The document discusses liquidity risk and risk matching in property and casualty (P&C) insurance. It notes that P&C insurance cash flows are highly volatile due to large claims, catastrophes, and adverse run-off. This creates liquidity risk from volatility rather than a mismatch in duration. The document also provides an example of how an insurer can assess and manage liquidity risk through reinsurance arrangements and investment strategies. Finally, it discusses how risk matching models can measure the diversification between underwriting and market risks to determine an optimal risk strategy and allocation of capital.

1. Property / Casualty Aspects of ERM Frank Sommerfeld EMB Köln (Cologne), Germany

4. Example - Volatility of cash flows at „going concern“ Expectation close to zero and very volatile

5. Duration of cash flows at „going concern” You will not match this duration!

8. Example of the liquidity risk on the basis of three paths Liquidity gap arises from one extreme negative u/w cash flow or from two medium negative cash flows.

9. Example - Volatility of cash flows at „going concern“ The ERM models we will not run with 3, but e.g. 100,000 simulations. The results will be measured in probabilities

10. Example liquidity risk

19. Risk Matching – simplified example From 15 % equity the risk capital increases faster than the expected return 13,9%

20. Risk Matching – simplified example For lower equity exposure the asset risk is overlain by the u/w risk. There is a large diversification potential on the asset side. 32,2%

21. Risk Matching – simplified example The diversification potential for the asset side decreases if the risk is mitigated on the liability side. 25,7%

22. Risk Matching – simplified example If the risk on the liabilities side is decreased even more the risk on the asset side has to be reduced as well. 14,7%

23. Risk Matching – simplified example 16,1%

26. Your contact for questions Frank Sommerfeld EMB Tel.: +49 (0)221 35 66 26 41 [email_address] emb.com