Risk Management for Australian Life (& General) Insurers

Transcription

1 Risk Management for Australian Life (& General) Insurers ICAAP & LAGIC 2013 年 11 月 29 日 演講人 :FredRowley Rowley, MA, FIA, FIAA, Hon FFA, CERA Appointed Actuary, TAL Life Ltd, Sydney, Australia Past President, Institute of Actuaries of Australia Director, CERA Global Association Why me? In Australia, the Appointed Actuary plays several roles in a Life Insurer s ERM processes: Annual Financial Condition Report (required by law) must: Review Profitability (by product, fund and company) Recommend insurance risk stresses Calculate Position (current and projected) Review Risk Management Framework (suitability/adequacy) Review and Comment on ALM matters Review Reinsurance Administration (effectiveness) Highlight impact of any financially material compliance issues Product Financial Advices (required by law) must: Consider consequences of any proposed product or reinsurance actions/ changes/ discontinuances 2

2 Essential Background In Australia, insurers report assets at fair value for accounting and regulatory purposes (with very few exceptions) In the P&L, policy liabilities are calculated as a best estimate (which allows for option asymmetry) plus profit margins which will be released over the period during which policy services are to be provided, in line with a carrier (e.g. carrier = premiums or claims) No profit permitted on new business: acquisition expenses are deferred and amortised through P&L: as a result, liabilities for viable risk (noninvestment) lines can often be negative, and vary with changes in interest rates: this approach is modified in the regulatory basis Losses are recognised as soon as best-estimate liabilities not adequate to recover DAC (which may be at the time of issue) Profit and Loss is occasionally quite volatile. 3 Australian ICAAP Overview ICAAP Risk Management Framework Adequacy Framework Risk Appetite Statement Business Plan Risk Management Strategy (Demand) Measurement & Reporting ICAAP Summary (incl. Target Policy) (Supply) Measurement & Reporting & Reporting Policy) & Reporting Sourcing (Strategy) ICAAP Report 4

3 Australian ICAAP Overview Internal Adequacy Assessment Process - Includes risk measurement & management, projections, capital planning & management (incl. sourcing), reporting, compliance, 3-yearly independent review, etc, etc. - APRA is looking for real Board and CEO ownership, real-world ld feel, and demonstrable depth (e.g. Target Surplus process) - ICAAP integrated into business decisions and planning - position (PCA etc) to be published (not Sup Adj) - Includes scenario-based stress tests -> capital sourcing - usage breakdowns, 3-yr projections (profit?) - 3-yearly review by operationally independent person 5 Risk AND Management in a Control Cycle Measure Action Plan/Monitor Action Measure Available (Supply) Measurement Management/ Sourcing Situations Addressed Cycle Risk Control/ Management Risk Charge (Demand) Measurement LPS 112 Calculation (Appointed Actuary) Regulatory Adjustments Prudential Adjustments Dividend Policy/ Reductions Other (P&L, admissibility, experience, growth, etc) Options to Increase Current/ Historic Positions Business Plan Forecast Positions Stress & Scenario Tests Risk Appetite Risk Limits Retrocessions Policy Investment Policy Credit Exposures Prescribed Amount from LPS 114/5/7/8 Validated Target Surplus Cycle 6

4 ICAAP (incl. Summary) (LPS110 S13/14) ICAAP must contain: - ADEQUATE & APPROPRIATE - risk measurement & management, projections, capital planning & management, reporting, compliance, review, etc - Strategy t for maintaining i i capital adequacy over time (TS), addressing all risks and including capital sourcing strategy - Stress-testing and scenario analysis - Compliance processes, actions and procedures plus (potential) breach avoidance and reporting (S55) - Shows ICAAP (and ICAAP reporting) are in practice driving i business decisions 7 ICAAP Report (LPS110 S17/18) ICAAP Report (ANNUAL, BUT. ) - Current and 3-yr projected capital level vs Prudential Requirements & Target - Actuals vs ICAAP Plan (amounts and actions) for last year - Changes to ICAAP - Detail and Outcomes of stress-testing & scenarios - Breakdown of Usage over the planning horizon business activity/ geography/ risk types - Anticipated changes in risk profile or capital processes - Reviews of ICAAP and responses to them - Compliance/ Adequacy/ Accuracy (S18 Declaration) 8

5 ICAAP Implementation (1) Basic (Periodic) ICAAP Reporting - Quarterly APRA statistical reports - updates APRA on capital position from March ICAAP Annual Report - for many, Apr 2014 will be the first full ICAAP Annual Report but even so, they will need substantial reporting before then (i.e. already) - most expected to treat as a continuation of Financial i Condition Report - including ICAAP compliance monitoring 9 ICAAP Implementation (2) Continuous Risk & Management - Boards expected to have been involved in Risk Scenario workshops, and to understand implications of stress tests for management & sourcing - Adequacy/ Target issues will probably be escalated via CFO and/or App Actuary via Risk Committee - Requires continuous monitoring of balance sheet (current & projected) by actuary and management - Many key components to be built 10

6 Australian ICAAP Overview ICAAP Risk Management Framework Adequacy Framework Risk Appetite Statement, Limits & Tolerances Business Plan Risk Management Strategy (Demand) Measurement & Reporting LAGIC Measurement ICAAP Summary (incl. Target Policy) (Supply) Measurement & Reporting Sourcing (Strategy) ICAAP Report 11 LAGIC Measures Statutory Measurement of entity capital is designed to harmonise with banking and other insurers capital measurement: is divided into Common Equity Tier 1, Additional Tier 1, and Tier 2 capital with restrictions on amounts that may be set against capital charges. CE Tier 1 must exceed 60% of the Prudential Requirement Tier 1 must in total exceed 80% of the Prudential Requirement Base must exceed 100% of the Prudential Requirement Base is adjusted to be the maximum of the total termination values in any fund and the risk-free best-estimate liabiltiies (RFBEL) which removes negative liabilities 12

7 Risk Appetite (& Target Surplus) Risk Appetite Statement(s) Specifies risk appetites and/or tolerances in simple terms at a high level, for the company as a whole Conceptually, may relate to: likelihood of failure to meet regulatory requirements likelihood of profit deviations from plan (P&L total or specific items) likelihood of failure to meet policyholder obligations Needs to be defined over a specific timeframe (& net/gross) Acts as basis for cascading risk measures to lower levels in more concrete terms, and in particular, supports determination of risk tolerances and risk limits at lower levels Examples: Likelihood of failing to meet regulatory capital requirements over a one year period is below X% Likelihood that half-yearly credit losses exceed $Ym is below Z% 13 Risk Limits & Tolerances Cascade Examples Insurance Risk: Product Features and Sales Volumes Underwriting Limits Automatic Cover Limits Pricing Guidelines and Price Approval Authorities Retention ti Limits it (individual) id Retention Limits (Group) Asset Risk: Credit category exposures Aggregate counterparty exposures Inflation (mismatch) limits IBS Duration (mismatch) limits Equity/Inflation-driven guarantees Reinsurer collateralisation (vs. concentration risk) 14

8 LAGIC Risk Measures Regulatory Basic Methodology for Risk Charges (Over-simplified!): Aiming to get 99.5% confidence that capital will be sufficient to meet liabilities (or termination values) after one year at company and sub-fund levels Apply insurance stresses (only) to calculate the Insurance Risk Charge. Actuarial judgement is applied to calculate most stresses. Apply asset stresses (only) in several different scenarios to calculate Asset Risk Charge; select the plausible worst case Apply diversification within each calculation Calculate l the additional impact of Aggregation (formula) Apply insurance and asset stresses (reduced by a formula) together, and adjust for tax effects and management actions. Compare with the plausible worst case selected above, and take the greater value; add the Operational Risk Charge, and the Asset Concentration Risk Charge (which are calculated separately) 15 Risk Measures Regulatory (LAGIC) Insurance Risk: Random mortality/morbidity fluctuations (relative to trend) Deterioration of mortality/morbidity y trends Event including pandemic Adverse lapse rate variations Adverse expense variations Asset Risk: Market risk (equity prices/ interest rates/ real estate/ inflation, currencies, derivatives, etc.) Credit (spread) risk Credit (default) risk Counterparty limits Reinsurer concentration limits 16

9 Risk Measures Regulatory (LAGIC) Operational Risk: Unit-pricing and other policyholder failures (~assets/ liabilities) Other operational breakdowns (~premiums) Rapid increase/ decrease in scale of operations (~change in premiums) Outcomes: Total charges = Prescribed Amount (PCA) PCA (PCR) is compared with regulatory Base Process provides $ sensitivities to various events Must be integrated with pricing and financial reporting More sensitive to risk, so capital demand is quite volatile Allows for diversification => potential for optimisation Relates to fairly real world scenarios (useful later!) Good but volatile basis for capital & NB planning No really useful P&L measures 17 Risk Measures Target Basis: Sufficient to give a 97.5% likelihood of meeting regulatory capital requirements over a one year period Defined at the Company level Takes account of likely P&L impacts affecting Base Takes account of likely movements in PCA Excludes very unlikely events Some operational risk modelled Real-world world scenario calculations modelling what the PCA and Base would look like after the events occur Set $ amount, which is reviewed periodically May fill any gaps in the Prudential Requirement Acts as an aggregate quantified risk control (how?) 18

10 Reinsurance as a Risk Mitigation Retail & Group business lines: Mitigates pricing risk and random fluctuations Mitigates capital impact of new business CAT Cover / Stoploss: Mitigates extreme random fluctuations Overall: Reduces capital demand (short position in insurance risk) Second reference on pricing Some admin/underwriting support Profit impact Can lead to counterparty risk concentrations 19 Asset[/Liability] Risk Detailed Points Asset Risk measures: Allow for change in asset value minus change in any matched liability Allow increases and decreases in interest rates, inflation, and currency market prices, as well as falls in equities/ real estate/ bonds (via spreads) and various types of asset default; as well as possible increases in equity volatility What about Liquidity Risk? And what about New Business? 20

11 Operational Risk Statutory Basis = Formula based approach with no discretion ORCR = 3% {maximum(gp1, NL1) + maximum(0, GP1 GP0 0.2 x GP0)} Target Basis = Simulation based on reasonable parameters Some instances of feedback from experience Overall: Target basis is much more real-world This overlay on the Statutory Basis is what enables the business to continue in a sound manner 21 Risk Concentration Reinsurance - Statutory Basis 25% of stressed value of assets in the fund Must be registered insurer else 2.5% limit Mitigated by legally-enforceable collateralisation Other limits on deposits, and any single asset See LPS 117 For i) any other actively traded security; ii) a non-traded security, loan, or reinsurance arrangement with a counterparty grade of 1, 2 or 3; iii) real estate; or iv) other income producing real property asset: The greater of: i) 5% of VAF; and ii) 25% of capital base. And half that limit for any asset not covered by any of the above categories. 22

12 Financial Stress/ Scenario Testing APRA strongly recommend the use of scenario tests, stress tests, and reverse stress tests Board should take ownership and be actively engaged May operate through the Board Audit / Risk Committees Different tools have different uses Scenario tests may be the best tool for capital planning All of these integrate with the base tools for LAGIC Philosophy documented in the ICAAP Summary Statement Results and policies arising from the work will be documented in the ICAAP Annual Report. 23 Planning & Sourcing Outputs from the various projections and tests are used to build a projection of capital demand and capital supply Board should take ownership and be actively engaged, using results from testing Planned uses of capital => geographic, product, etc Supply side may be less predictable, but equally necessary APRA require tracking of actual outcomes against plan APRA require review/update processes All this is necessary for business purposes regardless but probably more complete and formal now 24

13 Financial Risk/ Dashboards Companies have built detailed capital demand/supply projections, by product line and fund, to complement its qualitative ERM tools Used as an important live management tool, alongside budgets, and business planning Risk Committee will manage review/update Supplemented by tests to warn of discontinuities in the basis (e.g. monitor risk concentrations) Supply side may be less predictable, but equally necessary Board/shareholder will review actual outcomes against plan 25 What is the Industry Impact? Companies have generally been able to release some capital after LAGIC measures were introduced Greater risk-sensitivity, iti it allowing for judgement to be used Allowance for diversification, without excessive complexity Synergies between product lines BUT Some capital instruments have needed d to be refinanced charges have been more volatile than before Greater risk-sensitivity Unusually volatile experience For many reasons, Boards are becoming very familiar with the Risk profiles and dynamics of their companies LAGIC/ICAAP introduction was designed to illustrate scenarios Real-life scenarios have arisen, too Process may have been just in time? 26

14 Is this ERM? Yes, provided it is. supplemented by real-world ld overlay (including the Target process) and tests to warn of inadequacies or discontinuities in the regulatory bases (e.g. monitor risk concentrations) used as an important live management tool, alongside budgets, and business planning, so that the Board/shareholder take notice and are prepared to act Can you suggest any other provisos? 27 Thank you! 28