ERM Tools & Techniques 2007 ERM Symposium ERM Essentials Workshop Francis P. Sabatini

Transcription

1 Insurance & Actuarial Advisory Services ERM Symposium Chicago, IL March 28-30, 2007 ERM Tools & Techniques 2007 ERM Symposium ERM Essentials Workshop 0 0 Francis P. Sabatini

2 What are we trying to measure? Risk o Across the enterprise, products and businesses o Across all risk types o Caveats Recognition that legal entity risk measurement is important 1 1

3 What risks? o Interest rate o Equity o Credit o Catastrophe o Mortality o Morbidity o Underwriting o Operational o.. 2 2

4 What do we need to capture? (Reasonably) accurate assessment of the enterprise s risk exposure (distribution) o Inherent risk o Correlation across risks and businesses Tail Main distribution 3 3

5 In an ideal world we d have. A simulation model that reflects: o Our business including its unique characteristics o All of the inherent risks as manifested in asset and product liability outcomes o The capital markets o All of our business related risks (i.e. operational risks) o Outcomes across a universe of possible scenarios o The inherent correlation of risks in good times and in bad 4 4

6 Aggregation/Diversification Getting it right is an important consideration in addressing the tools and techniques agenda The mega-model although ideal is impractical o Too complex o Technology and hardware limitations o Impractical control environment o Etc. 5 5

7 In the absence of the mega-model how do we get there? This is the MOST IMPORTANT question that needs to be answered!!!!!!! Implications of not thinking it through. o Having to re-engineer the entire process o Credibility of results internally & externally o Complex and inefficient processes o Complex and ineffective control environment o Difficult model validation process 6 6

8 In the absence of the mega-model how do we get there? Design the end-state goals before building the tools and techniques to support the risk measurement process o What are the various uses and what are the requirements of each? Risk measurement & management Economic capital Capital management Valuation Strategic decision making Performance measurement 7 7

9 In the absence of the mega-model how do we get there? Recognize that there should be a balance between model framework complexity and: o Assumption uncertainty o Risk measurement methodology uncertainty o Correlation 8 8

10 Addressing aggregation/diversification Three common approaches: o Common scenarios o Correlation matrices o Copulas 9 9

11 Diversification through common scenarios (why correlation & copulas have limited appeal) Primary Attributes o Permits scenario specific correlation across products and risks o Inherently adjusts for shifts in risk relationship o Permits adjustment for cash flow effects o Allows for calibration of correlations to different parts of the distribution 10 10

12 What techniques? Integrated scenarios & product models o Interest rate, equity, credit, mortality/morbidity o Additive scenarios across products o Scenario generation process can adjust risk correlation dynamics o Cash flow effects captured o Ops risk integration? 11 11

13 What techniques? Other approaches o Representative model points o Replicating portfolios both assets & liabilities o Approximation techniques o Scenario selection 12 12

14 Building the infrastructure In designing the tools and techniques we should recognize that: o Complex models are difficult to build, maintain and validate o Therefore design the process so that it: Anticipates the techniques that are going to be used Allows for efficiency in building and maintaining the models Supports a robust control environment Meets timing requirements Leverages technology 13 13

15 Actuarial Transformation TM Technology Supported Actuarial Environment Data Integration and Improvement High Performance Computing Advanced Decision Support Admin Systems Input Management Modeling Engines Mgmt Reports Accounting Systems Actuarial Data Repository Actuarial Analysis Repository Accounting Analytics Assumptions Assumption Management Valuation Engines Bus. Intell. for Modelers Validation Automated and Controlled Environment 14 14

16 Tools & Techniques Implementing the right framework requires: o Understanding o Ingenuity o Revolution o Credibility 15 15

17 16 16 Questions?