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: 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: 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: 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.

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: 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.