Value of Dynamic Financial Analysis for Insurance Companies www.ultirisk.com
Main Applications of DFA 1. Ceded Reinsurance Evaluation and Optimisation 2. Risk-Adjusted Capital Allocation and Pricing 3. Asset Portfolio Optimisation
1. Ceded Reinsurance Evaluation Insurers spend hundreds of millions of dollars annually on Ceded Reinsurance Is such large expenditure always efficient? Insurers over-rely on brokers in reinsurance purchasing Best protection is not necessarily the most expensive Insurers need internal reinsurance analysis capabilities
Reinsurance Analysis in Risk Explorer Point-and-click evaluation of even the most complex Reinsurance Programmes Growth of Capital can be maximised while providing adequate reinsurance protection
Reinsurance Analysis in Risk Explorer Required Capital under each Reinsurance Programme calculated automatically Return on Risk- Adjusted Capital shows relative benefit of each Reinsurance Programme
Reinsurance Optimisation Ultimate Objective: To find the best Reinsurance Programme Which, for a selected level of Capital at Risk net of Reinsurance, Would maximise return on such Capital
2. Risk-Adjusted Capital Allocation Accounting figures hide true risk picture Business lines that appear profitable can in fact be dangerous Risk-Adjusted Capital Allocation reveals potential danger Return on Risk-Adjusted Capital shows relative performance of business lines and classes
Risk-Based Pricing Low Return on Risk-Adjusted Capital (RORAC) means rates should increase, high RORAC means rates can be reduced that is Risk-Based Pricing Risk-Based Pricing can be done for each business line and, if the data permits, for different sub-classes within each line If Risk-Based Pricing is applied consistently over multiple years, then during the process: Bad risks would leave the company or be priced at high rates Good risks would be attracted to the company by lower rates Result is a better managed, more profitable company
3. Asset Allocation and Optimisation Large insurance companies have billions of dollars in assets Intelligently chosen Investment Strategy can substantially increase profit of the company or reduce the risk while maintaining the same level of profitability Choosing the right Investment Strategy among many unknowns is a challenge Advanced insurance companies perform Strategic Asset Allocation with the objective of maximizing return on investment or minimizing the risk
Unknowns Macroeconomic environment that impacts market values of assets: Interest Rates Inflation Exchange Rates Stock Indexes Cash flows from insurance operations that impact amount of invested assets: Positive cash flows require investment decisions Negative cash flows drain the assets
Computer Simulation Techniques Impossible to know future outcomes of macroeconomic variables and insurance cash flows Possible to simulate them multiple times, each such simulation produces scenario that can occur in the future Large number of simulations provide large universe of possibilities under which we need to maximize Surplus of the company Different Asset Allocations can be tested on hundreds of thousands of future macroeconomic and insurance cash flows scenarios
Simulating Macroeconomic Volatility
Simulating Insurance Cash Flows
Asset Portfolio Optimisation Asset Portfolio Optimizer uses sophisticated optimisation techniques to: Automatically select different Asset Allocations Run each Allocation through hundreds of thousands of simulated macroeconomic and insurance cash flows scenarios Find Optimal Asset Mix that maximises expected Surplus in different risk bands Risk bands represent different volatility of Surplus Company would then choose a risk band and invest as indicated by Optimal Asset Mix in that band
Optimal Asset Mix - Efficient Frontier
Why Ultimate Risk Solutions (URS) Powerful Economic Scenario Generator (ESG): Unique and original modelling methodology Reviewed by world s leading academics Over 30 economies modelled Powerful Dynamic Financial Analysis (DFA) software generating cash flows of insurance companies: Quick construction of complex risk models Easy to use, fast simulation run time Used by world s top insurers, reinsurers, and reinsurance brokers Powerful Asset Portfolio Optimizer
URS Products: Predictable Dynamics - Produces large number of scenarios for macroeconomic variables in multiple economies, such as: - GDP growth, Inflation rate, Exchange rates, Interest rates, Stock indexes and many others - that impact Market Values of Assets Risk Explorer - Aggregates all Risks and Assets of Insurance Company into a portfolio - Produces large number of scenarios for Losses, Premiums, Expenses and Earnings of the Company - Analyses impact of Ceded Reinsurance or Investment Strategies on Profit, Surplus and Cash Flows of the Company
URS - Client Snapshot
Value of URS Technologies