Card Set Information

2012-05-09 16:54:33

Risk Adjusted Performance Measurement for P&C Insurers
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  1. Income measures
    • GAAP Net Income: convenient for mgt decisions
    • Statutory Net Income
    • IASB Faire Value: removes accntg bias
    • *Economic Profit: chg in econ value of firm (-) ignores franchise (-) mgt can't justify, doesn't reconcile w GAAP
  2. Capital measures - Risk-adj(Y) or not (N)
    • N - Actual committed C: from shareholders
    • N - Mkt value of equity: mkt capitalization
    • Y - Regulatory req C
    • Y - Rating agency req C
    • Y - Economic C: objectives = solvency & C adequacy
    • *Y - Risk C: amt of C from shareholders to cover risk that P > L + R
  3. Risk measures
    • percentile: achieve given prob of ruin
    • CTE = conditional tail expectation: mean XS loss = TVaR
    • EPD ratio
  4. Setting risk measure threshold level
    • bond default prob: sel cr rating (-) which cr rating? (-) ignores risk of downgrade
    • mgt risk pref: (-) diff to get consensus (-) differs from directors, investors
    • arbitrary default prob: (+) easy to measure, bypass very low lvl where more uncertainty
  5. Risk sources
    • mkt risk: chg in inv value; annualize (usually ST)
    • cr risk: counterparty default; inv position; prem receiv; reins recov (def of default - death spiral; contingent exposure; high corr w insr risk)
    • UW risk: loss res on prior yrs, UW curr yr, property CAT
    • others: operational, strategic; hard to quantify
  6. Aggregating dependencies
    • empirical analysis: (-) insufficient data (-) how corr chg in tail events
    • subjective estimates: (+) accnt for tail (+) reflects intuition (-) as # incr, exponential incr in estimates
    • explicit factors models: link variability of risk to common factors
  7. Risk Aggregation Techniques
    • closed form solutions
    • approximation methods: set dist like (log)normal
    • simulation methods
    • square root rule
  8. Myers-Read Method
    • use impact of entire BU to derive C requirement
  9. Capital Allocation Methods
    • proportional based on risk measure: eg VaR
    • incremental allocation: effect of adding entire line
    • marginal allocation: effect of increasing exposure
    • Co-measure: avg measure when avg firmwide loss > percentile
  10. RAROC calculation
    • economic profit = P - E - L + Inv return
    • RAROC = econ profit / allocated capital
    • highly sensitive to sel C allocation method
  11. Multiperiod RAROC
    • R = cost of risk capital
  12. Disadv of CAPM & Fama Fench to derive RAROC
    • "risk" in CAPM = systematic inv risk. RAROC = diff in CF exp value & tail value
    • denominator of RAROC understated (no franchise)