Enterprise Risk Management: Ratings Agency View

1
Enterprise Risk ManagementRatings Agency View

• David Ingram

Standard Poors Financial Services Ratings
2
Agenda

• Our ERM Criteria
• Who has been Evaluated
• Overall Findings
• ERM Elements
• Whats Next

3
SPs Evaluation of ERM
Strategic Risk Management
Extreme Events Management
Risk Economic Capital Models
Risk Control Processes
Risk Management Culture
4
Who we have evaluated?
5
Who have we evaluated?

• Both Europe based and US based companies
• Companies primarily selected based on schedule
  of review
• Small number of Leading Edge off-cycle
  evaluations
• The findings to date may not be representative
• Sample too small
• Slight positive skew from Leading Edge volunteers
• But percentages have remained stable with each
  passing month

6
Overall Findings
7
Overall Findings
Weak Lacking basic controls for important risk(s) 6
Adequate Basic risk controls in place for all major risks 62
Strong Basic risk controls in place for all major risks PLUS Process to prepare for Unknown Future Risks Process to make strategic choices among risks based on risk reward framework 24
Excellent Mastery of Controls, Unknown Future Risk preparations strategic risk applications 8
8
ERM Impact on Rating

• Out of 78 reviews completed approximately
• 5 ERM Evaluations Strengthen Ratings
• 25 ERM Evaluations Affirm or Support Ratings
• 65 ERM Evaluations Neutral to Rating
• 5 ERM Evaluations Negative to Rating

9
SPs Evaluation of ERM
Strategic Risk Management
Extreme Events Management
Risk Economic Capital Models
Insurance Risk Control
Investment Risk Control
Operational Risk Control
Risk Management Culture
10
SPs Evaluation of ERM
Strategic Risk Management
Extreme Events Management
Risk Economic Capital Models
Risk Control Processes
Risk Management Culture
11
Risk Management Culture
12
SPs Evaluation of ERM
Strategic Risk Management
Extreme Events Management
Risk Economic Capital Models
Risk Control Processes
Risk Management Culture
13
Investment Risk Control
14
Insurance Risk Control
15
Operational Risk Control
16
SPs Evaluation of ERM
17
Extreme and Emerging Risks
18
SPs Evaluation of ERM
Strategic Risk Management
Extreme Events Management
Risk Economic Capital Models
Risk Control Processes
Risk Management Culture
19
Risk Economic Capital Models
20
SPs Evaluation of ERM
Strategic Risk Management
Extreme Events Management
Risk Economic Capital Models
Risk Control Processes
Risk Management Culture
21
Strategic Risk Management
22
Coming Attractions - Criteria

• Risk Tolerance
• New Product Risk
• Extreme Event and Emerging Risk Management
• Risk Control
• Broad Considerations
• ALM / Market
• Credit
• Insurance PC Non-Life
• Insurance Life
• Insurance Health
• Operational
• Risk Models

23
Risk Tolerance
Quantitative Qualitative (Preferences)
Earnings Volatility Uncertainty are they assumptions or just guesses?
Ruin Extreme Loss potential Complexity how many ways are there to get it wrong? How much do we know?
Location Country or other legal jurisdiction
Experience/Expertise inhouse vs. for hire vs. outside
Tradability can we get rid of it?
Time Frame how long is exposure?
Type of Risk Market, Credit, Insurance, Operational (and subcategories)
Concentrations by any dimension

• Many Insurers will have several Zero Tolerance
  Risk Areas

24
Sound PracticesCredit Risk

• Broadly four approaches
• Traditional Credit Management
• Underwriting Standards enforcement process
• Limits for concentrations by sector, location,
  rating, name
• Workout Process to provide best residual value
• Portfolio Based Management
• Use of a Portfolio Credit Risk metric with
  structural model support
• Risk/Reward optimization process
• Credit Spreads and Sales
• Loss limitation targets
• Firm Sales Triggers
• Regular monitoring and assessment of Credit
  Spreads
• Credit Instruments
• Uses of CDOs other credit instruments to
  effect changes in credit risk retained

25
Sound PracticesInsurance risk PC

• Underwriting Process Set, monitor and enforce
  standards
• Underwriting guidelines and enforcement
• Risk review
• Pricing
• Cycle management
• Claims
• Process for assessing claims experience
  comparing to pricing expectations process to
  limit losses when appropriate
• Monitoring and feedback mechanism
• Underwriting, Pricing Claims
• Catastrophe Risk
• Exposure concentration limits, monitoring
  enforcement process
• Model and process to set and update model
  assumptions
• Reinsurance
• Policy for usage of reinsurance with update as
  conditions change
• Process to monitor and enforce compliance with
  policy
• Optimizing risk-return trade-off

26
Questions?

• Laura Santori
• Director, Enterprise Risk Management
• Financial Services Ratings, Paris
• Tel [phone]
• E mail laura_santori_at_standardandpoors.com
• David Ingram
• Director, Enterprise Risk Management
• Financial Services Ratings, New York
• Tel [phone]
• E mail david_ingram_at_standardandpoors.com