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ERM Concept and Framework

The Fabric of ERM
Author(s): Alice Underwood and David Ingram — Source: Society of Actuaries — Year Published: 2010
Summary: For a company to get the most out of ERM, it needs to find the right weave of the four ERM perspectives to best suit itself.


Practice note on enterprise risk management (ERM) for capital and solvency purposes in the insurance industry
Author(s): IAA Enterprise and Financial Risk Committee — Source: International Actuarial Association — Year Published: 2008
Summary: This Practice Note has been developed by the IAA for insurers to support the Standards and Guidance materials developed by the IAIS for supervisors. It draws on industry experience, supervisors’ supervisory practices, models and frameworks published by others and emphasises practical considerations. The Practice Note also seeks to help insurers assess risk framework maturity by reference to characteristics associated with different stages of development of risk management sophistication.


Guidance Paper on Enterprise Risk Management for Capital Adequacy and Solvency Purposes
Author(s): Solvency and Actuarial Issues Subcommittee in consultation with IAIS members and observers — Source: International Association of Insurance Supervisors — Year Published: 2007
Summary: This paper provides guidance on the establishment and ongoing operation of an enterprise risk management framework, and its importance from a supervisory perspective in underpinning robust solvency assessment. The paper identifies eight key features of an enterprise risk management framework which should be encouraged for all insurers. As well as supporting effective solvency assessment, following the guidance in this paper should assist an insurer to have appropriate risk and capital management policies, practices and structures in place which are applied consistently across its organisation, and embedded within its processes. By encouraging insurers to follow the key features in this guidance paper, supervisors will help to maintain the effectiveness of the solvency regime and, in addition, assist in establishing and maintaining a well regulated insurance industry overall.


Enterprise Risk Management Specialty Guide
Author(s): ERM Working Group of the Society of Actuaries Risk Management Section — Source: Society of Actuaries — Year Published: 2006
Summary: This Specialty Guide on Enterprise Risk Management (ERM) is a work in progress, begun in the spring of 2004 by members of the ERM Working Group of the Society of Actuaries Risk Management Section to serve as a fundamental resource for a basic understanding of ERM, as well as a guide to further study of the subject. Members of the Casualty Actuarial Society have participated in the effort, as well.


Adding Value Through Risk and Capita management - An ERM Update on the Global Insurance Industry
Author(s): Linda Chase-Jenkins and Ian Farr — Source: Towers Perrin — Year Published: 2004
Summary: The Tillinghast business of Towers Perrin conducted its third biennial survey on risk and capital management issues in an effort to provide industry leaders with a better perspective on the state of risk and capital management approaches. Responses were received from 150 insurance industry executives worldwide. Overall, the survey confirmed that significant strides have been made over the last two years, but there remains much work to be done.


ERM Process (Structure of the ERM Function and Best Practices)

ERM - a Guide to Implementation
Author(s): Institution of Civil Engineers and the Faculty and Institute of Actuaries — Source: Institute and Faculty of Actuaries — Year Published: 2009
Summary: This paper looks at the problem of valuing and managing the Asset/Liability Management (A/LM) risks associated with insurance liabilities that are too long to be matched by available investments. Two very different approaches to the problem are explored. The first approach called Yield Curve Extension starts with a number of simple ideas for extrapolating a yield curve and analyzes them from a risk management perspective. The paper concludes that these methods lead to unnecessarily extreme A/LM strategies. The paper then describes a second approach called the Static Control Model which allows one to use a total return vehicle as part of the A/LM strategy. The model decomposes a long liability into fixed income and total return components in a market consistent way. The fixed income component is a static hedge for the liability in the sense that it matches the first order sensitivities of the model liability as observable market information changes. The paper concludes by arguing that the Static Control Model leads to more useful A/LM strategies for long liabilities.


Risk Management: The Current Financial Crisis, Lessons Learned and Future Implications (Series of Essays)
Author(s): Various — Source: The Society of Actuaries, The Casualty Actuarial Society and The Canadian Institute of Actuaries — Year Published: 2008
Summary: The current financial crisis presents a case study of a “financial tsunami” (as former Federal Reserve Chairman Alan Greenspan recently called it) on what can go wrong. Its ramifications are far-reaching and the lessons learned will be embedded in risk management practices for years to come. As one of the premier enterprise risk professions in practice today, the actuarial profession is sharing its substantial insight into what went wrong and the implications for the future.


Risk Management and the Rating Process for Insurance Companies, Best Rating Methodology
Author(s): Edward Easop — Source: A.M. Best — Year Published: 2008
Summary: In this paper, A.M. Best explores the key risk management trends in the insurance industry and describes how risk management impacts the overall rating process and the development of capital requirements.


Insurance Criteria: Refining the Focus of Insurer Enterprise Risk Management Criteria
Author(s): Laura Santori — Source: Standard & Poor's — Year Published: 2006
Summary: Our evaluation of insurer ERM, as laid out in this report, includes the assessment of Risk Management Culture, Risk Controls, Emerging Risk Management, Risk and Capital Models, and Strategic Risk Management. An insurer’s ERM practices can be rated Weak, Adequate, Strong, or Excellent. We incorporate those assessments into our rating process alongside our other rating categories (Competitive Position, Management and Corporate Strategy, Operating Performance, Capital, Liquidity, Investments, and Financial Flexibility).


Insurance Criteria: Refining the Focus of Insurer Enterprise Risk Management Criteria
Author(s): David Ingram and Laura Santori — Source: Standard & Poor's — Year Published: 2006
Summary: Feedback from insurers, reinsurers, and other parties, as well as our own observations, have allowed us to further clarify the criteria, especially for highly complex companies with a vast complement of risks where extensive attention is paid to managing it. This paper is a detailed extension of our October 2005 paper and incorporates what we have learned and answers several questions raised by insurers. We said in October that an important part of a robust ERM process is learning and continual improvement. Learning and continual improvement are integral to a robust ERM evaluation process as well.


Evaluating the Enterprise Risk Management Practices of Insurance Companies
Author(s): Laura Santori and Mark Puccia — Source: Standard & Poor's — Year Published: 2005
Summary: With the new risk-management evaluation process described in this article, risk management will become a separate, major category of our analysis. In our published full analyses, the new category will be titled “Enterprise Risk Management.” The companies that are seen to be the best performers in this category will be those that have robust risk-management processes that are carried across the entire enterprise and that form a basis for informing and directing the firm’s fundamental decision making.


A Global Framework for Insurer Solvency Assessment
Author(s): Insurer Solvency Assessment Working Party of the IAA — Source: International Actuarial Association — Year Published: 2004
Summary: This paper has been prepared for the International Association of Insurance Supervisors (IAIS) to explore the elements needed for an international capital standard for insurers and to provide a “best practices” approach available to all supervisors. It deals with methods the supervisor might use to assess the current financial position as well as to understand the range of possible future financial positions of insurers. Its primary focus is on capital requirements for insurers.


RiskValueInsights™: Creating Value Through Enterprise Risk Management - A Practical Approach for the Insurance Industry
Author(s): Jerry Miccolis and Samir Shah — Source: Towers Perrin — Year Published: 2002
Summary: Laying the Groundwork for Strategic Enterprise Risk Management in the Insurance Industry: From Need, to Framework, to Process We set the stage in the first four chapters by:
Presenting an overview of the monograph and our objective in writing it (Chapter I)
Laying out the business case for enterprise risk management in the insurance industry (Chapter II)
Introducing RiskValueInsights™, our approach to enterprise risk management specifically designed for the insurance industry:
– the conceptual framework (Chapter III)
– the process (Chapter IV).
In Part Two (beginning with Chapter V), we focus on the strategy development stage of the RiskValueInsights™ process. We then provide suggestions on how to move forward in manageable increments.


Insurance Criteria: Nonlife Insurance Risk Control Criteria and Their Role in Enterprise Risk Management
Author(s): Christopher Myers and David Ingram — Source: Standard and Poor's — Year Published: 2007
Summary: On June 2, 2006, Standard & Poor’s Ratings Services published an insurance criteria report, “Refining The Focus Of Insurer Enterprise Risk Management Criteria” on Ratings Direct. That article clarified the core criteria for insurer enterprise risk management (ERM) assessments, including a discussion of nonlife risk controls. This article serves as an expansion of that nonlife discussion, outlining how nonlife risk controls relate to the ERM evaluation process. We address here the respective risk-control processes and considerations for commercial lines, personal lines, reinsurance, catastrophe risk, cycle management risk, and what we describe as new-venture (or new-product) risk.


Risk Modelling and Aggregation of Risks

Economic Scenario Generators and Solvency II
Author(s): Elliot Varnell — Source: Institute and Faculty of Actuaries — Year Published: 2009
Summary: The Solvency II directive mandates insurance firms to value their assets and liabilities using market consistent valuation. For many types of insurance business Economic Scenario Generators are the only practical way to determine the market consistent value of liabilities. The directive also allows insurance companies to use an internal model to calculate their solvency capital requirement. In particular, this includes use of ESG models. Regardless of whether an insurer chooses to use an internal model, Economic Scenario Generators will be the only practical way of valuing many life insurance contracts. Draft advice published by CEIOPS requires that insurance firms who intend to use an internal model to calculate their capital requirements under Solvency II need to comply with a number of tests regardless of whether the model (or data) is produced internally or is externally sourced. In particular the tests include a Use Test, mandating the use of the model for important decision making within the insurer. This means that Economic Scenario Generators will need to subject themselves to the governance processes and that senior managers and Boards will need to understand what Economic Scenario Generator (ESG) models do and what they don’t do. In general, few senior managers are keen practitioners of stochastic calculus, the building blocks of ESG models. The paper therefore seeks to explain Economic Scenario Generator models from a non-technical perspective as far as possible and to give senior management some guidance of the main issues surrounding these models from an ERM/Solvency II perspective.


A Practical Study of Economic Scenario Generators For General Insurers
Author(s): Gareth Haslip — Source: Institute and Faculty of Actuaries — Year Published: 2008
Summary: Agenda
· Introduction to economic scenario generators
· Building blocks of an ESG
· Time horizons
· Interest rate modelling
· Real world versus risk neutral
· Calibration techniques
· Equity return modelling


Risk Aggregation for Capital Requirements Using the Copula Technique
Author(s): Seng Zhang — Source: Society of Actuaries — Year Published: 2005
Summary: In order to determine the appropriate amount of capital for an organization, risks must be aggregated appropriately to reflect the non-normality of individual risks and nonlinear dependence among risks, particularly in the tails of risk distributions.In this article, we start with a brief overview of the MCCSR approaches and Correlation Matrix approach. Secondly, general introductions of the Copula technique are provided. We then elaborate on one type of popular Copula that has good application in risk aggregation for capital requirement purpose, t-Copula. Gaussian Copula is also briefly discussed. Finally, a numerical example is provided.


Mathematical models and the credit crunch
Author(s): Andrew Cairns — Source: 2009 AFIR Colloquium - Munich, Germany — Year Published: 2009
Summary: The aftermath of the credit crunch has seen numerous reviews by governments, regulators and other organisations of what factors contributed to the crisis. Often, mathematical models have been cited as one of these factors.

In this talk we argue that, although models did play a role in the crisis, it was how they were used or abused that caused the problems rather than the models themselves. Key themes that will be addressed are:
I: did users of models understand the underlying assumptions and the limitations of each model or were they used as black-boxes.
II: did users fully understand the difference between pricing models (also known as market models) and risk-management models.
III: did the developers of models and their sponsors have an incentive to conceal the true extent of model complexity and model risk from their clients?


Risk Measures

Fair Value of Liabilities: The Financial Economics Perspective
Author(s): David F. Babbel, Jeremy Gold, and Craig B. Merrill — Source: North American Actuarial Journal — Year Published: 2002
Summary: One purpose of this paper is to provide a framework of principles and basic approaches that apply to fair valuation of all financial instruments, including insurance contracts. A second purpose of the paper is to present several specific valuation techniques. The techniques presented here may be helpful in expanding the toolbox of some readers. However, each one is presented as a variation on the aforementioned framework of principles and basic approaches.


Fair Valuation of Insurance Liabilities: Principles and Methods
Author(s): American Academy of Actuaries Fair Value Work Group of the Accounting Policies and Procedures Task Force — Source: American Academy of Actuaries — Year Published: 2002
Summary: One purpose of this paper is to provide a framework of principles and basic approaches that apply to fair valuation of all financial instruments, including insurance contracts. A second purpose of the paper is to present several specific valuation techniques. The techniques presented here may be helpful in expanding the toolbox of some readers. However, each one is presented as a variation on the aforementioned framework of principles and basic approaches.


Understanding Enterprise Risk Management: An Emerging Model for Building Shareholder Value
Author(s): KPMG's ERM Services — Source: KPMG — Year Published: 2001
Summary: Organizations are engaged in a wide variety of risk assessment and monitoring efforts, but many of them remain largely unable to point to the specific value they derive from these activities. The emerging models for risk management are integrating how leaders think about risk with how they manage their businesses and are designed to monitor how risk management provides value. Leaders can participate in this ERM evolution by broadening and expanding the tools and concepts used today.


Black Monday and Black Swans
Author(s): John C. Bogle — Source: Financial Analysts Journal — Year Published: 2008
Summary: This essay is based largely on a speech delivered to the Risk Management Association on 11 October 2007. In early February 2008, the extreme volatility in the stock market continued at high levels, the contagion in the CDO markets had continued to spread, and the stock market (the S&P 500) had declined by another 14 percent. Together, these problems in the financial economy seemed to be spreading to the productive economy, with an emerging consensus that a business slowdown, if not a recession, lies ahead. The plethora of risks that I described in the article are beginning to manifest themselves, although a black swan has yet to appear.


Risk Management Tools and Techniques

Comprehensive Actuarial Risk Evaluation
Author(s): Enterprise and Financial Risk Committee of the IAA — Source: International Actuarial Association — Year Published: 2010
Summary: The Comprehensive Actuarial Risk Evaluation paper explains a framework that describes a comprehensive evaluation of a risk. ‘Comprehensive’ means that the analysis will quantify risk from numerous perspectives, such as market consistent vs. fundamental value, short term vs. long term, known risks vs. emerging risk elements, frequency risk (earnings volatility) vs. severity risk (solvency); viewed stand-alone and in the context of the full risk portfolio.


Risk and Light
Author(s): David Ingram — Source: David Ingram — Year Published: 2009
Summary: The Comprehensive Actuarial Risk Evaluation paper explains a framework that describes a comprehensive evaluation of a risk. ‘Comprehensive’ means that the analysis will quantify risk from numerous perspectives, such as market consistent vs. fundamental value, short term vs. long term, known risks vs. emerging risk elements, frequency risk (earnings volatility) vs. severity risk (solvency); viewed stand-alone and in the context of the full risk portfolio.


Liquidity Risk Measurement
Author(s): Subcommittee on Liquidity Risk Measurement Committee on Investment Practice — Source: Canadian Institute of Actuaries — Year Published: 1996
Summary: The purpose is to outline a tactical approach for monitoring and testing the extent of liquidity resources available to, and required, by a life insurance company. While the main focus of the paper is liquidity risk measurement, the management process required to prudently manage liquidity will also be briefly addressed. From a measurement point of view, the financial forecasts of the various sources and uses of cash, over specific time periods, will identify if and when there may be liquidity concerns. By looking at these forecasts through adverse scenarios, management is able to measure the magnitude of the issues and take corrective action if the results fall outside the targets set in a liquidity risk management policy.


A Primer on Credit Derivatives
Author(s): Stephen P. D'Arcy, James McNichols, and Xinyan Zhao — Source: Society of Actuaries — Year Published: 2009
Summary: Credit derivatives have rapidly become a key financial tool in the capital markets as a way to accept or transfer credit risk. These instruments have had a significant effect on financial markets, both in easing the trading of credit risk and increasing the complexity of financial transactions. The impact of credit derivatives is so extensive that anyone involved in enterprise risk management (ERM) must develop a basic understanding of these vehicles. Some insurers now routinely use credit derivatives as a financial management technique, and others are likely to do this in the future. Even if an insurer does not directly trade credit derivatives, understanding this aspect of the financial markets, and the key credit derivative metrics, is becoming increasingly important. This paper explains the development of the credit derivative market, describes the most common types of credit derivatives, discusses how insurers can and do use these instruments and explains the role they played in the financial market turmoil of 2008.


A Risk Management Tool for Long Liabilities: The Static Control Model
Author(s): B. John Manistre — Source: Society of Actuaries — Year Published: 2009
Summary: This paper looks at the problem of valuing and managing the Asset/Liability Management (A/LM) risks associated with insurance liabilities that are too long to be matched by available investments. Two very different approaches to the problem are explored. The first approach called Yield Curve Extension starts with a number of simple ideas for extrapolating a yield curve and analyzes them from a risk management perspective. The paper concludes that these methods lead to unnecessarily extreme A/LM strategies. The paper then describes a second approach called the Static Control Model which allows one to use a total return vehicle as part of the A/LM strategy. The model decomposes a long liability into fixed income and total return components in a market consistent way. The fixed income component is a static hedge for the liability in the sense that it matches the first order sensitivities of the model liability as observable market information changes. The paper concludes by arguing that the Static Control Model leads to more useful A/LM strategies for long liabilities.


Reverse Stress Testing: Challenges and Benefits (Recording)
Author(s): Dr. Christian Thun, Dr. Juan M. Licari, and Dr. Mark Zandi — Source: Moody's — Year Published: 2010
Summary: Definition and Key Purpose of Reverse Stress Testing. Quantitative, Qualitative and Hybrid Approaches.


Reverse Stress Testing: Challenges and Benefits (Powerpoint Slides)
Author(s): Dr. Christian Thun, Dr. Juan M. Licari, and Dr. Mark Zandi — Source: Moody's — Year Published: 2010
Summary: Definition and Key Purpose of Reverse Stress Testing. Quantitative, Qualitative and Hybrid Approaches.


Economic Capital

Specialty Guide on Economic Capital
Author(s): Economic Capital Subgroup of the Society of Actuaries Risk Management Task Force — Source: Society of Actuaries — Year Published: 2004
Summary: At its most basic level Economic Capital can defined as sufficient surplus to cover potential losses, at a given risk tolerance level, over a specified time horizon. This is the working we will use throughout this Specialty Guide, adding details as needed for specific applications. We will also acquaint the reader with alternative definitions currently in use in the marketplace, based on a survey conducted in 2003.