enterprise risk management confidential - do not distribute1 implementing and transitioning...

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Enterprise Risk Management

Implementing and Transitioning Enterprise Risk Management

Vinaya Sharma and Randy TillisAllstate Financial

ERM Symposium – Chicago

CS 6-A

April 26/27, 2004


Enterprise Risk ManagementAbout Allstate Financial

• VisionTo be the company financial service professionals choose for their clients' financial protection, savings and retirement needs

• MissionTo assist financial service professionals in meeting their clients' financial protection, savings, and retirement needs by providing top-tier products delivered with reliable and efficient service


Enterprise Risk ManagementAbout Allstate Financial

• Strategies– Broadly distribute a focused portfolio of top-tier

products through a multi-channel network of financial service professionals

– Drive operational scale, efficiency and effectiveness in all that we do

– Leverage investment and risk management expertise to deliver growth and superior risk-adjusted returns.

– Capitalize on the strength of the Allstate brand – Operate as a high performance organization



• Life Insurance– Term– Whole Life– Universal Life

• Deferred Annuities– Fixed– Variable– Equity-Indexed– Market Value Adjusted– T-Link

• Payout Annuities– Immediate– Structured

Settlements

• Health– Disability– Long Term Care– Accident

• Banking services• Institutional Markets



Risk Analysis• Current: Risks are addressed/owned, but fragmented• Desired: Enterprise view of risks (e.g. equity, default,

interest rate, disaster recovery, etc)

• Current: Each product viewed independently• Desired: Capture offsets from other lines of business

• Current: Infrequent selected measurements of risk• Desired: Routine measurement of risk levels

• Current: Limits to risk, if any, are at micro level• Desired: Enterprise level bounds to risk tolerances



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• Best Practice in today’s environment



Enterprise Risk Mgmt Approach

• Analysis of significant risks (e.g. equity, default, interest rates, etc)– Risk Dashboard (See Appendix 1)– Quarterly Risk Profile Report

• Aggregate risks throughout Enterprise– Catalog of risks – Monthly updates– Risk Forum

• ‘Point’ team on large events that impact the enterprise



Enterprise Risk Mgmt – Significant Risk Analysis

• 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– Must be used/understandable to the practitioner– Samples: Income, Capital, Cash Flow



Enterprise Risk Mgmt – Significant Risk Analysis• Establish Tolerance

– Considerations• Insurance Departments• Investors• Rating Agencies

• Establish scenarios– Stochastic vs Deterministic– Goal of scenarios

• Determine how often risk profile to be measured



Enterprise Risk Mgmt – Aggregate Risks

• Catalog of risks within Areas of Responsibility (See Appendix 2)

• Monthly updates from ERM liaisons• Risk Forum

– Day long event– 15 minutes of fame– Goals

• Share information• Quantify risks/opportunities• Clarify roles (See Appendix 3)



Enterprise Risk Mgmt – Point Team

• Terrorist Attacks

• NIMBDA Virus

• Bush 2003 Tax Proposals



Enterprise Risk Mgmt Successes

• Conduit of information

• Aggregation of exposure

• Increased discipline

• Broader understanding/measurement of risk



Enterprise Risk Mgmt Lessons

• Turf issues on Significant Risks• Witch hunts on aggregating risks• Risk Mgmt is different to different

people• Can not satisfy all of the people all of

the time• Senior Management buy-in is essential• Quantifying ERM value can be difficult



Transitioning Enterprise Risk Management

Creating Value

Handling Change



Creating Value from ERM - A beginners perspective

•A Three prong approach to ERM

•Dashboards

•Aggregate Risks

•Reactive Risk Management



Creating Value from ERMDashboard

Variable Annuity changes in 2003/04 that impact the dashboard include

•Market Recovery

•SOP 03-01 (GAAP GMDB/IB reserving)

•RBC Phase II (Statutory capital)

•New Product developments (GMWB,GMAB)

Risk Colour Metric Acceptable Range ($millions) Current Measurement from expected ($millions)

Equity ------ •STAT Income

•Surplus

•$AA annual income variance vs expected

•$BB surplus variance

•Stress Equity Scenario 1: ($--), ($--), ($--) in Yr 1,2,3

•Surplus variance in Equity Scenario: ($--)



•Risk identification

•Culture shift

•Witch hunts

Creating Value from ERM – Aggregate and Catalog Risk



•Business Recovery

•Investment Advisors

•Parmalat

•2003 Flu Deaths

Creating Value from ERM – Reactive Risk Management Examples



Transitioning Enterprise Risk Management

Handling Change



Early Learnings involved

•Research

•Practicality

•Communication

•Timeliness



Changes in the Industry by

•COSO

•Basel II

•International Accounting Standards

• Involvement with

•CAS

•PRMIA

•SOA



Integrating ERM with a parent/subsidiary involves

•Communication

•Clearly defined roles/responsibilities

•Demonstrating Value added by ERM



Implementing and Transitioning Enterprise Risk Management

Vinaya Sharma and Randy TillisAllstate Financial

ERM Symposium - Chicago

April 2004

Appendices


Enterprise Risk ManagementRisk Colour Metric Acceptable Range ($millions) Current Measurement from expected

($millions)

Equity ------ •STAT Income

•Surplus

•$AA annual income variance vs expected

•$BB surplus variance

•Stress Equity Scenario 1: ($--), ($--), ($--) in Yr 1,2,3

•Surplus variance in Equity Scenario: ($--)

Default ------ •STAT Income

•Capital

•$DD annual income variance vs expected

•Capital > EE

Stress Default Scenario: ($--) in Yr 1,2,3

Capital: --

Interest

Rates

------ •STAT Income

•Duration•Capital

•$FF annual income variance vs expected

•GG duration tolerance, •Capital > HH

•Interest Rates Up: ($--), ($--), ($--) in Yr 1,2,3 •Interest Rates Down: ($--), ($--), ($--) in Yr 1,2,3

•Duration: --base, •Capital > --


Enterprise Risk ManagementCatalog of Risks

Catalog of Risks FinanceRisk Measure Manage Severity (Sales/Rev or Expense) SusceptibilityReinsurance (Default)

Ad Hoc Reinsurance Committee. Dedicated Reinsurance Actuary establishes financial requirements

"Expsosure" based on reinsurer ratings

No Impact from overall company point of view. Will affect profitability by policy type in SAP reportingIncome statements by policy type would be incorrect and could give incorrect information for determining future strategies.Misallocation of capital among policy types has no immediate impact on company financial statements. However, misallocation will distort ROEs and possibly be a catalyst to incorrect decisions being made on strategy. Undercapitalization will lead to lower future sales and potential rating agency downgradeOvercapitalization leads to lower company ROEs and a higher cost of capitalInfrastructure - Allocated and direct expenses growing faster than margin can lead to operating income 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.

Capital Constantly Dedicated Capital Actuary reviews capital needs by policy type and for the entire company. Determines required capital, excess capital, and statutory capital

Expense Mgmt Constantly Unit in Finance has responsibility to monitor and measure both direct and allocated expenses

Reporting Monthly Employees in Finance department have responsibility to review investment income and expense allocations


Enterprise Risk ManagementResponsibility Template

VA EIA Capital Account

Identification

Quantification

Risk Analysis

Enterprise Tolerance

Solutions/Recommendations

Decision for Fin Risks w ithin Limits

Implementation

(A) = Accountable

(C) = Consulted

(I) = Informed

Step by Step process of responsibilities for equity related risks

enterprise risk management confidential - do not distribute1 implementing and transitioning...

Documents

risk tolerances

risk dashboard

enterprise slide

risk management expertise

enterprise view of risks

enterprise level bounds

efficient service slide

allstate financial vision