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Risk Tolerances and Limits CAS/SOA Enterprise Risk Management Symposium Washington, DC July 29, 2003

Risk Tolerances and Limits CAS/SOA Enterprise Risk Management Symposium Washington, DC July 29, 2003. Zafar Rashid Executive Vice President and CFO Prudential Annuities. Enterprise Risk Management.

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Risk Tolerances and Limits CAS/SOA Enterprise Risk Management Symposium Washington, DC July 29, 2003

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  1. Risk Tolerances and LimitsCAS/SOA Enterprise Risk Management SymposiumWashington, DCJuly 29, 2003 Zafar Rashid Executive Vice President and CFO Prudential Annuities

  2. Enterprise Risk Management “The discipline by which organizations in all industries assess, control, exploit, finance and monitor risk from all sources for the purpose of increasing the organization’s short and long-term value to its stakeholders”

  3. Role of a Chief Risk Officer • Risk Policy • Governance Issues • Organization and implementation • Risk analytics and modeling • Data development and management • Risk monitoring • Control and management

  4. Risk Management Policy • Define objectives • Risk definition • Risk standards • Establishing risk appetite

  5. Risk Governance • Management/Board approval of policy • Approval of risk standards and appetite • Establish and manage reporting structure • Management of risk committees

  6. Categories of Risk • Market Risk • Credit Risk • Pricing Risk • Legal/Regulatory Risk • Operations Risk • Strategic Risk

  7. Risk type • Systematic Risk • Non-systematic Risk

  8. Creating Transparency • Local management of risk • Enterprise view of risk profiles • Improving capital and tax efficiency • Monitoring concentration • Managing counter-party exposure

  9. Establishing Risk Tolerance • Managing extreme tail outcomes • Reducing the variability of earnings • Managing capital requirements • Preserving ratings

  10. Establishing Risk Tolerance • Deterministic Models • Stochastic Models • Modeling contagion effects • Liquidity testing • Diversification

  11. Establishing Limits • Single event limits • Aggregate exposure limits • Concentration management • Managing risk assessment

  12. Measurement • Varies by nature of risk • VaR • Present Value of Distributable Earnings • Sharpe ratios • Traditional measures of exposure • Economic value at risk

  13. Monitoring • Quarterly updates of exposures • Periodic reporting on maximum limits • Judgmental self-assessment at least quarterly • Regular meetings of divisional RMC’s

  14. The Goal of an Effective Limit System • Facilitate BU risk/reward choices • Enterprise wide consistency • Careful selection of global parameters • Recognition of contagion/diversification impacts

  15. Lessons learned from experience • Implementing Enterprise-wide Risk Management • Creating a risk management culture • Overcoming fear and suspicion • Broad organizational buy-in • Empowerment and control • Trigger events

  16. Role of a Chief Risk Officer Use caution to enhance, not impede, progress. - Chinese Fortune Cookie

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