Beyond RBC - Rethinking ORSA for Competitive Advantage
This whitepaper examines the limitations of the Risk Based Capital (RBC) model and demonstrates the advantages of Economic Capital Models (ECM) as a better, alternative tool for risk management. A well structured ECM not only helps an insurance organization satisfy The National Association of Insurance Commissioners (NAIC) Own Risk and Solvency Assessment (ORSA) requirements, but also goes beyond compliance to provide output and analytics to help management make better decisions related to risk management, capital adequacy and risk tolerance.
Voicing a View - The Rise of Custom Calibrations in Economic Scenario Generators
This paper discusses issues critical to insurers and pension plans. Custom ESG calibrations are becoming the norm. Companies that want to calibrate their ESG to reflect their own views of the capital markets and economies in which they operate should:
Crunching Credit - Best Practices in Modeling and Managing Credit Risk
- Develop methodologies that form a more complete view of risk, recognizing that multiple different views can be valid
- Assure use of the right tools and access to expert advice
- Consider views that align with assumptions for business planning and decision making
Investments in instruments carrying credit risk have become increasingly important across a number of sectors, especially for insurance firms and pension funds. The move toward larger allocations to credit has been driven by a sustained period of low yields, supply shortages for long maturities and deteriorating credit outlook for government debt, making riskier assets appear more attractive on a relative basis. Changes in regulatory frameworks around the world have placed increased pressure on risk management practitioners to use quantitative models and build risk management frameworks with enough sophistication to be proportionate to the exposures they face. This document gives an overview of the important issues that must be considered when incorporating credit into an investment strategy and risk management framework.
“Replicating Portfolios Revisited”, Oct 2014
Recent years have seen an increasing sophistication in the risk management regulatory frameworks for insurance companies around the world, like Solvency II in Europe or the National Association of Insurance Commissioners’ Own Risk and Solvency Assessment (NAIC ORSA) in the United States. Many market leaders in the insurance industry use stochastic projections for their risk-based capital (RBC) calculations instead of using a standard formulaic way to calculate the RBC. This Conning-Milliman paper takes a deeper look at the replicating portfolios method and how it can be enhanced to achieve better solutions to the approximation problem. Two methods allowing for a robust and reliable calibration of replicating portfolios are discussed.
“Emerging Markets: Perspectives on Russia and Poland, ” May 2014
“State of the States, ” April 2014
“The Importance of Risk Attribution, ” April 2014
The financial crisis and increased regulatory scrutiny in an ever more complex global environment has heightened the demand for insurers to understand, measure, and manage risks across the entirety of their organizations. More and more insurers have adopted Enterprise Risk Management (ERM) as a comprehensive framework for assessing internal and external threats to their business. Risk attribution is a critical component of ERM – it determines the overall impact of various sources of risk across all functions of an organization. While regulatory requirements are driving much of the effort, risk attribution is more than a compliance exercise. It is an important decision-making tool for senior leadership to manage their companies effectively.
“Essential Features of A Good Economic Scenario Generator (ESG)” April 2014
An economic scenario generator (ESG) simulates future paths of economies and financial markets and illuminates the nature of risk elements within the economy that drive financial variability. A well designed ESG is critical for insurers to identify and manage internal and external risks to their organizations. This paper distinguishes between real-world and risk neutral applications. The paper then discusses the key features that we believe make the difference between an adequate ESG and one that is truly powerful in its ability to uncover possible risk scenarios. Asset class-specific ESG attributes are introduced to demonstrate the depth and rigor that capturing risk requires.
“Strategic Asset Allocation-A Comprehensive Approach, ” October 2013
This paper reviews approaches to investment risk/reward analysis in a constrained environment with specific emphasis on how Strategic Asset Allocation (SAA) can benefit from and leverage a company's Enterprise Risk Management (ERM) and Economic Capital Modeling (ECM) platforms. It also discusses how a company can use its SAA applications to support rating agency and regulatory Use Test requirements. The paper offers Conning's approach to SAA as well as insights that can be gained from this type of analysis.
“Hedge Fund Evolution: Insurers and Hedge Fund Investing, ” July 2013
- Hedge fund assets under management have surged, reaching $2.4 trillion as of mid-year 2013; institutions dominate the investor base.
- Insurers are underrepresented among institutional hedge fund investors, often deterred by the capital charges associated with hedge fund investments. Of the $15.9 billion of hedge fund investments held by insurers, almost 75% were in life company portfolios.
- The variety of hedge fund strategies has grown and represents a diverse set of points along the risk/return spectrum. Their diversification and risk mitigation potential make hedge funds a beneficial component of a portfolio.
“Planning for NAIC ORSA,” April 2013
The NAIC's proposed ORSA legislation deliberately provides only broad requirements, leaving major implementation issues to the discretion of insurers; this paper discusses some of the major areas where insurers will need to determine their approach and some of the key considerations involved.
“The Importance of Expert Judgment in Generating Economic Scenarios February 2013 ”
Economic scenario generators are a key component of an enterprise risk management approach. An economic scenario generator simulates future paths of economies and financial markets and essentially illuminates the nature of risk elements within the economy that drive financial variability. Because managements rely on the output for a better understanding of the risks their companies face and to guide business strategy and decision-making accordingly, the precision of results is critical.
“Unyielding Yields: Interest Rate Challenges to Insurance Industry Profitability, ” September 2012
“The Correlation Question and Solvency II, ” July 2011
- Central banks in developed economies have driven interest rates down to record low levels
- Investment income has been falling sharply, putting pressure on earnings
- Low likelihood of respite from this in the short run, though long-run threats to capital lurk from future rate increases
- The insurance industry faces an asset-based problem that requires enterprise-wide strategies for its solution
“GEMS® Insights: The 2008 Financial Crisis”
- Correlation between simulated variables is a major theme under Solvency II
- It is a vital aspect in capturing the risk and return profile of assets
- Properly capturing the diversification and concentration effects among assets leads to a more reliable risk or capital calculation
- Implementing correlation represents a major technological challenge for ESG providers
The extreme events of the 2008 financial crisis were characterized by falling equity markets, widening credit spreads, falling yields on government bonds and moderate deflation. These market conditions provided a useful testing ground for all financial markets. In this document the ability of GEMS to capture the crisis is further investigated.