Ultimate Risk Solutions’ Dario Aliotta talks to Captive Review about the art of successful portfolio management for captive insurance companies
Captive Review (CR): How would you describe the process of successful portfolio management?
Dario Aliotta (DA): Portfolio management is an integrated part of a defined risk management process, which basically starts with the transfer of a risk from one balance sheet to another.
Before the transaction starts, the captive portfolio manager needs to understand the nature of the risk and the possible implications for its own balance sheet.
It means to properly assess a risk and to define its price tag. A successful portfolio management is a constant monitoring and control of the accepted risks.
CR: What instruments are available to control and monitor the accepted risks?
DA: Actuaries normally use tools such as Excel spreadsheets. In my view, it is an intrinsic risk to rely on a personal or team-based solution, even though the maths behind it is acceptable.
Also, some of the international broking community offer a homemade model to achieve their ultimate goal, which is ultimately to increase the dependency of their clients over time and to get more business exchange.
We believe a tool developed by professional and experienced industrial representatives over 20+ years and evolved within the frame of advanced and state of-the-art technology and industrial feedback offers a better working platform.
Our www.ultiriks.com products provide clients the most sophisticated, fast, and easy-touse software technology to address the wide range of analytical challenges insurers, reinsurers, brokers and consultants face in risk modeling. The solution offers an impartial, independent and intelligent solution for risk and financial modeling.
CR: What are the essential parameters needed for a successful model?
- Risk management: A portfolio manager should have as a constant task to revise the intrinsic development of the accepted risk. They need to constantly adjust the reserves and monitor the available capital at risks. It is essential.
You do not want to be surprised with a strong adverse development, which could cause a stress situation for the capital available of the portfolio and ultimately of the legal entity. The portfolio should not only be analysed constantly but the manager should also know what sort of events could have a severe impact.
Our model offers the option to run systematically various stress situations – scenarios according to your judgement and to visualise the impact from an adverse high frequency of loss or a higher unexpected severity.
The scenario-driven approach is also possible with the support of our Economic Scenario Generator that offers advanced econometric modeling to simulate movements of main macroeconomic variables in more than 30 different economic environments.
- Solvency II requirements: Our SF-Explorer enables the captive team to constantly know the current and prospective solvency ratio for pillars I/II purposes and fulfill with the respective regulator requirements.
- Reinsurance market: For a captive manager, one of the main concerns to protect the balance sheet is the development of the reinsurance market. According to the volatility of the supply and demand, the model (Risk Explorer dynamic financial analysis) offers the unique opportunity to fine tune the requirements for the captive.
Ultimately, the manager is able to design the appropriate reinsurance cover considering the retention in function of the market forces, the available capital and the needed retention according to the business retained. This allows the manager to consider all possible negotiation options for the adequate market approach and select the right partners.
- Portfolio Polis: We also provide the analysis of the calculated price of all insurance policies. The system allows us to quickly rate all policies and identify business that is underpriced and revise strategically the allocated capital.
The output allows you to benchmark to the market and assess the right pricing level for business, as well as improve underwriting performance, therefore allowing the portfolio manager to optimise the expected profitability.