Predyct ERM Diagnostics

As revealed in the benchmarking link on the Predyct ERM navigation bar, Predyct ERM allocates capital to firms in proportion to the risk contribution of their different business activities. In so doing, the firm obtains an accurate picture of where their firm is doing well and not so well. In the benchmarking link, we observe that all three firms are earning a negative risk adjusted return on their Homeowners business. Furthermore, we observe that close to 50% of firms’ A and B capital is being tied up in Homeowners at a negative financial return. We submit that no firm can dedicate this much of its capital to business activities with negative rates of real return for long without leading to major calamities. Firm C made this recognition and substantially withdrew from the line of Homeowners. We observe that only 13% of firm C’s capital is being consumed by Homeowners. We believe that Firm C’s withdrawal from Homeowners is what has led to its superior performance relative to the two other companies. The first step in improving financial performance is to make sure that the company is adequately capitalized and that its rating is safe. The second thing to know is where firm capital is allocated and what the firm is making on that allocated capital. The third step is to observe how your company is performing relative to your competitors. All three of these observations can be performed using Predyct ERM. The forth step is to be sure that your firm has an efficient capital structure and cost of capital from which embedded value is determined—an increasingly important value measure in the insurance industry. This can be determined using Predyct’s Shareholder Value Model (SVM). There are many other diagnostics that a company may perform when using Predyct ERM:

In short, Predyct ERM will not make a poor performing company better. All Predyct ERM can do is identify where your business is performing well and where it isn’t—it’s up to you to fix it and Predyct ERM can assist on that also by identifying the underlying root cause of non performance. Since most capital allocation schemes are not based on real risk attribution but on RBC, ad hoc schemes and regulatory & rating agency guidelines (all of which have very little to do with real risk attribution) most companies don’t really know the real return they are making in their different strategic business units (activities) and stay in faltering businesses way too long (See case histories: B-1, B-2, B-4, B-5) before fixing the lines or exiting all together. This is why multiline companies typically create all of their value with just a couple of business activities and destroy an enormous amount of value with everything else that they do.