Enterprise Risk Management
September, 2008
Michael E. Angelina, ACAS, MAAA
Endurance Specialty Holdings Ltd
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Initial Thoughts
 Enterprise Risk Management
 New fad or a step into a new frontier
 ERM due to its name is thought to be defensive
 Manage risks to protect downside
 ERM is strategic weapon (even within reserving)
 Process of understanding the drivers of risk and the impact to underwriting decisions can
make you a strategic partner in your organization.
 Think portfolio theory and risk levels
ￚ Avoid too much focus on individual cells at the ERM level
 Technology is our friend
 Analytical insights can takes us to the next level
Economic Capital Modeling
ERM Objectives/Principles
 Optimally manage the company’s capital
 Required return on capital
 Eliminate risks that threaten solvency/viability
 Target maximum aggregate level of risk given range of opportunities
 Manage volatility – Expected Value Curve
 Understand, manage, mitigate
 Shape business by taking risk we can quantify
 Risk mix, diversification, hedging
 Create behaviors that reinforce ERM culture
 Internally and externally
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Process
Silos and Integrated Approach
 ERM – Initial Phase
 Silo approach – focus on broad categories
ￚ Identification, Measurement, Management
□ Communication by individual risk owners
 ERM – Second Phase
 Bringing it all together – Integrated Approach
ￚ Holistic approach / Connecting the silos
□ Dashboards can be helpful - Stress test different scenarios
 ERM Process – Third phase
 Correlation Analyses
ￚ Need to reflect interactions with other stakeholders (eg Enron effect)
ￚ Examples
□ Catastrophe events on property coverages, investments in cat bonds, mortgage backed securities
□ Pricing errors and impacts on loss reserves
 Adding value by understanding other parts of business
 Understanding and communicating - this is cultural
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Execution
Risk Categories - Identification
 Separate Risks into General Categories
 Primary
ￚ Five broad categories
 Consequential (downward spiral)
ￚ Based on primary risk or event
□ Liquidity, Reputation (client/investor), Rating agency / Regulatory, etc
 Overall Risk Tolerances derived at organizational level
 Percent of equity limits, Rating agency trigger – capital adequacy levels, Liquidity
 Additional tolerances should be established for all primary risk categories
 Levels of investments, peak exposure zones, casualty premium, etc
 Controls
 Processes, guidelines, models & data, external reviews, risk assessment process, internal
audits, Sarbanes-Oxley process, disaster recovery planning & testing, succession planning
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Execution
Measurement of Risk Categories
 Select risk owners / gatekeepers of the broad risk categories
 Identify the various types of events/risks associated with each of the primary
categories
 Change in asset value, movement in interest rates, large property/casualty event
(hurricane, earthquake, Enron), adverse claims trends, etc
 Measure financial and operational impact to organization
 Balance sheet, liquidity, capital requirements
 Contingency planning
 Define tolerances for such events/risks
 Percent of capital, cash-flow, change in rating agency capital
 Establish controls to monitor risk exposure within established tolerance
levels and to enhance risk profile
 Manage business around such thresholds
 Optimally at the point of sale
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Economic Capital Model
Risk Assessment –Pricing Example
 Developed a model that assesses pricing risk
 Produces a set of risk-capital metrics
 Monitors level of capital deployed in the business units across group.
 Allows for better measurement of the marginal return on capital
 Real-time basis, for each contract in our portfolio
 Manages unique interaction of each contract with others in portfolio

Based on the geographic distribution of exposures for property.
 Results in a significantly more efficient portfolio
 In terms of the capital required to support it
ￚ Relative to typical industry position
 Supports a broad array of risk and capital management issues
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Economic Capital Modeling
Implementation Issues/Challenges
 Lack of full transparency
 Black box stigma attached
 Much noise when revisions were made that changed results
 Willingness for many to embrace technology
 Resistance to models and ability to forecast (predictive value)
ￚ Used to differentiate like risks
 Full commitment from executive level
 Non-traditional way of thinking
 People are generally open to change ?!
ￚ Real time examples made this easy to grasp
 Too focused on defensive uses initially
 Desire to seek opportunistic risks
 Understand outcomes outside the norm
ￚ Returns too good to be true, probably are
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Other Thoughts
Communication
 Consider the Audiences
 Management
ￚ Executive team, Reserve committee, Risk committee
 Board of Directors (Audit or Underwriting Committee)
ￚ Sarbanes Oxley, put risk in context with other risks
 External (The Street, Rating Agencies, Regulators)
□ Caution on how the message is perceived
 Consider the Message
 Move away from the point estimate
ￚ Embrace the range, communicate the volatility
ￚ Don’t be Pollyanna
 Communication of drivers allows management to make better decisions
ￚ Consider risks in the reserves when making investment decisions
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Other Thoughts
Strategic Planning
 Three approaches
 Contingency planning
ￚ What we will do if/when this happens
□ Need to model both
 Sensitivity analysis
ￚ Focus on cause and effect – the drivers
□ Impact and immediacy
 Scenario analysis
ￚ More than simulation
□ Present different paths under different assumptions
ￚ Look at the external factors as well as internal
□ Non-modeled events, undervaluation, demand surge, point in cycle
 Portfolio Theory
 Remember this is one part of the entire group of risks in portfolio
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