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health, group life, marine, and automobile physical will require RM to have considered not just the
damage. underwriting risk but to have incorporated the potential
impact on the investment portfolio, liquidity, reinsurance
These exposures may not be coded to location in the same recoverable, and business continuity both from a holding
detail as property policies, nor be subject to the same company and individual subsidiary legal entities level.
modeling capability. As such, RM needs to be comfortable Mitigation actions may then involve internal or commercial
that processes are in place and effective to identify peak reinsurance, standby credit, and/or similar arrangements
property exposures through name and location clearance to balance the potential exposures and financial stress the
systems in order to allow for identification of significant organization faces.
exposures to non-property lines of business at the same
location. Concentration risk from credit-related exposures:
Man-made catastrophic events can similarly impact all lines Another aspect of concentration risk arises from multiple
of business. This category includes events ranging from financial-related exposures to an individual policyholder. A
terrorism, primarily, to a train accident involving toxic significant event, such as a fraud or severe downturn in
chemicals. Terrorism exposures are generally divided into profitability, might lead to losses from a D&O policy, surety
two categories: conventional attacks (conventional bomb, and fiduciary coverage, and/or financial guarantees, plus
aircraft used as a missile) and non-conventional (nuclear, losses on any debt or equity investments, securities lending,
chemical, biological, radiological "NCBR" e.g. a "dirty reinsurance recoverable from a captive, and exposure as
bomb"). counterparty to a derivative transaction. In addition, third-
party liability and/or retrospectively rated insurance
Property and business interruption policies may or may not programs may generate exposure due to large deductibles,
include coverage for a terrorist act or coverage for NCBR. retrospective premium adjustments or other credit risk.
Policies covering worker compensation or employers liability,
by their nature, may provide coverage for all such events. From a RM perspective, tools to monitor and evaluate peak
From a RM perspective, it's important that data be exposures bridging insurance commitments and financial
captured identifying policies with NCBR coverage. It is also holdings need to be in place, as well as assurance that
vital that the same infrastructure and modeling capability assessments of the creditworthiness of the policyholder are
for monitoring and managing accumulations noted for effective and guiding collateral negotiations. Correlations
natural catastrophes be in place for man-made between the various insurance and financial exposures
catastrophic exposures. under stress scenarios need to be determined with limits
set reflecting both underwriting and credit rating
Stress Scenarios: Stress scenarios are especially considerations.
necessary for determining aggregate limit boundaries for Data capture: Accurate, thorough, relevant, detailed
natural and man-made catastrophic events and guiding
decisions on purchasing reinsurance protections. For data capture is key to measuring, modeling and managing
example, in addition to considering the results generated the risks of unintended exposure accumulations. RM needs
from the modeling tools, the ERM framework for Lloyd's to ensure that adequate auditing is in place to allow
includes consideration of specific Realistic Disaster Scenarios reliance on the data collected.
as a test of exposures under extraordinary circumstances.
Similarly, RM needs to be comfortable that underwriting
Further, RM is uniquely positioned in many insurance has the processes in place to monitor and manage individual
organizations to consider the interaction of risks from account underwriting across multiple business units,
different organizational silos in stress scenarios. Very low policyholders and lines of business to stay within agreed risk
probability events, like a 1 in 250 year windstorm or limits. Name clearance systems, allowing each underwriter
earthquake, a significant terrorism incident, or a pandemic participating on a policyholder's program to see all the
commitments to that policyholder, are an effective tool in
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10 June 2015 Life Insurance Today
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