Insurance Risk Study - Aon

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Contents 3 | Foreword 4 | Global Risk Parameters 6 | Evaluating Solvency II Factors 8 | U.S. Risk Parameters 10 | Best of Times, Worst of Times 12 | Correlation and the Pricing Cycle About the Study Asset Portfolio Risk Portfolio Risk 16 | Modeling Dependence 17 | Size and Correlation 18 | Macroeconomic Correlation 19 | Managing Inflation Risk 21 | Global Market Review 25 | Afterword: The Greatest Risk Rating agencies, regulators and investors today are demanding that insurers provide detailed assessments of their risk tolerance and quantify the adequacy of their economic capital. To complete such assessments requires a credible baseline for underwriting volatility. The Insurance Risk Study provides our clients with an objective and data-driven set of underwriting volatility benchmarks by line of business and country as well as correlations by line and country. These benchmarks are a valuable resource to CROs, actuaries and other economic capital modeling professionals who seek reliable parameters for their models. Modern portfolio theory for assets teaches that increasing the number of stocks in a portfolio will diversify and reduce the portfolio’s risk, but will not eliminate risk completely; the systemic market risk remains. This is illustrated in the left chart below. In the same way, insurers can reduce underwriting volatility by increasing portfolio volume, but they cannot reduce their volatility to zero. A certain level of systemic insurance risk will always remain, due to factors such as the underwriting cycle, macroeconomic factors, legal changes and weather (right chart below). The Study calculates this systemic risk by line of business and country. The Naïve Model on the right chart shows the relationship between risk and volume using a Poisson assumption for claim count — a textbook actuarial approach. The Study clearly shows that this assumption does not fit with empirical data for any line of business in any country. It will underestimate underwriting risk if used in an ERM model. Portfolio Risk Insurance Portfolio Risk Systemic Market Risk Systemic Insurance Risk Number of Stocks Insurance Risk Volume Naïve Model
Foreword Since the first internal Aon Benfield Insurance Risk Study in 2003, the insurance world has been shaken by mega-catastrophes and threatened by financial market turmoil. Industry best practice in enterprise risk management has evolved almost beyond recognition, and techniques for risk quantification and capital modeling have advanced from nascent specialties into mainstream core competencies. Yet despite change and progress, much remains constant. Risk quantification still relies fundamentally on accurate parameterization and realistic stochastic models. An incorrectly specified model is often worse than no model at all. Bad models can lead the user astray, as was shown by numerous examples during the financial crisis. Aon Benfield has consistently focused on the need to provide our clients the robust data and fact-based parameters published in this Study to complement state-of-the-art financial modeling tools such as our ReMetrica ® software. The Study is a cornerstone of Aon Benfield Analytics’ integrated and comprehensive risk modeling and risk assessment capabilities. > Our reinsurance optimization framework, linking reinsurance to capital, relies on the Study for a credible assessment of baseline frequency and severity volatility > Our global risk and capital strategy practice, providing ERM and economic capital services, uses the Study to benchmark risk, quantify capital adequacy and allocate capital to risk drivers > Our ReMetrica risk evaluation and capital modeling software provides easy access to the Study parameters and risk insights 2010’s Fifth Edition has again expanded in scope and coverage from previous editions. It includes: > Results from 46 countries, comprising more than 90 percent of global premium > A global market review showing premium, historical loss ratio and volatility parameters for the top 50 countries > A new approach to loss ratio volatility that measures year-over-year changes illustrating the magnitude of historical planning misses > A focus on the potential impact of inflation on P&C companies The massive database underlying the Study is supported by more than 450 professionals within the global Analytics team who are available to work with you to customize the basic parameters reported here to answer your specific, pressing business questions. Aon Benfield’s Insurance Risk Study, now in its fifth edition, continues to be the industry’s leading publicly available set of risk parameters for modeling and benchmarking underwriting risk. We are pleased to offer the Study for the advancement of risk management within our industry. For convenient reference, you can find earlier editions of the Study at aonbenfield.com. I welcome your thoughts and suggestions, which you can share with an e-mail to stephen.mildenhall@aonbenfield.com. Stephen Mildenhall CEO, Aon Benfield Analytics 3
Page 1: Insurance Risk Study Fifth Edition
Page 5 and 6: Underwriting Volatility for Major L
Page 7 and 8: Solvency II Correlation Coefficient
Page 9 and 10: Industry Reserve Adequacy: How Long
Page 11 and 12: Year-Over-Year Change in Gross Loss
Page 13 and 14: Germany Japan U.K. U.S. Accident &
Page 15 and 16: Americas - Liability Europe - Liabi
Page 17 and 18: Size and Correlation Insurers of di
Page 19 and 20: Managing Inflation Risk Risk manage
Page 21 and 22: Global Market Review With rates con
Page 23 and 24: Global Premium, Loss Ratio and Vola
Page 25 and 26: Afterword: The Greatest Risk In las
Page 27 and 28: For more information on the Insuran

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