Overseeing ASSET .


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MANAGING ASSET/LIABILITY RISK WITH REINSURANCE AND ASSET STRATEGIES - A P/C Insurance Company Application. Casualty Actuarial Society Casualty Loss Reserve Seminar September 13-14, 1999 Manuel Almagro, Tillinghast-Towers Perrin
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Overseeing ASSET/LIABILITY RISK WITH REINSURANCE AND ASSET STRATEGIES - A P/C Insurance Company Application Casualty Actuarial Society Casualty Loss Reserve Seminar September 13-14, 1999 Manuel Almagro, Tillinghast-Towers Perrin Stephen W. Philbrick, Swiss Re Investors - Falcon Asset/Liability Management

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Today\'s Agenda Company\'s Objectives Approach to Asset/Liability Risk Management Profile of Company Analysis of Current Strategy Design and Evaluation of Alternate Strategies Conclusions

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ALMCO\'s GOALS AND OBJECTIVES ALMCo is worried about: Expected esteem and instability of working pay Specific center is on GAAP salary Exposure to indebtedness chance Absolute level and fluctuation of Statutory Surplus Cost adequacy of its reinsurance buy Measured by effect on Economic Value of ALMCo Constituents include: Owners Policyholders Rating Agencies & Regulators

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ALMCO\'s GOALS AND OBJECTIVES\'s ALMCo will probably better deal with its hazard/return profile Alternatives include: Re-guarantee/move kind of business Change rates/terms of inclusions gave Restructure its surrendered reinsurance to existing and future liabilities Revise its advantage assignment profile and speculation style ALMCo has assessed elective reinsurance and resource systems Alternative reinsurance structures for imminent business were considered in conjunction with Alternative resource allotment methodologies

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APPROACH TO ASSET/LIABILITY RISK MANAGEMENT Build budgetary model of ALMCo Identify drivers of money related hazard Decomposition of monetary proclamation changeability Design potential substitute Reinsurance/Asset procedures Analyze appropriations of: GAAP Income, Economic Value, and Statutory Surplus Modify elective spreads to accomplish sought targets

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APPROACH TO ASSET/LIABILITY RISK MANAGEMENT Build model of ALMCo to mirror The budgetary dangers to which ALMCo is uncovered The dangers are multi-period and incorporated The effect of every technique on budgetary results Therefore the model of ALMCo ought to: Simulate Gross misfortune encounter Able to assess elective reinsurance structures Include hopeful resource classifications being viewed as Including just resource classes adequate to ALMCo Cover a three year projection period Reflects ALMCo\'s arranging skyline and existing marketable strategy

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APPROACH TO ASSET/LIABILITY RISK MANAGEMENT Model association is essential for precise impression of dangers ALMCo Investment Strategy Capital Markets ALMCo Assets Economy ALMCo Financials Insurance Market ALMCo Liabilities ALMCo Reinsurance Strategy Liability Cashflows

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APPROACH TO ASSET/LIABILITY RISK MANAGEMENT Each reproduction part creates 500 - 20,000 situations Each situation speaks to a solitary way through time for all factors A course structure permits reliance between chose factors Simulation Components Capital Markets ALMCo Assets Economy Insurance Market ALMCo Liabilities Liability Cashflows

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APPROACH TO ASSET/LIABILITY RISK MANAGEMENT The monetary segment changes situation comes about into money related articulations Economic, GAAP and Statutory bases are delivered Earnings, sources of income, excess, and so on - in view of the specific attributes of ALMCo (duty laws, bookkeeping rules… .) Simulation Components Capital Markets ALMCo Assets Economy ALMCo Financials Insurance Market ALMCo Liabilities Liability Cashflows

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APPROACH TO ASSET/LIABILITY RISK MANAGEMENT The methodology segments apply administration choices to situation comes about Alternate procedures can be assessed utilizing coveted reward/chance measures Searching a scope of techniques for the best reward/chance mixes produces a proficient outskirts ALMCo Investment Strategy Capital Markets Economy ALMCo Assets ALMCo Financials Insurance Market ALMCo Liabilities Liability Cashflows ALMCo Reinsurance Strategy

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APPROACH TO ASSET/LIABILITY RISK MANAGEMENT Different procedures are thought about utilizing the organization\'s chosen measures for reward and hazard Ideal systems have higher reward and lower chance

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APPROACH TO ASSET/LIABILITY RISK MANAGEMENT The "effective boondocks" is the arrangement of conceivable systems that either expands remunerate for a given level of hazard or minimizes chance for a given level of reward

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APPROACH TO ASSET/LIABILITY RISK MANAGEMENT This system can be utilized to assess the ebb and flow technique and discover others that decrease hazard or increment compensate

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APPROACH TO ASSET/LIABILITY RISK MANAGEMENT keeping in mind the end goal to choose which of the effective systems to pick, we have to break down the whole conveyance of results

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OBJECTIVES & APPROACH - Recap ALMCo has finished three stages in Asset/Liability Risk Management: Identified objectives and destinations Developed a way to deal with a stochastic model which precisely speaks to the dangers from resources, liabilities, and their collaboration; and their effect on monetary results Laid out a system for investigating these dangers and techniques for adjusting them in light of the communicated destinations Now ALMCo can continue to applying this procedure to their particular conditions

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Today\'s Agenda Company\'s Objectives Approach to Asset/Liability Risk Management Profile of Company Analysis of Current Strategy Design and Evaluation of Alternate Strategies Conclusions

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Expected Loss & LAE Ratio: Gross: 54% Net: 58% Expenses (to Net Prem): Commissions: 16% Taxes, Lic & Fees: 4% General Expense: 26% Expected Combined Ratio: Net: 104% PROFILE OF COMPANY - Premium & Expenses

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Characteristics: Duration: Liquidation Basis: 2.3 Ongoing Basis: 3.3 Note: For this examination the reinsurance on accounting report liabilities was not rebuilt PROFILE OF COMPANY - Loss & LAE Liabilities

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PROFILE OF COMPANY - Expected Liability Cashflow

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PROFILE OF COMPANY - Current Reinsurance Program Liability Lines of Business Net Retention of $1.0 Million 25% Quota Share on Net Miscellaneous spreads diminish certain lines to a $500 K Net Cost: 40% of Direct WP Property Lines of Business Net Retention of $100K per chance Cat assurance of $140 Million Excess of $10 Million Cost: 55% of Direct WP

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Characteristics: Duration: 4.3 Expected Return: 5.2% Current Investment Style: Buy and hold Assets set apart as accessible available to be purchased High quality - Investment review Conservative - okay of loss of important PROFILE OF COMPANY - Assets

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PROFILE OF COMPANY - Historical Experience Actual authentic experience gives confirmation of unpredictability and moderately low returns Ten year normal Return On Equity = 8.9%

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CURRENT STRATEGY - Projection of GAAP Income Current methodology lessens pay unpredictability, however Significant likelihood of low/negative pay in any given year

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CURRENT STRATEGY - Statutory Surplus Projection In any given year there is a noteworthy capability of decrease in statutory overflow

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CURRENT STRATEGY - Decomposition of Risk Total difference before reinsurance = 46.4 Billion 45.1 from Liabilities, 2.1 from Assets, (0.8) Covariance Total change after momentum reinsurance = 12.5 Billion 11.6 from Liabilities, 1.3 from Assets, (0.4) Covariance

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CURRENT STRATEGY - Reinsurance Strategy Efficiency Reinsurance in Current Strategy: Approximate $105 Million decrease in Standard Deviation, yet Economic cost of $80 million more than three year term

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CURRENT STRATEGY - Efficiency of Asset Allocation

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PROFILE & CURRENT STRATEGY - Recap Mid-sized Company with Property and Liability Exposures Risk Exposure is Virtually all Underwriting Significant Reinsurance Provides security yet at a solid cost Conservative Asset Mix - But not Efficient Yet, results are still unstable Conservative Reinsurance combined with Conservative Assets is insufficient to dispense with instability

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Today\'s Agenda Company\'s Objectives Approach to Asset/Liability Risk Management Profile of Company Analysis of Current Strategy Design and Evaluation of Alternate Strategies Conclusions

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ALTERNATE STRATEGY 1 - Design Alternate Strategy 1: Reinsurance Structure: Aggregate Excess of Loss Attachment at half Loss Ratio Limit of 100 Loss Ratio Points Cost: 27.5% of Direct WP Asset Allocation: Shift to longer span Fixed Income Increase Equity Allocation

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ALTERNATE STRATEGY 1 - Economic Value Modest aggregate hazard decrease, with increment in estimation of $45 million Must likewise take a gander at GAAP pay and Statutory Surplus

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ALTERNATE STRATEGY 1 - GAAP Income Downside hazard is drastically decreased Increases upside potential Lower anticipated that wage due would move towards undiscovered pay

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ALTERNATE STRATEGY 1 - Statutory Surplus Significantly enhances drawback and upside potential

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ALTERNATE STRATEGY 2 - Design Alternate 2 - Integrated Aggregate Excess of Loss Reinsurance: Attachment at half Loss Ratio Limit of 100 Loss Ratio Points Attachment point balanced descending for Equity returns beneath 10% Adjustment rate is one-for-one Cost: 32.5% of Direct WP Asset Allocation: Use distribution inferred for Strategy 1

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ALTERNATE STRATEGY 2 - Economic Value Very little monetary cost with emotional hazard diminishment But once more, we should take a gander at GAAP pay and Statutory Surplus

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ALTERNATE STRATEGY 2 - GAAP Income Downside hazard is practically identical or superior to anything Alternative 1 Improvement in expected pay and upside potential

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ALTERNATE STRATEGY 2 - Statutory Surplus Further lessening in drawback chance over Alternative 1, and Modest change in upside potential

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ALTERNATE STRATEGY 2 - Decomposition of Risk Alternate Strategy 2 takes best preferred standpoint of Covariance Better expansion of hazard amongst Assets and Liabilities .:tslidese

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