The insurance and surety industry make a positive contribution to the growth of countries' economies. Numeravi helps this industry to achieve a sustainable development through risk management.

Insurance and surety companies have a fundamental role in the economy through risk management and mitigation of the losses that risks can generate. Despite the growth that the Mexican insurance and surety industry has registered in recent years, its level of penetration in the economy in 2017, represents only 2.3% of the gross domestic product, which indicates its broad growth potential.

To consolidate the sector, in the international and local spheres, extensive regulatory frameworks have been established, leading insurers to strengthen risk control and mitigate exposure to losses that threaten compliance with their clients’ obligations. In that regulation, the following requirements have been established for insurance institutions:

  • Measure and manage their underwriting, market, credit, liquidity, mismatch, concentration, and operational risks.
  • Satisfy a Solvency Capital Requirement (SCR) to guarantee, with a high level of confidence, their ability to cope with the losses caused by the risks to which they are exposed.

To turn risk management into a competitive advantage and comply effectively and efficiently with regulation, Numeravi’s consultants carry out risk measurements adjusted to the business’ nature of each institution, allowing them to know the origin of their exposure and the potential affectations they can suffer. We also suggest the most appropriate mitigation and risk control measures that allow insurance and surety companies optimize the use of their capital.

Numeravi’s consultants explain transparently the risk measures and the methodologies applied, so the services we provide allow the insurance and surety companies:

  • Identify the areas (insurance lines or type of risk), that generate the biggest potential losses and, therefore, increase the SCR.
  • Understand the basis of the SCR calculation.
  • Identify the particular characteristics of their risks that can generate the need for a SCR’s internal model.

Numeravi provides the following consulting services for underwriting, credit, market, liquidity and operational risks management:

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    Underwriting risk:

    Underwriting risk management is based on estimating the expected and maximum probable (value at risk or VaR) claims that an insurance company could face. We perform these estimates using statistical models for the frequency and severity of claims and the application of the reinsurance schemes of each institution.

    We adjust specific statistical models for each institution or apply market models of claims, perform stochastic simulation to generate multiple scenarios and obtain expected and maximum probable claims by year, line of insurance and/or coverage.

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    Market risk:

    In investment assets and technical provisions:

    2.1 Estimation of the sensitivity and VaR of technical provisions, generated by movements of market risk factors (e.g. interest rates and exchange rates).

    2.2 Calculation of the value at risk of investment portfolios, global and disaggregated by security type, risk factor, security, etc.

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    Credit risk

    3.1 Calculation of the expected loss for default of reinsurers.

    3.2 Estimation of the expected loss and credit value at risk of investment portfolios.

    3.3 Estimation of credit risk by other counterparties.

    3.4 Estimation of the credit provisions for loans granted by insurance companies.

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    Mismatch risk:

    4.1 VaR estimation of own funds or economic capital, generated by movements in market risk factors and the mismatch between assets and liabilities.

    4.2 Calculation of other indicators of mismatch between assets and technical liabilities such as balance by currency, duration and convexity.

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    Liquidity risk:

    4.1 Liquidity gaps, considering cash flows from financial assets and technical liabilities.

    4.2 Statistical estimation of the loss due to early or forced sale of securities.

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    Advice to risk and investment committees:

    In case the institutions require it, attendance of a consultant specialized in risk management to the meetings of the investment and risk committees, in order to explain the risk measurements and how to get the greatest benefit from this information.

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    Operational risk:

    7.1 Development of operational risk management policies and procedures.

    7.2 Identification of risks associated with operational processes and construction of the operational risks’ matrix.

    7.3 Definition of key risk indicators.

    7.4 Definition of tolerance levels.

    7.5 Definition of the incident database structure.

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    8. Own Risk and Solvency Assessment (ORSA) and Dynamic Solvency Test (DST)

    The new national and international regulation require insurance companies to carry out periodic own risk and solvency assessments (ORSA). In Mexico, this assessment includes the Dynamic Solvency Test, whose purpose is to assess the capacity of institutions to satisfy the solvency capital requirement in various prospective scenarios.

     

    ORSA is an extensive exercise that requires multiple analyzes by personnel specialized in risk management and Solvency II, who should have strong knowledge of the operations of insurance and surety institutions. Two of the most important aspects of the ORSA that Numeravi´s consultants perform for insurance and surety institutions are:

    8.1 Evaluate whether the standard formula to calculate the SCR is adequate to estimate the probable maximum losses that the institution may suffer due to the risks to which it is exposed.

    8.2 Assess their capacity to maintain their solvency and satisfy the SCR in different stress scenarios. The dynamic solvency test is carried out within this evaluation. The objective of Numeravi´s advice is to transform the Dynamic Solvency Test into an instrument to optimize the use of the capital of insurance and surety institutions, estimating their real solvency level and their own funds needs based on their business goals and risk exposure. Through Numeravi’s consulting services, the following specific objectives will be achieved for each institution:

    • To identify which variables (line of insurance or types of risk) generate the greatest exposure to losses and, therefore, increase the SCR. That is, knowing in a disaggregated way, what generates the solvency capital requirement.
    • Identify specific classes of risk that may affect the institution’s satisfactory financial condition.
    • Propose actions that reduce exposure to those risks.
    • Design actions that mitigate adverse effects if such risks are materialize.
    • Efficiently comply with this regulatory requirement.
    • In the case of surety institutions, evaluate their solvency considering both their insurance and bonding operations.

     

    In Numeravi we have the technology, knowledge and the necessary experience to evaluate how appropriate the SCR standard formula is for each institution and develop scenarios appropriate to their specific business nature to provide useful information to optimize their capital.