Description: Highlight of the ERM Symposium

Description: This paper illustrates a current approach to capital allocation, referred to herein as Tail Contribution Analysis TCA, using it to evaluate the impact of changes in an insurer’s operations by allocating capital to individual lines of business. It then highlights a common problem in the implementation of the procedure arising from reserve volatility and briefly notes the failure of the methodology to account for a firm’s changing levels of risk under various strategies. Finally, it introduces an alternative method for analyzing business segments and strategies called Economic Profit Analysis EPA. We will discuss EPA’s key feature, “volatility replication,” an intuitively appealing process of building investor expectations and capital market information into the risk-and-return measurements used to evaluate strategic decisions. Finally, we will illustrate the benefit of using EPA in overcoming the problems of TCA and thereby providing concise reliable information for business decision making.

Description: The five words for ERM are transparency, discipline, alignment, adaptability and resilience. This article focuses on transparency, discipline and resilience.

Description: Risk management and capital budgeting are two critical components of the corporate decision process. They often need to be considered jointly at the corporate level because of their natural interaction through the dependent risk exposures and other synergetic relationships within an intricate corporate structure in a dynamic business environment. . This paper develops an integrated framework that aligns these two important corporate strategies across business divisions to optimize the streamlined enterprise strategic goal in a multi-period setting. The proposed integrated framework can serve as a practical guideline for corporate executives to optimally coordinate capital budgeting and risk management at the enterprise level.