Monday, April 6, 2015

Probable Maximum Loss (PML)

Probable Maximum Loss (PML) is a term used in the insurance industry especially to determine or measure risk exposure.
There are many definitions of PML depend on your approach. It may be generally defined as the largest loss exposure coming from disaster by assuming all risk/loss preventions working normally i.e Fire Extinguisher, Sprinkler etc.
Estimated loss value is always less than the Maximum Foreseeable Loss (MFL) which is mean all those risk/loss preventions were not working property.
PML and MFL are very important consideration when an Underwriter evaluate insurance exposure and no doubt it would be a tool of underwriting to increase their underwriting capacity and retained premium by limiting their exposure.
When an underwriter evaluate their PML/MFL, underwriter must have protection under reinsurance arrangement to protect PML/MFL error or missvaluation. 


when you hear underwriting?
what is your first though?
there are many perceptions of underwriting depend on your perspective.

but, in insurance business dealing with risk and the first entry point is must through underwriting process.

so still question what is underwriting?
it can be simplified to define what is underwriting as an analysis activity to find profit opportunity behind the risk.

Saturday, January 23, 2010

Risk Capital Management

This is as an alert for insurance company.
Capital is very important part of insurance industry as capital is on risk to the the loss and claim. But, did you aware that you cannot optimalize your capital in everyway?
Capital as shown in the Balance Sheet is consist of 2 parts i.e:
1. Liquid Capital (i.e deposit; cash etc)
2. Unliquid Capital (i.e asset; receivable etc)
So what would you do when your company has to pay claim, but you do not spred or risk your capital?
Therefore, to find your REAL Capital you can optimize freely, you have to risk your capital into the following parameter:
A. Risk Capital to Core Business
This is the major part of the insurance company. Payment of claim is taken from the sources of
a. Capital, whether liquid or unliquid. Liquid capital is prepared for the small claims or claim under net retention. But for the huge claims, payment of claim enable to use their unliquid asset or bank facility or other instruements.
b. Reinsurance, as you may call it as a reinsurance recovery. Claim payment taken from other company by reinsurance mechanism.
No matter the sources, it will still expose your capital. For the small amount of claim, it is very dangerous part if you have a lot of claim which is fall under your net-net retention, it means that you will unable to optimalize your capital for investment because your capital turnover will be high. Another problem is, what happend if your have very frequent of small claims fall under your net-net retention, is you have satisfied capital? or you have no sufficient capital finance it? it may exposure to your company to bancruptcy.
Eventhough you have reinsurance programs, your capital still being exposed by the following:
1. You must pay the claim first before you can take recovery from reinsurance. Therefore you will loss opportunity of investment because of time lack between claim paid by using your capital and recovery.
2. You will cannot recovery paid claim to your reinsurer. Means the capital you had used is purely funded by your capital. In other words, you can't use your THIRD CAPITAL
By put the risk in your capital, you will able to anticipate those conditions.
B. Risk Capital to Investment
The power of your Balance Sheet is also rely on your investment. Please back to 2008 when the Global Financial Crisis is Coming, how many companies falls down. If your investment instrument dominantly in the stock market, then you will exposed to the market weakening. Just simple simulation like in 2008 global financial crisis. When your stock in the market is say 1000 lots and price per lot is say USD. 1,000 then your Balance Sheet put USD. 1,000,000 investment as capital (USD. 10*100*1,000). What happend then if your stock priced as 1 sheet for USD. 2.5, it will weakening the power of your Balance Sheet for 75%. If your Insurance Company or Bank Company, your Risk Based Capital (RBC) or Credit Adequacy Ratio (CAR) will falls down and make your company falls to unliquid company. Furthermore, you have to put this risk in your Capital management to anticipate this condition to prevent your company in the red number.
C. Risk Capital to Human Resource
This is also the most important part of your capital management. The risks coming from the following part i.e:
1. Your HR is uncountable in your asset type. If your company has high employee turnover you will need more fund to create other employee as good as or much better than before. Cost of it will be taken from your capital fund.
2. This also very urgent it is fidelity. Your business operation will also being exposed from your employee i.e in insurance industry like your employee do not deposit the premium but you have to pay the claim.

D. Risk Capital to Information & Communication Technology
This is use to your ICT development where your must create reserve from your capital for the ICT improvement. ICT is expensive and to fund it development will be takef from your capital. This reserve is absolute but very rare company want to do it because mostly the company would to improve their ICT if the have sufficient fund taken from their profit but do not reserve it.
E. Risk Capital to Legal
Company must aware that this business is very dynamic and regulation may change at anytime to meet market requirement. It will exposed to the company especially to your Balance Sheet. Simple example in Indonesia Insurance Industry for the changes of :
1.  Minimum Paid Up Capital, this is urgent issue to against global market where the player must have sufficient capital to protect their insureds. Therefore, capital must be reserved to anticipate any changes as required by the regulator, therefore if any changes of government requirement then the company will easily to anticipate.
2. Sharia Reporting Basis, you may find it in the newest accounting standard report that the admitted company asset is for UJROH only and Tabarru find is not being recognize as company's Balance Sheet.

F. Risk Capital to Environment 
Insurance company may also concern in this aspect. Company may not put their capital as their own purpose but also must be used for the Corporate Social Responsibility. Beside that, it will also affect to the insurance business for the class of business of Liability. It able increase insurer exposure for the Insured liability to environment that must be recovered by Insured.
Hope this will develop your awareness of your capital.
Thank you.

Fakih Wahyudi

Wednesday, December 23, 2009

Treaty Reinsurance Renewal Review 2010

3rd Quarter 2009 was closed by super fantastic loss caused by Earthquake in Padang (30.09.2009).
The reason to state as super fantastic because no body expecting insurance loss will be that much, some (or most) of insurance company make an error in stating PML in purchasing Catastrophe cover and nobody can imagine if this error happend in Jakarta or Wes Jawa (Zone 3).
As an effect of this loss, all reinsurance company increasing their price in Indonesia and also it influenced by frequency of natural catastrophe was increased.
Final review of treaty renewal as below:
1. Adjustable increased as
2. %tage of MDP is increased
3. Price at risk layer relatively consistent
4. Price at Top Layer is expensive, this is because they will compensate their loss in risk layer into Toppest Layer.
Hope this review could assitfull.

fakih wahyudi

Wednesday, May 20, 2009

Reinsurance & Capitalisation

Reinsurance business may exposed by many source of risk whether direct or indirect. The dependency of capitalization will be no doubt.
Every element of capitalization will has specific advantages and disadvantages.
Reinsurance capitalization could be evaluated by the following things i.e:
1. Equity Issuance
2. Debt Issuance
3. Retained earning
4. Reinsurance
In this context, we will explore about reinsurance aspect to capitalization.
Obtaining maximum of capitalisation could be achieved by limiting cost or reinsurance. Price of reinsurance will vary and evaluation by factoring risk and loss profile and portfolio and also statistics. Therefore the price of reinsurance will relatively flexible.
Obtaining higher capital could be achieved by insurer will exposed to small retained claim from huge catastrophe loss and less exposed to capital.
Reinsurance will stand to protect insurer's earning by reducing loss exposure to earning. reinsurance should be able to manage volatility and secure any prediction.

Saturday, May 9, 2009

reinsurance in slight

Reinsurance is an insurance for insurance company. Reinsurance is as a mechanism of risk transferring or “ceding” some of the financial risk insurance companies from various underwritten by insurance company to another insurance or reinsurance company furthermroe named as the reinsurer.
Reinsurance can be called as a highly complex global business but surely demanded in insurance business. Demand for this reinsurance surely to protect insurance against exposure beyond their financial ability say as affect of catastrophe that may bring equity go down that may also will chain with the financial security changes.

Friday, March 20, 2009

Reinsurance Modelling

Reinsurance structure should has the right balance between risk and return therefore maximizing premium income and minimizing risk exposure will be main purpose of structuring treaty program of the company.
Structuring your treaty programs should consider the following things:
  1. entity financial target
  2. risk appetite (reinsured and reinsurer)
  3. asset exposured
  4. corporate plans
  5. historical review and future target (strategic business goal)
  6. catastrophe exposure modelling
  7. domestic and international market review
for multi structure design company should also consider i.e insured/insurer risk appetite and also market pricing and the corporate risk transfer objectives.

All data should be elaborate and making simulation based on the history and expected event in the future. You will need discussion among underwriter and claim assessor. Reinsurance Underwriter should has optional it related to the simulation and future expected events.

As reinsurance manager, having analyze those documents, you should propose your analysis report to management with quantitative and qualitative analysis including frequency and severity and expected retention and it's exposure to equity.

The management will consider the following things before buying reinsurance such as:
  • data and your analysis report
  • profile analysis
  • risk driving to portfolio
  • simulation analysis
Final step should be analyze the structure options, it will related to insurer and reinsurers risk apptite, financial strength and your demand/supply power.

By having those stages the decision result will bring returns:
  1. reinsurance structures/programs will bring good risk transfer balance between risk and premium
  2. technical analysis, reinsurance analysis should an input to the underwriter
  3. reasonable risk portfolio distrubution
  4. profit growth.

Fakih Wahyudi

Tuesday, March 10, 2009


Alkisah ada 2 orang yang hendak mendaki sebuah gunung.
1 orang pendaki merupakan pendaki yang professional kita sebut saja dia bernama Yusuf.
1 orang pendaki lainnya adalah pendaki pemula bernama Wahyu.
Dalam perjalan mendaki gunung tersebut, bertanyalah si Wahyu kepada Yusuf.
Suf, kenapa sich dalam perjalanan mendaki ini harus ada batu besar dan jalan yang menonjol?
Kemudian Yusuf mengatakan kepada Wahyu, bahwa dengan batu besar tersebut serta jalan yang menonjol tersebut kita gunakan sebagai pijakan untuk mencapai puncak gunung tersebut.

Hikmah yang dapat kita petik adalah:
Untuk mencapai suatu kesuksesaan penuh sekali dengan aral merintang dan kerikil-kerikil yang harus dilalui.
Dalam norma beragama, seharusnya kerikil-kerikil tersebut merupakan cobaan manusia untuk menjadi manusia yang mencapai posisi puncak dengan demikian dia akan semakin matang.
Kalau kita perhatikan banyak orang mengeluh atas cobaan dan rintangan yang diterima sehingga banyak dari mereka berdoa "agar dijauhi dari segala cobaan". Menurut saya lebih baik doanya menjadi "agar kita dikuatkan untuk menghadapi musibah dan dapat melaluinya dengan ridho ilahi." atas cobaan tersebut maka kita menjadi manusia yang jauh lebih sempurna.
Selain itu, kesalahan fatal kita dalam berdoa adalah kita meminta ilahi memecahkan masalah kita dengan cara kita. Padahal Ilahi memiliki trilliunan cara untuk menghadapi masalah kita dan hanya Dia-lah yang tahu bagaimana solusi terbaik untuk kita. Sungguh manusia banyak sekali yang sombang namun tidak menyadarinya.

Inti dari semua ini adalah, jangan pernah mengeluh atas segala cobaan, hadapi dengan tegar karena Ilahi bersama kita dan yakinlah akan kekuatan doa dan ridhonya.

Fakih Wahyudi

Tuesday, February 17, 2009

Reinsurance for Captive Company

For the captive insurance company, at the development phase, reinsurance decision will taken highest important consideration. the company should need to consider the following things:
  1. did company need reinsurance
  2. what type of reinsurance required
  3. what level of need reinsurance required
  4. how to purchase reinsurance]

purchasing reinsurance is very influenced by the risk behaviour of the management whether he is risk averter (front to risk) or risk netral (do not matter about the risk) or risk avoider (do want to face the risk).

to influence the management decision to reinsurance, they must be remind for the function of reinsurance such as:

  • stabilisation of the corporate profitability

none insurance could predict claim expected for the following years precisely because claim fluctuation is uncontrollable. by reinsurance mechanism, it will help company to measure maximum claim should be paid by companys' own capital. therefore, bottom line of the balance sheet can be measure more reasonable.

  • provide large limit capacity

deciding your risk retention will very influenced by your equity. reinsurance will assist you to retain higher by not exposing your equity too much.

  • catastrophe protection

catastrophe protection is the most thing should be considered by underwriter. any catastrophe loss occurred, it will reduce your equity significantly, by reinsurance, it will protect your equity to do not have much exposure and you will able this exposure to your reinsurer.

  • factor of high growth of premium income

the underwriter must able to spread their risk and aware for their portfolio and profile such as expanding territory, sell variative product. by expanding the business, it will significantly increase your premium income but underwriter must ensure that they have sufficient protection.

  • underwriting process support

underwriter enable to get assistance from reinsurance underwriter (please take a note that most of reinsurance underwriter has good comparison risk assessment per region). this will assist the underwriter assess the risk accurately.



Fakih Wahyudi

Monday, February 16, 2009

3 calls

life is so short, we have to manage our life carefully.
many people do not realize that 4ll SWT only call us for 3 times:

First Call is ADZAN
people only aware that ADZAN call is for pray purpose or pray time.
many people do not aware for the #meaning# of adzan, we must aware from ADZAN sentence for "WE WILL GIVE YOU HAPPINESS". this very meaningful of ADZAN means. by praying 4ll will give you happiness, do not translate the meaning of happiness is just for happy but it is multi meanings like glory, victory, wealth etc. well, if you are not happy; if you have too much loan or if you have any problem. you only need to pray and leave it to 4ll as the best solution maker. but, when you leave it to 4ll, don't ask 4ll to solve your problem by your own way because 4ll has a billions of solutions and 4ll know the best for us.

Second Call is Hajj
this is very fantastic call. no doubt that HAJJ spend a lot of cash (for Indonesian of course), means you must have a lot of money for HAJJ, is it? is that mean that if you do not have a lot of money you can't go for HAJJ? NO.... even you have a lot of money, young a good moslem, it doesn't mean you will get to HAJJ. if you don't have a lot of money not a good moslem, it doesn't mean you can not go for HAJJ. this 4ll rule, like I said early 4ll has billion ways for us.

Third Call is Maut
first and second call is for a moslem, and the third call is for everyone.
no doubt; dont wait because it will come to you.
soon or later, good way or bad way.
4ll the only one who know this.

this note is written for myself and anyone who read this note.

fakih wahyudi