Introduction to Predyct-ERM

While most property and casualty (P&C) insurance companies have preferred to implement risk management strategies centered on accounting statements and employing ad-hoc rules and ratios, the financial industry successfully embraced Value-at-Risk (VaR) methodology based on cash flow analysis (RiskMetrics®, CreditMetrics®, etc.). The historical failure of the insurance industry to adopt a modern risk framework has led companies to rely on such capital adequacy standards as Risk-Based Capital (RBC)—a methodology that offers almost no assistance to management regarding such paramount issues as prudent levels of operational capital, sources of risk, appropriate rates of financial return, modeling of future possible economic scenarios, and survival under various market stress conditions.

We present a VaR-based platform that allows for integration of assets and liabilities in a rigorous risk management framework. This Enterprise Risk Model (ERM) measures all the major risks faced by P&C companies: insurance risk, interest rate risk, equity risk, credit risk, foreign exchange, and operating risk.

This presentation covers in detail ERM’s characteristics:

Finally, we apply this advanced risk technology to several companies to reveal risk and capital issues that cannot be identified with conventional industry risk technologies. The authors will demonstrate how this new technology can be used to assist companies in maximizing capital efficiency and migrating from a risk management environment that is governed almost exclusively by ad-hoc rules of thumb to one that is governed by true risk management principles.

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