A mature approach to exposure and catastrophe risk management

The goal

IRB Brasil Re has a long history of reinsurance market leadership in Latin America and continues to maintain that position in 9 out of its 11 business lines while also growing to be among the 10 largest reinsurers in the world in market value (BRL 31 billion as of May 2019).

Looking ahead for IRB, expanding on the international stage, achieving greater efficiency across risk and exposure management processes, improving profitability, and boosting return on investment are core to maintaining and expanding its market position. In 2017, IRB launched a three-year transformation plan with a goal to become best in class on the global reinsurance stage. It saw Moody’s as the right partner to facilitate this transition through Moody’s Intelligent Risk Platform™ given IRB’s commitment to open platforms, big data, and quality analytics.
 

The objective

The IRB transformation plan objectives were closely aligned with the company’s primary strategic drivers. These included:

• To grow IRB’s international presence as a "best-in-class" global reinsurer
• To achieve greater capital efficiency across all business lines
• To develop a market-advancing enterprise risk management capability
• To maintain a focus on innovation as a key differentiator
• To achieve a competitive advantage by advancing modeling and analytical capabilities
   

The process

Setting the baseline

Phase 1 of IRB's transformation plan was to establish a clear understanding of the organization’s current maturity levels. Our consulting team — which is composed of insurance experts, technologists, and catastrophe risk management practitioners — applied our proprietary risk maturity benchmarking (RMB) methodology to evaluate the maturity of IRB’s domain expertise, processes, and technology across four key business areas and 10 sub-processes. Our consulting team worked with IRB representatives from across the exposure management spectrum over a three-day period. The team conducted interviews based on a granular questionnaire of over 100 questions to gain a working knowledge of every process and procedure across the four areas.

“This provided IRB with an effective way to establish where it was currently strong across the pillars,” says Rhett Austell, Director of Consulting at Moody’s, “and to pinpoint any specific weaknesses. By targeting specific areas for improvement, this would help it achieve the necessary level of maturity across its exposure and risk management capabilities to compete more effectively with its peers.”

Evaluating the scores

Following analysis of the interview data and demonstrations of various processes, our consulting team assigned provisional maturity scores to each business area and sub-process, plus an initial indication of areas for potential development. Scoring and recommendations across the 10 sub-processes are based on industry best practices developed by Moody’s consulting services, leveraging more than 10 years of client project experience, and have been calibrated against insurers and reinsurers across the major (re)insurance markets.

Maturity scores range from 1 to 5, with a Level 1 score denoting a process that is conducted on an "ad hoc" basis and a Level 5 score denoting where an activity is considered “best in class."

“It’s important to recognize that a low maturity score in a particular area is not necessarily 'bad,'” adds Austell, “and a Level 5 is not always desirable. The goal is to achieve a reasonable and appropriate balance over time across these areas for the market sector and the client’s strategic objectives.”
 

The outcome

• IRB demonstrated sound underwriting practices and a rigorous approach to risk analysis based on a structured and repeatable decision-making process.
• Management utilized the solid maturity in reporting with minimal key person risk and frequent detailed reports for decision-making.
• Portfolio management required some additional focus to reach the desired level of maturity.
• There was some room for improvement in modeling to help IRB gain a deeper understanding of catastrophe models and exposure management.

“Too often companies assume they are performing to their optimal potential,” says IRB Catastrophe Modeling Specialist Luis Brito. “The RMB process exposes the reality of the situation. In our case, it showed that in many areas our maturity level was on par with industry peers, but in others there was too great a gap. This allowed us to generate a clearer picture of where we needed to focus our attention and investment to bridge these gaps.”

In consultation with IRB, Moody’s gauged the organization’s initial response to the maturity scores to ascertain whether the results were in line with expectations.

“The RMB process is not simply about our stepping in and taking control of the situation,” explains Austell. “It is a collaborative undertaking that includes a series of ‘checkpoints’ to discuss the findings and incorporate their feedback. It’s critical that the client has a clear ownership stake throughout and that what is created is a joint plan of action.”
 

The solution

Taking action

Based on an understanding of IRB’s strategic priorities gained from the senior leadership team, Moody’s compiled a comprehensive series of prioritized recommendations designed to drive success and aligned with company strategy. In addition, the team generated projected maturity scores based on completion of the proposed actions, giving IRB a view of the possible magnitude of improvement.

Finally, Moody’s consulting services developed a “straw man” plan for the execution of each recommendation — aligned with IRB’s resources and capabilities — that detailed the proposed short-, medium-, and long-term steps in sequence as well as target time frames for completion. This formed the basis of IRB’s implementation strategy, developed in conjunction with Moody’s, to improve its overall cat risk management maturity. As Austell explains, the proposed recommendations were aligned with IRB’s strategic objectives and financial impact. 

“We focused on fundamental areas such as supporting premium growth in new markets while dynamically measuring against gross and net capacity,” he continues. “Being able to isolate IRB’s value drivers was central to this process. Our goal was to achieve what we both viewed as a reasonable and appropriate balance of actions over time across the four primary business areas to achieve the necessary maturity level.”
 

Delivering on the plan

“Moody’s worked closely with us at all stages in the development of the action plans,” says Brito. “The recommendations made clear what near-term steps should be taken to achieve improved performance with minimal effort and where it would be necessary to set up specific projects to deliver on longer-term aims.”

At the time of writing, IRB has already completed a number of near-term actions and is executing on Phase 2 of the implementation plan for delivering on the longer-term objectives.

“One area in which we have already increased our maturity level is data quality analysis,” Brito continues. “The RMB pinpointed this as a key investment area, and working with Moody’s we developed an enhancement program. We have now implemented this for one of our regional portfolios, which has strengthened our overall risk classification processes. This was a straightforward change that we were able to implement relatively quickly.”

In terms of the longer-term objectives, the IRB team is currently delivering on a series of projects across various business-critical areas.

“With each project,” Brito adds, “we have a clear understanding of what the beneficial outcomes will be. For example, on the portfolio management front, as we transition onto the Intelligent Risk Platform, we will be able to significantly improve our portfolio roll-up capabilities. That will mean being able to perform [probable maximum loss] reviews daily, which will fundamentally alter our ability to assess risk and allow us to manage our portfolios company-wide in real time.”
 

Forging ahead

For IRB, the RMB project formed the first phase of a much larger undertaking as it implements exposure and risk management processes that leverage the Intelligent Risk Platform. Yet in many ways, it is the most critical phase of the project as it has given the IRB a full understanding of where it is heading and how it will get there.

“There is no doubt in our mind that the RMB study has delivered tangible value,” Brito says. “It helped us generate a clear picture of where IRB stands against our peers from an exposure management perspective, how we need to move forward, and how we can achieve that forward momentum. We now have a clearly defined, precisely structured plan in place that is already helping us deliver on our broader strategic objectives. I don’t believe that we would have achieved what we have to date if we had not first undertaken the RMB study.”

“Through the RMB process,” concludes Austell, “we wanted to help IRB achieve its goal of owning its view of risk by building out expertise, insights, and capabilities across both modeling and exposure management and leveraging this in the wider marketplace. We are confident that it is now well on its way to achieving that.”

"I don't believe we would have achieved what we have if we had not first undertaken the Moody's study."

Luis Brito, Catastrophe Modeling Specialist, IRB