focus | support | accelerate ERM Symposium t Jim Rozsypal Partner Risk Management Practice Ernst & Young.
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Transcript focus | support | accelerate ERM Symposium t Jim Rozsypal Partner Risk Management Practice Ernst & Young.
focus | support | accelerate
ERM Symposium
t
Jim Rozsypal
Partner Risk Management Practice Ernst & Young
Agenda
Issues and trends in emerging risk management practices
Best practices and implementation challenges
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Competing Pressures on Management
Management must reconcile differences of views among key
constituents
Rating Agencies and
Investors
Risk
Default on Obligations
Loss of Value
Capital
Amount of Net Assets
Value of Investment
Accounting Returns
Return on Investment
Performance
Differences in focus and perspective can lead to conflicting
actions
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Risk Management Continuum Market Trends
Banks are leading the pack ; and
will continue to improve as they
rush to meet Basel by 2005/6
Most companies are
positioned here with leading
edge companies
moving up the continuum.
Stakeholder Value
ERM
Risk
Specialization
Treasury
Credit
Insurance
Legal
Enterprise-Wide
Risk Assessment
Value / Risk
Optimization
Risk
Management
Integration
Risk quantification, capital
measurement, KPI and KRI
Measurement Alignment with
balanced scorecard and broader
organization measures.
Sophistication
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What are Companies doing?
Building a bridge across risk silos:
—Realigning management responsibilities to facilitate integrated
discussions of risk across the enterprise
—Aggregating risk through common issues and exposures
—Aggregating risk through capital measurement
Strengthening the management of non-financial risks:
—Putting accountability for these risks back in the business
—Implementing operational risk management frameworks
—Developing internal control assessment methods, tools and
processes supporting compliance with Sarbanes-Oxley controls
certification
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Steady Movement Toward Integrated
Risk Management
Integrated Risk Policy Framework
Market Risk
Market risk policy and limits
Valuation and risk measurement
methods
Market data and forward curve
modeling
Stress and scenario testing
FAS
Credit
Risk133 issues and considerations
Credit risk policy and limits
Counterparty hierarchy definition
Internal ratings methodology
Exposure and default probability
measures
Stand alone and portfolio credit risk
Operational/Business Risk
Risk control policy and framework
Business risk definition and risk
assessment
Measurement methodology and
assumptions
Economic
Capital
Measureme
nt
methodolog
y
Risk
Integration
Capital
Allocation
Proactive Portfolio
Management
Risk adjusted
performance
measurement
Risk based pricing
Risk management
strategies
Insurance Risk
Underwriting and pricing policies
Actuarial and financial modeling
Loss/Reserve valuation methods
Stat/Gaap/economic earnings
reconciliation
Risk Management Technology Infrastructure
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Capital Management, Performance
Measurement Alternatives
Financial Performance
Metrics
Accounting Based
Metrics
ROE
ROI
ROA
Economic Driven Metrics
Measures of Risk and
Capital Adequacy
External Risk Capital
Requirements
Measures of Return
Adequacy
Internal Economic
Capital Process
Regulatory
Bottom-up
Rating Agency
Volatility of
Asset/Liability Values
Best suited for:
Determining capital adequacy
Supporting risk-adjusted return
measurement
Evaluating customer, product
and business risks, capital
consumption and profitability
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Supporting marginal pricing
Single Period
Top-down
Multi Period
Economic Profit
Embedded Value
Shareholder Value Added
Appraisal Value
Earnings Volatility
Best suited for:
Assessing adequacy of business
returns
Business planning and financial
forecasting
Evaluating strategic investments
Linking to reward framework
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Trends in Risk Measurement
and Performance Reporting
Greater interest in more aggressively managing capital and
returns due to stakeholder pressures
Availability of company-specific economic capital measures of
growing importance in rating agency discussions
Move toward common performance measures, cutting across
an enterprise and allowing all businesses and managers to be
evaluated on a consistent basis
Numerous alternative performance measures are in use:
—Clear trend toward “economic” measures, away from accounting
measures
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—Consensus emerging around “Risk Adjusted Return on Capital”
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Emerging Best Practices in Methodology
Market value measurements increasingly viewed as the best
conceptual framework, despite practical and management
challenges
Recognition of limitations of regulatory/rating agency risk
measures as drivers of business change
—Excess regulatory/rating agency capital viewed as a cost of doing
business
Risk and capital measures more commonly based on earnings
volatility, rather than insolvency considerations
Growing interest in separation of investment and business
activities for capital allocation and performance measurement
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Trend toward use of hurdle rates specific to each business
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Emerging Best Practices in Management
Processes
Banks have been doing it longer, offering both good and bad
experiences
Many insurers are designing and implementing RAPM, but far
fewer have been successful
Rapid integration into management processes is crucial,
including:
—Quarterly performance reporting
—Business planning
—Incentive compensation programs
—Rating agency discussions
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—Pricing methodologies
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Implementation Challenges
Data, Systems, Resources and Processes
— Relevant data for a rapidly growing business/enterprise
— Financial modeling expertise, adequacy of resources
— Dealing with dependencies on other management processes, e.g.,
planning, reporting
— Institutionalizing an efficient process
Change Management
— Getting real buy-in
— Integrating into decision making processes, incentive compensation
programs
— Communicating with stakeholders, e.g. rating agencies and analysts
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Implementation Challenges
Methodology
— Selecting among measurement alternatives to compare
heterogeneous businesses
— Reconciling to GAAP results
— Knowing when to stop drilling down
— Many complex technical issues
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