Milliman Risk Talks: Introduction to Milliman ModelGRC

May 26th, 2015 No comments

Model risk has become a major area of uncertainty for financial institutions. In this Milliman Risk Talks, Milliman’s Mark Stephens introduces ModelGRC, a cloud-based risk evaluation system for model management, documentation, and model risk mitigation.

To learn more about Milliman Risk Advisory Services, click here.

Mapping a corporate culture

May 13th, 2015 No comments

Solvency II, and other regulatory drivers, requires that insurers assess their corporate culture and embed best practices throughout their organization. This article, authored by Milliman’s Richard See Toh and Systemic Consult’s Hilary Lewis, highlights an assessment approach that helps organizations diagnose their cultural profile. The approach maps and identifies the behavioral traits within an organization across separate departments, geographical regions, and demographic groupings alongside corporate values and business objectives.

Here is an excerpt:

Over the past 40 years or so, research has wrestled with the challenge of identifying the features that characterise organisational culture. An approach that has proved successful in determining the emergent properties of culture is based on assessing the organisation against a set of behavioural dimensions. These focus on how organisations respond to key tensions that arise when engaging in different business activities.

Here are some examples of these tensions.

• Do we ensure the standard of our outputs by absolutely following well-designed processes at all times, or do we focus on achieving results in a variety of ways to meet growth aspirations?
• Do we put the well-being and relationships of our people first, or do we prioritise and focus on the accomplishment of their assigned tasks?

Assessing an organisation against a set of dimensions provides a quantitative measure. The methodology described above is deployed by surveying a target set of employees. The survey is designed to ask respondents questions to assess the behaviours observed across different dimensions. The questions are phrased in such a manner to avoid the potential pitfalls of bias and manipulation.

Before deploying this approach, firms can identify an internal cultural profile that they see as appropriate for a given business activity, or area of the business. Traditional benchmarks make comparisons of where the firm sits against its peers according to the extent to which they have items on a list deemed to collectively represent the ingredients of a ‘good’ culture.

By avoiding that type of flawed, input-based perspective, and instead having a more appropriate outcome-based view of culture, a richer insight is gained, allowing informed recommendations and action plans to be developed that fit with the culture of the firm.

Milliman launches competitive intelligence tool for insurers

May 11th, 2015 No comments

Milliman today announced the availability of Pixel™, a competitive intelligence tool for insurance companies. Pixel is a web-based, interactive platform designed to give marketing executives, product managers, and actuaries a comprehensive and customized view of the market.

Our clients want to know where they are vulnerable to the competition and how to position themselves to grow their book. Pixel allows company management to base decisions on a portfolio view of competitiveness, rather than on limited anecdotes from agents. Pixel takes in large volumes of data and enables users to analyze that information very quickly and easily. As a result, questions that used to take days or weeks to answer can be answered with just a few clicks.

“Homeowners insurance pricing is becoming more granular and complicated,” said Werner Kruck, Security First Insurance Company chief operating officer. “Having a next-generation tool like Pixel helps us glean important market and consumer behavior metrics, allowing us to more accurately and competitively price our products.”

Pixel applies advanced data visualization and machine learning techniques behind the scenes in an easy-to-use tool that analyzes premiums for a given company relative to the competition. Users can filter markets by geography and type of risk, and drill down into the variables that most impact their competitive position. Results are output in user-friendly datasets, charts, and maps that can easily integrate with other software. This information is useful not only in setting premiums, but also in arming agents with valuable information and supporting the regulatory process.

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Europe’s insurance industry seeks unity on operational risk management

European insurers are divided about how to monitor and measure operational risk. This Risk.net article (subscription required) examines issues the industry needs to address to establish consensus on a modeling framework. The article quotes Milliman’s Neil Cantle offering perspective on the use of the standard formula to analyze risk.

The standard formula might be expected to bring homogeneity to these numbers, but instead many insurers see it as an out of touch way to calculate required capital. Crucially, the data used to calibrate charges for the standard formula is from 2009 and is therefore outdated compared with the loss data insurers have accumulated since. It comes as little surprise that of the 30 insurers surveyed by Oric, 20 plan to use an internal model and only 10 the standard formula…

Perversely, the standard formula also becomes more punitive as insurers grow and improve their operational risk capabilities, according to Neil Cantle, principal and consulting actuary at Milliman in London. “[The standard formula] hurts certain insurers more than others. Because it is linked to premium, if you are a fairly small but fast growing business, then as you get bigger and get better at managing your risks you get penalised, which doesn’t seem to make sense,” he says.

For more perspective on operational risk management, read this blog series.

Washington Redskins: Appraising a brand name

April 29th, 2015 No comments

The Washington Redskins nickname has been highly controversial. The U.S. Patent and Trademark Office has gone so far as to cancel the team’s trademark because it considers the name derogatory. A significant aspect of the battle is the value of the team’s name, logo, and imagery, and the brand recognition that comes with it.

Maintaining the value of a company’s brand name is an important part of an organization’s risk management program. In his article “The Redskins: What is the value of a brand name?,” Milliman’s Will Carbone discusses some financial and marketing issues that risk managers must consider to assess a brand’s equity and protect an organization’s name.

Here is an excerpt:

The Redskins name, similar to Apple, Coca-Cola, or McDonald’s, provides a clear value to the franchise. Where does this high value come from? It comes from the associations made by customers when hearing the brand name. These associations can be related to exceptional organizational reputation, historically good consumer relations, or recognition as a leader in the field. Customers hear the brand name or see the company’s logo, and their long-held perception of the company often dominate their thoughts.

The positive feelings that some brand names bring to mind are a valuable and marketable commodity. Over the past few years, both Hostess Brands and Crumbs Bake Shop struggled financially and were looking at liquidation. However, they had one key asset that was available, the fond feelings and satisfied taste buds many customers associated with their brands. While both companies were suffering from management issues (and, for Hostess, legal troubles as well), the images associated with the brands were untouched in the snacking community. Today’s Hostess and Crumbs are not the same organizations that existed five years ago, but the brand names have remained intact.

Evaluating and capitalizing on the value of the brand is an essential part of a risk management framework. While these examples reflect opportunities presented by the presence of recognized goodwill, there should also be steps taken to avoid the downside risk of having a recognized brand. This includes both preemptive risk avoidance measures and contingency plans to protect or salvage brand equity. Preemptive measures would likely include marketing strategies focused on protecting the organization from reputational risk, or put more simply, trying to avoid bad publicity. This could take the form of vetting of spokespeople, doing careful due diligence on corporate alliances, or monitoring public opinion on the brand. If these efforts fail and an organization suffers from bad publicity, the organization will need to enact its contingency plan and work to rehabilitate the brand’s image.

Value in force (VIF) monetization considerations

April 28th, 2015 No comments

The need to enhance capital, liquidity, and risk conditions will be important for insurers under Solvency II. Value in force (VIF) monetization transactions can help them attain these business goals. In their article “Catching early cashflows,” Milliman consultants Chris Lewis and Scott Mitchell as well as Craig Gillespie, of Swiss Re, highlight some key aspects that insurers must evaluate before engaging in a VIF monetization transaction.

Here is an excerpt:

An insurer interested in exploring VIF monetisation must, as a first step, carefully consider the portfolios of business that it has available as the basis for a transaction.

A primary requirement is that there is a sufficiently large amount of VIF in the portfolio to make the transaction worthwhile for all counterparties. Secondary considerations focus upon the risks underlying the portfolio. Portfolios are likely to contain a mix of product types, each with their own combinations of demographic, behavioural and market risks.

The extent to which these risks can be transferred as part of a VIF monetisation will depend mainly upon a provider’s risk appetite. Generally there has been robust provider interest in the area from reinsurers, investment banks and private equity houses. Each provider will have specific expertise in assessing some or all of the risks underlying portfolios considered for VIF monetisation.

The provider’s risk appetite will to some extent determine both feasibility and appeal of the transaction terms to the insurer. It may be the case that in order to secure the most attractive terms the transaction may be structured with multiple counterparties, each assuming the run-off of different risks.

Actuaries involved with evolving risk management frameworks

April 17th, 2015 No comments

The insurance industry’s approach to risk management evolved significantly after the global financial crisis. Regulatory frameworks such as the Own Risk and Solvency Assessment (ORSA) of the National Association of Insurance Commissioners (NAIC) have been established to analyze the financial risk and solvency of insurance companies. In this Best’s Review article (subscription required), Milliman’s Anthony Dardis and Matt Killough discuss how actuaries have participated in this process since the financial crisis.

Here is an excerpt:

Anthony Dardis, a Milliman consulting actuary who focuses on life insurance, has seen increased actuarial involvement in the risk (and other) functions of life insurance organizations since the financial crisis.

“Even in advance of the financial crisis, we were seeing a lot more actuaries getting involved in what was genuinely the risk management side of things. But when the financial crisis hit it really accelerated that development. Prior to the financial crisis, a number of companies were doing economic capital modeling. But before the crisis those analytics were not getting very widely used. Another big development that’s worth highlighting is that the financial crisis really indicated there was something of a broken link between product pricing and risk management.”

That problem surfaced among some variable annuity writers, “who weren’t capturing all their risks in their pricing and were genuinely undervaluing the options that were inherent in the product,” Dardis said. “The flip side of this is that other companies did have strong risk management and pricing approaches in place pre-crisis and came out of the crisis very well, and in some cases used the aftermath of the crisis to pick up market share and grow their companies. Generally, the industry has made great progress since the financial crisis in the management of variable annuities with complex guarantees, although there is still more to do in terms of having relevant risk metrics produced quickly and properly understood and acted on by senior management.”

In addition, Dardis said, “There’s been a much more general trend toward bringing together risk, actuarial, finance, (company) treasury and investments and an increased recognition that these disciplines are all interrelated. There had traditionally been a real disconnect between the investment side and the actuarial side and again we’ve seen a lot of very positive developments in that area over the past few years.”

The financial crisis has had less of an impact on actuarial practice in the property/casualty industry, said Matthew Killough, a Milliman consulting actuary who focuses on the property/casualty segment.

“In general, the risks faced by property and casualty companies tend to be driven more by their insurance business than their asset portfolios,” he said. “Consequently, the industry weathered the financial crisis pretty well, but it did bring greater focus and attention to risk management and capital modeling. However, I believe we are still in the early stages of those efforts, and don’t think the financial crisis had a huge impact on the practice of most casualty actuaries.”

Actuaries and the future of predictive modeling

April 10th, 2015 No comments

Scott-SheriI had the pleasure of recently participating in a panel discussion on predictive modeling at the 2015 Casualty Actuarial Society (CAS) Ratemaking and Product Management seminar in Dallas. Prior to the meeting, the CAS conducted a predictive modelling survey, and the panelists were there to discuss both the results and the emerging role that actuaries play in predictive modeling. And it’s an important role! I always try to include an actuary on a predictive modeling project, teaming actuarial expertise with subject matter experts as well as data scientists. This kind of collaboration makes for stronger models. Actuaries bring a unique business knowledge to the mix, while the data scientists will challenge norms. The result of this collaborative tension: Innovative and relevant business insights.

The CAS issued a press release earlier this week recapping the panel. You can read it here, or contact me for more information.

The case for case studies in ERM

April 7th, 2015 No comments

Michael-EshooFounded in 2011, the Milliman Risk Institute provides scientific-based thought leadership on all facets of enterprise risk management (ERM). Composed of senior risk executives, actuaries, and university professors, the Milliman Risk Institute Advisory Board meets semiannually to discuss ERM trends, research, and key topics.

In this blog series, members of the Milliman Risk Institute Advisory Board share their views on ERM research and development and how it can support business insights.

The most critical question for me regarding enterprise risk management (ERM) is how to most effectively operationalize it and embed it in within your culture – it has to be a natural extension of how you operate in order to recognize the most value. In these volatile times, you have to be risk-aware and willing to take risks to win. Risk management’s role as a function, is to enable this culture and mindset to lead to optimized decisions and results that would not have been possible otherwise.

Some of the most useful things for me in the ERM research that has emerged in the past decade or so and via the Milliman Risk Institute is the 360 degree reflection on case studies. I like them because they highlight specific problems that have arisen from a failed risk management system that allow you to reflect on yourself and your business. Risks can take many forms and have many different levels of realization, and studying specific examples allows you to be self-critical and challenge the conventional way of thinking. The types of risks that organizations have to be prepared for change every day. For example, with the boom of social media and connectivity, this decade has seen some of the largest changes in service delivery models and disruptive technologies that have changed a number of industries forever. Theory is great, but the proof is always in the pudding, and looking at real examples is how I like to evolve my learning and preparedness.

What’s useful about ERM practices is that they provide an opportunity to benchmark and reflect on risk process, on risk culture, and on the evolution of risk thinking in the industry. It’s good to see the theory and it’s even better to see the practice which allows you to think outside the box. The past provides the tools, but we all need to look forward to imagining where we can go and how to continually evolve.

Michael is a member of the Milliman Risk Institute Advisory Board. He is the chief financial officer of GE Power & Water’s global supply chain of power generation products.

Exploring ERM on granular levels

April 1st, 2015 No comments

Stephen-DArcyFounded in 2011, the Milliman Risk Institute provides scientific-based thought leadership on all facets of enterprise risk management (ERM). Composed of senior risk executives, actuaries, and university professors, the Milliman Risk Institute Advisory Board meets semiannually to discuss ERM trends, research, and key topics.

In this blog series, members of the Milliman Risk Institute Advisory Board share their views on ERM research and development and how it can support business insights.

As far as risk assessment is concerned, I am impressed with David Cooper who analyzed risk in military settings and asked, “How can you take all of the intangibles that you face in a combat situation and then come up with anything reasonable to do?” In extremely hazardous situations where the “fog of war” prevents any one individual from having all the information needed to make critical decisions, it may seem impossible to develop risk management tools to decide, “We’ll do this,” or, “We won’t do that. It crosses a line.” However, as David Cooper explained, the military has developed a set of operational guidelines that are used in critical combat circumstances.

If an experienced military expert can say, objectively and with confidence, “We have standard operating procedures. We know we’ve done this before. We know what the success rate is in this type of operation. And we understand the uncertainties,” and can base a decision on that, then any company should be able to apply sound risk management processes, too. Companies just can’t get away any longer with saying, “This is too complicated. We don’t have all the information we need. We don’t know what to do. Enterprise risk management is just too much for our company to incorporate into our decision making processes.” Companies just have to have the discipline to set up a framework for making decisions involving risk, and then modify the framework as circumstances suggest.

There’s so much still to learn about ERM. I’d like to understand the dynamics of a typical board of directors when the board is presented with a decision about risk. How do the individual dynamics affect the decision making?  Does it matter how long somebody has been on the board or how they feel about raising objections? How do these factors figure into the final decision? Is there groupthink bias in organizations, in which the tendency to seek cohesiveness because everybody wants to agree with everybody else overrides a full airing of differences of opinion because it’s easier going along even if you know something is wrong? It would be useful for skilled researchers to watch board level decision making in action so we can learn about the process from somebody who is really skilled at analyzing group dynamics and applying that to boards of directors making decisions about risks.

What ERM professionals are doing now is important, obviously, working in the trenches of getting the quantitative and qualitative metrics right, but in many ways that’s useless without understanding how the right decisions are being made by people. We don’t really understand how that gets done. What appeals to these decision makers? What gets them to push in the right direction? There just are still many different directions to go with ERM research.

Stephen is a member of the Milliman Risk Institute Advisory Board. He is Professor Emeritus of Finance at the University of Illinois.