ERM Capability A Rating Agency s View. David N. Ingram, CERA Director Enterprise Risk Management, Financial Services Ratings Standard & Poor s

Transcription

1 ERM Capability A Rating Agency s View David N. Ingram, CERA Director Enterprise Risk Management, Financial Services Ratings Standard & Poor s

2 The materials in this presentation represent the views of Standard & Poor s. There is no explicit or implied suggestion that these views apply to any other rating agency. Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor s. Copyright (c) 2006 Standard & Poor s, a division of The McGraw-Hill Companies, Inc. All rights reserved.

3 ERM Capability A Rating Agency s View 1. How S&P Assesses ERM Capabilities & What We Found 2. ERM impact & Developments 3. Professions Working in ERM 4. ERM Methods in Different Regions and Sectors within Financial Services 5. What s Next

4 What Role Can ERM Have in the Ratings Process? A Better Understanding of Management Forces Forward Thinking ERM A Language for Communicating ERM at S&P Insurance Financial Institutions Energy Firms Other Industrials

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7 ERM & Insurance Industry Ratings

8 Strategic Risk Management Insurance ERM Evaluations Risk Management Culture In 2005, S&P Began to explicitly evaluate the ERM programs of insurers ERM became the 8 th major rating component Through the end of 2006, S&P has completed the evaluations of 241 Insurers Globally ERM commentary is now a regular part of our annual credit reports of Insurers ERM is now a major topic in most insurance rating committee meetings Risk Control Processes Emerging Risks Mgmt Risk & Economic Capital Models

9 ERM Evaluation in the Ratings Process Financial Flexibility Management Strategy Earnings Enterprise Risk Management Liquidity Market Position Investments Capital Adequacy ERM Evaluation

10 Standard & Poor s ERM Evaluation Components Strategic Risk Management Risk Control Processes Emerging Risks Mgmt Risk & Economic Capital Models Risk Management Culture

11 Risk Control Applies to: Risk Control Credit Risk Market Risk Insurance Risk Operational Risk Bonds Interest Rate Pricing/Underwriting Distribution Human Resources Mortgage Loans Equity Derivatives Hedging Reserving Process & people Regulatory & Compliance Reinsurance Ceded FX Catastrophe IT Change Management Other Assets Property Real Estate Mortality/Longevity Fraud & Internal Control Business Continuity Policyholder Behavior Outsourcing New Product Reputational

12 Standard & Poor s ERM Quality Classifications Excellent Advanced capabilities to identify, measure, manage all risk exposures within tolerances Advanced implementation, development and execution of ERM parameters Consistently optimizes risk adjusted returns throughout the organization Strong Clear vision of risk tolerance and overall risk profile Risk Control exceeds adequate for most major risks Has robust processes to identify and prepare for emerging risks Incorporates risk management and decision making to optimize risk adjusted returns Adequate Has fully functioning control systems in place for all of their major risks May lack a robust process for identifying and preparing for emerging risks Performing good classical silo based risk management Not fully developed process to optimize risk adjusted returns Weak Incomplete control process for one or more major risks Inconsistent or limited capabilities to identify, measure or manage major risk exposures

13 2006 All ERM Scores Global 241 Insurers Weak 5% Excellent 3% Strong 10% Adequate 82%

14 ERM & Ratings ERM Quality Evaluation is based on the risks of the company Importance of ERM in the company rating is based on: - Capacity to absorb losses - Complexity of risks A insurer with tight capital and complex risks - ERM is very important A insurer with excess capital and ordinary risks - ERM is not as important

15 ERM in Publications

16 Evolution of Enterprise Risk Management Link with strategy Return optimization High Strategic integration Medium Risk management Risk measurement Risk models: Loss minimization Economic capital models Other models Low Compliance Risk control Industry standard in the last 5-10 years Balance sheet protection Today Risk/return optimisation Industry standard in the next 5-10 years Value creation

17 ERM has different champions in different companies Who is Working on ERM? CEO/ BOD CFO CIO Internal Audit Chief Actuary Compliance CUO Corporate Insurance Legal

18 Who is Working on ERM? CEO/ BOD CUO CFO Internal Audit Chief Actuary Compliance ERM CIO ERM needs to work with everyone! Corporate Insurance Legal

19 Global ERM Score Distributions 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% US/Can Europe Bermuda Other Excellent Strong Adequate Weak

20 Standard & Poor s ERM analysis of Financial Institutions Economic Capital Operational Risk Market Risk Trading Risk Interest Rate Risk (ALM) Credit Risk Underwriting Processes Credit Risk Analytics Portfolio Mgmt Funding & Liquidity Funding Composition Liquidity Mgmt Stress Testing Risk Governance (Culture, Appetite, Disclosure)

21 Assessing TRM Practices: The PIM approach INFRASTRUCTURE RISK TECHNOLOGY VALUATION METHODS OPERATIONS RISK TRAINING MODEL VETTING & BACK-TESTING METHODOLOGY CAPITAL ALLOCATION DISCLOSURE & AWARENESS LIMITS SETTING & CONTROL RISK TOLERANCE & STRATEGY RISK CULTURE POLICIES

22 Stature Stature Of of RM RM 55.00% 35.00% % Weak % Adequate % Strong % Very Strong 10.00% 0%

23 Risk Appetite Risk Appetite 25.00% 30.00% 45.00% 10.00% 20.00% 35.00% 35.00% % Very Strong % Strong % Adequate % Weak 0.00% Establishing the Risk Tolerance NPA process

24 Model Model Vetting Vetting Process Process 0.00% 5.00% 40.00% 25.00% 55.00% 45.00% % Very Strong % Strong % Adequate % Weak 5.00% Validating Pricing Models 25.00% Back Testing

25 What s Next Economic Capital reviews for Insurers ERM findings for Banks Including Impact of US Sub Prime ERM Evaluation Standards for Bank/Insurance groups ERM Evaluations for Corporates Selection of initial Sectors

26 Universal ERM Framework

27 Analytic services and products provided by Standard & Poor s are the result of separate activities designed to preserve the independence and objectivity of each analytic process. Standard & Poor s has established policies and procedures to maintain the confidentiality of non-public information received during each analytic process.

28 ERM Capability A Rating Agency s View David N. Ingram, CERA Director Enterprise Risk Management, Financial Services Ratings Standard & Poor s