Milliman infographic: Building a better ERM framework

February 24th, 2015 No comments

Recently, the Milliman Risk Institute partnered with Oxford Economics to survey 125 North American risk executives on the current state of their ERM programs. Insights from the survey report include two differentiators for successful ERM programs and several action items to boost the effectiveness of ERM efforts.

The following infographic captured these highlights from the survey report:


To access the full survey report, click here.

Establishing ORSA processes with Solvency II on the horizon

February 19th, 2015 No comments

Insurers are finalizing Own Risk and Solvency Assessment (ORSA) trials as they prepare for Solvency II to take effect in January 2016. Assessing and documenting the uncertainties that affect business goals can help firms maintain risk profiles that align with their risk appetites. Milliman consultant Neil Cantle’s article entitled “The final countdown” provides insurers perspective on what they need to consider when running an ORSA exercise.

Here is an excerpt:

The focus on risks that produce financial uncertainty, and specifically those which might be absorbed with capital, has arguably led to a rather indirect way of thinking about risk in insurance. Most firms equate ‘risk’ with the capital needed to absorb it and often avoid the issue of understanding the actual risk itself, which can have consequences beyond immediate financial losses. This has led to wide-spread use of statistical approaches based on loss data and expert estimates which, by design, do not provide any rigorous linkage to other (non-capital) outcomes or directly back to risk management efforts. Scenario-based approaches are slightly more helpful but arguably leave firms open to the criticism that they have missed important scenarios, so the process for choosing them needs to be pretty robust. Developments in causal modelling have enabled firms to tackle this problem and show how the underlying dynamics of risks can simultaneously lead to a range of outcomes.

The regulator has expressed some concern that the types of scenarios and stresses being considered are too focused on regulatory capital (rather than the amount of capital you think you need), concentrated too much on the risks covered by the SCR, and have been rather too simple. Scenario and stress testing methodologies have advanced considerably over the past few years, and a key theme is the need to consider multivariate conditions (as real life tends to combine events).

In most cases, the shortcoming in the methodology is in developing the scenarios in the first place – the models are quite capable of producing the results once you know what the scenario is. The draft guidance is clear that the assessment of risk includes deciding the extent to which non-capital mitigation techniques are used and consideration of the effectiveness of the system of governance in different circumstances. While it is useful to have capital model outputs help you decide whether a scenario is extreme or not, take care not to create a circular argument centered on the model – it is better to decide the right scenarios and then explore their dynamics including, but not limited to, capital consequences.

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Student loan debt at for-profit colleges

February 11th, 2015 No comments

For-profit colleges attract students through innovative scheduling and online educational opportunities. However, 44% of defaults on federal loans come from students at for-profit colleges. In his latest Insight article, Milliman’s Leighton Hunley examines some of the possible causes of these for-profit defaults as he revisits the issue of student loan debt. The article also highlights student loan debt and delinquency trends.

For more analysis on this issue read Leighton and Jonathan Glowacki’s article “The student loan debt crisis in perspective.” The authors also offer some reform ideas in the article.

Risk factor portfolio management

February 9th, 2015 No comments

Traditional allocation approaches assume that investing in a wider range of assets or asset classes will lead to a lower risk portfolio. It was also believed that the correlation between asset classes was relatively stable. But recent experience has found a number of issues with this approach. Instead of constructing portfolios using the traditional asset class approach, risk factor portfolio construction can lead to a better understanding of portfolio risk exposures. Milliman consultants Fred Vosvenieks and Stuart Reynolds offer some perspective in this research report.

Solvency II update 2015

February 3rd, 2015 No comments

The Solvency II implementation date is quickly approaching. To date, several milestones have been met. In October 2014, the European Commission adopted the text for delegated acts, also known as implementing measures. In addition, the European Insurance and Occupational Pensions Authority (EIOPA) recently published a number of implementing technical standards, regulatory technical standards, and guidelines consultation papers. Much of the final framework for Solvency II has been drafted, but more changes are expected before 2018. Milliman consultants Matthew Cocke and Philip Simpson provide perspective in a Solvency II Wire article.

Milliman Risk Talks: Mature risk assessment process

January 30th, 2015 No comments

How can companies effectively quantify risk? In this episode of Milliman Risk Talks, Mark Stephens, Vikas Shah, and Olivia Wang from the Risk Advisory Services discuss different maturity levels of risk assessments. They also provide perspective on how companies can improve the quality of their risk assessments over time.

To watch our Milliman Risk Talks series, click here.

Cloud computing reading list

January 21st, 2015 No comments

Cloud-based computing systems provide insurance companies several advantages over traditional systems. The following reading list highlights the benefits that cloud computing solutions such as Milliman’s Integrate offer insurers.

• Reuters: Amazon’s cloud business a harder sell in post-Snowden era
This article discusses the pros and cons of public, private, and hybrid cloud models.

• (Wired): The biggest risk facing insurers today? Old-guard IT
Some insurance companies have moved their actuarial modeling systems into the cloud. This article highlights how UK-based insurance firm The Phoenix Group increased productivity by implementing Integrate. In the article, Milliman principal Pat Renzi discusses the value that cloud-based actuarial modeling can have for insurance companies.

• What to consider before running HPC in the cloud
Information technology (IT) administrators should follow best practices when running high-performance computing in the cloud. Milliman’s Paul Maher and other IT professionals offer eight tips that can help administrators manage testing, networking performance, and more in this article.

• Contingencies: Fast forward: Emerging technology and actuarial practice
Cloud-based solutions such as Integrate are transforming the actuarial profession, offering clients the speed and scalability needed to process advanced analyses in real time. Pat Renzi discusses the advantages of conducting complex calculations using an actuarial modeling system in the cloud.

• The Digital Insurer: Actuarial models meet the cloud: A perfect marriage?
The costs associated with actuarial modeling have increased. This article, authored by Milliman consultant Dennis Stanley, demonstrates how migrating an actuarial model to the cloud is cost-effective and increases flexibility for large-scale, time-intensive projects.

• MG-ALFA® Compute for Windows Azure
This video shows how MG-ALFA Compute for Azure can help insurers meet their growing needs for high-capacity computing as the industry’s modeling requirements expand. This solution reduces run-times, increases capacity for analyses, and lowers costs relative to an in-house grid.

Review of 2014 and upcoming ERM challenges

January 20th, 2015 No comments

In this InsuranceERM interview (subscription required), Milliman consultant Neil Cantle discusses key business developments from 2014 that affected the insurance industry. He also talks about enterprise risk management (ERM) challenges that insurers may face in 2015. Here is an excerpt:

What will 2014 be remembered for?
From an economic perspective I think many people will feel that 2014 represented a much better year economically. Whilst not everyone is past the legacy of the economic crisis it does seem that confidence returned and a there is a more generally positive outlook. The big industry news probably has to be the reforms being made to pensions. The removal of compulsory annuitisation was a huge bombshell and taken as a whole, the changes to the retirement landscape during 2014 are pretty momentous. Of course Solvency II got a step closer to reality as the delegated acts passed through the Commission and Parliament….

What will be the biggest ERM challenge of next year?
…Operational risk remains one of the most problematic areas, closely followed by risk appetite and culture. I think the big challenge with these areas, more so than others, is that they starkly reveal the complexity of modern business and the fact that risk management tools are still catching up with how to deal with that. Publicly listed firms, more generally, are of course wrestling with the forthcoming Financial Reporting Council requirements on risk appetite and disclosures about risk assessment. The rapid pace of change in areas like cyber-crime and challenges in finding ways to finance infrastructure developments, for example, reveal the need for a broad view of risks to include societal dynamics as well as financial ones, and rather demonstrate the interconnected nature of things. ERM really needs to up its game and cope better with this.

Milliman Risk Talks: Risk data management

January 15th, 2015 No comments

Risk data management has become a source of tremendous business value for many companies, especially as data and analytics are becoming more common. In this Milliman Risk Talks video, Mark Stephens, Vikas Shah, and Olivia Wang from Milliman’s Risk Advisory Services shared their insights on risk data management with a focus on different sources of risk data.

To learn more about this topic, sign up for our upcoming complimentary webinar here.

To learn more about Risk Advisory Services, click here.

Top 10 worldwide Milliman publications of 2014

January 5th, 2015 No comments

In 2014, Milliman published a range of articles and videos, covering issues including retirement ideas for Millennials, the pros and cons of catastrophe models, the value of enterprise risk management (ERM) programs, and the impact of the Patient Protection and Affordable Care Act (ACA) on financial statements. We also published on challenges related to healthcare costs and insurance and risk management issues—and about real insurance for fantasy football and insurance for ride sharing. To view this year’s 10 most viewed articles and reports, click here.