Enterprise Risk Management at Nationwide

1. Enterprise Risk Management at Nationwide Emily Gilde Session: Implementing DFA 2003 CAS Risk and Capital Management Seminar

2. Key Forces driving ERM at Nationwide: • Need for greater centralization • Influence of banking industry

3. Nationwide: an increasingly complex and diverse institution in recent years • 30 thousand employees, 60 thousand agents • 21 separate P&C companies • Financial services company • Life Insurance company • An international asset management company

4. Need for ERM DIVERSITY/COMPLEXITY Challenge to Implementing ERM

5. Banking Philosophy Comfort with ERM CEO, at NW since 2000, former executive VP at Bank One former bankers sponsor ERM tools at Nationwide CFO, at NW since 2002, former CFO at Bank One Treasurer, at NW since 2001, former banking executive Office of Corporate Development “hands on” control of ERM tools

6. Initial push for ERM: • How much capital do we need to prevent insolvency with a very high degree of confidence? • How are our lines of business performing on a risk adjusted basis? adoption of RAROC model

7. RAROC = Risk Adjusted Return on Capital • Developed by banks in early 1990’s and in widespread use there today • Differs from DFA • Uses a correlation matrix to aggregate risks • Risk measure = Value-At-Risk • Capital adequacy tied to specific bond rating benchmark; e.g. default probability for AA corporate bonds

8. Current Uses of RAROC at Nationwide: • Assessment of capital adequacy • Performance measurement • Reinsurance optimization • Evaluation of new strategic opportunities

9. Governance of RAROC Model • Office of Corporate Development • usually leads model development • initiates model applications • runs the model and publishes results • CPA • FCAS • Several Analysts SVP Finance represents Business units • Business Unit “Module” Owners • responsible for updating models • work with OCD to determine if model changes needed • Investments • Actuarial • Reinsurance • Finance • supervisory role • Key participant in final decision on model changes

10. Recent Corporate Initiative: Asset-liability management of P&C business • RAROC not an appropriate ERM tool for ALM • Relationship between assets and liabilities summarized in a correlation coefficient • Focuses on extreme tail events only • ALM DFA

11. Asset - Liability Management Using DFA: Economic Value Efficient frontier C B Different asset portfolios A Current portfolio Standard deviation of EV Economic Value = MV assets – PV liabilities + PV future business cash flows

12. ALM: Maximize after-tax Economic Value Subject to: • “Hard” constraints: various practical and legal constraints on asset allocations affect the position of the efficient frontier • “Soft” constraints: for each asset portfolio on efficient frontier, examine the probability distribution of variables such as statutory surplus and GAAP equity

13. ALM Decisions: • Optimal duration of bond portfolio • % of portfolio to hold in market equity • % tax exempts • Whether or not to invest in “alternative” assets such as TIPS

14. ERM Implementation Issues: • Consistency between models: RAROC & DFA • Modeled output viewed as “law” that is either “right” or “wrong” • Difficult to elicit unbiased assumptions • tendency to be conservative • on other hand, business plans may reflect “stretch” goals • Decentralized organization  Decentralized data and potential inconsistencies

15. Conclusion • ERM is here to stay • Vehicle for building consensus and common vision within a complex, decentralized organization