Traditional Actuarial Roles – Putting It All Together in an ERM (and EOM) Framework CAS Spring Meeting June 18, 2007 John Kollar, Russ Bingham, Hartford.

Traditional Actuarial Roles – Putting It All Together in an ERM

(and EOM) Framework

CAS Spring Meeting

June 18, 2007

John Kollar,

Russ Bingham, Hartford Financial Services

Gene Connell, Erie Insurance

CAS Centennial Goal (Refreshed)

• Advance their expertise in– pricing– reserving– capital modeling

• Leverage their skills in risk analysis

• Become recognized as experts in the evaluation of enterprise risk

Are you part of the “Big Picture?”

orAre you “silo bound?”

How do you

• Estimate reserves

• Model risk & capital

• Make rates

Without seeing the “big picture?”

(New?) ERM Reserving Questions

• Risk allocation?

(New?) ERM Reserving Questions

• Risk allocation?

• Reinsurance?

(New?) ERM Reserving Questions

• Risk allocation?

• Reinsurance?

• Ratemaking assumptions?

(New?) ERM Reserving Questions

• Risk allocation?

• Reinsurance?

• Ratemaking assumptions?

• Marketing program?

(New?) ERM Reserving Questions

• Risk allocation?

• Reinsurance?

• Ratemaking assumptions?

• Marketing program?

• Underwriting guidelines?

(New?) ERM Reserving Questions

• Risk allocation?

• Reinsurance?

• Ratemaking assumptions?

• Marketing program?

• Underwriting guidelines?

• Predictive modeling?

(New?) ERM Reserving Questions

• Risk allocation?

• Reinsurance?

• Ratemaking assumptions?

• Marketing program?

• Underwriting guidelines?

• Predictive modeling?

• Underwriting cycle position?

Loss Reserve (Unpaid Claim) Estimates

• New Approaches– Stochastic methods– Bayesian estimates– Benchmarking– Confidence intervals

• Fair Value Accounting– Discounted reserves– Market Value Margin– Convergence of FASB to IASB

(New?) ERM Capital Modeling Questions

• Loss reserve adequacy?

(New?) ERM Capital Modeling Questions

• Loss reserve adequacy?

• Risk allocation?

• Reinsurance?

• Ratemaking assumptions?

• Marketing program?

• Underwriting guidelines?

• Predictive modeling?

• Underwriting cycle position?

0.0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9

Cumulative Probability

Lo

ss A

mo

un

t

Aggregate Loss Distribution& Implied Capital

Value at Risk

TVaR

Risk Measurement & (Cost of) Capital Allocation by Line, etc.

CMP HO Auto Cat Multiline

Am

ou

nt

Diversification Benefit

Standalone

Optimize Mix of Capital and Reinsurance Relative Costs

Net Cost ofReinsurance

Cost of Capital

Investment Income

Income Tax Deduction

(New?) ERM Ratemaking Questions

• Capital allocation?

(New?) ERM Ratemaking Questions

• Capital allocation?

• Cost of capital?

(New?) ERM Ratemaking Questions

• Capital allocation?

• Cost of capital?

• Reinsurance?

• Loss reserve adequacy?

• Marketing program?

• Underwriting guidelines?

• Underwriting cycle position?

• Predictive modeling?

Underwriting Cycle PositionPricing Risk

• Competitors’ actions

• Changes in terms and conditions– Coverage provisions– Exposure measurement– Limits– Deductibles– Prices

• Policyholder selection

Confidence Interval Around the Target Combined Ratio

0

0.2

0.4

0.6

0.8

1

0 20 40 60 80 100 120 140 160 180

Combined Ratio (%)

Cu

mu

lati

ve

Pro

ba

bili

ty

CDFTarget Combined

Ratio (104%)

Marketing/Underwriting StrategyReflect Risk in Planning Change

Growing the Business

Standalone Standalone Standalone Total Total

Req

uir

ed C

apit

al

Prospect 1Prospect 2Existing

Predictive Modeling• Use of other information (beyond rating

variables) to more accurately rate a policy– Increased profits– Reduced risk– Lower capital

• Inability to select better policies and compete with other insurers results in adverse selection– Losses or reduced profits– Increased downside risk– Higher capital

Common ERM Issues (Questions)• Loss reserve adequacy

• Capital adequacy and cost

• Risk/capital allocation

• Reinsurance

• Ratemaking assumptions

• Marketing program

• Underwriting guidelines

• Predictive modeling

• Underwriting cycle

“Standard” ERM Issues• Communication

– Clear & complete

• Responsibility/authority– Objectives & resources

• Data Quality– Accuracy, credibility, variability

• Quantification– Model building & parameterization

Robust Analysis of an Enterprise’s Risks (ERM) is

Essential to Sound:

• Ratemaking

• Loss Reserving

• Capital Modeling

What

is

ERM?

ERM

is the

“Big Picture”

Are You Part of the

“Big Picture?”or

Do You Want to bePart of the

“Big Picture?”