Enterprise Risk in Investments

Transcription

1 Enterprise Risk in Investments Enterprise Risk Management Je Celentan Senir Vice President Chief Risk Officer Pacific Life

2 Agenda Enterprise Risk Management Risk Management Framewrk Key Terms and Cncepts Rles and Respnsibilities Types f Risks Current Issues 1

3 Regulatrs have emphasized the industry need fr a mre deliberate apprach t managing risk 2013 Qutes Frm Regulatrs Cncerned that recent changes t firms risk management practices might nt be sustained as memries f the crisis fade and pressures t pursue revenue pprtunities increase. The Bard f Directrs shuld ensure that senir management establishes strng accuntability structures t translate risk framewrk int clear incentives and cnstraints fr business lines. Intensifying the versight f risk issues at the bard thrugh creatin f a standalne risk cmmittee is cmmn practice thugh nt required. Changing the attitude tward wnership f risk acrss the firm with the business line nw being much mre accuntable fr the risks created by their activities. CRO s stature, authrity, qualificatins, and independence within the firm.are pre-requisites fr the CRO t be able t influence the firm s risk-taking activities. 2

4 Risk management framewrk is an iterative prcess Risk management framewrk sets the firm s risk prfile in the curse f implementatin f the firm s business strategy Embed in Business Line Strategic/ Tactical Decisins Risk Management Reprting (Senir Management & Bard) Target Capital Management (STAT, GAAP, EC) Risk Culture and Gvernance Risk Measurement Risk Prfile Reverse Stress Test Scenari Analysis (Deterministic & Stchastic) Risk Management Framewrk (RMF) Risk Appetite Statement and Risk Preferences 3

5 Key Terms and Cncepts Risk management framewrk: The verall apprach, including plicies, prcesses, cntrls, and systems thrugh which risk appetite is established, cmmunicated, and mnitred Risk appetite statement: The articulatin f the aggregate level and types f risk that a firm is willing t accept in rder t achieve its business bjectives. It can include measures expressed relative t earnings, capital, risk measures, liquidity, and ther Risk capacity: The maximum level f risk the firm can assume befre breaching established cnstraints fr regulatry capital and ther limits stated in risk appetite statement Risk limits: Quantitative measures based n frward lking assumptins that establish maximum levels f acceptable risk by risk factr Risk prfile: Pint in time assessment f the firm s net risk expsures aggregated within and acrss each relevant risk categry based n frward lking assumptins 4

6 Rles & Respnsibilities Bard f Directrs Establish risk management framewrk and apprve firm s risk appetite statement Regularly assess risk appetite in strategic decisins and review apprved risk limits Obtain independent assessment f effectiveness f risk management framewrk Chief Executive Officer: Establish risk appetite fr firm that is cnsistent with shrt and lng-term strategy With CRO and senir leadership, be accuntable fr the integrity f risk framewrk Ensure risk appetite is translated int risk limits Chief Risk Officer: Develp prudent risk appetite fr firm Obtain Bard apprval f risk appetite and regularly reprt firm risk prfile Independently mnitr business line risk limits t ensure they remain cnsistent with firm s risk appetite Escalate t Bard and CEO any material risk limit breach 5

7 Types f Risks Aggregate risk measurement and management start with identifying and quantifying individual key risks: Market Risk Equity Risk Interest Rate Risk Credit Risk Liquidity Risk Insurance Risk Operatinal Risk Others: Regulatry Risk Reputatinal Risk Emerging Risk The list ges n 6

8 Equity Risk Equity Market Risk: The risk that equity markets and/r implied vlatility will change such that cntractual bligatins increase r revenue will decrease Expsure Lwer grwth rates r unusually vlatile equity markets reduce prfits and value Riders and guarantees increase expsure in pr equity markets Risk Management Tls Prduct design, such as limits n feature richness and mandatry prtfli diversificatin t purchase riders Reinsurance Capital market hedging prgrams 7

9 Interest Rate Risk Interest Rate Risk: The risk that the value r cash flws f prducts and surplus will be negatively affected by changes in the level, slpe, r curvature f the yield curve (rates at varius duratins) Summary f Expsure Declining r persistent lw interest rates Spread cmpressin Guaranteed r minimum credited rate flrs Higher reserves and required capital, especially fr variable annuities Rapidly rising r high interest rates Disintermediatin Capital lsses n asset sales Higher debt re-financing csts 8

10 Credit Risk Credit risk: The ptential f a brrwer failing t meet their cntractual bligatin resulting in lss t the lending firm Expsure Crprate credits Asset-backed securities (including RMBS) Cmmercial mrtgage lans Perpetual preferred securities Cunterparties t derivative and reinsurance transactins Risk Management Tls Bttm-up fundamental analysis cmplemented with tp-dwn analytics Investment Guidelines (diversificatin) Hedging 9

11 Liquidity Risk Liquidity Risk: The risk that a firm, thugh slvent, des nt have sufficient financial resurces available t meet its bligatins withut the sale f assets n shrt ntice at a significant lss Expsure Surrenderable liabilities Less than perfect matching f prduct and asset cash flws Allcatin f prtfli t less liquid investments Risk Management Tls Regular managing f cash balances Regular cash frecasting and liquidity stress testing Cmmercial paper and ther shrt-term facilities Guidelines fr liquidity requirements f investments 10

12 Insurance Risk Insurance Risk: The incidence f mrtality r plicyhlder behavir varying frm expectatins Expsure t insurance risks via prducts sld directly r via reinsurance Uncertainty f life (lngevity) Uncertainty f death (mrtality) Plicyhlder behavir variatins (lapse rates, utilizatin rates, premium patterns, etc.) At mst firms, remains small relative t financial market risks Risk Management Tls Prduct develpment and prduct management Mrtality and lngevity naturally ffset each ther, but nt perfectly Disciplined develpment and apprval prcesses Experience review prcess 11

13 Other Risks Regulatry Risk: The risk f nt cmplying with regulatry requirements, regulatry change, r regulatrs expectatins Significant risk that has been increasing Reputatinal Risk: The current r prspective risk t earnings and capital arising frm an adverse perceptin f financial institutins n the part f existing and ptential transactinal stakehlders Fcus cntinues t increase as this risk can have significant impact, hwever very difficult t quantify Emerging Risk: A new r changing risk which is difficult t quantify and which culd significantly impact the cmpany s financial strength, cmpetitive psitin, r reputatin Invlve a high degree f uncertainty due t lack f past experience and the firm may have limited ability t influence the utcme 12

14 Current Issues Systemically Imprtant Financial Institutins (SIFI) Prvisin f Ddd-Frank SIFI s will require federal supervisin AIG, Prudential, and GE Capital named as SIFI Glbal Systemically Imprtant Insurers (G-SIIs) Financial Stability Bard s (FSB) designatin methdlgy develped by Internatinal Assciatin f Insurance Supervisrs (IAIS) Additinal regulatry requirements Recvery and reslutin plan Enhanced grup-wide supervisin Higher lss absrbency fr nn-traditinal activities 9 glbal insurers 1 named as G-SII in July, Allianz SE, AIG, Assicurazini Generali, Aviva, AXA, MetLife, Ping An, Prudential Financial, Prudential PLC 13

15 Current Issues Cntinued Cmmn Framewrk (CmFrame) IAIS develping cmmn supervisry standards fr Internatinally Active Insurance Grups (IAIG) 3 part, 3 year prcess 2012 initial draft released 3Q, 2013 anther draft CmFrame 2014 field testing Capital Assessment Regulatry, prescribed (STAT) Slvency II-type mdel Own Risk Slvency Assessment (ORSA) 14

16 Capital Allcatin Amng Risk Factrs Prgress by NAIC Investment RBC Wrking Grup (E Cmmittee) Objective: Evaluate histrical data t develp recmmendatins fr revisins t the current asset risk structure and factrs relating t C-1 In Prgress: Develping Crprate Bnd Mdel Reviewed ttal lss, tax, recvery, and expected lss assumptins based n rating agency data Representative prtfli under develpment t build new C-1 factrs Capital structure, issuer and issue rating differences Carrying value may impact capital charge Other Asset Classes Cntinuing analyses planned and/r underway fr equity real estate, nn-recurse debt, derivatives, cmmn stck, cmmercial and residential mrtgages 15

17 Impact f Credit Rating n Firm Imprtance t Insurance Cmpany Hw? Credit ratings are used as indicatrs f a cmpany s financial strength, including ability t meet plicyhlder bligatins Ratings are given by independent agencies and cnsequently seen as impartial metrics fr cmparisn A ratings dwngrade can have adverse effects Rating changes affect public cnfidence, which can impact: Cmpetitive psitin in terms f prduct sales, surrendered plicies, and acquisitin pprtunities, and Relatinships with creditrs r trading cunterparties Debt credit ratings directly affect interest rates a firm pays n its brrwings 16

18 Why is this imprtant? Significant increased fcus n risk management frm senir management, bard f directrs, regulatrs, and rating agencies Transitin perid may cause uncertainty Reslutin f expectatins f risk management is unknwn May yu live in interesting times. 17