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Enterprise Risk Management from
the P&C Perspective
IABA Conference
August 6, 2010
Presented By:
Gary Ganci, FCAS,MAAA
VP ERM
Travelers Enterprise Risk Management
The mission of Travelers Enterprise Risk Management is
to facilitate risk assessment and implement strategies to
optimize risks/returns in accordance with the Company’s
goals and values.
To enhance the coordination of risk management across all categories
of risk throughout the company and develop dynamic models to
quantify and examine the interaction of these risks and returns on our
capital structure and earnings potential.
Work in partnership with all current key risk management leaders who
are focused on risks related to their disciplines (i.e. underwriting,
reserving, investments, credit, regulatory compliance, operations etc.)
to ensure that coordinated cross-departmental risk management is
achieved.
Create and maintain a dynamic capital model that will be used in the
process of allocating capital to our products and business lines, as well
as helping to ensure capital efficiency in concert with regulatory and
rating agency targets.
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Travelers Enterprise Risk Management
• Long established enterprise risk management processes imbedded in the culture of the
organization, reflected in the Company’s conservative investment policy and the
Company’s disciplined underwriting philosophy with strong overall corporate governance
• Strong established Board governance provided by the following sub-committees of the
Board:
Risk Committee
Investment and Capital Markets Committee
Audit Committee
Compensation Committee
Nominating and Governance Committee
• Strong established management governance supported by the highly seasoned,
experienced and stable management team across all disciplines – underwriting, claim,
reinsurance, investing, legal/regulatory and finance/actuarial
• Dedicated senior executive appointed to oversee Enterprise Risk Management process
• Corporate governance further supported by Chief Compliance Officer, Business Conduct
Officer, Corporate Actuarial Group, Internal Audit and Accounting Policy Group
• Strong earnings base of Company and diversified, national scope of operations reduces
franchise exposure to catastrophe events as well as non-catastrophe losses
• Maintaining conservative capital adequacy position to protect franchise, further supported
by financial flexibility afforded by strong liquidity and low financial leverage
2
Travelers ERM: Management Process
• Management Committee
ERM – Senior executive team
– Strategic and tactical focus
– Monthly financial and operational reviews
• Operating Committee
– Expanded executive team
Investment Insurance Financial – Strategic and tactical focus
– Business line financial and operating reviews
• Insurance Risk Committee
Legal & – CAT Committee
Administrative
Regulatory – Emerging Issues Committee
– Climate Change Committee
– New Product Group
• Administrative Risk
• Local Office / Regional / Countrywide – Business Resiliency Steering Committee
– Controllable Income Statements – Executive Crisis Management Team
– Monthly Summary of Production Results – Operational Response Team
– Regional President’s reports
• Business Units / Support Units
• Investment & Credit Risk
– Monthly investment performance
– Monthly detailed financial and operational reviews
– Quarterly investment report to Board
– Performances measures evaluated against
– Credit Committee
established benchmarks based on allocated equity
and target ROE’s
• Legal Services Mgmt Team
3
Code of Business Conduct & Ethics
• All employees are required to certify that they have reviewed the Code on an annual basis,
including applicable policies such as the Code of Conduct for Systems Users and the
Employment Policy Guide.
• All employees are required to complete Code of Business Conduct & Ethics training courses
on an annual basis. Training includes the review and testing of key components of the
Code such as:
Conflicts of Interest
Confidential Information
Computer Safety
Privacy
Accurate Financial Reporting
• All employees are required to affirm the Code on an annual basis - failure to do so will
result in termination.
• Toll-free Ethics Helpline available for U.S. & International employees. Any employee who
in good faith seeks advice, raises a concern or reports misconduct will not be subject to
discipline or retaliation for doing so. Employees may report anonymously.
4
Fraud – Special Investigation Unit
• Monitor and measure fraud detection in the field through enhanced quality
management and metrics
• Many former law enforcement with diverse federal, state, local law
enforcement or private industry backgrounds (accident reconstruction, fire
science, pharmaceutical industry or forensic accounting, medical fraud, cargo
and chiropractic)
• Continue to recruit individuals who have extensive experience and connections
with law enforcement (e.g., Leader of NJ Cargo Theft Task Force; TX WC
Fraud Bureau)
• 96% of staff are field-based and are dedicated to outside investigative work.
• SIU investigated 50,000 files in 2006 (individual claims)
• Investigating 80+ providers each having hundreds and sometimes thousands
of files (provider/group fraud).
• Results: (124 arrests; 64 convictions; $1.2MM in restitution)
5
Travelers Accounting Policy Group
• Is staffed by CPAs and actuaries
• Represents the Company before insurance regulators and the FASB
on financial and accounting issues
• Develops and executes implementation plans for new GAAP and
Statutory accounting standards and interpretative guidance issued
by authoritative accounting bodies
• Researches and develops positions on emerging accounting issues
emanating from new exposure drafts from authoritative sources;
from the Group’s participation in accounting or trade association
committees and task forces; from business lines or from proposed
transactions
• Provides consultation and support on accounting and actuarial
issues identified by the business lines, financial reporting and
corporate finance
• Monitors changes in accounting practices and policies at the
business lines
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World Class Corporate Audit Organization
• Leadership: The Chief Auditor is a former insurance partner from a Big 5 Public Accounting Firm and
has direct reports with an average of over 16 years Internal Audit experience.
• Mission: To provide assurance to Senior Management and the Audit Committee that internal controls
across the organization are operating effectively, the company maintains compliance with SOX 404,
and we hire and develop personnel with the intent of providing them career opportunities in the
company. Our work must meet the quality expectations of KPMG, our external auditors, in order that
they can rely upon our audit procedures.
• Risk Assessment Approach: Travelers integrates risk assessments from Corporate Audit and the
Businesses to develop the Annual Audit Plan to test financial, operational, compliance and system
controls over strategic emerging and operational risks
• Assessment: In a recent independent quality assurance review performed by Ernst & Young, they
reported that Travelers Corporate Audit exhibited 122 of 136 leading practices, making Travelers “the
leading internal audit function within the US Property and Casualty industry.”
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Capital Modeling
• How much is enough?
• Economic
• Statutory
• Rating Agency views
• Allocation to Risk Types, Businesses/Products
• Many different approaches
• Tail Based
• By Percentile Layer
• Utility Theory
• Other Uses
• Reinsurance strategy
• M&A and divestitures
• Investment strategies
• Stress Testing
• What if?
• Inflation of early 80s returns
• and, the next big northeast hurricane hits…
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How are Results Measured?
Reference Outcome
TVaR[99]
VaR[99]
...
Required Capital
Outcome
9
Reserve Risk – Statutory vs. Economic Views
Statutory View
Carried VaR[99] TVar[99]
25.0 30.0 35.0 40.0 45.0 50.0 55.0 60.0 65.0
Economic View
Mean Carried VaR[99] TVAR[99]
25.0 30.0 35.0 40.0 45.0 50.0 55.0 60.0 65.0
10
Co-TVaR vs Relative TVaR: Risk Attribution Issues
Relative TVaR[99]
Reserve
URR
CAT
Non-CAT U/W
Asset
Co-TVaR[99]
Reserve
URR
CAT
Non-CAT U/W
Asset
11
Enterprise Risk Model
Assets
Premium Risk Drivers Reserves
(Economic Scenario
(Plan) Generator)
Premium
(Future Years)
Examples of Potential Risk Drivers:
Interest Rates/Inflation
Underwriting Cycles
Catastrophes
Other economic indicators (S&P 500, GDP, Unemployment)
12
Reserve/UW Risk – Correlation of Accident Years
AYs independent
AYs 100% correlated
AYs correlated with
inflation index
TVaR[99]
- 5.0 10.0 15.0 20.0 25.0 30.0
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Reinsurance Collectability
Top Reinsurers modeled individually, remaining grouped by credit quality.
Balance Sheet recoverables and prospective treaties modeled.
• Introduced correlation between invested asset risk (bonds) and reinsurance asset risk
• Introduced correlation between TRV CAT exposure and reinsurance asset risk
• Introduced correlation between TRV exposure to economic/social inflation and reinsurance
asset risk
Adverse
Insurance
Outcomes
Reinsurance
Collectability
Simulated
GEMS – Corp.
Industry
Bond Defaults
CAT Loss
14
Model Limitations
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