Solvency II. Building an internal model in the Solvency II context. Montreal September 2010

Transcription

1 Solvency II Building an internal model in the Solvency II context Montreal September 2010

2 Agenda 1 Putting figures on insurance risks (Pillar I) 2 Embedding the internal model into Solvency II framework 3 Solvency II: the Pillar II issues 2

3 1- Putting figures on insurance risks (Pillar I) 3

4 Axa s P&C ERM story begins with reinsurance modelling Axa first acquires ReMetrica in 2000 for reinsurance modelling and optimizing: At this time, ReMetrica was really reinsurance oriented AXA Cessions (managing reinsurance operations of Axa operational entities since 1992 for Non-life and 2004 for Life) developed actuarial modelling and Risk Management processes for managing reinsurance as a Risk Management tools. The use of ReMetrica focused on the modelling of the Underwriting risk and on the impact of reinsurance covers: - Analysing and modelling the insurance risk - Using the reinsurance as Risk Management tool - Defining optimal structure not only for ENTITIES but for an Insurance GROUP AXA Group Exposure Gross Underw riting Result Net Underw riting Result Old Reinsurance Net Underw riting Result New Reinsurance 100% 80% Reinsurance premiums saving 60% 40% Underwriting Result 20% 0% for a greater efficiency in case of large losses. 4

5 From reinsurance optimization to full risk management Reinsurance management implies: Capital resources management - Reinsurance saves capital Protect policyholders - Higher security level And ensure more stable shareholders return ERM Enterprise Risk Management Risk Reinsurance Focuses on One year time horizon Barely only risk linked with losses - Attritional, - Large claims - Cat (Natural or Man made) Capital Return This framework (ERM) actually apply to the whole company Not only loss risks but all underwriting risks (mispricing, insurance market risk, ) But also financial risks, operational risks, reinsurance counterparty risk. 5

6 What we expect a full model to project in Solvency II framework PV of surpluses Internal model enable to: Calculate the economic capital ie. the worst present value of surpluses with probability of 0.5% The more risks as possible are modelled in the framework Average surplus Deterministic view distribution Economic Capital Projection of cash-flows Projection of insurance risks in ReMetrica for assessing SCR but also assessing Risk Margin (MVM)! AFR Tax cost of capital The need appeared to develop new components in ReMetrica! 6

7 Adapting the DFA tool from RI optimization to a full internal model Solvency II is not only about SCR but also Risk Margin (MVM) : MVM calculation involves Economic Capital projections until extinction of reserves run-off: SCR s (economic years return period) Projected years Imply specific component to project run-off as required in Solvency II Need year by year risks projections in ReMetrica on reserves run-off AXA has developed specific models for projecting Volatility on reserves (boni mali projections with inflation) Premium and portfolio modelling but is not a key issue for Short Term risk but future profitability of portfolios Risk drivers are on progress 7

8 Which kind of tools for Solvency purposes? Solvency II settles standards to frame the insurance risk: Risk Measures: 200 years Value at Risk Risk cartography for all marginal risks: - Catastrophe risks - Underwriting risks (premium and loss risks) - Reserve risks - Asset risks - Operational risks. Aggregation and dependence Even if a Standard formula is proposed (in QIS), Insurance companies are allowed to build their internal model if they are able to demonstrate its relevancy and accuracy Different insurance companies could have different modelling approaches. All of them should be easy to implement in a unique simulation tool. The different products characteristics have to be replicable. The tool is the mean, not the goal in itself. Insurance companies need a tool which allow to simulate all these type of risks The simulation tool should not drive the model choice, but the model should drive the choice of the simulation tool(s) ReMetrica is a simulation tool that gets these two fundamental properties as it embeds Standard components whose list could be extended to internal components. 8

9 A overview on model architecture P&C internal model Motor personal Sub Lob 1 Sub Lob2 Economic scenarios In each sub-model Frequency Severity Cat scenarios Motor fleets Motor direct Run-Off (reserves) modelling Premiums modelling Attritional & atypical modelling Cat modelling Property personal Property corporate Property special (construction) Stochastic projections of boni mali and cash-flows Stochastic boni mali (one-year risk volatility) Stochastic projections of boni mali and cash-flows Inflation scenarios Liability personal Liability corporate Reinsurance modelling All flows are gathered and discounted by Accident Year In an in-house AXA component As many sub-models as LOBs modelled OUTPUTS : sets of simulations Correlation / aggregation / allocation of diversification 9 OUTPUTS : Economic Capital, MVM

10 2- Embedding the internal model into Solvency II framework 10

11 Internal model architecture & tools A Solvency II compliant tool suite Calibrate: Reserves Economic scenarios / loss inflation Premium Risk Net Cat modelling Market software's: Cat models ESG Risk Assessment Net Losses Risk Risk on the past Risk on pricing and production AXA estimation modules Platform developed by AXA Project all economic cash-flows Perform projections Simulation ReMetrica!! Several runs Reporting & Aggregation Aggregation / calculation of P&C insurance STEC Production of other metrics (P&C Value) AXA aggregating and reporting tool 11

12 Internal model architecture & tools...around ReMetrica... Calibrate: Risk Assessment Perform projections Reporting AXA estimation modules Platform developed by AXA REMETRICA is used to jointly simulate the risk AXA reporting tool But we still need... sophisticated tools to assess all parameters in input of ReMetrica Outputs of Risk Assessment are tailored for being easily imported in ReMetrica Reporting possibilities inside of ReMetrica does not enable us to provide a reliable, standard reporting: We use a specific AXA reporting tool This tool is designed to automatically import ReMetrica outputs Results analysis & audit Production of P&C indicators, in particular Short term economic capital (Solvency II purpose) Simple replicating tool A simplified tool to replicate the main results, sell and explain the outputs of the internal model analysis help 12

13 An integrated AXA group process Ensure quality, consistency and stability Risk Assessment modules DFA model (ReMetrica) Reporting tool STEP I: Group Definition Standard Template models and tools designed at Group level Spread over all AXA entities for local implementation Entity 1 Entity 2 Entity 3 Entity 4 Entity 5 STEP II: Local Implementation Entities own their internal model: - Adapt and customize the template model according to their business segmentation and their product characteristics (Worker Comp, Health, multi-year policy) - Perform the calculation - Perform the analysis Results auditing and gathering The need appeared to develop new components in ReMetrica! 13 Figures consolidation Group Economic Capital and Value indicators STEP III: Group Validation and Aggregation Figures are consolidated at Group level, whose ensure appropriate correlation between entity risks

14 An integrated AXA group process The automation tool Since 4 years, AXA build automation tool in order: To facilitate model building into entity independently of their granularity: To reduce the operational risk A set of inputs with: -The business architecture (LoB/SubLob) - as many entries as LOB for each parameter The automation tool The full ReMetrica model for all the entities The template ReMetrica Model 14

15 An integrated AXA group process Ensure quality, consistency and stability Ensure robustness and quality among a large number of users!! First: Teaching and disseminating how to use tools A full documentation: how to? documents for all parts of the model, and tools Specific trainings on the Tools (Remetrica) and our Group Template Day to day group support (on ReMetrica model building and model implementation) Focus on Data collection, Internal model requires a good and large data collection Improve data quality, and granularity Standard framework has to adapt to different data collection levels Testing relevancy at each step of the process, Metrics benchmarking and reconciliation Parameters: statistical back-testing tests to test past relevancy of proposed model and associated parameters Posterior to the process: Auditing and Validating A complete validation procedure (documentation, on-site visit, sharing of all internal model elements) Benchmarking Audit and control are Key points of the process 15

16 Solvency II compliance implication in IT properties / features The modeling system has to facilitate validation and control Easy models comparison Traceability of model changes A model easy to read and understand (at least the architecture) Automatic controls as much as possible. Integration in a larger framework (especially with other tools) Easiness and flexibility of data flows importation and exportation Traceability of the data flows exchange Automatic exchanges of data flows Need of deeper and wider documentation How to? guidelines for users Documentation of the code What about the standard formula? Need to test the standard formula (at least for the P&C part) Facilitate QIS / standard formula benchmarks. ReMetrica appears to be on the good way for bringing solutions on this issues and have already tackle some of them. 16

17 3- Solvency II: the Pillar II Use-Test issues 17

18 Axa Risk Management framework consistent with Solvency II approach ERM Enterprise Risk Management Capital protect the risk Economic capital Risk Remunerate the risk (policyholder risk price) Reinsurance Capital Return Remunerate Capital (shareholders) Solvency II definition of economic capital Shareholders should be protected up to a 200 years return period event One year risk with a probability of 0.5% All risks beard by the insurance company risk mapping Which return for which risk tolerance, Risk Appetite Framework - Return versus investors risk aversion Value creation measures - P&C embedded value - New Business Value - Return on capital (RAROC, ROE etc.) Challenge Solvency II standard formula SCR P&C Value framework Use Test of the internal modelling 18

19 What we expect from a DFA tool The Use tests issues The internal model should not be just the Short term economic capital... But a tool to monitor business and to manage risk & capital Risk mitigation issues Reinsurance optimization - This is the origin of ReMetrica conception (!) Securitization strategies testing - A great challenge for the years to come. Even if the financial turmoil has reduced the opportunities in the short term, we are still looking on this side - Reduction of reinsurance capacity - Large AXA experience (auto portfolio in 2005, Cat bonds) Hedging strategies testing - For example inflation, ALM P&C Value P&C Embedded Value Value creation indicators (RAROC..) Strategy testing / profitability adequacy checking - Profitability test at the product level should be consistent with the internal modeling framework (!) This is for us a crucial part of the Solvency II Use Test 19

20 What we expect from a DFA tool The Use tests issues (2) In terms of DFA tool, this means... More rapidity As to calculate P&C Value indicators, a multiyear simulations is needed Use tests involve more calculations, and testing have to be performed : so the run time is crucial More flexibility For example, to test more risk mitigation techniques And also to adapt to different issues as different as, - Product profitability testing - Reinsurance optimization 20

21 Conclusion 21

22 Future challenges ReMetrica has gone with AXA to support P&C Economic Capital modeling but there still huge challenges for the future, How to improve reporting and automatic and reliable data flows inputs and outputs Adapt to risk drivers approach to model correlations The ability of having sequential runs become a key issue for complex modeling and risk aggregation Enhance audit capacities, simulating speed, memory management Cope one-year horizon as well as multi-year horizon in still a flexible and user friendly environment as (AON) Benfield always managed to achieve in the past. 22