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Risk Management in Insurance

Risk Management in Insurance. Zvi Wiener mswiener@mscc.huji.ac.il. 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.

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Risk Management in Insurance

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  1. Risk Management in Insurance Zvi Wiener mswiener@mscc.huji.ac.il http://pluto.mscc.huji.ac.il/~mswiener/zvi.html

  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. RM Insurance

  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) RM Insurance

  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. RM Insurance

  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. RM Insurance

  6. RM Insurance

  7. RM Insurance

  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. RM Insurance

  9. Insurance (including pensions) • Crossroad of actuarial approach to liabilities, • accounting reporting principles, and • managing financial assets according to market (economic) rules. RM Insurance

  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. RM Insurance

  11. Is risk bad? • Risk is the main source of profits! • It should be • measured • understood • managed RM Insurance

  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. RM Insurance

  13. Main Steps • Identify risk • Quantify risk • Decide on hedging or mitigation of risk • Execute the decision RM Insurance

  14. Main Steps • Identify risk • Quantify risk • Decide on hedging or mitigation of risk • Execute the decision RM Insurance

  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. RM Insurance

  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 RM Insurance

  17. st. dev mean T-VaR95% VaR95% Risk probabilities 0.14 0.12 0.1 0.08 0.06 0.04 0.02 2 4 6 8 10 12 14 losses RM Insurance

  18. Major Types of Risks • Market • Underwriting • Credit • Operational • Liquidity RM Insurance

  19. Aggregation of Risks RM Insurance

  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. RM Insurance

  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. RM Insurance

  22. Risk Management Insurance RM Insurance

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