View
215
Download
0
Category
Tags:
Preview:
Citation preview
Enterprise Risk Management:Enterprise Risk Management: What’s the Fuss All About?
Brian C. Schneider, CPA, CPCU - Director
Casualty Loss Reserve Seminar
September 11, 2006
www.fitchratings.com 2
TakeawaysTakeaways
Next Logical Step in Risk Management
Measure What You Manage
Enterprise “Reward” Management
www.fitchratings.com 3
Premise #1: Premise #1: Next Logical Step in Risk ManagementNext Logical Step in Risk Management
www.fitchratings.com 4
“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.”
www.fitchratings.com 5
ERM is nothing “new” – improves existing skillsERM is nothing “new” – improves existing skills
Insurance is the business of risk assumption (or risk trading)
Insurers must be the pre-eminent risk managers
Evolution of Three Letter Acronyms: ALM: Asset / liability management DFA: Dynamic financial analysis ERM: The latest trend
Aided by vast improvements in technology and data management Greater regulatory oversight due to corporate malfeasance
www.fitchratings.com 6
Risk Management FeaturesRisk Management FeaturesMonitoring,
Assessment, ReportingRisk
Governance
(people, process)
Capital Modeling, Allocation
Crisis Management
(catastrophe, operational)
What else?What if?
www.fitchratings.com 7
Benefits of ERM – “squishy”Benefits of ERM – “squishy”
Common “risk
language” throughout
organization
Better risk and crisis
management
Earlier identification of problems
Potential to eliminate
inefficiencies
Improved Board and statement disclosure
Consistent strategic and
financial decision-making
www.fitchratings.com 8
What Goes Into Fitch’s Rating Analysis?
IndustryAnalysis
FinancialReview
OperationalAnalysis
ManagementQuality
OrganizationalReview
RatingAnalysis
www.fitchratings.com 9
Has Our Rating Methodology Changed?Has Our Rating Methodology Changed?
Since Risk Management is not new, no reason to create a
new component to our rating methodology
Not a new “pillar”
Risk management is a fundamental component of rating
analysis
Analysis is updated to understand / utilize today's management
techniques and related information output
www.fitchratings.com 10
ERM Cuts Across All Aspects
Industry Review
Operational Review
Organizational Review
Financial Review
Management Review
ERM
www.fitchratings.com 11
Overall Rating Analysis - MethodologyOverall Rating Analysis - Methodology
ManagementQuality
OrganizationalReview
Industry Analysis
OperationalAnalysis
FinancialReview
ERMERM
ERM
ERM ERM
RATING OPINIONRATING OPINION
www.fitchratings.com 12
Premise #2:Premise #2:Measure What You ManageMeasure What You Manage
www.fitchratings.com 13
Measure What You ManageMeasure What You Manage
Financial analysis “proves” the success of ERM process How successful were limits / reinsurance programs How successful were underwriting / pricing decisions Did management have crisis programs in place - liquidity backstops Number of “exceptions”
Economic Capital is a Cornerstone Fuels growth opportunities Offers protection to stakeholders Maximizes value – not too much, not too little
www.fitchratings.com 14
Considerable Time Spent on “the Numbers”Considerable Time Spent on “the Numbers”
ManagementQuality
OrganizationalReview
Industry Analysis
OperationalAnalysis
FinancialReview
ERMERM
ERM
ERM ERM
RATING OPINIONRATING OPINION
1. Earnings2. Reserves3. Capital 4. Investments5. Asset / Liability
Management6. Liquidity7. Financial flexibility
www.fitchratings.com 15
Where does Prism come in?
IndustryAnalysis
FinancialReview
OperationalAnalysis
ManagementQuality
OrganizationalReview
RatingAnalysis
EarningsReservesCapital
InvestmentsAsset / Liability Management
LiquidityFinancial flexibility
Prism
www.fitchratings.com 16
Capital Adequacy Requires Three PerspectivesCapital Adequacy Requires Three Perspectives
Regulatory Requirements
Insurer’s Internal Capital Models
Prism
• Official “scorekeeper”• May be insufficient for
today’s products / issues
• Independent, third-party review• Consistency – universal model /
work with the data provided
• Granular data / product analysis• Moral hazard of opportunistic
assumptions
www.fitchratings.com 17
Simple Complex
Current Current regulatory modelsregulatory models
Insurer’s In-Insurer’s In-House Capital House Capital
ModelModel
Stochastic platform with interactive surveys Stochastic platform with interactive surveys using consistent assumptionsusing consistent assumptions
Optimal Spot for Fitch Optimal Spot for Fitch is Verticalis Vertical
Less than vertical is unresponsiveLess than vertical is unresponsive> Arbitrary adjustmentsArbitrary adjustments> Incomplete scopeIncomplete scope
Past vertical is inefficientPast vertical is inefficient> Too much dataToo much data> Too much timeToo much time> Lack of comparabilityLack of comparability
Prism’s Targeted Approach
www.fitchratings.com 18
Prism FeaturesPrism Features
Uses country-specific data for insurance
risk parameterization
Powered by a realistic, economically
based stochastic engine
Adaptable to more closely reflect an
insurer's unique financial profile
Integrates and analyzes
risk on a fully aggregated
basis A sophisticated, stochastic
methodology
A common platform from
which to evaluate insurers
globally
www.fitchratings.com 19
Many papers available at www.fitchratings.com/prism
www.fitchratings.com 20
Premise #3:Premise #3:Enterprise “Reward” ManagementEnterprise “Reward” Management
www.fitchratings.com 21
ERM PitfallsERM Pitfalls Model over-reliance
Garbage In, Garbage Out Over-optimization
Inappropriate diversification Must have fundamental skills
Greatest asset: People A few can bring firm down SBU become risk-averse
Pass up opportunities since business line hurt but firm benefits
Resource issues Objectives Benefits Complexity
Modeling / measurement issues Data / IT constraints Credibility of results
www.fitchratings.com 22
Business 101Business 101
Adequate compensation for risks undertaken
Cannot mitigate all risks – leaves no profit opportunity
Firm’s appetite for risk
Past performance is not always a good future predictor
Equity markets
Catastrophe events
Knowing the unknown
www.fitchratings.com 23
ERM Sample QuestionsERM Sample Questions
IndustryAnalysis
FinancialReview
OperationalAnalysis
ManagementQuality
OrganizationalReview
RatingAnalysis• Assess current regulatory,
legal and accounting risks• Describe ensuing
competitive factors
• What crisis management plans do you have
• List top threats to franchise
• What risk reports are monitored by your Board
• Define your risk appetite
• List support agreements amongst entities
• Stress-test upstream dividend capabilities
• Show expected variability in future earnings
• What is your risk exposure• What is economic capital
threshold
www.fitchratings.com 24
Enterprise “Reward” - Sample QuestionsEnterprise “Reward” - Sample Questions What is your expected variability in future earnings projections - by
business line and in aggregate? What is your estimated redundancy or deficiency in your liabilities – by
business lines and in aggregate? How much capital is considered in place to support the current book of
business on balance sheet versus expected new sales? What do you determine your capital needs to be related to operational risk? At what thresholds do you target for economic capital? How does your risk mitigation efforts – reinsurance, securitization, hedging
– lower your required capital needs? How do hedging strategies influence your earnings profile?
Do you consider potential liquidity charges in your various economic scenarios? If yes, what are they?
www.fitchratings.com 25
RecapRecap
ERM: Next Logical Step in Risk Management
Measure What You Manage
Enterprise “Reward” Management
Fitch Ratings
www.fitchratings.com
London
Eldon House
2 Eldon Street
London EC2M 7UA
UK
+44 207 417 4222
Singapore
7 Temasek Blvd.
Singapore 038987
+65 6336 6801
New York
One State Street Plaza
New York, NY 10004
+1 212 908 0500
+1 800 75 FITCH
The Fitch Group Fitch Ratings Algorithmics Fitch Training
Recommended