Effective Risk Management. Act. Luis Alberto Morales

Transcription

1 Act. Luis Alberto Morales

2 The objective of risk management is: not to prevent people from taking risk but to allow people to understand and manage in the optimal way the risks that they take

3 As risk manager, our role is threefold: 1. to define a framework to help choosing consciously the risks we want to retain defining metrics: NOT to create new complicated indicators BUT to provide a common measurement basis across all risks governance and processes: NOT to annoy people and be bureaucratic BUT to ensure proper information is considered and challenged to base decisions, setting limits: NOT to sadly decrease our bottom line, BUT because our capacity to take risks is limited and should be clearly allocated

4 As risk manager, our role is threefold (cont): 2. to aim for long-term survival of the company ( still be here in 50 years ) We need to be prepared against adverse events: NOT because we are so pessimistic BUT to quicken our reaction and make a difference when it matters most. 3. to promote a culture of selective risk taking People in investment, underwriting, etc..., are all risk takers So everybody should feel as Risk Manager beyond risk teams

5 5 pillars of Risk Management

6 SII metrics Coverage ratio What is it? Own Funds: excess of assets over liabilities Solvency Capital Requirements (SCR) Risk sensitive approach to calculate the capital requirement; Capital needed to pay ultimately all policyholders in a very extreme scenario (1/200 year return period) What is new? New measure for resources (AFR) Capital requirement aligned with the risk taken Recognition of new forms of capital (hybrids) Recognition of advanced risk mitigation techniques Recognition of diversification effect at consolidated level Possibility to develop an internal model tailor made to the risk profile of a given company A coherent application across jurisdictions Should be the same for the standard approach and the Internal Model Measure of our strength Coverage Ratio = OwnFunds / SCR Either assessed with: (i) the standard formula or (ii) internal model

7 SII metrics Coverage ratio (cont) Coverage ratio (CR) >= 100% it is acceptable under SII In practice, a CR>=130% is recommended to guarantee an acceptable SCR after shock. CR [~75%-100%], the insurance company needs to demonstrate that recoverability plans are put in place. If the insurance company is listed into stock exchange a capital injection it is needed. CR [40%-75%], local supervisors will define a rigorous recoverability plan and will closely review to the insurance company. CR [0,40%] i.e. the insurance company it is not able to cover the MCR. Local supervisor would consider to the insurance company in run-off

8 SII return - Introduction of a new KPI linking profitability to capital needed as capital needs to be monitored - KPI needs to be risk-adjusted in order to compare profitability between different business lines and entities - Solvency II will raise awareness of all players on risks and on financial risks in particular - There will be advantages for first movers on the re-design of the products and of investment portfolios - Uses tests will become essential to validate the relevance of the internal model (Insurance companies will have to prove that the regulatory capital calculated from its internal model is actively used in the management of the business) A new KPI is being added in all processes Value created reflects the evolution from one year to another of the market consistent value of assets and liabilities Value created / Required capital Capital required is the required capital over 1 year under Solvency II to sustain an adverse 1/200 year shock

9 2 key consequences of SII should already be managed Solvency II features 1. The balance sheet is economic, fully marked-to-market Consequences Insurance companies need to monitor closely its Solvency II coverage ratio which by nature is more volatile than the previous Solvency I ratio Return on required capital measured on an economic basis 2. The required capital is directly linked to risks incurred both from Liabilities and from Assets Insurance companies need to optimize its portfolio of risks - going from managing a portfolio of activities to managing a portfolio of risks Insurance companies need to. optimize its investments