Global enterprise risk management webinar announced

The fourth annual Global enterprise risk management (ERM) webinar will take place in Europe at 2.00 pm (GMT) on 14 January 2011, with separate North American and Asia Pacific sessions on 12 January and 14 January, respectively. 

Featuring debates on latest hot topics in ERM, the Europe event will feature three leading figures from the European insurance industry:

·       Karel van Hulle of the European Commission
·       Alberto Corinti of the CEA
·       Seamus Creedon of the Groupe Consultatif

Europe webinar moderator, Elliot Varnell of KPMG, said: “Following last year’s debate with Kathryn Morgan and Tom Wilson it is a pleasure to welcome Karel van Hulle, Alberto Corinti and Seamus Creedon to debate the hot topics in ERM - particularly at such a crucial stage in the development Solvency II.”

The debate will be followed by a series of 10 minute executive summaries on the leading insurance related ERM research from around the globe. Each executive summary will feature the research explaining the motivation and key results of their research – and providing pointers to more information for the interested reader.

Researchers presenting their executive summaries include Paul Klumpes (EDHEC), John Manistre (AEGON), Andrew Aziz (Algorithmics), David Schraub (AVIVA), Bradley Todd-Smith (University of Cape Town), George Orros (Institute of Actuaries), Richard Shaw (Institute of Actuaries) and Robert Wolf (Society of Actuaries).

Elliot Varnell said: “The standard of ERM research within the insurance industry has been excellent during the last 12 months and we are extremely pleased that so many of the best researchers from around the globe have agreed to share their research ideas.

Registrations are now open at the URL below 
http://www.soa.org/professional-development/event-calendar/event-detail/erm-economic/2011-01-14/default.aspx

Abstracts of the research to be presented are shown below:

Robert Wolf Society of Actuaries, USA
Identifying the Operational Failures Underlying the Global Financial Crisis

The global financial crisis can be largely attributed to a series of catastrophic operational failures which manifested themselves in market, credit and business/strategic losses. This reveals that operational risk is not a unique and distinct class of risk, instead operational risk is embedded in or exacerbates all other risks. This session will discuss research sponsored by the Joint Risk Management Section of the SOA/CAS/CI. The research is the recently published comprehensive research report “A New Approach for Managing Operational Risk – Addressing the Issues Underlying the 2008 Global Financial Crisis” (December 2009) and the management of operational risk in a broader Enterprise Risk Management context. In the report, the researchers define operational risk as the risk of loss from operational failure, which includes system failures, acts of nature, inadvertent execution errors and excessive risk taking, among several other actions and inactions. This session will discuss the identification of these risks by going beyond the traditional audit-based approach to an evolved, holistic, top -down approach with tactical and strategic implications, which is less resource intensive.

George Orros - Institute and Faculty of Actuaries, UK
ERM for strategic and emerging risks working party 

This session will cover ERM and strategic business management for insurance and financial services in a world of ‘unknown unknowns’ and how the CRO can:

•	critically and self-consciously set a strategic direction, aligned with corporate governance processes and the corporate culture, vision and mission
•	focus on ‘risk and opportunity management’, balancing risks against opportunities, whilst being resilient against ‘unknown unknowns’ and their emergence over time as ‘known unknowns’ and ‘known knowns’
•	take greater risk to improve rewards and gain competitive advantage, bearing in mind that achieving strategic direction is like running a marathon where competitive advantage assists only with short-term positioning.

http://www.actuaries.org.uk/sites/all/files/documents/pdf/orroscantle.pdf

Paul Klumpes - EDHEC, France
Corporate, Product and Distribution Strategies in the European Insurance Industry

New regulations introducing fair value financial reporting and enterprise wide risk management systems could significantly changing the business strategies, corporate policies and systems over time to reduce increase firms’ competitiveness, especially given the credit crisis. This study examines whether there are significant differences in European life insurer efficiency attributable to managerial choices about overall strategy, product distribution and target marketing. The objective of this paper is to determine whether distribution system choice plays an important role in relative efficiency across insurers, in the light of this changing regulatory environment. We analyse cost and profit efficiency, strategy and financial characteristics of a sample of 46 life insurance firms spread across six Continental European countries. We find no evidence in support of the Porter (1980) hypothesis that firms which adopt one of three generic strategies (cost, customer focus and product differentiation) are more efficient than rivals that fail to adopt one of these strategies. We argue that this is driven by a combination of tax incentives, regulatory advantages for life insurance and technology transfer. Larger firms are significantly more cost and profit efficient. Our results find limited support for the market imperfection hypothesis that firms with non-exclusive distribution systems are less cost and profit efficient. We also analyse the effect of ongoing consolidation related to the recent credit crisis on the probability of survival. Product leadership firms are most likely to be surviving firms and those relying on exclusive distribution channels experience the highest degree of change in efficiency over time.

John Manistre AEGON / Society of Actuaries

A Cost of Capital Approach to Extrapolating and Implied Volatility Surface

This discussion develops an option pricing model which takes cost of capital concepts as its foundation rather than dynamic replication. The resulting model, called the ‘C’ measure in this paper, is related to the family of Affine Jump Diffusion models that are well known in the finance literature so it is fairly easy to understand and implement. We argue that this is a reasonable model to use for estimating equity implied volatilities that are beyond the 5-10 year horizon that can typically be observed in today’s capital markets. The paper concludes with a short discussion of how to grade from observable market data to the ‘C’ measure. 
Society of Actuaries, USA

Richard Shaw - Institute and Faculty of Actuaries, UK
Measurement and modelling of dependencies in economic capital

This paper covers a number of different topics related to the measurement and modelling of dependency within economic capital models. The scope of the paper is relatively wide. We address in some detail the different approaches to modelling dependencies ranging from the more common variance-covariance matrix approach, to the consideration of the use of copulas and the more sophisticated causal models that feature feedback loops and other systems design ideas. There are many data and model uncertainties in modelling dependency and so we have also endeavoured to cover topics such as spurious relationships and wrong-way risk to highlight some of the uncertainties involved. With the advent of the internal model approval process under Solvency II senior management needs to have a greater understanding of dependency methodology. We have devoted a section of this paper to a discussion of possible different ways to communicate the results of modelling to the board, senior management and other interested parties within an insurance company. We have endeavoured throughout this paper to include as many numerical examples as possible to help in the understanding of the key points, including our discussion of model parameterisation and the communication to an insurance executive of the impact of dependency on economic capital modelling results. The economic capital model can be seen as a combination of two key components, the marginal risk distribution of each risk and the aggregation methodology which combines these into a single aggregate distribution or capital number. This paper is concerned with the aggregation part, the methods and assumptions employed and the issues arising, and not the determination of the marginal risk distributions which is equally of importance and in many cases equally as complex.

David Schraub – AVIVA USA
Andrew Wunsch - Allstate
Luang Fu - State Auto Insurance Companies

Modeling Tail Events

In this session, two topics will be covered – preparing for the implications of a pandemic and concentration risk measures based on marginal PML at enterprise level. 
The first topic will explore the recent emergence of the H1N1 influenza virus, on the heels of SARS and avian influenza incidents, has renewed interest in preparing for the implications of a pandemic. While pandemics fortunately do not occur regularly, the potential impact to financial services companies is significant in many areas including product liabilities, capital and solvency, business continuity, and basic services. The speaker will discuss various considerations in pandemic preparedness for a financial services company including: 
•Product impact–life insurance/annuity, auto insurance frequencies, including capital & solvency
•Business continuity–staffing, critical processes, customer service, etc.
•A sample scenario illustrating impacts to the financial services industry and to the company, including ancillary effects from other industries.
For the second topic, the panelist will present several concentration risk measures based on marginal PML at enterprise level and will discuss the optimal de–concentration strategies under various business scenarios. A case study will follow to demonstrate the approaches. The property and casualty industry has experienced large catastrophe losses from property lines in recent years. A critical task of enterprise risk management is to measure the concentration risk and develop a strategy on geographic mix. A traditional method on concentration risk is to compare the market share of territories (or state, county, ZIP, agency). If market share is well above the average, it may represent a concentration risk. The market share approach provides a direct and straightforward measure of concentration. However, the measure does not directly reflect the right tails of insurance losses, which are the subject of interest in concentration analysis.

Bradley Todd-Smith - University of Cape Town, South Africa
A Comparison of Methods for Modelling Rates of Withdrawal from Insurance Contracts 

Withdrawal from insurance contracts can be a significant risk for insurers. Withdrawal rates can be difficult to predict because withdrawal is influenced by a number of inter-related factors related to, inter alia, the sales process, characteristics of the insurance contract, characteristics of the contract holder, and economic variables. Existing methods used to model and predict withdrawal rates are initially reviewed. Two additional methods which have been proposed in the literature as means for modelling insurance risks are neural networks and Bayesian networks. These two methods are utilised in order to build models to compare their predictive ability with a commonly used method for modelling withdrawal rates, namely logistic regression. The models are evaluated on the basis of practical usage criteria before they are evaluated on the basis of Receiver Operating Characteristics metrics and by using cross-validation. Bayesian networks and logistic regression emerge over neural networks as preferable methods for modelling rates of withdrawal from insurance contracts.

Andrew Aziz - Algorithmics, Canada
Risk- Based Decision Making – Incorporating Risk Management into the Investment Process

The recent market turmoil has focused attention on the question of how to best understand, manage and mitigate risk. One of the common criticisms of risk management is that it produces a lot of detailed reports, but rarely provides portfolio and risk managers with any concrete steps to take to effectively manage risk. During the past several years, leading firms have successfully evolved their risk functions away from pure risk measurement and monitoring and have begun to feed output into risk-based decision frameworks that directly drive performance results. This session will appeal to risk professionals and investment managers within the asset management, pension fund and insurance industries and will focus on the incorporation of advanced risk metrics into the investment process. The session will provide insight into how these firms are looking at risk and the techniques they are using. Topics include:
• evaluation of hedging strategies,
• integration of stress test output,
• what-if trade analysis,
• liability-driven investing and
• advanced optimization and portfolio replication.