Enterprise Risk Management Symposium
Enterprise Risk Management Case Studies – CS5
Vinaya Sharma
Allstate Financial
July 30, 2003
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Enterprise Risk Management Symposium
Why Enterprise Risk Management
• Provide company-wide scope/assessment to risk
analysis which currently doesn’t exist
• Present how a single relevant economic event affects
the company
• Reveal natural hedges and portfolio effects
• Enhance capital allocation process
• Clarify roles/responsibilities
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Enterprise Risk Management Symposium
Enterprise Risk Mgmt Approach
• Analysis of significant risks
– Aggregate information
• Equity: VA, EIA, Unaffliated common stock, etc
• Default: Private Placements, Inv Grade Corp Bonds, Real Estate, etc.
– Establish Metrics
• Not subject to manipulation
• Understandable to the practitioner
– Establish Tolerance
• Internal considerations
• External considerations
– Establish scenarios and frequency of measurement
– Risk Dashboard (Appendix 1)
• Aggregate risks throughout Enterprise
– Monthly Risk Report
– Catalog of risks (Appendix 2)
– Annual Risk Forum
• ‘Point’ team on large events that impact the enterprise
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Enterprise Risk Management Symposium
Enterprise Risk Mgmt Successes
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Conduit of information
Aggregation of exposure
Increased discipline
Broader understanding/measurement of risk
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Enterprise Risk Management Symposium
Enterprise Risk Mgmt Lessons
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Turf issues (Appendix 3)
Witch Hunts
You only know what you are told
Risk Mgmt is different to different people
Senior Management buy-in is essential
Quantifying ERM value can be difficult
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Enterprise Risk Management Symposium
Enterprise Risk Management Case Studies
Enterprise Risk Management Symposium
July 30, 2003
Appendices
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Enterprise Risk Management Symposium
Risk
Colour
Metric
Acceptable Range ($millions)
Current Measurement from expected ($millions)
Equity
------
•STAT Income
•$AA annual income variance
•Stress Equity Scenario 1: ($--),
•Capital
Default
Interest
Rates
------
------
•$BB capital variance
•Capital variance in Equity Scenario: ($--)
•STAT Income
•$DD annual income variance
Stress Default Scenario: ($--) in Yr 1
•Capital
•Capital > EE
Capital: --
•STAT Income
•$FF annual income variance
•Interest Rates Up: ($--)
•Interest Rates Down: ($--)
•Capital
•Capital > HH
•Capital > --
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Enterprise Risk Management Symposium
Catalog of Risks
Catalog of Risks Finance
Risk
Measure
Reinsurance
Ad Hoc
(Default)
Reporting
Monthly
Capital
Constantly
Expense Mgmt
Constantly
Manage
Severity (Sales/Rev or Expense)
Reinsurance Committee.
"Expsosure" based on reinsurer ratings
Dedicated Reinsurance Actuary
establishes financial requirements
Susceptibility
Employees in Finance department
have responsibility to review
investment income and expense
allocations
No Impact from overall company point of view. Will
affect profitability by policy type in SAP reporting
Income statements by policy type would be incorrect
and could give incorrect information for determining
future strategies.
Dedicated Capital Actuary reviews Misallocation of capital among policy types has no
capital needs by policy type and immediate impact on company financial statements.
for the entire company.
However, misallocation will distort ROEs and possibly
Determines required capital,
be a catalyst to incorrect decisions being made on
excess capital, and statutory
strategy.
capital
Undercapitalization will lead to lower future sales and
potential rating agency downgrade
Overcapitalization leads to lower company ROEs and
a higher cost of capital
Unit in Finance has responsibility Infrastructure - Allocated and direct expenses growing
to monitor and measure both
faster than margin can lead to operating income
direct and allocated expenses
pressures.
Inadequate pricing projections can exist if not reviewed
and managed.
Misallocation - Income statements by policy type
would be incorrect and could give incorrect information
for determining future strategies even though total
company expenses are correct.
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Enterprise Risk Management Symposium
Responsibility Template
Step by Step process of responsibilities for equity related risks
VA
EIA
Capital Account
Identification
Quantification
Risk Analysis
Enterprise Tolerance
Solutions/Recom m endations
Decision for Fin Risks w ithin Lim its
Im plem entation
(A) = Accountable
(C) = Consulted
(I) = Informed
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