Custom Solutions within the Insurance Sector: Catastrophe and Large Loss Simulation Model

Insurance companies are now encouraged by regulation to perform assessment of their own risk exposure. Monte Carlo simulation, and particularly @RISK are extremely useful in performing assessments that can be used not only to satisfy regulators, but also to improve financial risk management within the company.

Waszink Actuarial Advisory in collaboration with Palisade's Custom Development Team created this Catastrophe and Large Loss Simulation Model to provide an output that includes the aggregate loss gross and net of reinsurance, and the reinsured loss.

In this example, an application was created using @RISK to generate the aggregate loss resulting from multiple large or catastrophic losses occurring within a given period of time. Aggregate losses are determined gross and net of any Excess of Loss Reinsurance.

Parametric distributions for frequency and severity of loss gross of reinsurance must be specified by the user. Frequency and severity are assumed to be mutually independent.

In addition, the user can specify an Excess of Loss Reinsurance program. The following features of the reinsurance program must be specified:

  • Number of layers
  • Limit and retention by layer
  • Reinsurance premium by layer
  • Number of reinstatements by layer;
  • Reinstatement premium as percentage of reinsurance premium

The output includes the aggregate loss gross and net of reinsurance, and the reinsured loss.

More example of Custom Development:

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Risk Professionals Gather in Vegas for Palisade’s 2013 Risk Conference

The 2-day Palisade Risk Conference in Las Vegas brought together around 170 decision-makers from a wide range of industries at the Mandalay Bay Resort & Casino.

In the ever-popular Software Presentations track, Palisade developers and trainers covered features of the DecisionTools Suite and @RISK. At the same time, 3 additional tracks featured experts from CH2M Hill, Westinghouse, Lockheed Martin, Intel, Premera Blue Cross, Tennessee Valley Authority, and many others. These presentations covered industry case studies from fields as diverse as aerospace, energy, agriculture, finance, healthcare, and many more.

» View presentations from the 2013 Palisade Risk Conference in Las Vegas

Mark Krahn presented at 2013 Palisade Risk Conference in Las Vegas

Conference attendees were also able to meet with Palisade consultants in one-on-one Expert Sessions. The Expert Sessions were well-received by both conference participants and Palisade consultants and trainers. Participants get a chance to bring their own models for the consultant to review, while consultants get a chance to discuss interesting applications of Palisade software in detail.

As always, the Risk Conference events are invaluable opportunities for networking and learning. "As an introduction to the software, I thought this conference was eye-opening. As I get more familiar with the software, I can see future conferences being valuable in honing my skills and learning new tricks and different perspectives on using the software," said Cory Forgrave, Economic Analyst in the DOI Division of Energy and Mineral Development. See more quotes from participants below.

 

Keynote focuses on successful BorgWarner
project with Palisade Custom Development

Brian Maturi, Director of Risk Management at BorgWarner, delivered the keynote address. Mr. Maturi described the successful implementation of a capital appropriations model that is used by around 300 financial analysts, controllers and program managers in 17 countries around the world.

Maturi and BorgWarner worked with Palisade’s Custom Development team to incorporate @RISK functionality into their model so that non-expert users could easily input data, and obtain standardized reports for business managers. The users of the system are not statisticians, so the model needs to be powerful, yet simple. “We wanted a system that could model 90% of the risks rather than an overly complex system that tries to model everything,” said Maturi. Palisade developers were able to take his instructions and build a flexible model with the user interface he was looking for.

Explains Maturi, “We have educated about 2,000 managers over the years in how to interpret the @RISK outputs, and more importantly, how they can use the information to design business strategies to manage, mitigate and even exploit the risks using real options thinking.”

“We are with Palisade for the long haul,” adds Maturi. “My company is very, very good at engineering leading edge automotive products. Palisade is very, very good at building risk based models.”

» View Brian Maturi’s keynote presentation
» View presentations from the 2013 Palisade Risk Conference in Las Vegas

 

A Global Series

The 2013 Risk Conference series took place in over a dozen cities covering 6 continents, and brought together hundreds of risk analysis professionals. We have announced dates for the EMEA region for 2014, with more dates coming soon. We hope you will be able to join us.

» 2014 Conference dates

Chris Albright presenting  at 2013 Palisade Risk Conference in Las Vegas

» See more photos from the 2013 Vegas Risk Conference

 


Quotes from the 2013 Las Vegas event

"Very good conference with good usage of time."
— Mark Mendonca, Program Risk Management, Ernst & Young

"Excellent opportunity to explore all aspects  of risk analytics!"
— Kurt Carson, Senior Quant Analyst  in ERM group, Chelan PUD

"Excellent conference. Very informative.  Great topics."
— Laurie Rutherford, Director, Enterprise Risk Management at CenterPoint Energy

"Great conference!"
— Matt Rosenberg, RoseCap Investment Advisors

"A valuable and educative experience."
— Richard Horsfall, Consultant

"Excellent learning and networking opportunity."
— Mike Wallace, Consultant

 “As an introduction to the software, I thought this conference was eye-opening. As I get more familiar with the software, I can see future conferences being valuable in honing my skills and learning new tricks and different perspectives on using the software.”

Cory Forgrave, Economic Analyst in the DOI Division of Energy and Mineral Development

 

 

 

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Hitachi taps Palisade RDK Software to help manage Supply Planning

Hot off the heels of recent success in China, Palisade continues to establish a reputation for excellence in Eastern markets—this time in Japan. Hitachi Solutions East Japan, Ltd., a core IT company of the Hitachi Group, which employs some 400,000 people worldwide, has selected Palisade’s @RISK Developer Kit to help manage supply planning. 

With its headquarters in Sendai City in Miyagi Prefecture, Hitachi Solutions East Japan Ltd. is responsible for data and risk analysis of supply chain management, production, and sales & inventory planning and management. Analyzing these elements can be tricky, particularly when it requires forecasting demand and prices of raw materials. Using the @RISK Developer kit, Planning Department Research Division Head Masaru Tezuka and his team were  able to do these analyses.

There are a wide variety of risks in the manufacturing industry, including fluctuating variables such as demand, price, and foreign exchange. For demand fluctuation, supply is determined by demand forecasts. If the forecast underestimates demand, a supply shortage results, causing the company to miss opportunities to increase sales. If the forecast overestimates demand, inventory or disposal costs may follow. Price and currency fluctuations are also important factors for risk management in the manufacturing sector, and the improvement of forecast accuracy through risk analysis is essential to mitigate these risks.

For these problems, Hitachi wanted to develop a high level stand-alone GUI (graphical user interface) to visualize production and inventory conditions, while also incorporating @RISK’s excellent risk analysis functions. @RISK’s Developer Kit made it easy to tailor the program to Hitachi’s needs and desires. Through the use of tornado diagrams, Hitachi was able to understand the effects on profitability based on which product is produced or sold at what time, and observe the overall situation for each product.

In his case study for Palisade, Dr. Tezuka concludes, “It is crucial to develop strong risk forecasting and risk analysis…@RISK is a critical part of that process.”

Read the case study here.
 

See also: Palisade's Risk Analysis Solutions at Work in China

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Palisade Software Aids Business and Research in Japan

First Palisade made its mark in China--now we're establishing success in Japan. Two recent case studies detailed the use of Palisade's @RISK software by both a major Japanese company, Hitachi Solutions East Japan, and a researcher at the University of Tokyo illustrate how our easy-to-use software can benefit businesses and academics across the world.

The Hitachi case study details how executives at the manufacturing company used @RISK Developer Kit to analyze supply chain and inventory management. They created a stand alone graphical user interface to visualize production and inventory conditions, while also incorporating @RISK’s excellent risk analysis functions. @RISK’s Developer Kit made it easy to tailor the program to Hitachi’s needs and desires.

At the University of Tokyo, Professor Katsuaki Sugiura at the Laboratory of Global Animal Resource Science used @RISK to  improve the surveillance program for bovine spongiform encephalopathy--otherwise known as mad cow disease, in beef production in Japan.

Read the case studies in English here and here.

Both of these reports are available in Japanese on the Palisade website:

See also: Palisade's Risk Analysis Solutions at Work in China

o improve the surveillance program for BSE in beef production, - See more at: http://blog.palisade.com/blog/risk-and-opportunity#sthash.0W8NnwG8.dpuf
o improve the surveillance program for BSE in beef production, - See more at: http://blog.palisade.com/blog/risk-and-opportunity#sthash.0W8NnwG8.dpuf

 

 

ta and risk analysis of supply chain management, production, and sales & inventory planning and management. Analyzing these elements can be tricky, particularly when it requires forecasting demand and prices of raw materials. Using the @RISK Developer kit, Planning Department Research Division Head Masaru Tezuka and his team were  able to do these analyses. - See more at: http://blog.palisade.com/blog/risk-and-opportunity#sthash.0W8NnwG8.dpuf
ta and risk analysis of supply chain management, production, and sales & inventory planning and management. Analyzing these elements can be tricky, particularly when it requires forecasting demand and prices of raw materials. Using the @RISK Developer kit, Planning Department Research Division Head Masaru Tezuka and his team were  able to do these analyses. - See more at: http://blog.palisade.com/blog/risk-and-opportunity#sthash.0W8NnwG8.dpuf

 

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2013 Palisade Risk Conference Series - Three stops coming up in November: Paris, Milan and Las Vegas

We have three cities left to go in our 2013 Risk Conference Series - Paris, Milan and Las Vegas! We have spanned the globe and stopped in 11 cities in the past 7 months. Last week at our Moscow Risk Conference we were able to present our latest versions of @RISK and the DecisionTools Suite programs which have been completely translated into Russian. According to Craig Ferri, Palisade's EMEA & India Director, "The speakers were of very high standard, and attendees were excited about the software and looking forward to being able to download the presentations. It was a great success and we look forward to new partnerships in Russia."

2013 Palisade Risk ConferenceThe Moscow conference, as well as the others in the 2013 Palisade Risk Conference Series, are beneficial for both novice and experienced users of our risk and decision analysis products. If you are a new user and unfamiliar with @RISK and the DecisionTools Suite, we invite you to see why 93% of the Global Fortune 100 are using Palisade products to make better decisions. If you are an existing user, this is your opportunity to network and be exposed to some useful hints and tips to get more out of our software.

In general, Palisade software enables clients to be more confident in the decisions that they make, in a wide variety of industries and applications. Clients use Palisade software in industries ranging from oil & gas, mining, and finance, through to utilities, insurance, and banking, along with government, manufacturing, and logistics. So, if one of your responsibilities is to create or base decisions on a credit risk analysis, financial risk analysis, or maybe a pharmaceutical risk assessment, or if you are looking to improve your project risk management strategies, we invite you to join us in one of the following cities to learn how other people utilize our software.

Palisade Conférence régionale sur le risque
Paris - 12 novembre
Voir le programme - Inscription

Palisade Regional Risk Conference Milan
Milan - November 14th
View Schedule - Register Now

Palisade Regional Risk Conference Las Vegas
Las Vegas - November 20th-21st *
View Schedule - Register Now

* 2-day event with 4 tracks for each day.

 

Previous 2013 Palisade Risk Conferences

An advantage of our software being available in 8 different languages is the Palisade's ability to provide risk analysis services throughout the world. The following is a list of the cities Palisade Risk Conferences were held this year. If you missed us in a city near you, be sure to look for us in 2014!

 

See also: Palisade Global Risk Conferences Advance Best Practices in Risk Management

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Risk Analysis Helps Keep Things Sane: Managing Mad Cow Disease in Japan

Bovine spongiform encephalopathy (BSE), is not something you want to catch. Commonly known as ‘mad cow disease’, it's a progressive and fatal nervous disease found mainly in adult dairy cattle and caused by consuming abnormal prion protein. BSE is particularly worrisome because it can be transmitted to humans via meat-and-bone meal (MBM). The disease has a long incubation period, from 2-8 years with a 5 year average.

Japan is on high-alert for the disease. The first case of BSE in Japan was confirmed in September 2001, and ever since, all cattle slaughtered for human consumption have been tested for the disease. However, if a cow is infected, it cannot be detected unless it is just before the onset of the disease. The test cannot detect the infected cattle that are slaughtered or have died from other causes (“fallen stock”) before the end of the incubation period. Since the incubation period is long and varies between 2 and 8 years, the age of clinical onset is not fixed, and the age at which cattle may die or be slaughtered varies.

To improve the surveillance program for BSE in beef production, Professor Katsuaki Sugiura at the Laboratory of Global Animal Resource Science at the Graduate School of Agriculture and Life Sciences, the University of Tokyo, used Palisade’s @RISK to conduct Monte Carlo simulations and build stochastic models to conduct scenario analysis in predicting how changing the testing age of the cattle impacts the number of cattle tested and BSE infected cattle detected.

Four surveillance strategies were explored for beef cattle, with the minimum age at testing set at 0, 21, 31, or 41 months. Three surveillance strategies were explored for fallen stock, with the minimum age at testing set at 24, 31, or 41 months. Increasing the minimum age of testing from 0 to 21 months for both dairy cattle and Wagyu beef cattle had very little impact on the probability that a BSE-infected animal slaughtered for human consumption would be detected. Although increasing the minimum age at testing from 21 to 31 or 41 months would lead to fewer slaughtered animals being tested, the impact on the probability of detecting infected animals would be insignificant. The probability of infected Wagyu-Holstein crosses and Holstein steers being detected at slaughter or as fallen stock would be very low under all surveillance strategies.

Ultimately, thanks to Professor Sugiura’s work, the insights provided by @RISK enabled researchers to eliminate testing age as an important factor, which helped them focus on other, more effective factors in tracking BSE.

» Case Study: @RISK Helps Improve Mad Cow Disease Detection in Japan

See also: Unsafe Seafood? Monte Carlo Analysis Finds Increased Cancer Risk Due to Arsenic-heavy Seafood

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Safe Food: Reducing Risk from Farm to Table

Lowering risk in food is a complex challenge, and is an area that government authorities and the food industry are ever-vigilant to address. Given negative impact food-borne illness can have on the population—such as sickness and, in some cases, death—minimizing risk at every turn is critical. The biggest challenge is examining  the risk that exists along the many stages food products must go through to get from the farm to the table. EpiX Analytics, a consultancy that works with a wide range of industries to lower risk, utilized @RISK in a partnership with the Royal Veterinary College at University of London  to launch a Postgraduate Certificate in Risk Analysis in Health and Food Safety.

Using Monte Carlo simulation, students were taught how to determine a range of possibilities, including the likelihood of bacterial contamination at different points of the food production chain, growth of bacteria in different conditions, conditions of transport and storage of food products, frequency of purchase/consumption of food products, portion of food product per person per meal or dose-response model for the bacteria found. Another lesson considered the cost-effectiveness of using seasonal vaccines on entire populations versus vaccinations used solely on individuals who are at a higher risk of infection.

It is gratifying to know that @RISK is being used to help train those who are doing work to benefit the overall health and well-being of people around the world.

» Read more about the University of London and EpiX Analytics' program

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At King’s College, @RISK is used to Evaluate the Economic Impact of Medical Interventions

Dr. Sadmir Ciketic, Research Fellow in Health Economics at King’s College London has been using Palisade’s @RISK since his postgraduate days. His research in health economics and public health involves economic evaluation of healthcare programs and quantifying risks and uncertainties to evaluate the economic impact of medical interventions, such as the costs and benefits/harms of new medications, new or existing treatments and medical technologies.
 
 
According to Dr. Ciketic, Palisade’s DecisionTools Suite provides good estimates for the adverse outcomes and risks associated with new interventions or medical drugs introduced into the market. The Suite’s @RISK especially comes in handy for complex simulations and parameter uncertainties in modeling economic evaluations of medical interventions for making policy decisions. The software allows him to change the different assumptions of critical estimates in practice—for example, using a different distribution or a different method of sampling and simulation of results. Typically, quality of life estimates are derived from clinical trials and systematic reviews and as such these data already have a varying degree of confidence associated with them. This is especially of importance in solving the economic problem of limited resources in the public health arena. This is where the DecisionTools Suite and @RISK join in. Through Monte Carlo simulation, models can account for a whole range of possible outcomes, and indicate how likely they are to occur, providing crucial estimates that can be interpreted and used in policy and decision-making.
 
“In my current area of work for King’s College London, I mainly use quantitative analysis,” said Dr. Ciketic. “The two most common examples of the distributions that I use include the beta distribution for the quality of life estimates and gamma distribution for cost estimates. The use of these distributions is justified due to the fact that quality of life parameters in the model are binomial data---mainly probability parameters in the model ranging in values from 0 to 1, while the cost data are non-negative and in many cases skewed. Due to the fact that cost is represented in Bayesian statistics (discrete) by a Poisson distribution, the gamma distribution is a conjugate to the Poisson and as such is constrained on the interval 0 to positive infinity.”
 
Dr. Ciketic also attends presentations and events organized by Palisade on a regular basis. He said, “There is always something new to learn and something that is very useful in relation to @RISK, and all the other DecisionTools Suite tools. It’s a complete suite of programs that are suited for many professions from science, finance, government, health and many other areas. I like the fact that Palisade has this broad level of use that is relevant in all aspects of life. ”
 
 
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@RISK and DecisionTools Suite 6.2 Now Available

Offers Improvements to Excel Developer Kit Automation, Russian Translation

New version 6.2 of @RISK and the DecisionTools Suite is now shipping.

Version 6.2 offers a variety of improvements and now is localized for Russian, in addition to the previously available English, Chinese, French, German, Japanese, Portuguese, and Spanish.

Get Your Upgrade
If you have a current maintenance plan, you can upgrade at no charge on our website.

     » Upgrade now with maintenance

If you do not have current maintenance or aren’t sure, contact Palisade.

New XDK Functionality and Documentation
@RISK, PrecisionTree, Evolver, StatTools, and NeuralTools offer an Excel Developer’s Kit (XDK), which allows you to automate and customize the tool within Excel using Excel’s built-in VBA programming language. The XDK for @RISK has been updated to include new functionality for the automation of @RISK graphs and simulation filters, as well as several additional improvements.

For most products, the XDK now includes a new “Automation Guide” to help you get started quickly. In addition, new videos and example files have been added to all XDKs to help you use this powerful feature.

     » See XDK videos

Improved Simulation Startup Time for Project Models
The time required to initialize a simulation of models from Microsoft Project has been dramatically reduced for most cases. The improvement is most significant in models with many tasks.

Russian Translation
All products have also been translated into Russian. This is in addition to the other languages available for the DecisionTools Suite: Spanish, Portuguese, German, French, Chinese, Japanese, and English.

Other Enhancements
Version 6.2 also includes maintenance fixes and improved messaging for software updates. In addition, the @RISK graphics engine now has the ability to display graphs using logarithmically scaled axes.

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@RISK Utilized in Spelman College Grant Research Project on Health Care Costs of Former Inmates

@RISK utilized in Spelman College grant research project on health care costs of former inmates According to Dr. Marionette Holmes, assistant professor at Spelman College, the homeless and previously-incarcerated population represents one of the most vulnerable demographics in the United States in terms of health care, and the cost for caring for these individuals can be staggering. For example, the monthly cost to care for those who are triply diagnosed with a mental illness, HIV positive, and substance abuse problems can range from approximately $4,000 to $40,000. In a grant research project entitled, "Examining the Health and Economic Impact of a Policy Driven Supportive Housing Program for Formerly Incarcerated Homeless Individuals in New York City," Holmes is utilizing @RISK in a cost-benefit analysis that considers the economic and health impacts of prisoners moving from incarceration to homelessness and moving from incarceration to supportive housing.

The supportive housing program Holmes examined is located in New York City, and specifically targets individuals who have cycled through both the penal and health care system more than four times over the past five years. One of the implementations of @RISK in this research is through a model that converts risky sexual behavior into HIV transmission risk and uses findings to project future HIV transmission probabilities.

Findings of the study are expected to be released in December.

Dr. Holmes has also assisted her research students with the use of @RISK. Ms. Andrea Brown, a recent graduate of the Spelman College Mathematics Department is writing a research paper entitled, “The Impact of Condom Attitudes of African American Female College Students on HIV/STD Transmission Risk,” which utilized @RISK in a cost-benefit analysis. Though the paper is still being written, the research conducted took first place in a recent research competition.

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Cost Risk Analysis Example Movie: Palisade's Custom Development Team uses @RISK's XDK for this custom application

Here is an example of a custom application written by Palisade Custom Development using @RISK's XDK in Excel. In this example, @RISK is used for cost risk analysis and estimation.  The application prompts the user for a three-point estimate for each cost item in the project as a way to recognize uncertainty in these cost elements.  A risk register is created using a simply colored grid interface.  Next, because in real life costs are seldom independent of each other, the user is able to set up correlations between related cost elements.  Finally, the user can define external risk events that will affect the total cost of the project. Automation takes the shape of an Excel add-in, which is shown to the user as a new Excel ribbon.

 

 

Custom Development in Excel

Palisade Custom Development has written applications for insurance, cost estimation, retirement planning, oil and gas prospecting, portfolio risk management, schedule-cost risk analysis and more – all utilizing @RISK technology in Excel. This means we can create risk analysis solutions for you using a range of powerful analytics, including Monte Carlo simulation, decision trees, statistics, neural networks, and optimization. In each case, the interface is customized to include only what the users need, hiding unused @RISK functionality and preventing user access to the underlying model logic. You can also automate processes like reporting, generating only the charts and data you want. The result is a tailored application ready to roll out to your workgroup. 
 

New XDK Functionality and Documentation in version 6.2

Excel Developer’s Kits (XDK) automatically come as part of the DecisionTools software which includes, @RISK, PrecisionTree, Evolver, StatTools, and NeuralTools. XDKs allow you to automate and customize the tool within Excel using Excel’s built-in VBA programming language. In @RISK 6.2, the XDK has been updated to include new functionality for the automation of @RISK graphs and simulation filters, as well as several additional improvements. For most  products, the XDK now includes a new “Automation Guide” to help you get started quickly. In addition, new videos and example files have been added to the XDKs to help you use this powerful feature.

» See XDK videos

 
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Why Use Decision Tree Analysis?

Life is full of tough choices. Most of us muddle through them using best guesses and gut feelings. But have you ever wondered if there might be a more sophisticated way to make decisions? Many businesses, researchers, and organizations have asked the same question, and turned to decision tree analysis.

Decision trees for decision analysis, in PrecisionTreeDecision trees are quantitative diagrams with nodes and branches representing different possible decision paths and chance events. This helps you identify and calculate the value of all possible alternatives, so you can choose the best option with confidence. This technique applies to almost any industry and field; it can help oil companies determine optimal testing and drilling strategies, help medical researchers determine the best tests and procedures to maximize a patient's recovery, or help a law firm decide on the best litigation strategy in a legal dispute.

How does this tool work? Decision trees let you visually map out complex, multi-layered decisions in a sequential, organized manner. This helps you identify all possible alternatives and choose the best option. This formal structure represents decisions and chance events that are linked in sequence from left to right. Decisions, chance events, and end results are represented by nodes and connected by branches. The result is a tree structure with the "root" on the left and various payoffs on the right. Probabilities of events occurring and payoffs for events and decisions are added to each node in the tree. Palisade's  PrecisionTree software creates decision trees  and influence diagrams in Mircosoft Excel, allowing you to  identify all possible alternatives and choose the best option.

PrecisionTree is a part of Palisade's DecisionTools Suite, an integrated set of programs for risk analysis and decision making under uncertainty that runs in Microsoft Excel. The DecisionTools Suite includes @RISK for Monte Carlo simulation, PrecisionTree for decision trees, and TopRank for “what if” sensitivity analysis. In addition, the DecisionTools Suite comes with StatTools for statistical analysis and forecasting, NeuralTools for predictive neural networks, and Evolver and RISK Optimizer for optimization. All programs work together better than ever before, and all integrate completely with Microsoft Excel for ease of use and maximum flexibility.

See also: Some Uses of Decision Support Software

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Modeling Today and Tomorrow's Risk: One Insurance Company's Strategy

In a recent white paper from Government Entities Mutual, (GEM) Inc., which writes Liability, Workers’ Compensation, and Property reinsurance coverage, underwriting manager Joel Kress posed the question, “how risky are we?” 
 
To answer this question, Kress and his team decided to simply model the most detrimental and most quantifiable risks: Underwriting Risk and Reserve Development Risk. For Underwriting Risk, they sought to quantify their annual risk transfer contracts. For Reserve Development Risk, they outlined and measured the risk associated with all past contracts they had written. Since GEM is almost 10 years old, they knew there would be years (and decades) of further Incurred But Not Reported (IBNR) development on GEM’s balance sheet. This type of risk accumulates geometrically as the years move on.
 
Since GEM’s loss experience alone was limited and thus statistically non-credible, Kress and his team supplemented this data with loss experience from other industry reinsurance data. With this combination, they were able to create a single loss distribution, which statistically estimates the company’s predictability of loss.
 
Using @RISK's Monte Carlo simulation, GEM then created a profile for each contract written in the  most recent policy year (2011), and distilled all the information from each contract into exposure to loss, which is simply frequency x severity, that GEM held as the risk bearing captive. Kress and GEM actuaries then estimated the risk for the historical policy periods by using the selected loss distribution to measure the variability around the expected loss reserves. This variability or, of greater concern, the variability of losses costing more than expected, was the third piece to GEM’s risk metric. GEM’s selected loss distribution looked like many other (re)insurance loss distributions--skewed towards the  right, indicating a chance, albeit slim, of a large, calamitous loss. 
 
The majority of this risk came from contracts currently being written, since the insurable events have not yet occurred. Turning to @RISK again, Kress and his team used the  input variables to estimate GEM’s  losses for the current policy year’s contracts, and then ran the algorithm for 10,000 hypothetical policy years. From this tome of data, they were able to determine key statistical metrics. 
 
Once all the simulations were finished, it was time to measure the results. GEM used Surplus as a measuring stick since it is easily understood, readily calculable, and of concern to most interested parties. GEM found that at a 60% Confidence Level, their Surplus would need to make up a $965,000 shortfall in losses. Thus with this risk they modeled, the amount of extra money from GEM’s current and historical contracts will cost beyond what is expected.
 
The last step in this process was to use five statistical benchmarks of ruin to measure themselves against. These benchmarks included the total Captive’s Contributed Capital, Company Action Level, Regulatory Action Level, Authorized Control Level, and Mandatory Control Level. GEM was able to assign chance percentages to all these potential risks, ranging from 17.2% and 0.4%.
 
Thus, using @RISK, Joe Kress and GEM were able to assess their risk for current and future books of business. According to Kress, “None of this minutia would be possible without the power of computers. It is one thing to program an algorithm to do a set of tasks, as outlined above. It is another thing entirely to make the computer work for you.”
 
 
 
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Troubled Waters: Report Calls for New Risk Analysis Services when Estimating Flood Insurance

As our weather patterns change and become more severe, it can’t be denied--climate change is upon us, and with it are some serious changes to life as we know it.  Take, for example, a recent report  commissioned by FEMA and  written by the National Research Council which outlines the true risks and costs of flooding in the Missouri and Mississippi river flood plains, and attempts to accurately price out flood insurance in a way that recovers actual costs.

The report highlighted the fact that flooding is bound to increase in severity--and thus, it's crucial to have a modern, statistically sound approach using risk analysis when analyzing and managing flood risk in areas protected by levees. Palisade’s @RISK software is used around the world for these type of analyses, and has in fact been used to analyze the risks and rewards of flood mitigation in the UK .  The National Research Council stated a need for state-of-the art estimates on how well levees will perform, in order to paint an accurate picture of the likely risks communities might face during flood conditions. Scenario analysis is key--multiple variables must be analyzed, such as how high a river might rise, and how many times will it crest it’s specified flood level.

According to Gerald Galloway, an engineering professor at the University of Maryland  who chaired the panel that produced this report, flood losses are continuing to rise. In fact, the National Weather Service predicts roughly $8 billion per year in flood losses--a number that is bound to grow as climate change continues.

The report states that, as an administrator of the Nation's  flood insurance program, FEMA must adopt a more up-to-date approach to analyzing as well as managing the risks of flooding behind levees. “Property owners would be more favorably inclined to buy flood insurance if individual risk is well-known, understood, and insurance rates are priced to match the probability of flooding and financial impact of flooding events,” the report says. 

If FEMA chooses to tackle the problem using @RISK, they'll be sure to have accurate answers to these complex questions.

 

See also: Using Risk Analysis to measure the impact of climate change

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Postgraduate Certificate in Risk Analysis in Health and Food Safety at the Royal Veterinary College of the University of London

  • What will be the effect of a new health policy in a country?
  • How do we quantify and mitigate health risks in our food supply?
  • Should we allow imports of a certain agricultural product?

Quantitative risk analysis techniques can help you answer these and many more questions. A new postgraduate certificate program in Risk Analysis in Health and Food Safety is being offered by EpiX Analytics and the Royal Veterinary College (RVC), University of London. “People interested in risk analysis in health and food safety come from a variety of backgrounds, so it was important for us to use software that is not only statistically sound, but also user friendly. This is why we chose @RISK as the primary teaching software for this course,” said Dr. Francisco Zagmutt, managing partner of EpiX Analytics and one of the course instructors.

This course will use many examples and case studies to provide participants with the skills for cutting-edge quantitative risk analysis in health and food safety. The course is designed to accommodate the work schedules of professionals from research institutions, governmental and international agencies; agricultural, food, pharmaceutical and related industry; and academic staff and post graduate students.

 » More information and to register
 » Case study about @RISK and the Royal Veterinary College
 » "Good Practices and Common Mistakes" webcast delivered by Dr. Huybert Groenendaal of EpiX Analytics

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PricewaterhouseCoopers deals with uncertainty head on, using Corridor Budgeting

PricewaterhouseCoopers put together a beautiful video about the Corridor Budgeting program, developed by Tobias Flath and Michael Hofmann. Corridor Budgeting is a methodology combining planning, business management, and risk management in order to prepare for a range of possible outcomes, and thereby generate a more realistic picture of the future.

Palisade's DecisionTools Suite is an integral part of this program. As explained in the video: "We identify the factors underlying variables and ranges that impact on financial results. The Corridor is regularly analyzed and validated, giving visibility into any gaps or delta between target bandwidths and actual figures. Specially designed software then aggregates these bandwidths and event risks to paint an accurate picture of possible scenarios."

The video depicts modeling with Monte Carlo simulation: "A simulation models the total risk exposure. The width of the curve indicates the level of uncertainty. The height shows the likelihood that an event will occur, giving senior executives insights into the full spectrum of future possibilities, and making it easier to make the right decisions."

The video concludes, "Corridor Budgeting allows businesses to forecast more realistically, and prepare more effectively for what's to come, equipping them to face the future, however it turns out." It's a simple and beautiful explanation of how risk and decision analysis are a central part of business decisions today.

See PwC's Corridor Budgeting video here:

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Fish Stock Levels being Threatened by Disease: @RISK gives aquatic farmers ability to test for disease cost effectively and implement key biosecurity measures

It’s estimated that the human population will be nine billion by 2030. The Food and Agriculture Organisation believes that aquaculture, which currently provides around half of the fish and shellfish eaten around the world, is the only agricultural industry with the potential to meet the protein requirements of this size of population.  

However, one of the biggest constraints to achieving this is the depletion of stock levels through disease. Biosecurity measures, which aim to prevent, control and ideally eradicate disease are regarded as essential. However, encouraging the adoption of these practices are often difficult due to aquatic farmers’ levels of education, training, responsibility and perceived economic benefits. In addition, global estimates of disease losses may appear remote and irrelevant to farmers and producers.

Having seen Palisade’s risk analysis tool @RISK being demonstrated, Dr Chris Walster, a qualified veterinary surgeon and the secretary of the World Aquatic Veterinary Medical Association (WAVMA), started using the program to calculate the realistic risk of aquatic disease to farms, with a focus on cases where data inputs were limited. The capacity of @RISK to present data in an easy to understand way meant farmers could more easily understand the disease risk probabilities, review the cost/benefit of disease prevention and make informed choices about whether to put controls in place.

“@RISK enables farmers to reduce the risk of disease spreading amongst their animals whilst minimising additional costs,” Dr Walster explains. “For aquatic vets, the key is the graphs which allow us to demonstrate a complex probability problem quickly and simply in a way that is easy to understand and trust. These inform decision-making, thereby helping to boost the world’s aquatic stock whilst safeguarding farmers’ livelihoods.”

“This technique also potentially offers an economical method of assisting in the control of many diseases. Farmers undertake their own tests, with each of these providing incremental inputs so that the macro picture can be developed and acted upon,” concludes Walster.

» Dr. Walster's PPT presentation:
   @RISK's Role in Biosecurity: Reducing Disease Risk when Data is Limited

» Case Study: Reducing the risk of disease in aquatic animals using @RISK from Palisade


 

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Free Webcast this Thursday: "Use of @RISK in Food Safety Risk Assessment" with Charles Yoe

Join us this Thursday, January 10, 2012, for a free live webcast entitled, "Use of @RISK in Food Safety Risk Assessment " to be presented by Charles Yoe.

The Food Safety Modernization Act is the most sweeping reform of FDA’s food safety authority in more than 70 years. It strengthens and increases the role of risk analysis in protecting consumers and promoting public health. In this free live webcast, Prof. Charles Yoe of Notre Dame of Maryland University will use the FDA/ Center for Food Safety and Applied Nutrition’s report “Quantitative Risk Assessment on the Public Health Impact of Pathogenic Vibrio parahaemolyticus In Raw Oysters” in a demonstration and discussion of the use of @RISK in food safety risk assessment.

Charles Yoe is a professor of economics at Notre Dame of Maryland University and an independent risk analysis consultant and trainer. Working extensively for U.S. and other government agencies as a consultant and risk analyst, his wide range of risk experience includes international trade, food safety, natural disasters, public works, homeland security, ecosystem restoration, resource development, navigation, planning, and water resources. As a consultant to private industry his work includes a discrete but wide variety of concerns. He has trained professionals from over 100 countries in risk analysis and has conducted customized risk training programs for government agencies and private industry in over two dozen nations.

» Register now (FREE)
» View archived webcasts

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Free Webcast this Thursday: “Good Practices and Common Mistakes”

Join us this Thursday, December 6, 2012, for a free live webcast entitled, "Good Practices and Common Mistakes" to be presented by Dr. Huybert Groenendaal. This was one of the favorite sessions last month at the Palisade Risk Conference in Las Vegas.

Ever question if your Monte Carlo model is correct? Ever wondered how other organizations use @RISK, how to get the most value out of @RISK, and what are some of the most important best practices? Then this is the right free live webcast for you!

An increasing number of organizations are using analytical techniques such as quantitative risk analysis, value at risk (VaR), and risked NPV to help them improve decision making. However, all too often, these techniques may not be used optimally or accurately and their full value may not be realized.

During this presentation, Dr. Huybert Groenendaal will share his hands-on experience through hundreds of projects, and will discuss the following topics:

  1. Good practices for the use of @RISK and risk modeling to support decision-making
  2. Common mistakes in Monte Carlo simulation and how to prevent them.

All good practices and common mistakes will be discussed with the use of real-life risk modeling case studies and models based on EpiX consulting work.

Dr. Huybert Groenendaal is a managing partner at EpiX Analytics, a consultancy that helps clients use Monte Carlo simulation and probabilistic modeling in a broad range of industries and fields, ranging from financial risk analysis, business development, marketing, budgeting, inventory optimization, and pricing, to risk analysis in health. Dr. Groenendaal has extensive experience in risk modeling and analysis for business development, financial valuation, R&D portfolios and portfolio evaluations in pharmaceuticals and medical devices. Dr. Groenendaal also teaches a variety of risk analysis training courses including Financial Risk Modeling for Pharmaceuticals, Quantitative Risk Analysis, and Corporate Finance Risk Analysis and customized on-site courses. He also lectures on the use of risks modeling in business at the executive MBA program at the Leeds School of Business, University of Colorado and teaches two online risk analysis courses at Statistics.com. Dr. Groenendaal has an MBA in Finance from the Wharton School of Business and PhD from Wageningen University and is an adjunct faculty at Colorado State University.

» View the recorded webcast "Good Practices and Common Mistakes"
» View webcast archive

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New in DecisionTools Suite 6: Integration with Microsoft Project for project risk modeling

@RISK (risk analysis software using Monte Carlo simulation) is now a truly cross-platform tool, enabling risk modeling of your Microsoft Project schedules using the same @RISK you use for risk analysis modeling in Microsoft Excel!  You can now do your project risk modeling in Excel rather than Microsoft Project, providing a new world of flexibility. A new interface layer reproduces your schedule in Excel, enabling you to use all Excel formulas and @RISK functions. When you make changes to your model in either Project or Excel, those changes are reflected in the other with @RISK’s Sync feature. (Note that all @RISK modeling takes place in Excel, so @RISK functions do not appear in Microsoft Project.) Then simulate your Project schedules in Project itself, using Project's scheduling and calculation engine.

The benefits of using Excel for your Project risk modeling are many.  You can easily build risk registers in Excel for your Project model using new “RiskProject” functions.  You can integrate your cost and schedule analyses. You can standardize on a single tool – @RISK – to meet the needs of your project managers, cost estimators, finance analysts – everyone who deals with risk and decision making under uncertainty in your company. Plus, a single interface means a shorter learning curve for everybody.

@RISK is part of The DecisionTools Suite -- an integrated set of programs for risk analysis and decision making under uncertainty that runs in Microsoft Excel.

» Watch a demonstration of project risk modeling with @RISK
» See What's New in the DecisionTools Suite 6

 

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