Key ERM Components. November 2007

Transcription

1 Key ERM Components November 2007

2 Topics Risk Management and Enterprise Risk Management (ERM) what s the difference? Key Elements of an ERM Framework Importance to the Actuarial Profession

3 Risk Management Steps Risk Monitoring Risk Identification Risk Mitigation Risk Evaluation

4 CAS Definition of ERM ERM is the discipline by which an organization in any industry assesses, controls, exploits, finances and monitors risks from all sources for the purpose of increasing the organization s short- and long-term value to its stakeholders Casualty Actuarial Society: Overview of Enterprise Risk Management May 2003

5 Objectives of Risk Management Avoid risks that could materially affect the value of the company Contribute to stability of growth in value Take risks that the company can manage in order to increase risk-adjusted returns Provide transparency of the company s risk management processes to stakeholders Making better risk-adjusted business decisions

6 Key Elements of ERM Culture Discipline Common Language Common Measurement Corporate Risk Appetite Comprehensive Reporting Controls Continual Development - Tools & Processes COMPREHENSIVE & CONSISTENT

7 Risk Management Framework GOALS & OBJECTIVES RISK PROFILE RISK CULTURE RISK STRUCTURE PROCESSES COMMUNICATION REPORTING POLICIES MODELS RESOURCES HEDGING

8 Framework must reflect Business Business Characteristics: nature of risks, state of risk management diversity of businesses extent of growth (key business objectives) business partners (outsourcing, JVs etc.) Organizational Characteristics: centralized vs. decentralized culture technical vs. non-technical entrepreneurial incentives

9 The Importance of Culture Can t be just an exercise Not just a report to satisfy requirements and sit on the shelf Must be supported by management And have management participation Must be a disciplined process Must be integrated into an overall framework

10 Risk Categorization Strategic Risk Credit Risk Market Risk Insurance Risk Operational Risk Common Language

11 Risk Categorization/Identification Categories Sub-categories Source of Exposure Exposure Triggers Direct Consequences

12 NOT JUST FINANCIAL Consequences

13 Economic Capital: Rationale for Common Measurement Help Ensure Solvency and Viability Consistent Understanding of Risk & Return Impact of Diversification Contributions of Businesses to Value Consistent Disclosure to Stakeholders

14 Economic Capital: A Common Risk Measure Comprehensive coverage of all risk types (financial, insurance, credit, operational) All risks measured on a consistent basis Time horizon harmonized across analysis Confidence interval linked to strength Forward-looking Aggregated across the businesses

15 Illustration of Economic Capital Expected Loss 1.80% Probability 1.60% 1.40% 1.20% 1.00% 0.80% "A" Solvency Standard "AA" Solvency Stand "AAA" Solvency Standard 0.60% 0.40% 0.20% 0.00% Economic Capital for "AAA" Solvency

16 Risk Filter Capability to manage risk identify and understand risk Desired Risk Profile Appropriate level of monitoring and reporting as well as the infrastructure to support monitoring and reporting Ability to act on mitigation plans Adequate return for the risk taken

17 Risk Management Reporting Determine that the business is being managed in accordance with the defined risk framework Company s changing Risk Profile vs. Risk Limits Sensitivities to financial markets, including impact of hedging Credit and other investment risk profile Insurance risks Operational & Strategic risks Key Corporate Risks Risk-adjusted return (economic capital) Specific initiatives and plans Action plans to deal with risks; ad hoc issues Governance reports Compliance with internal policies

18 Dealing with Risk Characteristics of Risk unacceptable volatility/risk to capital not well understood no capability to manage Resolution AVOID!! significant volatility or risk to capital lack of experience managing lack data, monitoring systems some volatility some compensation for risk some capability to manage MITIGATE APPROACH WITH CAUTION reinsure hedge limit exposure relatively low volatility or risk part of business, good data, monitoring fair compensation for risk take the risk ensure systems in place to manage characteristics of risk well-understood strong capabilities to manage the risk well compensated for the risk INCREASE RISK!

19 Reinsurance: Excess risk Expertise Capital management Risk Mitigation: Hedging Capital Markets Hedging: Derivative instruments Example: interest rate floors for minimum interest guarantees Example: put options for equity-related guarantees Hedging instruments have a cost and involve counterparty risk as well as market risk

20 Implementation Experiences Importance of Communication repeat the key messages find simple ways to illustrate technical concepts Business Involvement and Ownership Experience is usually the best teacher Unfortunately often costly, negative Generates attention, focus Often knee jerk Can t happen here syndrome

21 The Risk Management Chain Only as Strong as its Weakest Link!

22 Risk Management and Actuaries Threat and Opportunity

23 Why is ERM Important to Actuaries? Rapidly evolving field of practice Many groups are trying to take leadership in the areas of risk management Actuaries are experts at risk management Risk management is at the core of actuarial practice Many of the new practitioners are overlapping with areas of traditional actuarial practice Risk management is a tremendous opportunity for the actuarial profession Must be proactive

24 What do Actuaries Offer? Actuarial training includes many elements of risk management Mathematical and statistical models of risk Probability and statistics Actuaries are true professionals (unlike the other groups) Education and qualification standards Standards of practice Continuing education requirements Discipline processes Need to enhance business skills to gain credibility

25 SOA - Initiatives Joint SOA/CAS Risk Management Section Education: Inclusion of financial economics material on syllabus ERM Symposium and other education Risk Management Newsletter CERA Designation International Webinar

26 Summary: Threat and Opportunity Threat Everyone looking for some of the risk management space Encroaching on traditional actuarial areas Others moving fast, globally Large organizations (GARP, PRMIA) Opportunity Actuaries are experts in risk management Actuaries are professionals Solid training and education ERM field is huge

27 RISK... is not a four-letter word

28 Questions? Questions? Questions? 28