Risk Metrics CS-18

1. Risk Metrics CS-18 Max J. Rudolph, FSA CFA RHU FLMI MAAA Vice President and Actuary Mutual of Omaha Enterprise Risk Management July 29, 2003

2. Risk Metrics Audience • Key individuals have differing backgrounds, education, perspectives and goals • internal audiences • senior corporate management • actuarial, accounting and investment professionals • external audiences • securities analysts, rating agencies, regulators • Absence of common risk management language • Graphics are the key…but not always

3. Risk/Return Profile OAVDE42,296

4. Alternative Investment Strategy OAVDE27,000

5. Deferred Annuity - Value of X% Interest Guarantee

6. Strengths distribution of returns identify challenging scenarios tail of distribution is “THE RISK” test hedges compare against deterministic scenarios provide summary statistics mean, median, quartiles Weaknesses scenarios must cover universe - do they? model run time accuracy doesn’t always follow large volumes of data - GIGO (garbage in, garbage out) Risk/Return Profile

7. Economic Surplus • Difference between the market value of cash inflows and outflows • asset and premium cash flows are combined • liability cash flows • Spirit of fair value accounting • DS = DL + (DA-DL) * MVA/MVS • DS,DA,DL duration of surplus,assets,liabilities • MVA,MVS market value of (all) assets,surplus • Mismatch DA-DL • Leverage MVA/MVS

8. Price Behavior Curves

9. Strengths drives duration/convexity puts assets and liabilities on level playing field you can’t eat a rate - based on cash flows create values at lowest level - can roll up intrinsic value - starting point for market value discussion Weaknesses learning curve see David Babbel papers model run time sensitive to interest rates reliance on canned software Economic Surplus

10. Additional Risk Metrics • Internally measured liquidity ratio • RBC diversification ratio • Key Rate (Partial) Durations

11. The key is to use multiple tools, leverage off of what you are already doing and know your audience (graphics)