Identifying strategic asset allocation strategies for Toa Re

The introduction of ORSA provides an incentive for companies to take a more holistic approach to understanding enterprise risk. This film looks at how Milliman and Conning worked together to build a strategic asset allocation model for Toa Re, which gave the reinsurer a fuller understanding of its return on assets relative to whole company risk. According to Toa Re CEO Ed Stanco, the Milliman-Conning model not only helped him better understand his company’s tolerance for taking on new risks, it also provided critical insights into the profitability of various lines of business.

Video transcript

Bob Meyer: Certainly most companies today manage their business in silos. They are struggling to get to that point where they can look at their risks on a more collective basis. The introduction of ORSA in the U.S. is going to change all that and companies are going to need to look at things more on a holistic basis going forward, in order to have a proper response to regulators, rating agencies, and other stakeholders in the firm.

Stephen Sonlin: Traditionally, insurance companies have looked at their investment portfolio from an asset only perspective, trying to maximize the investment income or the returns that they're getting from their investment portfolio in isolation. But the investments are there for a purpose, and that purpose is to fund the liability claims and the capital within the insurance operations.

Wayne Blackburn: To move from that silo return basis that they understand and have been doing for years to a whole company perspective is a very difficult task. And it is a challenging task but it can be done and completed and provide a very tangible output. It's not a theoretical compliance concept, it's a very real outcome for the health of the company.

Optimizing your capital

Ed Stanco: What an economic capital model will do for you is really help you in how to allocate capital. Or, really the way I look at it is not really capital allocation, it's capital consumption. What I mean by capital consumption is looking large downside events. On the other side of it—which is what companies are always hunting for—are the upside risk opportunities, and you can see that with an economic capital model.

Sherry Manetta: The ability for an insurance company to be able to look at different "what if" scenarios and understand the various impacts of what could possibly happen over the next two or three years is extremely critical in terms of making decisions about what lines of business the company wants to plan and what states they want to operate in.

Wayne Blackburn: What we're doing for TOA and for other clients is showing the return on assets relative to the risk or volatility of the company as a whole, the overall value. So the efficient frontier that we present is this picture of the return on assets relative to the risk for the whole company.

Stephen Sonlin: Conning, with their investment optimizer platform, allows our systems to generate an efficient frontier, which shows you all combinations of investment strategies that maximize reward levels for particular levels of risk. This is an extremely efficient and effective way to identify strategic asset allocation strategies for the insurance industry.

Ed Stanco: So the strategic asset allocation model really told us how much risk we were taking and how much more we could take, let's say in terms of capacity in various lines of business. It also pointed out to us, from the underwriting side of the business, specifically what lines of business might have been enhancing our return versus what lines of business may have been detracting a little bit from our return. So one of the things we really looked at as a result was what was the probability in any given year or over a longer term period, that our capital would maintain a certain threshold.

The Conning-Milliman Alliance

Bob Meyer: Milliman and Conning have had an alliance since 2008. It has worked out well for us and it has worked out well for our clients. We offer very complimentary services, which I think is really the key to what clients want.

Sherry Manetta: When Milliman and Conning start to talk together about a solution for a particular prospect, we work at making it a success because we know that what we are able to provide in the marketplace goes beyond what anyone else is able to provide.

Wayne Blackburn: They [Conning] bring what is clearly the state of the art software of the table with ADVISE® and GEMS®. And ADVISE is ready made to bring in those liability models that Milliman comes up with on a stochastic basis into the ADVISE model. Basically, you're dealing with a team that has a tremendous amount of experience and expertise and ability to deliver understandable output from both sides of the balance sheet: assets and liabilities.

Ed Stanco: Working with Milliman and Conning was a good experience because, number one, the expectations were clearly outlined at the beginning of the project. Secondly, the time table was clearly outlined in terms of when we would have a product that was deliverable. And I would say that the third part was that working with them, obviously we worked with a professional staff and we got lot of insights along the way in terms of how we handle our business.