ENTERPRISE RISK MANAGEMENT

Click on the headings below for more information.

• Dynamic Financial Analysis

Dynamic financial analysis (“DFA”) is an integral component of any enterprise risk management effort.  It is a critical tool for quantifying and managing the risks an insurance organization faces.

 

DFA is a stochastic modeling process that can be tailor-made to answer a very specific question, such as: Which reinsurance program most reduces the volatility of underwriting income for a specific line of business? It can also be used across an enterprise to model the volatility inherent in an organization’s entire balance sheet, incorporating market, credit, insurance, and operational risk.

 

Constructing a state-of-the-art DFA model requires a thorough comprehension of the statistical theory underpinning the model, an intimate knowledge of the strengths and weaknesses of different modeling approaches, and a solid understanding of how the statistical models can be shaped to mirror the real-world behavior.

 

ReAdvisory has developed DFA models for a wide range of clients to serve a variety of needs.  We have built models to quantify the risk inherent in the insurance process, quantifying the reduction of risk relative to cost for a reinsurance product and the impact of pursuing alternative business strategies. 

 

We have also integrated a state-of-the-art credit risk model for reinsurance recoverables, capturing the migration of ratings over time, as well as the correlation across a diverse base of reinsurers due to the underwriting cycle.

• Economic Capital Models

 

Economic capital is a theoretical measure of how much capital an organization needs to support the risks they face.  Economic capital models are closely linked with Dynamic Financial Analysis (“DFA”) models, which are frequently used to aid in quantifying economic capital.

 

Economic capital models vary in their complexity and application.  Factor-driven risk-based capital models such as those used by U.S. regulators and some rating agencies are among the most basic.  These models, however, fail to capture many of the nuanced differences in risk profiles and the correlation among sources of risk.

 

The use of DFA models, when properly constructed in conjunction with factor-driven risk-based capital formulas, can greatly enhance economic capital models by capturing these differences in risk profiles and the correlation of risk. 

 

This advantage is driving the move away from factor-driven risk-based capital models towards company-specific economic capital models based in large part on DFA models.  European regulators are migrating towards company-specific models via Solvency II, many rating agencies are beginning to review the results of company-specific models as a part of the rating process, and one rating agency has developed its own proprietary economic capital model that uses company-specific risk profiles as an input into the model.

 

ReAdvisory prides itself on its understanding of the different measures and uses of economic capital models, as well as their relative strengths and weaknesses.  Rather than applying generic economic capital models, we customize our modeling to reflect the economic capital models utilized by our clients.

 

We have helped clients develop and implement economic capital models for such purposes as optimization of reinsurance purchasing, allocation of reinsurance costs, and contrasting the impact of alternative business strategies on a company’s risk profile.

 

• Risk Monitoring

A key aspect of an enterprise risk management program is the ongoing monitoring of risks.  This includes the establishment and ongoing monitoring of Key Risk Indicators (“KRIs”), leading indicators of the risks an organization is taking on.

 

KRI in an insurance enterprise can include:

 

• Exposure information – aggregates and PML by zone and peril, limits usage, mix of business by line and industry
• Production – hit ratios, retention ratios, pricing levels (renewal business and new business), rate per unit of exposure
• Claims – frequency, severity, new classes of loss

 

ReAdvisory has extensive expertise in helping clients identify and monitor the risks they face.  We have developed custom analytics, including the proprietary storm shield property aggregate tracking tool, benchmark pricing indices factoring in shifts in limits / deductibles and class of business, and loss analyses (including claim frequency, severity and clash potential).

Contact
John Pagliaccio
jpagliaccio@readvisory.com