Question

Analytics is now at the forefront of the insurance industry. Please describe the applicability of analytics to managing, retaining and transferring risk.

Describe briefly the tools that are being deployed: Product Lines Quantified; Total Cost of Risk (TCOR); Global Peril Diagnostic; Stress Tests and; Peer Analytics.

Answer 1

Risk management is the identification, evaluation, and prioritization of risks (defined in ISO 31000 as the effect of uncertainty on objectives) followed by coordinated and economical application of resources to minimize, monitor, and control the probability or impact of unfortunate events^[1] or to maximize the realization of opportunities.

Risks can come from various sources including uncertainty in financial markets, threats from project failures (at any phase in design, development, production, or sustaining of life-cycles), legal liabilities, credit risk, accidents, natural causes and disasters, deliberate attack from an adversary, or events of uncertain or unpredictable root-cause. There are two types of events i.e. negative events can be classified as risks while positive events are classified as opportunities. Risk management standards have been developed by various institutions, including the Project Management Institute, the National Institute of Standards and Technology, actuarial societies, and ISO standards.^[2][3] Methods, definitions and goals vary widely according to whether the risk management method is in the context of project management, security, engineering, industrial processes, financial portfolios, actuarial assessments, or public health and safety.

Strategies to manage threats (uncertainties with negative consequences) typically include avoiding the threat, reducing the negative effect or probability of the threat, transferring all or part of the threat to another party, and even retaining some or all of the potential or actual consequences of a particular threat, and the opposites for opportunities (uncertain future states with benefits).

Certain risk management standards have been criticized for having no measurable improvement on risk, whereas the confidence in estimates and decisions seems to increase.^[1] For example, one study found that one in six IT projects were "black swans" with gigantic overruns (cost overruns averaged 200%, and schedule overruns 70%).^[4]

^{Tools Used For Risk Management}

^{1. Total cost of risk}

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Jan

DEFINITIONS

Total Cost of Risk – Definition

Total Cost of Risk or (TCOR) is the only accepted measurement of an organization’s entire cost structure as it relates to risk.

Components of Total Cost of Risk

Total Cost of Risk is the sum of 4 major components that are individually measured and quantified. Risk Financing Costs, Loss Costs (Direct and Indirect), Administration Costs and Taxes & Fees.

Risk Financing Costs

Risk Financing Costs include all insurance premiums and attendant costs. Attendant costs should include broker commissions or fees, captive contributions, dividend adjustments, letters of credit and any other items that impact the either the funding of transfer or retention of risk.

Loss Costs

Loss Costs are generally broken up into 2 parts. The direct cost of the losses and the indirect cost of losses. Both of these items impact the organization’s Total Cost of Risk.

• Direct Cost of Losses — Deductibles and claims that are anticipated and funded inside the organization’s risk financing program. (i.e. Captive, Deductible or Self Insurance Programs) In addition the cost of administering claims by third party administrators (TPA’s) are considered a direct cost of the loss as the TPA expense is usually a direct correlation of the claims experience. Any uninsured loss is also a direct cost of loss.
• Indirect Loss Costs — Every loss creates a corresponding expense that is unfunded and in some cases unanticipated. While the risk financing (insurance) may pay the known claim, there is a high correlation of additional unfunded business expenses that arise from virtually any claim. These loss costs are commonly known as The Iceberg. These are quantified and measured in an accurate Total Cost of Risk calculation. (For more on the subject of Indirect Loss Costs see the Wikipedia Indirect Loss cost topic)

Administration Costs

Financial impacts incurred in providing the services required to effectively administer a Total Cost of Risk Program. They include claims management, risk control and all other project costs such as data analytics. In the case where a firm pays additional fees or expense for these services, they are an addition to the TCOR formula. However, when they are provided by a third party (Insurance Brokerage or Risk Management Services Provider) as part of the relationship, they are a reduction to the extent that the measurable ROI exceeds the cost of the services.

Taxes and Fees

The taxes and fees attached to the placement of the risk financing program. They are the various State taxes that become part of the insurance placements that are paid to governmental and regulatory bodies. (i.e. State Surplus Lines or Admission Fees).

2. Global peril diagnostic

This sophisticated diagnostic model evaluates your property portfolio to assess natural catastrophe exposure, designed with your needs in mind.

This tool provides clarity to your exposure to terrorism and a range of twelve natural perils which put your global assets at risk. Our holistic diagnosis empowers you with a strategic foundation for smart next level analytics.

Global Peril Diagnostic's refined evaluation of your comprehensive catastrophe risk includes:

• Gain insight into your terrorism exposure, with quarterly updates to target areas.
• A concise global view of natural perils, the foundation for a smart analytic approach to catastrophe risk
• Interactive map showing the location and peril scores for each of your properties worldwide, and visualization of hazard layers
• Diagnoses your Quality of Address Data, because improving this is the single biggest opportunity to change how the market perceives your exposure
• Risk adjusted benchmarking compares the your property portfolio to the universe of Willis Tower Watson clients.

3. Stress tests

Stress testing is a computer simulation technique used to test the resilience of institutions and investment portfolios against possible future financial situations. Such testing is customarily used by the financial industry to help gauge investment risk and the adequacy of assets, as well as to help evaluate internal processes and controls. In recent years, regulators have also required financial institutions to carry out stress tests to ensure their capital holdings and other assets are adequate.

Stress Testing for Risk Management

Companies that manage assets and investments commonly use stress testing to determine portfolio risk, then set in place any hedging strategies necessary to mitigate against possible losses. Specifically, their portfolio managers use internal proprietary stress-testing programs to evaluate how well the assets they manage might weather certain market occurrences and external events.

4. Peer analytics

Peer Analytics provides investment risk-skill analytics and consulting to insurance companies, endowments, family offices, and pension fund clients.

EQUITY RISK MODELS BUILT FOR OVERSIGHT

Common performance analytics based on Brinson attributions and returns-based-style analysis – including FactSet, Novus, Wilshire, and Morningstar — fail to predict future performance.

Analytics that are not predictive are not valid and decisions based on invalid data are dangerous.

We offer an alternative: robust risk and skill estimates, using statistical risk models built with passively-investable factors, that are strong predictors of future performance.

Users should only trust risk models and performance analytics that they can test out-of-sample themselves, as with replicating portfolio tests. More    Sample

DYNAMIC FINANCIAL ANALYSIS/ASSET LIABILITY MODELING  

Stochastic asset-liability scenario modeling integrating the effects of underwriting risk, leverage, and asset risk on surplus, net income and capital requirements.   More

DFA/ALM PEER RISK ANALYSIS

A time and cost-efficient annual DFA review that assesses both client company and peer company surplus and net income risk postures. Designed to enhance annual risk communication with board members charged with investment oversight. Sample

DFA / ALM MODELS

Cloud-based, user-friendly, transparent, flexible yet robust, stochastic asset-liability models designed to be easily vetted.

PEERTRAC: PERFORMANCE EVALUATION | BENCHMARKING

Performance evaluation incorporating insurance company peer universes, equity and fixed-income style universes, and equity portfolio risk analysis.