Risk Dynamics Internship Program

1. Risk Dynamics Internship Program 2014 – 2015 Brussels, April 2014

2. Risk Dynamics Internship ProcessPractical details • Duration : 1- 6 months (part-time or full-time) • Start : This summer or the next academic year • Interested ? • Send your cover letter indicating • Your topic(s) of interest (see list of topics in the next slides) • Preferred time for making the internship • With your CV • By 30th April 2014 at ybigah@riskdynamics.eu and/or jobs@riskdynamics.eu • Interview and Selection Process • From 1st -15th May 2014 • Communication of decision • Week of 19th May 2014 Risk Dynamics Internship Program – April 2014 2

3. Internship Topics Risk Dynamics Internship Program – April 2014 3

4. List of topics - overview • Risk aggregation in Insurance: regulatory, business and academic view • Economic Scenario Generators (ESG) • Bayesian Method for Claims Reserving in Non-Life • Asset Quality Review (AQR) • Risk Appetite in Non-Financial Risks - Risk Tolerance on Non-Achievement of CSR Objectives Risk Dynamics Internship Program – April 2014 4

5. Risk aggregation in Insurance: regulatory, business and academic view • Context • Aggregation is the final step of potential future cash flow calculation (including Economic Capital) for the insurance companies with the Internal model used for modelling and managing risk in the Insurance business • Aggregation refers to modelling dependence between the different risk types, businesses and/or entities with the subsequent combination in order to achieve an aggregated group/company Profit & Loss distribution which is used as a basis to compute the Economic Capital, SCR and other internal risk measures • By modelling the dependence an insurance company provides justifications on why certain risks and/or businesses tend to have or not to have tight relationships. In such a way a company can justify for its diversification benefits • Level of dependence between the risk types and/or businesses can depend on various factors, e.g. geographical location, inflation, economy status and other factors. All of these factors need to be taken into account when assessing dependence (for both approaches). • The questions of interest • What are the risk factors driving portfolio bucketing (of risks and/or products), dependencies (concentrations and diversification)? • How could insurance companies integrate event risk (interconnections) or systemic risk (correlations)? • How should they assess diversification advantage (per risk class, per sub-risk class, across risk types)? • What do the insurance company do to reduce the concentration risk? Risk Dynamics Internship Program – April 2014 5

6. Risk aggregation in Insurance: regulatory, business and academic view • Objectives • Perform a thorough literature review on: regulatory requirements and expectations, business best practices in dependence modelling and aggregation (high level), latest academic research on dependence risk drivers identification and risk scenarios modelling • Expected deliverables • Internal – deliver: • PPPT and Word report on Literature review • External – potentially contribute to: Blog article, Webinar, White paper • Required qualifications • Language: Good level of English • Insurance: • Good understanding of the insurance business and risk • Basic knowledge and understanding of regularity requirements (Solvency II) • Duration • 4-5 months (part or full time) • Supervisors • Dr Olga Reznikova • Tamar Joulia Risk Dynamics Internship Program – April 2014 6

7. Economic Scenario Generators (ESG) • Context • ESG are of primary importance in market risk management for insurance companies and banks, mainly for economic and regulatory capital calculation purpose, but also for the market consistent valuation of complex liabilities, involving a lot of optionalities • The purpose of an ESG is to generate a (very) large number of real world and/or risk neutral scenarios (depending on the context) for a set of market and economic variables. These variables are supposed to follow stochastic models, including dependencies between them. Concretely, the scenarios consists in Monte Carlo simulations of different sample paths for the different variables considered jointly, i.e. taking into account dependencies between them   • This requires first the choice of the market or economic variables that will be modelled, then the choice of stochastic model (typically financial models in continuous time used in stochastic finance, as they allow both real world and risk neutral contexts), and the calibration methodology (the way parameters will be estimated from historical data or market quoted data like options) Risk Dynamics Internship Program – April 2014 7

8. Economic Scenario Generators (ESG) • Objectives • Build a flexible but sophisticated ESG tool covering the most relevant market variables (e.g. real and nominal interest rates, equity indices, real estate, FX rates, etc.) • Implement the most sophisticated stochastic models currently used in the market • Define and test calibration methodologies, and implement them in handy tools  • Expected deliverables • Flexible and sophisticated ESG tool with the most sophisticated stochastic models currently used in the market • Required qualifications • Language: Good level of English • Strong quantitative background (e.g. Finance, Actuarial, Mathematics, Physics, Statistics, Econometrics, Engineer, etc.) • Good knowledge in stochastic finance • Keen interest in risk management of financial institutions (Banks and Insurance) • Programming skills in Matlab and/or R • Duration • 6-9 months (part or full time) split between 2-3 students • Supervisors • Dr Céline Azizieh Risk Dynamics Internship Program – April 2014 8

9. Bayesian Method for Claims Reserving in Non-Life • Context • Bayesian methods for claims reserving can be viewed as methods in which one combines expert knowledge or existing prior information with observations resulting in an estimate for the ultimate claim • The Bayesian inference is then understood to be the process of combining the prior distribution of the random quantity with the observed data given in the upper triangle • In some cases, it is possible to obtain an analytic expression for the posterior distribution of the ultimate claim. When we are not able to explicitly derive the posterior distribution of the ultimate claim, we can use for instance Markov Chain Monte Carlo (MCMC) methods to generate empirical posterior distributions (see the book of Wüthrich and Merz (2008) for more details). Risk Dynamics Internship Program – April 2014 9

10. Bayesian Method for Claims Reserving in Non-Life • Objectives • The goal of the traineeship is to implement Bayesian methods on data from the Belgian market. In particular, the main purpose is to assess the impact on the final outcomes of (1) the prior distributions used and (2) the selected method. • Expected deliverables • Internship report • External – potentially contribute to: Blog article, Webinar, White paper • Required qualifications • Language: Good level of English • Strong quantitative background • Good knowledge in Actuarial Sciences, notably Non-Life Insurance • Keen interest in risk management of financial institutions (Banks and Insurance) • Programming skills (e.g. Matlab, R, SAS) • Duration • 4-6 months (part or full time) • Supervisors • Dr Julien Trufin • Dr Jérôme Barbarin Risk Dynamics Internship Program – April 2014 10

11. Asset Quality Review (AQR) • Context • The European Central Bank (ECB) will conclude the comprehensive assessment of some 130 credit institutions in October 2014, prior to assuming its new supervisory tasks in November 2014. This exercise has three main goals: transparency, that is, enhancing the quality of information available concerning the condition of banks; repair, by identifying and implementing necessary corrective actions, if and where needed; and confidence building, namely assuring all stakeholders that banks are fundamentally sound and trustworthy • The comprehensive assessment comprises three complementary pillars: • A supervisory risk assessment, addressing key risks in the banks’ balance sheets, including liquidity, leverage and funding • An asset quality review (AQR), examining the asset side of bank balance sheets as at 31 December 2013. All asset classes, including non-performing loans, restructured loans and sovereign exposures, are covered. The asset quality review is conducted with reference to harmonised definitions, including those for non-performing exposures and forbearance • A stress test, building on and complementing the asset quality review by providing a forward-looking view of banks’ shock-absorption capacity under stress • The result of the comprehensive assessment will be disclosed in October 2014. Where necessary, it will be followed by corrective measures. The timelines for implementing such measures will be part of the outcome of the assessment. The ECB will acknowledge and welcome corrective actions taken, also before the conclusion of the exercise, by banks and supervisory authorities, in the form of enhanced disclosure and provisioning, as well as recapitalisation, asset separation and sales, and other measures Risk Dynamics Internship Program – April 2014 11

12. Asset Quality Review (AQR) • Objectives • Synthesize and review the main assumptions and key methodological choices that underlie the AQR • Analyse the impacts of the AQR on the banking system, and the proposed corrective measures • Expected deliverables • Write a report • Required qualifications • Language: Good level of English • Strong interest in risk management and regulations of banking organisations • Good knowledge of economics and finance • Duration • 3-5 months (part or full time); starting in September-October 2014 • Supervisors • Tamar Joulia • Olivier Salomé Risk Dynamics Internship Program – April 2014 12

13. Risk Appetite in Non-Financial RisksRisk Tolerance on Non-Achievement of CSR Objectives • Context • Any company has to take risks to make business. At Risk Dynamics, we try to help the financial institutions to properly manage their risks, i.e. to balance their risk appetite/tolerance with a good estimation of their risk exposure (on both financial and non-financial activities). • Risk Appetite is a concept that has emerged recently, mainly due to the latest financial crisis. Therefore the importance of developing a Risk Appetite framework and embedding it throughout the organization. • In the context of this traineeship, we want to focus on the non-financial risks and the qualitative aspect of risk management under Solvency II, covering: • The “Strategic and business risks” which relate to all risks that affect or are created by business strategy decisions and or changes in the market environment; • The “Operational risks” which are the risk of a loss resulting from inadequate or failed internal process, people, systems or from external events. • Additionally, “Reputation risk” is recognized as number 1 risk for most of the industries, which is also known as “emotional capital” and therefore, if capital, subject to risk. • We aim at developing a risk appetite framework dedicated to these non-financial risks. It implies the identification of the respective indicators and their uses to monitor/mitigate/anticipate these risks, which have an impact on the franchise value of a company and ultimately also on the financial performance. • Most of the risks that could impact the franchise value are also addressed by the Corporate and Social Responsibility (CSR) objectives and policy. Risk Dynamics Internship Program – April 2014 13

14. Risk Appetite: Best Practices in Risk Appetite Framework • Objectives • Test a first version of our risk appetite framework focused on the non-financial risks through a survey in order to get feedback from the market on the existing practices and needs. • Develop CSR indicators for which a risk appetite can be attached. • Expected deliverables • Survey development and results analysis and reporting • CSR indicators templates based on research on what is already existing in the market • Required qualifications • Language: Good level of English • Strong analysis skills • Keen interest in risk management of financial institutions (Banks and Insurance) • Background on CSR related matters • Duration • 3 months • Supervisors • Maribel Tejada • Thierry Pauwels Risk Dynamics Internship Program – April 2014 14