Manulife and Market and Model Risk Management

1
Manulife and Market and Model Risk Management

• Joseph Campos
• VP Market and Model Risk Management
• Manulife Financial
• October 2008

2
Agenda

• Manulife Financial A Canadian Company
• Manulife Financial A Global Presence
• Risk Management at Manulife Financial
• Market and Model Risk Management
• Questions

3
Manulife Financial A Canadian Company

• 1887 Manulife Financial was incorporated by an
  Act of Parliament. Sir John A. Macdonald,
  Canada's first Prime Minister, was elected
  President of the Company.
• 1992 Manulife becomes the first Canadian life
  insurer to open a representative office in China
  (Beijing).
• 1999 The Manufacturers Life Insurance Company
  demutualizes. Manulife shares begin trading on
  the TSX, the NYSE, the SEHK and the PSE.
• 2004 Manulife Financial and John Hancock merge

4
Global Presence
Canada
United States
Australia
5
Manulife Financials Vision

• To be the most professional insurance company in
  the world, providing the very best financial
  protection and investment management services
  tailored to customers in every market where we do
  business.

6
Manulifes Community Involvement

• Focus on four main areas
• Health care, education, community service and
  local volunteering
• Local Management choose the areas of focus for
  their philanthropy
• 25.5 million donated to more than 600 non-profit
  organizations in 2007
• Employee time valued at an additional 1.4
  million

7
Financial Strength

• Manulife is among the most profitable life
  insurance companies in North America
• It was the first Canadian life insurer to top
  1.5 billion in earnings in 2003. By the end of
  2006 earnings had reached almost 4 billion
• AAA Rating from SP
• One of only two public life insurance companies
  rated AAA worldwide
• Factors contributing to upgrade include
• Leading well-diversified business positions
• Superior performance relative to peers
• Well-diversified investment portfolio
• Extremely strong capital adequacy position
• Excellent enterprise risk management framework.

8
Risk Management at Manulife

• Vision
• To strategically optimize risk taking and risk
  management in support of long term revenue and
  earnings growth and shareholders value growth.
• In optimizing risk, we will seek to
• Capitalize on business opportunities that are
  aligned with our risk taking philosophy, risk
  appetite, and return expectations
• Identify, monitor, and measure all key risks
  taken and
• Proactively execute effective risk control and
  mitigation programs.

9
Risk Management at Manulife

• Strategy
• To adopt an integrated, enterprise wide risk
  management strategy to guide all risk taking and
  risk management activities across the
  organization.
• Also have in place separate strategies for the
  management of each specific risk category
  Strategic, Credit, Market, Insurance, and
  Operational.

10
Corporate Risk Management Organization Structure
11
Market and Model Risk Management
12
Quantitative Analytics and Modeling (QAM) Group

• The Quantitative Analysis and Modeling (QAM)
  Group is comprised of 9 Quantitative
  Professionals.
• The majority of QAMs team members have graduate
  degrees in a quantitative disciplines including
• Physics
• Mathematics
• Mathematical Finance
• Engineering
• Statistics
• Economics
• Actuarial Sciences

13
QAM Group - Model Risk Management

• Market and Model Risk Management (MMRM) is
  responsible for the development and maintenance
  of Manulifes model risk management framework.
• The model risk management framework is designed
  to mitigate the model risk associated with
  business critical models validating that they
  are conceptually sound, used as intended, and
  executed in a substantially error-free manner.
• Model Risk is principally mitigated through
• Clearly identifying model ownership
• Documentation
• User Acceptance Testing
• Independent Model Validation/Vetting
• End-to-End Model Controls

14
QAM Group - Model Risk Management

• QAM involvement in model risk management is via
  the independent model validated services it
  provides to the Business Unit model owners.
• All new models must be validated before they are
  implemented in the production environment.
• QAM provides independent model validation
  services to a variety of Business Units
• Investment Division Derivative Pricing Risk
  Analytics
• Asset Liability Management Risk Metrics

15
QAM - Economic Scenario Generation (ESG)

• Economic Scenario Generation (ESG)
• In-house developed software used to generate
  stochastic market scenarios
• ESG to stochastically simulate market scenarios
  in both real world and risk neutral settings
• ESG applications include
• Actuarial reserve valuation for financial
  reporting under CGAAP and USGAAP
• Insurance Product Pricing (i.e., for insurance
  products with guarantees)
• Economic market risk capital determinations

16
QAM Model Efficiency

• Modeling efficiency looks to examine ways in
  which modeling techniques can help ease the
  burden of huge processing requirements without
  impacting the credibility of results.
• The following techniques are used by the QAM
  Group in a variety of areas
• Data compression
• Scenario reduction

17
Market Risk Group

• Team is comprised of 6 individuals.
• The majority of Market Risk team members have
  graduate degrees in a quantitative disciplines
  including
• Engineering
• Mathematical Finance
• Economics

18
Market Risk Model Development

• The Model Development group is directly
  responsible for the development of models related
  to the measurement and management of Market Risk
  at the Corporate level.
• In addition, the group provides consulting
  expertise to help in the development of models,
  which are used to value transactions and assess
  market risk, to client areas such as Derivative
  Operations, Investment Division, and Business
  units.

19
Market Risk Market Risk Management
Infrastructure

• Manulifes Derivative Usage Framework seeks to
  ensure that derivatives are used as an effective
  tool to achieve the Companys investment and risk
  management objectives.
• That risks associated with the use of derivative
  are understood and controlled effectively.
• Considering Legal, accounting, tax, operational,
  settlement, operational and pricing issues
• The Company also seeks to meet the expectations
  set out by OSFI in Guidelines B-7 Derivatives
  Best Practices (May 1995), Guideline B-1
  Prudent Person Approach and in the Standards
  of Sound Business and Financial Practices.

20
Market Risk Market Risk Management
Infrastructure

• Market Risk Managements knowledge of the
  intended derivative application is captured
  through the complete documentation process which
  includes detailed descriptions of
• Whether the derivative strategy represents a
  prudent and acceptable method to achieve the risk
  management, investment or other objective of the
  Company or particular entity, division or
  segment.
• A review of the anticipated outcome(s) of a
  particular strategy. Including market,
  accounting, capital, actuarial, legal,
  regulatory, and tax regimes that may impact the
  outcome and desirability of a particular
  strategy.
• Legal and regulatory compliance requirements.
• The anticipated strategy volumes and any need to
  place quantitative limits on the use of the
  particular derivative strategy. The need to place
  restrictions on the use of the particular
  strategy.
• The need to require specific controls.

21
Financial Risk Management Resource Committee
(FRMRC)

• Manages Manulifes Quantitative Finance and
  Financial Risk Management Professional Resources.
• The Committees mandate is the development of a
  program for the recruitment and on-going
  development of Quantitative Finance and Financial
  Risk Management Professionals including
• Needs Assessment
• Talent Assessment
• Job Rotation
• Compensation Management
• Qualitative Finance and Financial Risk Management
  Professionals are currently employed in many
  business units including
• Corporate ALM
• Market and Model Risk Management
• Corporate Treasury
• Manulife Bank
• Derivative Operations and Middle Office
• Investment Division Front Office

22
Typical First Assignments

• Financial Engineer, QAM Group
• Model vetting Interacting with QAM staff, model
  developers and users as required to understand
  the specifics of the algorithm, the target
  application in order to assess the
  appropriateness of the algorithm and identify
  impacts associated with its use.
• Duties and responsibilities include replicating
  model analytics to ensure models implemented
  according to specification, benchmarking model
  results, run tests to assess business impacts
  associated with model assumptions, stress testing
  the model to ensure it functions as expected, and
  provide user-focused quantitative and business
  reports.

23
Typical First Assignments

• Financial Engineer, Model Efficiency Group
• Conduct research and develop models to improve
  efficiency of the existing financial
  applications. As a member of Model Efficiency
  group, the incumbent will get involved in the
  development of advanced quantitative financial
  methodology, especially the research on improving
  the scenario reduction techniques.

24
Questions?