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Enterprise Risk Management Case Study: Improved Modeling Ernst & Young LLP

Enterprise Risk Management Case Study: Improved Modeling Ernst & Young LLP. Balance Sheet. Investment Income. External Capital. Service Improvement. Contribution to Surplus. Expanding the Dialogue – Linkages. Benefits Expenses Taxes. Premium. Surplus Solvency Investment

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Enterprise Risk Management Case Study: Improved Modeling Ernst & Young LLP

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  1. Enterprise Risk ManagementCase Study: Improved ModelingErnst & Young LLP

  2. Balance Sheet Investment Income External Capital Service Improvement Contribution to Surplus Expanding the Dialogue – Linkages Benefits Expenses Taxes Premium Surplus Solvency Investment Viability

  3. Capital Allocation RBC “ + ” RAROC Linking the Pieces Premium Investment Income Benefits Capital Costs Admin Expenses Taxes Surplus Regulatory Investment Viability Budgeting Capital Budget Strategic Plan Contribution to Surplus

  4. Rate Increases Trend Renewal Distribution Stochastic Health Models

  5. Trend Provider Contracting Benefit Buy-Down Stochastic Health Models

  6. Process as Important as the Model • Forces logical thought process • Broaden the types of assumptions • Financial • Business • Range of assumptions – beyond point assumptions • Outcomes • Range of potential results • Ranges show sensitivity to specific assumptions/variables • Management dialog

  7. Assumptions c Revenue Premium Increases Target Loss Ratios Renewal Distribution Investment Return Claims Current Loss Ratio Trend Provider Contracting Claims Liabilities c c c c c Expenses New Business Administration Capital Expenditure Exposure New Business Lapses c c c Net Income Targeted Surplus Aggregate Outcomes

  8. Assumptions and Linkages Revenue Premium Increases Target Loss Ratios Renewal Distribution Investment Return Claims Current Loss Ratio Trend Provider Contracting Claims Liabilities Interactions Renewals: Shock Lapse Antiselection Expense Recovery Benefit Buy-Down Providers: New Business Lapses Trend Expenses New Business Administration Capital Expenditure Exposure New Business Lapses Net Income Targeted Surplus Aggregate Outcomes

  9. Assumption probabilities Ending Surplus Monte Carlo Simulation Stochastic Health Models

  10. Earnings Easy Step to Risk-Adjusted Returns • Itemization of risk assumptions • Process provides structure for addressing rate factors • Construction of assumptions includes variability • Easily accommodates capital expenditures • Assumptions are typically LOB-specific • Many have LOB-specific risks and outcomes • Include items like likelihood of obtaining needed rate increases • Range of outcomes • Variability is linked to risk spread • Surplus targets can be set based on risk/reward outcomes Probability of loss Uniform risk (e.g., 99.75%)

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