Tail Risks How does a CEO think about them?

Transcription

1 Tail Risks How does a CEO think about them? Bronek Masojada Hiscox Ltd 10 th September 2013

2 2 Business Motivation Create a business which serves customers distinctively with specialist insurance/reinsurance products in a way which maximises return on equity within a well defined risk appetite

3 3 Maintain Balance Products + Profits Risk + Returns

4 4 Maintain Balance Products + Profits Risk + Returns

5 5 Maintain Balance Products + Profits Risk + Returns

6 6 Maintain Balance Products + Profits Risk + Returns

7 7 A few beliefs A model will never fully reflect the real world We cannot run our businesses without models Individuals will always seek to game the system More data and/or analysis doesn't always help you understand a risk You can have too much of a good thing

8 There are limits to how well a model can ever reflect real life 8

9 Boxplot and whisker diagram of modelled Hiscox Ltd net loss (US$m) June 2013 Lower 5%- upper 95% range Modelled mean loss Superstorm Sandy - $20bn market loss, 7 year return period Loma Prieta Quake $6bn market loss 15 year return period 1987J $10bn market loss 15 year return period Hiscox Ltd loss (US$m) Hurricane Katrina $50bn market loss 21 year return period 2011 Tohoku Quake $25bn market loss, 45 year return period Northridge Quake $24bn market loss 40 year return period Hurricane Andrew $56bn market loss 25 year return period JP EQ Japanese earthquake US EQ United States earthquake EU WS European windstorm US WS United States windstorm Industry loss return period and peril Mean industry loss US$bn 5-10 year year year year year

10 Do people game the system? 10

11 11 Confusing mysteries with puzzles Puzzles are attractive because they come to clean conclusions. Puzzles can always be solved if you just pay attention to the right information, which is all there for you. Unfortunately, many of the big problems that we face are not puzzles, but rather mysteries. Mysteries are messy, and the methods that solve puzzles don t work for mysteries, and they might actually make them worse. Open Secrets by Malcolm Gladwell

12 12 Hiscox focus No single class overwhelms Total Group controlled income for % = 1,792m 18% Local errors and omissions and commercial Reinsurance 28% 3% Tech and media errors and omissions Large property Global errors and omissions 5% 2% Specialty terrorism, specie, political risks, aerospace 10% 8% Marine and energy 14% Art and private client 7% 5% Specialty kidnap and ransom, contingency, personal accident Small property

13 13 Done well create a symbiotic relationship Internationally traded lines Local specialty lines Larger premium, catastrophe exposed Steady premium growth Shrinks and expands according to rates Excess profits allow investment in retail development Profit generator Value creator Pays dividends Brand builds strong market position Profits act as additional capital

14 14 Managing the tail Micro and Process Focus Individual, business unit, and executive authorities and limits Business plan and business process review and performance 1 Day to day risk management processes Process for identifying new risks, dealing with them and triaging them into business as usual Manage the tail Macro and Strategic Focus Regular reviews of the top 10 risks in the business Discussion and debate on business unit and overall organisations strategy and ambitions 1 What happens when the Capital models or risk controls fail? Grey swan brainstorming and thinking 1 in 10 to 1 in 50. Thematic reviews Rationale Avoid a focus on controls and processes as the sole determinants of effective governance in an organisation Manage scale of information flows Focus on bigger issues means that gaming becomes harder

15 15 Maintain Balance Products + Profits Risk + Returns

16 16 Maintain Balance Products + Profits Risk + Returns

17 17 Maintain Balance Products + Profits Risk + Returns

18 18 Maintain Balance Products + Profits Risk + Returns

19 19 Achieve Balance Products + Profits Risk + Returns

20 Tail Risks How does a CEO think about them? Bronek Masojada Hiscox Ltd 10 th September 2013