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Enterprise Risk Management Case Study 5

Enterprise Risk Management Case Study 5. Ron Harasym Sun Life Financial Casualty Actuarial Society / Society of Actuaries Enterprise Risk Management Symposium July 30 2003, Washington DC. Outline of Presentation. Market Risk Tolerance Limits (MRTLs) Progression to Earnings-at-Risk (EaR)

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Enterprise Risk Management Case Study 5

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  1. Enterprise Risk ManagementCase Study 5 Ron Harasym Sun Life Financial Casualty Actuarial Society / Society of Actuaries Enterprise Risk Management Symposium July 30 2003, Washington DC

  2. Outline of Presentation • Market Risk Tolerance Limits (MRTLs) • Progression to Earnings-at-Risk (EaR) • Comparison with other tools • Sample Earnings-at-Risk report • ERM moving forward

  3. Development of Market Risk Tolerance Limits • Senior management was surveyed as per risk tolerance. • Limits were established on interest, equity, and currency risk at the company and business group level. • Stylized capital market shocks were defined. • An income sensitivity testing standard was developed. • Income sensitivity is now tested against these limits. • Business groups must explain and justify if beyond these limits. • Compliance report is presented to the Executive Risk Committee and the Risk Review Committee of the Board.

  4. Progression to Earnings-at-Risk • Quantifies both the frequency and severity of scenarios • Forward looking: • can identify exposures • can act as an early warning system • High information density: • identification of cross-operation risk diversification • identification of intra-operation risk diversification • Complex stochastic modeling required • heavy computational demands • use of representative scenarios helps • Communication challenges

  5. Comparison: Business Plan, MRTL, EaR (1) Business Plan: consists of a single projection • (2) Market Risk Tolerance Sensitivities: • 4 interest scenarios • 4 equity scenarios • (3) Earnings-at-Risk ,,,,,,Sensitivities: • Additional 16+ ,,joint interest/equity ,,scenarios

  6. Comparison of Approaches (Continued) • (4) Earnings-at-Risk Simulation • simulation of typically 10,000 economic scenarios via interpolation into the earnings surface

  7. Comparison With Other Tools

  8. Sample Earnings-at-Risk Report

  9. Sample Earnings-at-Risk Chart

  10. ERM Moving Forward • MRTL & EaR are decisions support tools, directed at supporting risk based decision making by senior management • It will take a number of years to: • to include other risk factors such as mortality/morbidity, credit risk,.... • to fully embed in the organization with • greater drill down • greater linkage between decisions made in front/operational lines and resultant impact on risk exposure • Finally, the process is still evolving.

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