ERM - Holistic Risk Management
“Enterprise Risk Management (ERM) is driven by the concept that one cannot effectively protect the whole organization without analyzing all factors that influence financial outcomes.” That is the message Anya Kutsina, Chief Marketing Officer at Ultimate Risk Solutions, LLC and Director of U.S. RE Analytics, brought to the recent conference of the New York Insurance Association.
In a panel moderated by Joe Petrelli Sr., President of Demotech, Inc., the rating agency, Kutsina focused on the importance of Dynamic Financial Analysis (DFA) in stress testing to meet regulatory requirements. She pointed out that Risk Explorer™, the URS DFA tool, can “quantify in probabilistic terms whether the company will be able to meet its commitments in the future…and provide a range of results regarding the anticipated Surplus of the company.” Using the model, the financial position of a company can be evaluated from the perspective of regulators, agents, and insureds, she explained.
Kutsina and Petrelli pointed out that after the turmoil in many sectors of investments, the New York Insurance Department expects all companies to have a scenario stress testing process in place as part of prudent risk management. In fact, Matti Peltonen, chief of the Department’s Capital Markets Bureau, recently issued a letter alerting companies that meetings will be scheduled with the Department to review how stress tests will be conducted. Kutsina advised that a DFA model is a critical element of a credible stress test.
DFA applications include reinsurance optimization, strategic asset allocation, capital allocation, performance measurement, business mix, pricing, and mergers/acquisitions. Risk Explorer™ is used by insurers and reinsurers in portfolio risk management, risk modeling, reinsurance/retrocession analysis, risk-based capital calculation, and cash flow testing/financial planning (Statutory and GAAP), among other critical decisions.
ERM is a “process for making decisions that will minimize the impact of risk,” Kutsina said. A sophisticated DFA is an essential component of ERM. Today, Kutsina noted, rating agencies are expecting companies to have a credible ERM program. In Europe, Solvency II, the new regulatory framework, will require companies to have an ERM program in place.