Description: Increased attention was paid to regulatory capital with the global financial crisis in 2008. Whilst companies may not have the incentives to retain a large amount of capital in the absence of regulatory capital requirements, overcapitalized entities can have drawback such as its impact on competitiveness. There are other weaknesses in the regulatory capital model such as its limitation in facilitating risk-based decisions as regulatory capital does not necessarily reflect the economic reality and risks an entity faces. Nonetheless, there are ways for regulators and/or companies to handle the weaknesses in the regulatory capital model. For instance, granularity can be introduced in determining regulatory capital. Economic capital can be used to encourage entities to implement risk management controls and facilitate risk-based business decisions (e.g., risk-adjusted performance assessment and risk-based capital allocation). Ultimately, hav ing effective risk management and risk-based capital determination are ways to prevent company failures and bankruptcies.

Description: The author constructed the efficient frontier of new business sales by modeling the embedded value and economic capital against a universe of possible growth rates of the three lines of business in a typical three-year planning horizon. The ERM function can use the efficient frontier of new business to provide a more rigorous analysis of the impact of growth rates on the firm’s overall capital efficiency and value creation, hence forming a feedback loop with the businesses in the planning process to optimize the growth strategy.

Description: Abstract: A model for analyzing the probability and severity of default of sovereign entities and banks. The methodology analyzes the risks inherent in the investment of debt of sovereign governments and large financial institutions side-by-side, taking into consideration macroeconomic interactions among the sovereign fiscal and monetary authorities, the financial institutions, and the real economy. The signature aspect of the methodology is that it adapts a Merton-style default model to use explicit measures of sovereign assets and asset volatility.

Description: In this Chapter we present a novel way for estimating aggregated EC figures based on Bayesian copula estimation. Contrary to the classic approach of using a single inter-risk- correlation matrix we derive a probability distribution of possible correlation matrices that enables us to tackle the important issue of parameter uncertainty. Presented at 2010 Enterprise Risk Management Symposium, Society of Actuaries, April 12-15, 2010.

Description: The author constructed the efficient frontier of new business sales by modeling the embedded value and economic capital against a universe of possible growth rates of the three lines of business in a typical three-year planning horizon. The ERM function can use the efficient frontier of new business to provide a more rigorous analysis of the impact of growth rates on the firm’s overall capital efficiency and value creation, hence forming a feedback loop with the businesses in the planning process to optimize the growth strategy.

Description: This paper introduces a minor modification to the Wacek framework that restores market consistency and additivity. The modification shifts the basis of the cost-of-capital risk margin embedded in the fair value loss reserve from an insurer’s own solvency capital requirement with respect to its claim obligations as prescribed by Solvency II to the required market-clearing capital implied by those obligations, which depends not only on the internal characteristics of the unpaid claim portfolio but also on its correlation with the total market portfolio of unpaid claims.

Description: This paper addresses the allocation of solvency capital in multi- line financial businesses. Although this paper is uniformly applicable to financial enterprises of all types, the terminology in the paper is mainly that of insurance. The TailVaR risk measure is extended in a natural way to allocating capital to each of the business units. This method of allocation allocates capital in a way that is invariant over the method of decomposing the enterprise into business units. Analytic results are derived in the case of multivariate Normal risks. The key result of this paper is that the TailVaR-based proportional allocation of total required capital is identical to that based on mean-variance considerations analogous to the CAPM in the case of the multivariate Normaldistribution.

Description: In this paper, we formulate the Capital Allocation problem as an optimization problem in which we seek the mix of business that maximizes an insurance company’s Expected Net After Tax Income subject to a constraint on the Tail Value at Risk TVAR. Using the method of Lagrange multipliers, we demonstrate that the returns on the respective TVAR contributions, so-called RORAC, are equal across all lines of business when the mix of business is optimal. Although the discussions in this paper center on the TVAR, the conclusions hold true for any conditional expected value measure. Presented at 2010 Enterprise Risk Management Symposium, Society of Actuaries, April 12-15, 2010.

Description: As an alternative to the widely-used 'return on economic capital' RAROC, this paper proposes a performance measure consistent with standard valuation models, and discusses its implications for prudential regulation. From 2007 Enterprise Risk Management Symposium, M-AS07-1.

Description: Scenario analysis and stress tests based on consideration of shock events and their possible repercussions can provide useful information to management and regulators on a company’s resiliency through a chain of events, as well as support the consideration of a firm’s operations as an integral part of a wider financial system. We discuss how scenario analysis and stress testing can be used to define a company’s risk appetite, which is at the core of a well-embedded ERM framework. Presented at 2010 Enterprise Risk Management Symposium, Society of Actuaries, April 12-15, 2010.