Risk Metrics CS-18
Max J. Rudolph, FSA CFA RHU FLMI MAAA
Vice President and Actuary
Mutual of Omaha
Enterprise Risk Management
July 29, 2003
Risk Metrics Audience
• Key individuals have differing backgrounds,
education, perspectives and goals
• internal audiences
• senior corporate management
• actuarial, accounting and investment professionals
• external audiences
• securities analysts, rating agencies, regulators
• Absence of common risk management language
• Graphics are the key…but not always
Risk/Return Profile
OAVDE
42,296
Alternative Investment Strategy
OAVDE
27,000
Deferred Annuity Value of X% Interest Guarantee
Risk/Return Profile
•Strengths
• distribution of returns
• identify challenging
scenarios
• tail of distribution is “THE
RISK”
• test hedges
• compare against
deterministic scenarios
• provide summary statistics
• mean, median, quartiles
•Weaknesses
• scenarios must cover
universe - do they?
• model run time
• accuracy doesn’t always
follow large volumes of
data - GIGO (garbage in,
garbage out)
Economic Surplus
• Difference between the market value of cash
inflows and outflows
• asset and premium cash flows are combined
• liability cash flows
• Spirit of fair value accounting
• DS = DL + (DA-DL) * MVA/MVS
• DS,DA,DL duration of surplus,assets,liabilities
• MVA,MVS market value of (all) assets,surplus
• Mismatch DA-DL
• Leverage MVA/MVS
Price Behavior Curves
Assets w / Premium
Liabilities
1 , 6 00, 000
1 , 5 00, 000
1 , 4 5 0, 000
1 , 4 00, 000
1 , 3 5 0, 000
1 , 3 00, 000
1 , 2 5 0, 000
1 , 2 00, 000
1 , 1 5 0, 000
1 , 1 00, 000
-300
-200
-100
0
100
200
300
Yield Shift (bp)
OAV($,000)
Option Adjusted Value ($,000)
1 , 5 5 0, 000
Economic Surplus
2 00, 000
1 5 0, 000
1 00, 000
5 0, 000
-
-300
-200
-100
0
Yield Shift (bp)
100
200
300
Economic Surplus
•Strengths
• drives duration/convexity
• puts assets and liabilities
on level playing field
• you can’t eat a rate - based
on cash flows
• create values at lowest
level - can roll up
• intrinsic value - starting
point for market value
discussion
•Weaknesses
• learning curve
• see David Babbel papers
• model run time
• sensitive to interest rates
• reliance on canned
software
Additional Risk Metrics
• Internally measured liquidity ratio
• RBC diversification ratio
• Key Rate (Partial) Durations
The key is to use multiple tools,
leverage off of what you are already
doing and know your audience
(graphics)