giro conference october 2011 henry johnson, jerome kirk, … · giro conference october 2011 henry...

© 2010 The Actuarial Profession www.actuaries.org.uk

GIRO conference October 2011Henry Johnson, Jerome Kirk, Karen Seidel, Matt Gold – Lloyd’s

Workshop C8

- Lloyd’s Update

Agenda

• Three speakers today (plus me)– Matt Gold – Karen Seidel– Jerome Kirk

• Solvency II update– Central workstream

– Scope, Governance and change, ORSA, link to syndicate models

– Actuarial function– Syndicate workstream

• BAU update– Current issue & Interim results– Year End process

1© 2010 The Actuarial Profession www.actuaries.org.uk

Lloyd’s Solvency 2 programme is on track and progressing within published timescales

• Syndicate dry run process is on schedule• Majority of agents meeting the majority of deadlines• Close monitoring of Red and Pink agents continues

• Key syndicate deliverables are crucial for the Lloyd’s Internal Model (LIM) development

• First full calibrated run of LIM to calculate a robust SCR• Key for our evidencing of the internal model requirements• Working towards an end April submission to the FSA

• FSA has commenced their pre-application reviews of the LIM


Our model includes or supports our key solvency and capital activities

Lloyd’sCorporation

Lloyd’sCorporation

Lloyd’s TP Review

Governance & AssuranceGovernance & Assurance

SyndicatesSyndicates

Risk Monitoring & ORSARisk Monitoring & ORSALloyd’s Internal ModelLloyd’s Internal Model

SBF

Syndicate SCR Benchmark

Allocate member capital

LIM CCKLCM

Risk appetite monitoring and capital planning

Corporation Operational Risk management

Op scenario analysis

Lloyd’s Society SCR

Lloyd’s Society Economic Capital

Other risk & capital reports

Emerging risk management

Review and monitoring of syndicate TPs

LIM Reporting

LIRM (inc ESG)

Syndicate SCR Review

Par

amet

eris

atio

n P

roce

ss

External Disclosure

SFCR

RTS

Quantitative Reporting

External DisclosureExternal Disclosure

SFCR

RTS

Quantitative Reporting

Lloyd’s Risk Governance Framework

Internal Audit & Independent Review – assurance on processes and controls

Para

met

eris

atio

nSyndicate Reporting

Solvency II reports

Feedback into Risk Strategy and Risk Appetite

Feedback into Internal Model development

Feedback

Syndicate Business Planning

Internal Risk Reporting

Lloyd’s ORSA

Lloyd’s Risk Reports

DATASRC: Syndicate risk monitoring

CRC: Corporation Risk Monitoring

FRC: Financial Risk Monitoring

LRC

: Ris

k O

vers

ight

Syndicate Returns

SCR

Technical Provisions

Set capital uplifts

Syndicate operations

Syndicate performance monitoring

Strategy & Risk Appetite

Syndicate Internal Models

Review and Approve SBFs

Lloyd’s Strategy & Risk Appetite

Set Franchise Standards

3

We have set out how the LIM will be governed …


LIM IT and Systems

Central Fund(LIM CCK,

PARM)

LIM Manager

LIM Operating Board

Data Standards Management

Qualitative Standards Management

Catastrophe Risk

Management (LCM)

Syndicate Capital (ICP)

Investment Risk

Management (LIRM)

Syndicate Review

Operational Risk

LIM Change Board

LIM operations

ERC

Franchise Board FB LIM Sub-Group

… and how our Change process will operate …


Change Process

ERC

LIM Change Board

LIM Manager

LIM Operating Board

Data Standards Management

Qualitative Team

LIM IT and Systems

Franchise Board

FSA

LIM Component TeamsInitiate the changeRaise the changeReason for changePossible impacts

Assessment of change -Required changeAssess as major / minorReport to LOB

Major/Minor considerations1. Quant impact on SCR/FAL2. Number of components affected3. Complexity of change4. Impact on the 6 tests

Is it a change?---

Approve assessmentImplement agreed Minor changesEscalate not-agreed Minor changes and all Major Changes to ERC/FB for sign off

Approve assessmentSign -off following Major model change, and resolve other escalated issues

Re-approval (for Major changes)

… and how the LIM is integrated within our ORSA process


ORSA Process

LIMModel

tests, inc. use and

validation

Risk management and

monitoring• Risk governance• Reporting and MI

Risk appetite• Setting risk appetite and tolerances

Lloyd’s strategy• Definition of strategic goals and objectives

Solvency assessment

• Assessing the adequacy of member and central assets against requirements

Capital setting• Setting member and central regulatory and economic capital requirements

LIM Supports our risk and capital framework

ORSA element

Lloyd’s strategy

• LIM supports our key activities to ensure a sound capitalunderstanding and allows Lloyd’s to demonstrate capital advantages

Risk Appetite

Risk Management

Capital Setting

Solvency Assessment

• LIM supports the measurement and monitoring of key risk appetite metrics to ensure we know where we are in relation to risk

• LIM provides further understanding of the key risks we face so we can implement effective risk management tools

• LIM supports both member level capital setting and central fund capital assessments in a transparent and robust way

• LIM provides a robust measurement of the state of the market

7

Linking the central and syndicate models


Presentation name 00 July 20059

LIM High Level Model Structure

Synd 1

Synd 2

Synd 3

Synd 85

Produce syndicate results

Member A

Member B

Member X

Central Fund

Allocate to Members

Calculate hit on Central

Fund

Simulate losses

RG n

Asset risk and returns from LIRM

Member allocation from MCAT

PTF FAL CF

Risk G

roups

RG 1

RG 2

RG 3

Simulated Attritional losses

Catastrophe losses from LCM

9

Presentation name 00 July 200510

LIM CCK - Overview

Phase A Phase B Phase C Phase D Phase E1 2

p

p

n

n

Attritional risk

Event risk (catastrophe risk)

Event claims

Attritional claims

p

Total claims

=

+

n

n

n

p

p

1n

t

2n0

t

2 31 Central fund assetsp

n

99.5th percentile(Capital requirement)

Risk types

Members

Syndicates

Allocate Metrics

Management information for

example:% chance of

market combined loss

ratio exceeding

110%

Deficit by syndicate

Deficit by member

Hit on Central Fund

Phase ASimulate losses

Phase BClaims

Phase CSyndicate level P&L,

BS

Phase DMember level P&L,

BS

Phase ECapital requirement

• Solvency capital requirement• Allocation of capital requirement to risk types, members, syndicates

• Discounted cash flows• Risk margin• SII profit and loss account and balance sheet

• RI credit risk• Op & Group risk

• Attritional and event claims at future time periods

• Reinsurance• Correlation between attritional and event claims

• Calibration to syndicate stats

• Allocation of deficit to members

• Impact of deficit on members’FAL and callable layer

• SII balance sheet specific to central fund assets

• Op & Group risk

• Natural catastrophe claims

• Other event claims

• Asset values• Yield curves• Bad debt on assets

CatModel

Treasury Model

• Attritional risk drivers• Dependence between risks• Preparation for catastrophe risk aggregation with attritional risk

• Syndicate noise

Nominal cash flows

Discounted cash flows

11

LIM CCK Input from LCM

• 10,000 event scenarios by Synd-YoA-Event– 5 perils

– (US WS incl GOM, US EQ, Eur WS, JP WS, JP EQ)

– Cross syndicate dependency– In force view supplied by syndicates– Projected forwards and split by Yoa

(Proposed Year, Proposed Year -1, Proposed Year -2)

• Mapping to risk groups• Mapping to currencies (USD, ...)

11

Phase B – Syndicate Claims

1. Calculate mean total net loss, for each synd-yoa-rg-ccy– Net prem * mkt avg Net ULR * payment pattern– Scale to syndicate’s mean total net loss (submitted by synd-yoa)

2. Calc mean attr net claim = mean total net loss - mean cat loss (from LCM)

3. Simulate attr claims– Mean attr claim * claim volatility * syndicate noise

4. Simulate total net claim = sim attr claim + sim cat claim, using rank matching

5. Calibrate resulting distribution to mean and 99.5% net insurance loss for each syndicate, by applying a factor to attritional losses

12 12

The Actuarial Function at Lloyd’s


… and both must meet Solvency II standards

Both Lloyd’s and syndicates will require an Actuarial Function

Lloyd’s ActuarialFunction

14

Syndicate Actuarial Functions

Actuarial Function requirements are split into three areas

• Technical Provisions

– including supporting data

• Underwriting

• Reinsurance

15

And will require (annual) formal report to the Board

Actuarial Function (1)- Technical Provisions

• Requirements are:– coordinate the calculation of technical provisions;– ensure the appropriateness of the methodologies and underlying models

used as well as the assumptions made in the calculation of technical provisions;

– assess the sufficiency and quality of the data used in the calculation of technical provisions;

– compare best estimates against experience;– inform the administrative, management or supervisory body of the

reliability and adequacy of the calculation of technical provisions;– oversee the calculation of technical provisions in the cases set out in

Article 82;

• Lloyd’s have been testing the requirements over the summer…

16

… and have seen that the impact is significant …

Source: y/e 2010 SRD and May 2010 TP submissions

Note: excludes some syndicates so that a like for like comparison can be made

Note: Solvency II TPs include estimated risk margin of 10%

50%

55%

60%

65%

70%

75%

80%

85%

90%

95%

100%

Current basisnet reserves

as at year-end2010

Removal of100% UPRrequirementand marginsfor prudence

Inclusion ofincepted future

premiums

Inclusion ofuninceptedcontracts

Change ofexpense basis

Allowance forbinary events

Discountingcredit

Inclusion ofrisk margin*

Solvency II nettechnical

provisions asat year-end

2010

Source of change in reserves

% c

hang

e in

rese

rves

17

…and need to look closely at the overall impact on the balance sheet

Analysis of Technical Provisions and Impact on Balance Sheet (£m)

Current Basis

Solvency II Basis

Change from Current Basis

%change

Net Technical Provisions 35,422 28,123 (7,299) (21%)

Net Premium Debtors * (2,612) (238) 2,375 (91%)

Deferred Acquisition Costs (2,348) - 2,348 (100%)

Net technical provisions less premium debtors and DAC 30,462 27,885 (2,577) (8%)

Note: table above shows liabilities with a positive sign and assets with a negative sign* Net premium debtors are calculated as insurance and intermediary recoverables less reinsurance accounts payable

Market Total

• “Real” impact is much lower allowing for asset movements– direct impact on Solvency position– Need to ensure consistency with any Internal Model

18

What does this mean for the future of SAOs?

• Can potentially see the future of SAOs going one of three ways:– an SAO based on the TP’s for solvency purposes– no opinion to be given– an opinion on a financial reporting basis and map this

across to solvency figures • Not decided and there are many considerations /

interested parties. For example:– auditors– actuaries / profession– Lloyd’s / FSA– international regulators

19

Actuarial Function (2)- Underwriting

• Doc 29/09 outlines: The actuarial function’s opinion on underwriting policy must include the following issues, at a minimum:

“Sufficiency of premiums to cover future losses.”“Considerations regarding inflation, legal risk, changes in mix, anti-selection

and adequacy of bonus-malus systems implemented in specific lines of business”

• Lloyd’s Minimum underwriting standard state:

“Managing agents are expected to have appropriate pricing methodologies which are transparent and consistent for each class of business. This is to

ensure that the syndicates they manage generate sufficient premiums in the aggregate to achieve the planned levels of profitability in the business plan

approved by Lloyd's.”

20

Actuarial Function (3)- Reinsurance

• Doc 29/09 outlines: The actuarial function’s opinion on underwriting policy must include the following issues, at a minimum:

“The adequacy of significant reinsurance arrangements. Expected cover under stress scenarios in relation to underwriting policy.

The adequacy of the calculation of technical provisions arising from reinsurance.”

• Lloyd’s Minimum underwriting standard state: The managing agent should regularly review its reinsurance arrangements to ensure that:

“All significant risks related to the arrangements, and the residual risks borne by the firm, have been identified.

Appropriate risk mitigation techniques have been applied to manage and control those risks. There is full and regular analysis of the effect of the reinsurance plan on its exposure to

insurance risk, its underwriting strategy and business plan, and its ability to meet regulatory obligations.

Specific consideration has been given to the risks associated with the use of shared reinsurance arrangements.”

21

Syndicate review update


Overall, the syndicate dry run has seen good progress over the summer

• Additional guidance published by Lloyd’s– Final Application Pack, Validation Report and ORSA

• Approx 150 model walkthrough sessions held to date– joint meetings with FSA in many cases

• Further evidence templates submitted by agents• Quantitative submissions on technical provisions, QIS5 and

SCRs• And still significant work until the end of the year…….

23

…the level of the Standard Formula acts as a reminder of the importance of model approval

Note: excludes some syndicates for illustration purposes

SCR vs ICA Comparison

ICA

SCR

- SF Rerun vs. 2011 ICA (215%)

- QIS5 SCR vs. 2010 ICA (244%)

- QIS4 SCR vs. 2008 ICA (157%)

- Current (100%)

25

Half Year results


Source: Lloyd’s pro forma basis, 1) Technical account 2) Return on syndicates’ assets, members’ funds at Lloyd’s and central assets 3) Non-technical account

£m June 2010 June 2011 % chg Dec 2010Gross written premiums 13,490 13,534

8,546

(6,697)

(2,987)

(1,138)

548

(107)

(697)

113.3%

22,592

Net earned premiums 8,285

0

3

24

Net operating expenses1 (2,775) 8 (5,939)

-

(8)

(42)

-

17,111

Net incurred claims (5,403) (10,029)

Underwriting result 107 1,143

Investment return 2 597 1,258

Other income / expenses3 (76) (206)

Profit before tax 628 2,195

Combined ratio 98.7% 93.3%

We have reported a loss in the first half which is heavily impacted by…

27

366

2,749

2,252

1,841

546

57

4,192

1,592

174314

3,395

270

869

565

122

256402

678

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Lloyd’s Major claims: Net Ultimate Claims (£m)

Indexed to June 2011

… unprecedented half year catastrophe claims…

Source: Lloyd’s pro forma basis

£242m - H1 Average

28

… which may not necessarily develop to historic patterns ...

Source: Lloyd’s QMR & Xchanging data

Chilean EQ Development (Gross)

0%

20%

40%

60%

80%

100%

1 3 5 7 9 11 13 15 17 19Month

Incu

rred

/Ulti

mat

e

Hurricane benchmark Chile Earthquake benchmark

29

Combined ratios

2010H1

… elsewhere have seen little movement in other elements of the combined ratio

2011 H1

Source: Lloyd’s pro forma basis

80%90%

100%110%120%130%140%

Accident year Major losses Prior year reservemovements

Calendar year

(5.5%)

86.4%

113.3%32.4%

80%90%

100%110%120%130%140%

Accident year Major losses Prior year reservemovements

Calendar year

86.2%

98.7%(4.6%)17.1%

30


Note: PTF – Syndicate Premium Trust Funds; FAL - Members’ Funds at Lloyd’s

IR: 2.4% 0.9% 1.6% 1.3% 1.1%

Investments in the first half were “modest”

Source: Lloyd’s pro forma financial statements, 30 June 2011

INVESTMENT RETURN

-100

0100

200

300400

500

600

700800

900

H1 07 H1 08 H1 09 H1 10 H1 11

£m

PTF FAL Central assets

2,298

2,925

3,099

2,490

2,756

0

5,000

10,000

15,000

20,000

25,000

Dec 2007 Dec 2008 Dec 2009 Dec 2010 Jun 20110

500

1,000

1,500

2,000

2,500

3,000

3,500

Members' balance (surplus)

Members' funds at Lloyd's(FAL)

Central assets (excludingcallable layer)

Solvency surplus

Source: Society of Lloyd’s financial statements

14,46115,264

19,121

But solvency coverage and central assets are now at record levels

17,357

Balance Sheet (£m)Solvency (£m)

19,121

32

Current Issues and Year End timetable


Looking forward to year-end

• The catastrophe losses will impact the year-end• No new reserving “hot topics” have emerged …• …. but last year’s do remain

– UK Motor

– Italian Hospitals

– Casualty and the cycle

• Monitoring and understanding reserving remains vital

– at the same time as transitioning to the new regime

34

Year-end - submission dates - reminder

• Please submit two copies of the SAO report– one of which must be a hard copy, electronic copies are

encouraged– reports to Jerome Kirk, Market Reserving & Capital, G5,

Lloyd’s, One Lime Street, EC3M 7HA, – submit electronic copies via email to [email protected]

Submission DeadlineUS Trust Fund SAOs 13 February 2012

Worldwide SAOs 23 February 2012

SAO Reports 30 March 2012 or earlier

35

Wrap up and Questions


• Central and syndicate level Solvency II projects are progressingwell– And are closely intertwined: BOTH must succeed– Many requirements of the Actuarial Function should already

exist• Half Year results reflected the risks taken at Lloyd’s• Current issues and year end timetable: no major changes

GIRO conference October 2011�Henry Johnson, Jerome Kirk, Karen Seidel, Matt Gold – Lloyd’sAgendaLloyd’s Solvency 2 programme is on track and progressing within published timescalesOur model includes or supports our key solvency and capital activitiesWe have set out how the LIM will be governed …… and how our Change process will operate …… and how the LIM is integrated within our ORSA processLIM Supports our risk and capital frameworkLinking the central and syndicate modelsLIM High Level Model StructureLIM CCK - OverviewLIM CCK Input from LCMPhase B – Syndicate ClaimsThe Actuarial Function at Lloyd’s… and both must meet Solvency II standardsActuarial Function requirements are split into three areas Actuarial Function (1)�- Technical Provisions… and have seen that the impact is significant ……and need to look closely at the overall impact on the balance sheetWhat does this mean for the future of SAOs? �Actuarial Function (2)�- UnderwritingActuarial Function (3)�- ReinsuranceSyndicate review updateOverall, the syndicate dry run has seen good progress over the summer …the level of the Standard Formula acts as a reminder of the importance of model approvalHalf Year resultsWe have reported a loss in the first half which is heavily impacted by…… unprecedented half year catastrophe claims…… which may not necessarily develop to historic patterns ...… elsewhere have seen little movement in other elements of the combined ratioBut solvency coverage and central assets are now at record levelsCurrent Issues and Year End timetableLooking forward to year-endYear-end - submission dates - reminderWrap up and Questions

giro conference october 2011 henry johnson, jerome kirk, … · giro conference october 2011 henry...

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