Credentials

 
PENSION DUE DILIGENCES
  • Client issue   
    Regularly, in the context of company reorganisations our industry clients ask us to evaluate the impact on their employees and pension plans. The optimisation of social protections encompasses pension and healthcare plans (benefits and funding), as well as the harmonisation of intragroup benefit plans. Similarly in the framework of M&As our clients require on a regular basis our assistance and advice to assess the pension risk of the target companies. Often we are also involved in the establishment, recapitalisation or liquidation of pension funds.

  • Approach used   
    Analysing the relevant documents (e.g. affiliation agreement, pension plans etc.). Risk assessment under statutory and IFRS aspect.

  • Client benefit   
    Obtain solutions for several problems (e.g. ensure compliance with the standard). Recognition and valuation of the transaction risk.

 
  • Client issue
    A client wished to gather a second opinion on the way he used to check the degree of convergence of his economic capital model.

  • Approach used
    We reviewed the documentation of the client and confirmed the good sense of the methodology. However, we also pointed out that the methodology was more cumbersome than more standard approaches, of which the implementing team was not aware.

  • Client benefit
    The Chief Mathematician understood that the method his team implemented, albeit correct, may lead to wrong results because it requires sophisticated human intervention at local level. We convinced him to eventually implement a simpler yet more powerful error & convergence Analysis
     

REVIEW OF A MONTE CARLO CALCULATION
 
REINSURANCE RENEWALS
  • Client issue    
    Regularly we are approached by reinsurers to provide them with pricing support and advice during their renewal, typically at the end of the year. This need can be due to a temporary lack of adequate resources to cope with the increasing pricing workload.
    But the need can also arise from the absence of appropriate pricing knowledge or experience in the team.

  • Approach used   
    On a standard basis we price all proportional & non-proportional treaties, short & long tailed. Depending on the department's setup, we may or may not have the Chief Actuary review our quotations.
    In all cases, though, we explain our findings to the responsible underwriter and help her convey them appropriately to the broker or cedent.

  • Client benefit    
    In all cases the reinsurers managed to finish the critical renewal season having actively quoted all the treaties their cedents submitted.

VALIDATION OF AN ECONOMIC SCENARIO GENERATOR
  • Client issue    
    The client, a major reinsurer, had developed an economic scenario generator (ESG) to perform its ALM and run its internal solvency capital model. The Swiss regulatory authority wanted a third independent party to review this ESG and to assess whether it fits the requirements of the Swiss Solvency Test. Our client requested us as the reviewers and the regulator endorsed this choice.

  • Approach used   
    We first elaborated an initial list of ESG components and outputs to assess in the framework of the solvency calculations, and had both the regulator and the client endorse this list.
    Having thus set the scope, we reviewed the documentation and interviewed the owners and developers of the model.
    Based on the understanding we had gained, we designed and ran a large array of tests on the data, the method, the implementing tool and its outputs.
    In our report to the regulator, we summarised the methodology of the ESG and its implementation, and we compiled the findings of our tests.

  • Client benefit    
    The regulator gained substantial comfort. The same report could also serve as partial validation of the internal model with other national regulators.
    Our client, who had never performed such a comprehensive testing of its ESG, was relieved to know it was fit for purpose.
    In the course of the review, we also pointed out some areas of improvement, which our client implemented in a following upgrade.

 
SOLVENCY II GAP ANALYSIS
  • Client issue    
    An EU-based reinsurer wanted to assess its readiness towards Solvency II and asked us to investigate and provide our opinion.

  • Approach used   
    We first identified the main stakeholders directly and indirectly involved or affected by any of the 3 pillars of the regulation.
    We then ran over a period of 2 months interviews with these stakeholders, where we investigated to what extent the processes and deliverables of their teams complied with the expectations of the Consultation Papers.
    Finally, we compiled the findings into a gap report and delivered it to the Executive Board, together with our recommendations.

  • Client benefit    
    This analysis provided the executive management with a clear picture of the priorities. It accordingly set up a plan to address these issues.

 
DEVELOPMENT OF AN INTERNAL SOLVENCY MODEL
  • Client issue    
    To comply with Swiss law, a reinsurance captive needed to develop an internal model for its Swiss Solvency Test (SST).
    Its infrastructure and internal resources were inadequate to undertake this task, and it asked us to develop this internal model.

  • Approach used   
    The captive had previously never developed its losses actuarially. We first performed this reserving exercise, including the effects of inflation and discounting, to determine the Risk Taking Capital.
    To compute the Solvency Capital Requirement we modelled the main risks of the captive, including the reserving, underwriting, market and credit risks. We also modelled their dependencies with the help of copulas.
    We added the effects of large threat Scenarios by deforming the distribution tails accordingly, and we approximated the Risk Margin by running off of the non-hedgeable risks similarly to the reserves.
    At all stages we accounted for the retrocession. We documented the whole model.

  • Client benefit    
    The internal model was accepted by the Swiss Financial Authority (FINMA) for the current SST exercise.
    The obtained solvency ratio was comfortably in excess of the 180%, and FINMA did not question this result.
    The internal model could clearly demonstrate the utmost importance of the captive’s retrocession program. Its Board is now interested in using it to optimise the program and to consult it when facing other solvency relevant management decisions.

 
APPOINTED ACTUARY MANDATES
  • Client issue    
    Regularly we are approached by smaller and medium sized insurers, reinsurers and captives, to assume the responsibility of their Appointed Actuary under Swiss law.

  • Approach used   
    Depending on the particular business underwritten by the client and its own constellation, we handle different issues:
     - Reserves
     - Tied assets
     - Swiss Solvency Test
     - Policies & processes

  • Client benefit    
    Thanks to our corporate experience we are able to solve the individual issues of the companies in a pragmatic way.
    Moreover, because we have developed a long lasting relationship with the Swiss regulator FINMA, we know which issues are most relevant and how to address them.

 
WORKSHOPS ON THE SST STANDARD MODEL
  • Client issue    
    A non-European regulator explored the option of implementing a Solvency II regime, but to adopt a Standard Model inspired by the Swiss Solvency Test (SST) template.
    The national Insurers Association therefore wanted to familiarise the actuaries of its mem-ber companies with the SST Standard Model and asked us to train them appropriately in a series of workshops.

  • Approach used   
    We designed a hands-on workshop, in which we explained the underlying theory and demonstrated how it is implemented in the SST.
    To this effect we constructed a realistic and representative portfolio of assets, life and P&C exposures, which we used as an input to the SST template.
    In order to smoothen the interplay and transitions between theory and practice, we used throughout two beamers: on the first screen we described on slides the essential concepts, while on the second screen we applied these concepts into the SST Excel template.
    This way the participants assembled in real time a prototype internal model on their laptops. At the end of the workshop (Which typically lasted two days.) we applied this model in usetest exercises of portfolio management, reinsurance optimisation and capital allocation.

  • Client benefit    
    At the end of the workshops the participants understood the strengths and weaknesses of the SST Standard Model, and they could judge the impact of the model’s approximations.

 
RISK TRANSFER OF A STRUCTURED REINSURANCE COVER
  • Client issue    
    The structured solutions department of a leading international insurer had concluded a complex non-traditional multiyear and multiline transaction with a client.
    It asked us to provide our independent opinion to gauge the amount of risk transfer.

  • Approach used   
    We analysed the structure of the deal based on its wording and an Excel pricing file.
    We then stochastically projected the possible outcomes of the transaction.

  • Client benefit    
    We came to the conclusion that although the transaction will only rarely trigger a payment, the risk transfer was nevertheless appreciable due to the large size of the possible losses.
    Moreover, we highlighted the importance of carefully accounting for the numerical convergence, because the large number of nonlinear on-off features of the deal generated a highly asymmetric multimodal probability distribution.

 
INTERIM MANAGEMENT OF AN ACTUARIAL DEPARTMENT
  • Client issue    
    A large life insurer approached us to lead ad interim the actuarial team of one of its foreign subsidiaries, while it was searching for an appropriate candidate for this function.
    This came at a crucial moment, when the company was starting to implement its Solvency II framework.

  • Approach used   
    For a period of 6 months we provided a seasoned actuary, who also assumed the statutory role of Appointed Actuary.

  • Client benefit    
    Our colleague managed to keep the extant actuarial team motivated and functional during the interim period, and successfully initiated the subsidiary’s Solvency II exercise.

 
IMPLEMENTATIONS OF PILLARS 1+3 OF SOLVENCY II
  • Client issue    
    Several European life (re)insurers wished to implement the Pillar 1 of Solvency II and asked us to model and document each module according to the EIOPA Technical Specification. 
    In addition, they asked us to automatize the feeding of the in & outputs into the QRTs via a robust interface.

  • Approach used   
    Based on their business models and the characteristics of their products, we first determined the modules that were relevant for the calculation of the Solvency Capital Requirement in accordance with the standard formula.
    We considered the influence of the non-proportional reinsurance with a partial internal model, since the standard model does not properly treat these risks.
    We implemented the formula on a symbolic programming platform, which allowed us to perform and document the calculations simultaneously analogously to the structure of the EIOPA Technical Specification.

  • Client benefit    
    The clients received a tool, which combines the documentation and the formulas that match those of the EIOPA Technical Specification, and which calculates their capital requirements.
    Armed with this tool, they can easily test the sensitivities of the Solvency Capital Requirement by changing any input parameter, and they can redefine the granularity of the model points with no effort in the future.
    The tool can furthermore be used for the purpose of fulfilling the quantitative ORSA requirements, including planning and running scenarios.

 
REVIEW OF A RISK CATALOGUE CONCEPT AND CALCULATION OF REQUIRED CAPITAL
  • Client issue    
    A stock exchange was implementing an integral risk framework and the risk catalogue was part of that process.
    The aim of this risk catalogue was to eventually enable all Stock Exchange risk managers to identify, assess and quantify their contributions to the group’s risks.
    The risk catalogue was prototyped in Excel format and the Stock Exchange wanted to ensure its foundations were suitable before implementing it on an enterprise platform.

  • Approach used   
    The critical review concerned predominantly the Stock Exchange integral risk management documentation and the risk catalogue handbook.
    We discussed regularly the implementation philosophy of the risk catalogue in the con-text of integral risk management with the Head Risk Analytics & Reporting.
    For this review no international approved procedure concerning Stock Exchanges was available to us, so we considered the relevant regulatory requirements for financial institutions, banks and insurance companies.

  • Client benefit    
    An assessment whether the risk catalogue achieved its goals.
    An evaluation of its usefulness and practicability, including a succinct comparison with the state-of-the-art.
    Suggestions with respect to improvements.

 
COACHING IN SWISS ACTUARIAL REGULATORY FRAMEWORK
  • Client issue    
    A foreign insurer wanted to register its Chief Actuary as the Appointed Actuary of its Swiss subsidiary.
    The regulator (FINMA) agreed to provide its endorsement on the condition that she become acquainted with the relevant Swiss laws and regulations.

  • Approach used   
    We designed an appropriate training program and coached the company’s Chief Actuary.

  • Client benefit    
    After having interviewed the company’s Chief Actuary, FINMA endorsed her as Appointed Actuary.

 
 
IMPLEMENTATION OF THE FIRST PILLAR OF SOLVENCY II
  • Client issue    
    A European life insurance company specializing in pension funds provides its customers with a surplus combined with a stop-loss on the retention, to cover the risks of death and disability.
    It wanted to implement its Solvency II first pillar requirements and requested us to draft the models and documentations of the relevant modules.

  • Approach used   
    Based on the business model and the characteristics of the products offered, the modules that were relevant for the calculation of the Solvency Capital Requirement (SCR) according to the standard Solvency II formula were first determined.
    The influence of the stop loss cover on the determination of the SCR was taken into account outside of the scheme by an internal model, because the standard formula does not correctly account for this risk exposure.
    The formal implementation took place with the help of a tool developed by us, and the documentation of the implementation followed the structure of EIOPA technical documentation.

  • Client benefit    
    Our client disposes now of a customized proprietary tool, which also contains the documentation, and whose calculation formulas correspond to those of EIOPA’s technical documentation.
    The customer can easily determine his capital requirement and test the sensitivity of the SCR against changes in the input parameters.
    The granularity of the model points can be refined without great effort at any point.

INTRODUCTION TO RISK-BASED SOLVENCY SUPERVISION
  • Client issue    
    A Latin American regulator approached us to provide a comparative introduction to the standard models of the Swiss Solvency Test (SST) and Solvency II (SII).

  • Approach used   
    We prepared a detailled yet didactic analysis of both schemes, which we illustrated comparatively on specific life and non-life portolios during a 5 days on-site workshop.

  • Client benefit    
    After the workshop, the regulator decided to adopt a hybrid approach for ist own standard solvency model, adopting the most appropriate features of each scheme for ist local market.

 
VALUE AT RISK ANALYSIS OF A PORTFOLIO OF DERIVATIVES
  • Client issue    
    A chemical manufacturer held a significant portfolio of options and futures on commodities and wished to double check the value at risk of its position.

  • Approach used   
    We verified the methodology used by the client and reproduced the numerical results independently.

  • Client benefit    
    The client was relieved to see his in-house systems and calculations provided the correct answers. We nevertheless pointed out some deficiencies in the methodology and the client decided to eventually implement a more sophisticated approach, beyond a mere multivariate normal model.

 
TRAININGS IN STOCHASTIC RESERVING
  • Client issue    
    An actuarial association wanted to offer its members a course on stochastic reserving and asked us to prepare the material and deliver the lectures.

  • Approach used   
    We prepared a comparative overview of the current state of the art and documented the compilation in a didactic form. We designed a number of exercises and their solutions in Excel format. We delivered 8 hours of lectures and exercise tutoring on site.

  • Client benefit    
    According to the feedback forms, the participants appreciated very much the whole course, and in particular the opportunity to upload the exercise files on their private computers.
    The actuarial association was pleased with the feedback from the course participants, and invited us to deliver the course recurrently on an annual basis.

 
DEVELOPMENT OF A RISK AND CAPITAL MANAGEMENT GUIDE
  • Client issue    
    In preparation of the upcoming Solvency II exercise, a client wanted to prepare for its risk professionals a manual compiling the state of the art in risk and capital management.

  • Approach used   
    We presented the material at two levels: one high level compilation for the benefit of the management and a more detailed and sophisticated drill down for the risk professionals.
    The theory was illustrated with examples for a fictitious company and a number of excursions into mathematically more challenging topics for the aficionados.
    After finalising the guide, we trained a selection of specialists within the company in the concepts addressed by the guide.

  • Client benefit    
    The client now owns a compilation of the current state of the art in risk and capital management, which he can use internally at different level of sophistication. If necessary, he can choose to implement different processes and techniques at different business unit, depending on the local needs and capabilities.
    At the end of the training the selected specialists underwent an exam. The high passing rate, exceeding 90%, ensures the client has a pool of experts who can implement management's Solvency II ambitions.

 
PRICING OF AN EMBEDDED VALUE SWAP
  • Client issue    
    A reinsurer wanted to relieve a life insurer from the mortality and lapse risk of a closed book of business.
    To do this he considered performing an embedded values swap, assuming on a yearly basis for the following 15 years the uncertain experienced cash flows and paying in return the fixed expected cash flows.
    Before engaging on a full due diligence, the reinsurer wanted to estimate the order of magnitude of the risk based capital he would have to allocate to this transaction.

  • Approach used   
    We estimated the relative occurrence likelihoods of the different mortality & lapse scenarios and modelled accordingly a multivariate probability distribution.
    We modelled separately the response of the embedded values to the mortality and lapse with a generalised linear model.
    This way we approximated the distribution of the net present value of the embedded values swap and derived the economic risk capital the reinsurer had to allocate to this deal, according to his internal risk policy based on an expected shortfall Ansatz.

  • Client benefit    
    The reinsurer now had a solid basis for negotiations. By applying his cost of capital crite-ria, the reinsurer could quote an estimate of the up-front premium he needed to charge his cedent for this risk transfer.
    In the end, our preliminary calculations convinced the reinsurer that the conditions the life insurer was willing to accept were incompatible with his risk appetite.

 
RENEWAL SUPPORT
  • Client issue    
    A reinsurer was growing his portfolio but did not yet have sufficient internal actuarial resources to cope with the increasing pricing workload during renewal.

  • Approach used   
    We priced long & short tail proportional & XL treaties, and after having the calculations reviewed by the Chief Actuary we explained our findings to the responsible underwriter.

  • Client benefit    
    The reinsurer managed to finish the critical renewal season having actively quoted all the treaties his cedents submitted to him.

 
STRUCTURED PRODUCT WITH DOUBLE TRIGGER
  • Client issue    
    A reinsurer wanted to offer one of his cedents a more efficient risk transfer, with a traditional excess layer that only triggers when the overall loss ratio exceeds a certain threshold. This way, the cession only takes place when the cedent is in financial distress, but not when his portfolio is overall performing well: hence a substantial reduction in the cost of reinsurance.
    This kind of non-traditional pricing requires modelling simultaneously the attritional and the large losses, for which the reinsurer needed experienced and qualified advice.

  • Approach used   
    We modelled separately the attritional and the large losses. However, when simulating the behaviour of the portfolio, we took care to include the generated large losses into the overall loss ratio, hence reproducing the natural dependency between the attritional losses and the excess layer. Otherwise the dependency would have gone unnoticed on the basis of the limited portfolio experience.
    We inferred the optimum loss ratio trigger by analysing its influence on the EPI/RAC ratio.

  • Client benefit    
    The reinsurer was initially unaware of the dependency between attritional and large losses, and would have severely underestimated the burning cost of the product he was about to offer to his cedent.
    The reinsurer now had a solid understanding of his structured solution and offered it with confidence to his cedent.
    The latter appreciated how this construct saved significantly on premium while transferring his risk more efficiently.

 
RATEMAKING OF A PROFESSIONAL LIABILITY COVER
  • Client issue    
    An insurer wanted to determine the long term profitability of his professional liability cover. He had collected over the past 20 years all his fromgroundup claims data, including case reserves, ALAEs and recoveries. 
    However the data for these nearly 100’000 claims had been recorded on different systems in several different formats. As some of the records overlapped, the data was partially redundant. Moreover, claims stemming from older reporting years were missing information on early development years.

  • Approach used   
    After a careful analysis and comparison of the different data sources, we partitioned the record sources into clearly unconnected and irredundant blocks, and parsed these separately into a common format. After consolidation, we aggregated all the claims into a reporting-development year paid and incurred triangles, which we could develop to ultimate after appropriate indexation for inflation. After loading for expenses and cost of capital, the comparison with the historical exposures yielded the rates the insurer should charge his policyholders.

  • Client benefit    
    In the course of our analysis we noted that the franchises played a significant role and could substantially reduce the loss ratio. The insurer now felt confident he had a solid understanding of his professional liability portfolio and could rely on his rates.

 
VARIABILITY ANALYSIS OF REAL ESTATE PORTFOLIOS
  • Client issue    
    A bank needed to determine the value at risk (VaR) of its real estate portfolio and asked us to perform this calculation.

  • Approach used   
    We were provided with a hedonic-DCF tool with which we could perform the real estate valuations. However, this tool did not allow for any variability of the input parameters and could therefore not calculate a VaR. We adapted the tool in such a way that the most sensitive input parameters could be generated stochastically. This allowed the calculation of the portfolio value with a Monte Carlo technique. The resulting probability distribution of the portfolio value yielded its VaR.

  • Client benefit    
    The bank could now estimate the VaR of its real estate portfolio for any given confidence level. The value of the portfolio depends on some inputs (notably the interest rate) in a strongly nonlinear manner. Therefore, its best estimate (computed as the mathematical average of a probability distribution) differs from the result obtained naively without accounting for the variability of the input parameters. We convinced the client that a fully stochastic analysis provides more accurate results.

 
COMMUTATION OF A PENSIONS STOP LOSS
  • Client issue    
    A pension insurer wished to commute a stop loss treaty with his reinsurer. The unsettled liabilities included a number of pending cases, where the cantonal authorities still had to decide upon the degree of invalidity.
    The reinsurer approached us to value the remaining liabilities.

  • Approach used   
    In a first step we calculated the present values of each unsettled case with the use of collective life tables.
    We then modelled the historic patterns of invalidity grants by the cantonal authorities, and applied them to the pending cases.
    Finally, we converted the obtained figures to nominal values and applied the stop loss conditions of the different underwriting years.
    Throughout the calculations we kept track of the various sources of uncertainties and delivered the best estimate value of the remaining liabilities with its 1-sigma error range.

  • Client benefit    
    Although our calculation of the present values reproduced closely the figures claimed by the cedent, it turned out that the negative IBNR effect of the cantonal authorities’ decision pattern significantly reduced the value of the liabilities. This effect was dramatically leveraged upon application of the stop loss treaty conditions.
    The reinsurer could objectively & convincingly argue that the cedent’s estimate of the remaining liabilities exceeded the correct value by 50%, and accordingly negotiated the commutation.

 
WHOLE ACCOUNT RESERVE REVIEW
  • Client issue    
    In the frame work of an M&A, a large international insurer asked us to independently calculate within a confidence interval the reserves of his general insurance book of business.

  • Approach used   
    After having received the data, we submitted to the client a list of questions to resolve inconsistencies and open issues.

  • Client benefit    
    The figures we determined were used in the transaction. Moreover, our detailed questioning revealed some quirks in the client's data procurement.

 
VALIDATION OF A REPLICATING PORTFOLIO
  • Client issue    
    Our client, a global insurer, used a replicating portfolio to accelerate the calculation of the market values of its liabilities in the framework of its solvency calculations. 
    The Swiss regulatory authority wanted a third independent party to review the methodology and implementation of this replicating portfolio and to assess whether it fits the requirements of the Swiss Solvency Test.
    Our client requested us as the reviewers and the regulator endorsed this choice.

  • Approach used   
    We first elaborated an initial list of replicating portfolio components to assess in the framework of the solvency calculations, with a particular focus on the fitting in extreme economic regimes. Both the regulator and the client endorse this list.
    Having thus set the scope, we reviewed the documentation and interviewed the owners and developers of the model.
    Based on the understanding we had gained, we designed and ran a comprehensive array of tests on the method, the implementation and the outputs.
    In our report to the regulator, we summarised the methodology of the replicating portfolio and its implementation, and we compiled the findings of our tests.

  • Client benefit    
    The regulator gained the necessary comfort to validate the model, modulo some improvements. The same report could also serve as partial validation of the internal model with other national regulators.
    The client, who had never performed such a comprehensive testing of its replicating portfolio, was very interested in implementing in its next model upgrade the quality checks we designed.

 
ACTUARIAL TESTING OF A REINSURANCE PRICING TOOL
  • Client issue    
    A reinsurer developed a new in-house tool for modelling and pricing of non-life treaty reinsurance.
    The specifications of the user interfaces, work flows and methodology were developed by the reinsurer’s pricing actuaries and underwriters. However, the tool development and implementation was mostly outsourced to external providers.
    The reinsurer asked us to test the methodology and actuarial calculations.

  • Approach used   
    We systematically defined the mathematical functionality to be tested, and identified a set of test cases covering this functionality.
    We separately developed a set of simple Excel/VBA based tools to validate specific parts of the functionality in an efficient way.
    In a first phase, we used this suite of validation tools to validate the results of the existing pricing tool.
    In a second phase, the validated results of the existing pricing tools served as a benchmark for the results of the new pricing tool.

  • Client benefit    
    In the first phase, we identified some shortcomings of the existing pricing tool, where typically the implementation did not reflect the intended methodology. In other cases, the intended methodology itself was flawed and we brought in the fresh view of an independent third party by developing new pricing methodologies.
    In the second phase, prior to the rollout, we contributed to the success of the tool with an efficient detection of implementation errors. In addition we also assisted the project manager in running the User Acceptance Tests and we provided critical input to the documentation.
    The project was an overall success and all the reinsurer’s operational units now use this same pricing tool.

 
IMPLEMENTATION OF STATISTICAL TESTS IN A REPLICATING PORTFOLIO
  • Client issue    
    Under the pressure from the regulator, a client needed to test the quality of its replicating portfolio.
    The client asked us to design tests checking how well the figures obtained from the financial instruments replicating the life liabilities do indeed fit the results of the Embedded Value calculation. We also implemented these tests in a convenient simple tool.

  • Approach used   
    Two tests check the replicated and the replicating portfolios converge to the Embedded Value with sufficient precision.
    Two tests check the goodness of the fit and the goodness of the replication with the help of Chi Square statistics.
    One test checks the residuals have zero mean within the expected statistical sample’s range.
    One test checks the residuals are identically distributed.
    Three tests check the residuals are independent, by measuring their heteroskedasticity and their bias, and by inspecting their percentile distribution.

  • Client benefit    
    The regulatory authority was satisfied both with the breadth and depth of the tests, and it was convinced that in the audited instances the replication was satisfactory.
    The client can check the quality of its replicating portfolio in such a straightforward manner, that he now routinely uses our testing tool in the construction of his replicating portfolios.

 
RISK CONTROLS OF A MARKET RISK MODEL
  • Client issue    
    In the framework of its internal Solvency II model a client stored, manipulated and modelled the different components of its market risk on a large number of different platforms, mainly Excel and Access.
    This historical inheritance was unsatisfactory for efficiency and governance reasons, because each component had been developed by different risk managers from various operational units. Moreover, most of these tools had originally been developed under time pressure as quick ad hoc solutions, which were not intended to eventually crystallize into permanent enterprise model components.
    As a result, all processing tools lacked a transparent construction, operated inefficiently, and obeyed contradictory conventions. Their handling was therefore cumbersome and error-prone.
    To remediate this unsatisfactory situation, our client asked us to streamline this historical inheritance into a unified, transparent and efficient concept that complies with governance requirements.

  • Approach used   
    We rewrote all the components on a single platform, obeying clear and consistent conventions as to the inputs, parameters, calculations, outputs and controls.
    We streamlined and simplified the calculations to increase their efficiency and enable future risk managers to easily implement further features or improvements. For this we also introduced a version management. 
    We implemented automatic controls verifying the consistency and reconciliation of data and calculations; in the case of a test failing, an unambiguous alarm signal informs the risk manager. In addition, we defined manual controls by which the risk manager can gauge the reasonableness of the results.
    For each component we wrote a separate documentation specifying its purpose, methodology, use and controls.

  • Client benefit    
    The client has now an efficient, logical and transparent suite of market risk processing tools on a single platform.
    Each component is now clearly documented with a double focus for the ease of both the risk managers and the model auditors.

 
DEVELOPMENT OF AN INTERNAL SOLVENCY MODEL
  • Client issue    
    To comply with Swiss law, a reinsurance captive needed to develop an internal model for its Swiss Solvency Test (SST).
    Its infrastructure and internal resources were inadequate to undertake this task, and it asked us to develop this internal model.

  • Approach used   
    The captive had previously never developed its losses actuarially. We first performed this reserving exercise, including the effects of inflation and discounting, to determine the Risk Taking Capital.
    To compute the Solvency Capital Requirement we modelled the main risks of the captive, including the reserving, underwriting, market and credit risks. We also modelled their dependencies with the help of copulas.
    We added the effects of large threat Scenarios by deforming the distribution tails accordingly, and we approximated the Risk Margin by running off of the non-hedgeable risks similarly to the reserves.
    At all stages we accounted for the retrocession. We documented the whole model.

  • Client benefit    
    The internal model was accepted by the Swiss Financial Authority (FINMA) for the current SST exercise.
    The obtained solvency ratio was comfortably in excess of the 180%, and FINMA did not question this result.
    The internal model could clearly demonstrate the utmost importance of the captive’s retrocession program. Its Board is now interested in using it to optimise the program and to consult it when facing other solvency relevant management decisions.

 
REVIEW OF A CREDIT MODEL
  • Client issue    
    Our client, a stock exchange, was developing a model to account for its credit exposure to banks while pre-financing their transaction after clearing.
    The very short duration (typically a few hours) requires the use of nonstandard techniques. Therefore, before embedding the model in its processes (alarms, credit limits, etc.) the stock exchange asked our opinion regarding the used methodology, the plausibility of its results and how it could be best implemented.

  • Approach used   
    As the model was still under construction, it was not yet sufficiently documented and we interacted closely with the CRO and the head modeller. From these intensive discussions we achieved a full understanding of the model and verified it conforms to the current state of the art.
    Moreover we examined the prototype developed by the head modeller to check it indeed implemented this methodology correctly.
    Finally, for further plausibility, we developed our own simplified model, which reflected the same risks in an alternative manner, and obtained similar results in the applicable regimes.

  • Client benefit    
    We confirmed that the model’s methodology is sound and that the results of the prototype were correct.
    As a result, the Board of Directors gave the green light for the continuation of the project, with the aim to eventually use it to set the credit limits dynamically, possibly even in an automated way.

 
VALUATION OF MUSIC AIR TIME ON RADIO STATIONS
  • Client issue    
    The client acts on behalf of music producers and artists, an in this role collects royalties from radio stations, which broadcast the recorded music. The royalties are calculated as a fixed percentage of advertisement revenue, and the percentage had not been changed for about 10 years.
    The client wished to increase this percentage and asked us to analyse whether there is evidence to support this interest
    .

  • Approach used   
    We presented two different approaches.
    The first one looks at the income statement of radio stations and suggests a fair split of the profit of the radio stations by the contributors of the program, which are the radio station themselves on the one hand, and the producers of music on the other hand.
    The second approach used a regression analysis to estimate the economic value of one unit of music played on the radio. The regression distinguishes as far as possible the value of music from other factors, such as economic environment and differences between single radio stations by allowing these effects in the model used.

  • Client benefit    
    We provided the client with a well-founded study that can be used in negotiations with other parties about the split of advertisement revenue / profit.
    In addition, the client has a better understanding of the financial impact of music used on the radio.

 
VALIDATION OF A SOLVENCY CAPITAL CALCULATION
  • Client issue    
    An automobile insurer had developed a model to assess its solvency capital requirement.
    It asked us to review the methodology and result of the model.

  • Approach used   
    As the model had not yet been documented, we ran several interviews with the modellers and we analysed the source code of the implementation.
    Moreover, we emulated the calculations with a simpler model based on the same data sample, and obtained similar results.

  • Client benefit    
    The insurer was relieved to see that our independent emulation plausibilised its own conclusions.
    We nevertheless pointed out that the model ignored several potentially important sources of risk.
    Furthermore, we suggested simplifying the model, as the current version was very complex and modelled irrelevant aspects of the risk exposure. We argued that such a simplification would not only improve the performance and governance of the model, but it would also significantly contribute to its transparency.

 
QUANTITATIVE ASSESSMENT OF INPUT DATA SENSITIVES
  • Client issue    
    In the context of its Solvency II pre-application, a large international reinsurer needed to test the sensitivity of its economic capital and solvency ratio to the inputs and model parameters.
    The client asked us to help him performing this task.

  • Approach used   
    The analysis turned out more sophisticated than expected, because the company’s risk aggregator folded the various risk distributions with a time-dependent Monte Carlo seed. We therefore started the exercise by quantifying the size of the stochastic error and so defining appropriate materiality thresholds.
    Armed with this we tested both the gross and net effects of variations of numerical and non-numerical inputs and classified these based on their impact on capital requirements.
    We identified 13 out of the 123 input data which were severely sensitive and require dedicated attention and governance processes.

  • Client benefit    
    The reinsurer concluded from these outcomes that its risk aggregation process is more robust than it had expected from a previous qualitative assessment.
    Moreover, we convinced the company that the use of a time-dependent Monte Carlo seed diminishes the reproducibility and transparency of the model, and has the potential to hide major errors. The client has now eliminated this peculiarity and its new version of the tool provides reproducible results, which in the future will allow a more straightforward sensitivity analysis.

 
WORKSHOPS ON RISK, CAPITAL AND SOLVENCY MODELLING
  • Client issue    
    Several European and Overseas clients and professional associations asked us to train their actuaries in Solvency issues.

  • Approach used   
    We designed a hands-on workshop, in which we modularly built up in Excel the different components of an internal Solvency II model and pragmatically explained the basic theo-ry of the applied methods, focusing on the necessary essentials.
    In order to smoothen the interplay and transitions between theory and practice, we used throughout two beamers: on the first screen we displayed via slides the underlying con-cepts, while on the second screen we applied these concepts into an Excel prototype.
    This way the participants assembled in real time a prototype internal model on their lap-tops. At the end of the workshop (Which typically lasted two days.) we applied this mod-el in use-test exercises of portfolio management, reinsurance optimisation and capital al-location.

  • Client benefit    
    The workshops convinced the participants (insurers and regulators) that the Pillar 1 implementation of an internal solvency model need neither be complex nor expensive. 
    However, they all realised that by using an internal model they could substantially enhance their understanding of their specific company risks and greatly facilitate their management.

 
CPD TRAININGS
  • Client issue    
    On a regular basis actuarial organisations solicit us to do design and deliver courses on particular technical topics in the framework of their Continuing Professional Development (CPD) program. So far we have developed such courses on:
     - Reinsurance techniques, with a focus on pricing
     - Stochastic reserving
     - Actuarial engineering, with a focus on Excel programming
     - Modelling risk, capital and solvency

  • Approach used   
    We designed and delivered the courses in the format of hands-on workshops of 1 to 3 days. The emphasis was on pragmatic applications and solutions, as they are used in practice. We only presented the necessary theoretical basis needed to grasp the strengths and weaknesses of the methods, and to judge the impact of the approximations.
    The participants brought along their own laptops and were given calculations templates in Excel, which they could fill out in the course of the exercises.
    In order to smoothen the interplay and transitions between theory and practice, we used throughout two beamers: on the first screen we described on slides the essential concepts, while on the second screen we applied these concepts into the Excel templates.

  • Client benefit    
    At the end of the workshops the participants had develop a solid practical understanding of the methods and their applicability. 
    Moreover, we received the feedback from a number of participants, that they used the workshop’s Excel templates in their daily work as standalone applications or as the prototypes and specifications of in-house enterprise tools.

 
REVISION OF RETIREMENT PROVISIONS
  • Client issue    
    A health insurance company developed an extensive model for the estimation of the retirement provision in the supplementary health insurance. 
    The calculations were programmed in VBA. 
    Since the results of the model are very important to the business policy, the insurer engaged us as an experienced and independent actuarial team for the revision of the retirement provision model.

  • Approach used   
    The revision was executed on mathematical (reasonability of the model) and on a programming (VBA) base.
    We conducted the calculations of the retirement provisions with Mathcad and Excel.
    In order to identify the significant variables (parameters and input data), we distinguished between local sensitivities and stress tests. 
    Our analysis and results were presented in a revision report.

  • Client benefit    
    It turned out that the model fulfils the regulatory requirements as well as the financial purpose.
    The model provides a critical overview of the numerical results, which were achieved through the execution of the model.
    We created a list of recommendations, especially for the simplification of the manipulations (indexation and smoothing) of the input data, which were very transparent and had significant influence on the end results.

 
RISK TRANSFER STRUCTURE
  • Client issue    
    A specialized agency of a continental organization will underwrite extreme weather risks on the continent.
    In order to support and accelerate the agency’s start-up, our client intended to reinsure it on a sub-competitive basis.
    Our client engaged PRS as independent team of experts in order to assess a previously performed dynamic financial analysis and on that basis to recommend an excess-of-loss reinsurance structure within a well-defined risk transfer framework.

  • Approach used   
    To compute the structure’s parameters and estimate the required premium, we have adapted the dynamic financial analysis to appropriately reflect the risk transfer structure’s features of our client.

  • Client benefit    
    An assessment of the dynamic financial analysis with a particular focus on its suitability for carrying out a risk transfer analysis.
    Several recommendations as to an appropriate risk transfer structure.
    The design of the structure also allows our client to get a good estimation of the risk exposure each year. 
    The client can observe with the help of an Excel file, how random sequences of losses affect the risk transfer structure.

 
MTPL RESERVING METHODS
  • Client issue    
    A large international insurance company needed to review the reserving process of its Argentinean MTPL portfolio. Several reasons triggered this decision: 
     - law reforms
     - severe past and future inflation
     - unreliable historical case reserves
     - lately increased frequency of large claims 
     - inexperienced local actuarial team.
    The accumulation of similar complications in one single portfolio was unusual and challenging. Therefore our client wished to engage on a consulting basis an experienced sen-ior reserving actuary, and asked us to develop an adequate reserving framework for its MTPL portfolio and to lead the reserving process up to year end.

  • Approach used   
    We conducted interviews with the local management, claims department and actuarial team to obtain an understanding of the portfolio and its complications.
    We computed the ultimate losses on the basis of several methods in order to evaluate realistic IBNR reserves, and we delivered the full calculations in the form of a documented Excel file.
    We submitted a reserving range based on several methods. For each method we speci-fied in a comprehensive report 
     - its complete description and workings
     - its parameters and their calibration
     - its underlying assumptions                                                                           We submitted recommendations and a list of issues that should be monitored over time, to ensure a proper and compliant reserving process.

  • Client benefit    
    Each method is based on different assumptions. Over the next years the Argentinean actuarial team can monitor the actual-versus-expected, and eventually rule out the as-sumptions underlying the less performing methods. In doing so, it will develop a better understanding of the underlying portfolio and its behaviour, and progressively further re-duce the width of the reserving range.
    We enabled the company’s management to ultimately make an informed decision on the reserves to be booked.
    In the course of our analysis we uncovered statistical phenomena, which refuted common wisdom taken for granted by the claims department. The claims managers acknowledged our findings and accordingly adjusted one of their processes.

 
RISK TRANSFER MODELLING
  • Client issue    
    A private investment firm, specializing in alternative investments would develop the general pricing model for its prospective life securitization.
    The client was structuring a novel securitization of life insurance policies, which required calculating the value and the amount of risk transfer of the conversion of a continuous and variable cash flow into determined bond proceeds.
    The client engaged us for the necessary computations.

  • Approach used   
    We developed a pricing model reflecting the conversion of the life settlement cash flows into bond proceeds.
    The model valued the transaction and estimated its risk transfer. This risk consisted mainly of counterparty risk related to reinsurer default, carrier default and individual policy litigation potential. It had to be investigated whether the transaction might also carry some interest rate risk.
    Then we assisted the client in its effort to approach the potential players from the (re)insurance industry, who would be best suited to perform the conversion.

  • Client benefit    
    The client has the desired pricing model and understands how it works.
    Thanks to our contacts in the insurance industry, the client could meet many potential players and find the best suited.

 
DEVELOPMENT OF A METHODOLOGY FOR INDIVIDUAL DAMAGE TRENDS
  • Client issue    
    A large Swiss insurance company had the objective to build up a methodology for the development of individual damages of reservation and tariffing purposes. 
    According to the customer, the solution should be based on Excel. 
    Our task included the education of the firm’s internal actuarial team and to support them actively with the solution.

  • Approach used   
    The project was structured in 4 stages. 
    In the first stage a workshop was set up in order to familiarize the team with the methodologies and to define the possible application fields. 
    In the second stage the data was processed for the execution of the first test with a consisting and prototypical VBA application. 
    In the third stage an object-oriented VBA application was programmed considering the predefined needs of the project. 
    At the last stage the application was tested with the company’s claims data.

  • Client benefit    
    All rights on the developed application are owned by the company. 
    The application has the ability to analyze the behavior of the damages in a more exact way and thus it provides more information to the company.

 
REVIEW OF A REINSURANCE PROGRAM
  • Client issue    
    A health insurer had recently decided to diversify its operations and to venture into Medical Malpractice. To mitigate this new risk it had asked its reinsurance broker to structure and place a solid reinsurance program.
    Nevertheless, the Board of Directors asked us to provide a second opinion and address the following questions:
    How well is the company protected with this reinsurance program?
    How fair are the reinsurance conditions?
    How can the reinsurance program be further improved?

  • Approach used   
    We studied the 4 reinsurance treaties and interviewed the reinsurance executives on the underlying portfolio of risks. 
    Based on this information, we examined the impact of some extreme adverse scenarios and concluded that the solvency position of the affected entity remained solid.
    We also performed a re-quotation of the reinsurance treaties and could confirm the validity of the actual pricing figures.

  • Client benefit    
    We provided the Board of Directors with the necessary comfort that this traditional reinsurance program was very solid and protected the company very well.
    Also the reinsurance conditions appeared fair, possibly even advantageous to the cedent.
    Nevertheless, we raised the question whether the group would not fare even better by having the concerned entity cede the risk internally, and addressing the reinsurance program at a global level. This way the company could retain more of its premium within the group, without compromising on its overall risk profile. This argumentation found a particular resonance in the context of Solvency II.

 
FEASIBILITY STUDY FOR A PATENT ENFORCEMENT INSURANCE PRODUCT
  • Client issue    
    A large international insurance company contemplated introducing a new patent insurance product on the European market.
    It asked us to perform a feasibility study and to initiate the product development.

  • Approach used   
    We first analysed and compiled what patent insurance solution currently existed world-wide: only few had been developed previously and most had failed.
    Furthermore we came to the conclusion that in the context of the company's underwriting policy the only viable product was a patent enforcement policy.
    For such kind of policies we developed for the core protection plus two further extensions:
     - The policy wording and clauses
     - The underwriting process
     - The claims process
     - The tariffs

  • Client benefit    
    The insurer originally intended to first test the new product on a single national market. However, we demonstrated that it was only viable if sufficient volumes could be guaranteed, and that this required either:
     - An obligatory scheme, which was unlikely to be politically enforceable.
     - A multinational policy, which would have rendered the underwriting and claims process-es unwieldy.
     - A focus on the European Community Patent and the European Patent Court of Justice.

 
TARIFFING OF A PROFESSIONAL LIABILITY PRODUCT
  • Client issue    
    An insurer wanted to offer a national engineers association a cover for its members’ general and professional liabilities. It needed to offer 6 different retention options for 12 separate occupational categories.
    Moreover the professional association wished to consider 3 distinct aggregate covers.

  • Approach used   
    The historical incurred claims data was consistent and of good quality, but lacked devel-opment information. Nevertheless, the exposure-weighted yearly losses were fairly con-stant over the observation interval and revealed no particular trend. This was indicative of an accurate case reserving policy.
    Therefore we developed 2 from-ground-up frequency-severity loss models: one with con-servative assumptions about a possible loss development, and a more aggressive model with no IBNR effect.
    We stochastically generated a statistically relevant sample of possible annual scenarios, which included more than 100 individual losses each. We applied the different option and cover structures to these scenarios to derive the different tariffs.

  • Client benefit    
    We explained to the underwriters how we circumvented the limitations of the data by quoting 2 extreme alternatives (the conservative and the aggressive one). We emphasised how they could apply their underwriting knowledge to navigate between these assumptions.
    Based on their understanding of the previous claims management, the underwriters decided to opt for the aggressive quote, plus some adequate risk margins.

 
INTERNAL AUDIT OF A CATASTROPHE UNDERWRITING UNIT
  • Client issue    
    The Internal Audit department of a global reinsurance company wanted to assess the risks and controls of its catastrophe underwriting unit.
    The internal audit team did not have appropriate technical expertise and its managers sought our support to perform this task.

  • Approach used   
    We first interviewed the management of the unit to understand the major renewal processes and identify some key treaties to assess in more details.
    Based on this information we performed a complete end-to-end walkthrough of the renewal of these treaties with their respective underwriters and pricing actuaries. These walkthroughs spanned the whole underwriting process from the receipt of the cedent submission up to the delivery of a quote.
    We compiled our findings in a report, which described the overall process, drilled down the risks, assessed their mitigations & controls and substantiated our opinion with a comparison with peers.

  • Client benefit    
    The Internal Audit team valued the report and was satisfied we did not detect any major threat.
    The management of the underwriting unit appreciated our peer comparison.

 
INTERNAL AUDIT OF A P&C UNDERWRITING UNIT
  • Client issue    
    The Internal Audit department of a global reinsurance company wanted to assess the risks and controls of its property and casualty underwriting unit.
    The internal audit team did not have appropriate technical expertise and its managers sought our support to perform this task.

  • Approach used   
    We first interviewed the management of the unit to understand the major renewal processes and identify some key treaties to assess in more details.
    Based on this information we performed a complete end-to-end walkthrough of the renewal of these treaties with their respective underwriters and pricing actuaries. These walkthroughs spanned the whole underwriting process from the receipt of the cedent submission up to the delivery of a quote.
    We compiled our findings in a report, which described the overall process and for each main step we drilled down the risks, assessed the mitigations & controls and prided our opinion with a comparison with peers.

  • Client benefit    
    The Internal Audit team valued the report and was satisfied we did not detect any major threat.
    The management of the underwriting unit appreciated our peer comparison.

 
DOCUMENTATION OF A P&C INTERNAL MODEL
  • Client issue    
    In the course of its pre-application for the use of a Solvency II internal model, a client asked us to document its non-life internal model.

  • Approach used   
    We developed the documentation on-site with our client, immersed in and participating in its processes. This way we developed a complete and deep understanding of its model, which we could precisely document.

  • Client benefit    
    The client submitted the documentation to its principal regulator, who is currently still re-viewing the pre-application.

 
INTERNAL AUDIT OF AN ECONOMIC CAPITAL FRAMEWORK
  • Client issue    
    The Internal Audit department of an insurance company wanted to assess how the findings of the firm’s internal economic capital model were used in practice by management. In particular, it wanted to assess the compliance with the Use Test of the Swiss Solvency Test. The internal audit managers sought the appropriate technical expertise to perform this task.

  • Approach used   
    We reviewed the documentation, highlighting the relevant matters and explaining those issues that were not clear to the internal audit managers. 
    Together with the internal audit managers, we prepared interviews with the risk managers, conducted those interviews and debriefed the results. 
    We summarised the findings in a report that was also understandable to non-technical experts, and was used by the Internal Audit department as the basis of its report to the Board of Directors.

  • Client benefit    
    This procedure ensured that the internal audit managers properly understood the technical details and their implications, and did ask the appropriate questions to the subject matter experts.                                      Overall the exercise uncovered serious inconsistencies in the data procurement of the Risk Management department. It also revealed that some important key risk and performance indicators measured by the Risk Management department did ultimately not find their way into management decisions. 
    Armed with these findings, the Internal Audit department escalated the matter to the Chief Risk Officer and the Board of Directors.

 
EXPERT OPINION IN LIFE INSURANCE
  • Client issue    
    In a trial against a life insurer, holders of a life insurance policy argued they were due a terminal bonus.

  • Approach used   
    We analysed the relevant supervisory law, legal ordinances and prescriptions for profit participation and argued in a written opinion that the insurer had no further obligations towards his policyholders.

  • Client benefit    
    Based on our expert opinion, the insurer avoided paying the claimed terminal bonus.

 
BOTTOM LINE BUSINESS PROJECTIONS
  • Client issue    
    A small reinsurer intended to grow its business in Europe and asked us to project how the 12 different lines of business it intended to underwrite might develop over the first 3 years of operation.

  • Approach used   
    We discussed with the Chief Underwriter what his expectations were regarding staffing, fixed costs and underwritten volumes.
    Following this discussion, we compiled historical market loss ratios and runoff patterns, with which we projected several scenarios. This enabled us to estimate the shape of the future distributions of the bottom line profitability.

  • Client benefit    
    We came to the conclusion that there was a 90% probability that the business would be sustainably profitable over the first 3 years.
    However, we pointed out that this conclusion relied strongly on the Chief Underwriter's assumptions.

 
DEVELOPMENT OF AN EQUALIZATION RESERVES POLICY
  • Client issue    
    The Swiss branch of an international reinsurer wanted to establish an equalization reserve for tax financial statements. The main goal was to reduce fluctuations of taxable income.
    On the other hand, it was important to have an approach that was based on sound actuarial methods and that was easily explainable to the tax authorities.

  • Approach used   
    We conducted interviews with management to obtain an understanding of the relevant tax aspects. We performed a high-level review of the reserving methodology applied by the client.
    We proposed an actuarially sound approach to establish the equalization reserve, including definition of a reasonable target level, granularity considerations, as well as rules for withdrawal and allocation of funds. 
    We assisted the client in communication with the tax authorities.

  • Client benefit    
    Easy-to-implement approach based on available model outputs. Solution was accepted by tax authorities.