Enterprise Risk Management at
Nationwide
Emily Gilde
Session: Implementing DFA
2003 CAS Risk and Capital
Management Seminar
Key Forces driving ERM at Nationwide:
• Need for greater centralization
• Influence of banking industry
Nationwide: an increasingly complex and
diverse institution in recent years
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30 thousand employees, 60 thousand agents
21 separate P&C companies
Financial services company
Life Insurance company
An international asset management company
Need for ERM
DIVERSITY/COMPLEXITY
Challenge to
Implementing
ERM
Banking Philosophy
Comfort with ERM
CEO, at NW since 2000, former
executive VP at Bank One
former bankers
sponsor ERM
tools at
Nationwide
CFO, at NW since 2002, former
CFO at Bank One
Treasurer, at NW since 2001,
former banking executive
Office of Corporate Development
“hands on” control of ERM tools
Initial push for ERM:
• How much capital do we need to prevent
insolvency with a very high degree of confidence?
• How are our lines of business performing on a risk
adjusted basis?
adoption of RAROC model
RAROC = Risk Adjusted Return on Capital
• Developed by banks in early 1990’s and in
widespread use there today
• Differs from DFA
– Uses a correlation matrix to aggregate risks
– Risk measure = Value-At-Risk
– Capital adequacy tied to specific bond rating
benchmark; e.g. default probability for AA
corporate bonds
Current Uses of RAROC at Nationwide:
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Assessment of capital adequacy
Performance measurement
Reinsurance optimization
Evaluation of new strategic opportunities
Governance of RAROC Model
Office of Corporate Development
• usually
leads model development
• initiates model applications
SVP Finance
represents
Business
units
– supervisory role
– Key participant in final
decision on model
changes
– CPA
– FCAS
– Several Analysts
•runs the model and publishes results
Business Unit “Module” Owners
– Investments
• responsible for updating models
– Actuarial
• work with OCD to determine if model
changes needed
– Reinsurance
– Finance
Recent Corporate Initiative: Assetliability management of P&C business
• RAROC not an appropriate ERM tool for ALM
– Relationship between assets and liabilities summarized in a
correlation coefficient
– Focuses on extreme tail events only
• ALM
DFA
Asset - Liability Management Using DFA:
Economic Value
Efficient frontier
C
B
Different asset portfolios
A
Current portfolio
Standard deviation of EV
Economic Value = MV assets – PV liabilities + PV future business cash flows
ALM: Maximize after-tax Economic
Value Subject to:
• “Hard” constraints: various practical and legal
constraints on asset allocations affect the position
of the efficient frontier
• “Soft” constraints: for each asset portfolio on
efficient frontier, examine the probability
distribution of variables such as statutory surplus
and GAAP equity
ALM Decisions:
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Optimal duration of bond portfolio
% of portfolio to hold in market equity
% tax exempts
Whether or not to invest in “alternative” assets
such as TIPS
ERM Implementation Issues:
• Consistency between models: RAROC & DFA
• Modeled output viewed as “law” that is either
“right” or “wrong”
• Difficult to elicit unbiased assumptions
– tendency to be conservative
– on other hand, business plans may reflect “stretch”
goals
• Decentralized organization  Decentralized data
and potential inconsistencies
Conclusion
• ERM is here to stay
• Vehicle for building consensus and common
vision within a complex, decentralized
organization