyMgmt
ClaimsMgmt
General Ledger Market Data
I l t ti St tImplementation Strategy
Data Foundation
Goal – to create an enterprise data platform – an integrated, consistent and reliable source
Copyright © 2009, SAS Institute Inc. All rights reserved. Company Confidential - For Internal Use Only
I l t ti St tImplementation Strategy
Risk Analytics
Data Foundation
Goal – to model risks faced by companies and determine risk capital requirements
Copyright © 2009, SAS Institute Inc. All rights reserved. Company Confidential - For Internal Use Only
I l t ti St tImplementation Strategy
Planning & decision support
Risk Analytics
Planning & decision support
Data Foundation
Copyright © 2009, SAS Institute Inc. All rights reserved. Company Confidential - For Internal Use Only
Goal – to embed risk capital models in business planning and decision making
I l t ti St tImplementation StrategyRisk Adjusted Risk Adjusted
Performance managementPerformance management
Planning & decision supportPlanning & decision support
Risk Analytics
Data Foundation
Copyright © 2009, SAS Institute Inc. All rights reserved. Company Confidential - For Internal Use Only
Q tiQuestions
Contact me for any late thoughts or questionssubbu munagala@sas comsubbu.munagala@sas.com
Copyright © 2009, SAS Institute Inc. All rights reserved. Company Confidential - For Internal Use Only
Copyright © 2008, SAS Institute Inc. All rights reserved.Copyright © 2006, SAS Institute Inc. All rights reserved.
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