Risk Tolerances and LimitsRisk Tolerances and Limits
CAS/SOA Enterprise Risk Management SymposiumCAS/SOA Enterprise Risk Management Symposium
Washington, DCWashington, DC
July 29, 2003July 29, 2003
Zafar Rashid
Executive Vice President and CFO
Prudential Annuities
Enterprise Risk ManagementEnterprise Risk Management
““The discipline by which organizations in The discipline by which organizations in all industries assess, control, exploit, all industries assess, control, exploit, finance and monitor risk from all sources finance and monitor risk from all sources for the purpose of increasing the for the purpose of increasing the organization’s short and long-term value organization’s short and long-term value to its stakeholders”to its stakeholders”
Role of a Chief Risk OfficerRole of a Chief Risk Officer
Risk PolicyRisk Policy
Governance IssuesGovernance Issues
Organization and implementationOrganization and implementation
Risk analytics and modelingRisk analytics and modeling
Data development and managementData development and management
Risk monitoringRisk monitoring
Control and managementControl and management
Risk Management PolicyRisk Management Policy
Define objectivesDefine objectives
Risk definitionRisk definition
Risk standardsRisk standards
Establishing risk appetiteEstablishing risk appetite
Risk GovernanceRisk Governance
Management/Board approval of policyManagement/Board approval of policy
Approval of risk standards and appetiteApproval of risk standards and appetite
Establish and manage reporting structureEstablish and manage reporting structure
Management of risk committeesManagement of risk committees
Categories of RiskCategories of Risk
Market RiskMarket Risk
Credit RiskCredit Risk
Pricing RiskPricing Risk
Legal/Regulatory RiskLegal/Regulatory Risk
Operations RiskOperations Risk
Strategic RiskStrategic Risk
Creating TransparencyCreating Transparency
Local management of riskLocal management of risk
Enterprise view of risk profilesEnterprise view of risk profiles
Improving capital and tax efficiencyImproving capital and tax efficiency
Monitoring concentrationMonitoring concentration
Managing counter-party exposureManaging counter-party exposure
Establishing Risk ToleranceEstablishing Risk Tolerance
Managing extreme tail outcomesManaging extreme tail outcomes
Reducing the variability of earningsReducing the variability of earnings
Managing capital requirementsManaging capital requirements
Preserving ratingsPreserving ratings
Establishing Risk ToleranceEstablishing Risk Tolerance
Deterministic ModelsDeterministic Models
Stochastic ModelsStochastic Models
Modeling contagion effectsModeling contagion effects
Liquidity testingLiquidity testing
DiversificationDiversification
Establishing LimitsEstablishing Limits
Single event limitsSingle event limits
Aggregate exposure limitsAggregate exposure limits
Concentration managementConcentration management
Managing risk assessmentManaging risk assessment
MeasurementMeasurement
• Varies by nature of riskVaries by nature of risk
• VaRVaR
• Present Value of Distributable EarningsPresent Value of Distributable Earnings
• Sharpe ratiosSharpe ratios
• Traditional measures of exposureTraditional measures of exposure
• Economic value at riskEconomic value at risk
MonitoringMonitoring
• Quarterly updates of exposuresQuarterly updates of exposures
• Periodic reporting on maximum limitsPeriodic reporting on maximum limits
• Judgmental self-assessment at least quarterlyJudgmental self-assessment at least quarterly
• Regular meetings of divisional RMC’sRegular meetings of divisional RMC’s
The Goal of an Effective Limit SystemThe Goal of an Effective Limit System
Facilitate BU risk/reward choicesFacilitate BU risk/reward choices
Enterprise wide consistencyEnterprise wide consistency
Careful selection of global parametersCareful selection of global parameters
Recognition of contagion/diversification impactsRecognition of contagion/diversification impacts
Lessons learned from experienceLessons learned from experience
Implementing Enterprise-wide Risk ManagementImplementing Enterprise-wide Risk Management
Creating a risk management cultureCreating a risk management culture
Overcoming fear and suspicionOvercoming fear and suspicion
Broad organizational buy-inBroad organizational buy-in
Empowerment and controlEmpowerment and control
Trigger eventsTrigger events