Description: This paper focuses on the role of holism in enterprise risk management ERM. The performance measure known as market consistent embedded value is discounted for being overly reductionistic. The concept of an economic capital charge or credit is seen here as a potential bridge from the reductionistic to the holistic approach. It shows some promise for achieving holism, but falls short.

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 discusses both the theoretical and the application aspects of stress testing in managing enterprise risks. Effective stress testing maximizes the risk adjusted enterprise profit by controlling major risks financial, strategic, operational and hazard upon identifying risk metrics and modeling the correlations. A case study is included for demonstration purposes.

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: 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: 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 Market Cost of Capital approach has emerged as the standard for estimating risk margins for insurers' fair value balance sheets. This paper takes some of the ideas developed for valuing life insurance liabilities and applies them to the problem of valuing credit risky bonds. The basic idea is that credit spreads should cover the cost a) best estimate defaults plus the cost of holding capital for b) contagion risk (e.g. a credit crunch) and c) parameter risk, this risk that the best estimate is wrong and must be revised. We argue that the margins required for parameter risk can capture liquidity issues. In addition, the models developed here allow the cost of capital rate itself to be a random variable which allows credit spreads to open and close stochastically. Finally, the paper argues that it is reasonable to include something like AA best estimate default rates and liquidity spreads when valuing insurance liabilities. The main rationale for doing so is the idea that there are elements of the total credit risk issue that can be hedged between the assets and liabilities.

Description: Capital allocation by percentile layer has important advantages over existing methods. It highlights a new formulation of value at risk and other capital standards, recognizes the capital usage of losses that do no extend into the tail and captures the disproportionate capital usage of severe losses. From 2007 Enterprise Risk Management Symposium, M-AS07-1.

Description: This paper provides a novel approach to the valuation of the market value of economic surplus that is stable and immune from “market noise”.

Description: The purpose of this paper is to build a bridge between the traditional methods of looking at financial risk and insurance risk. The paper starts by explaining the concepts behind VaR models of economic capital used in banking. Differences between actuarial and financial views of risk are reviewed and explained. The paper concludes with proposing, developing, and parameterizing a true VaR model of insurance loss reserve risk, which combines several lines of business. From 2006 Enterprise Risk Management Symposium, M-AS06-1.