Risk Appetite PDF
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ERM Community Risk Appetite – Practical Issues – Role for Actuaries Ian Laughlin 10 Sept 2008 Refs: Risk Appetite: Practical Issues for the Global Financial Services Industry Prepared by Caroline Bennetand Kelly Cusick, 2007 Bad luck? Appetite Unclear? Risk > Appetite? • Westpoint, ACR, MFS, City Pacific … • Opes Prime, Tricom … • Centro, Allco, Babcock and Brown … • Bear Stearns, Credit Agricole, … • NAB , ANZ , RAMS, Northern Rock, … (CDOs) (Opes) • AIG , MBIA … (CDSs) • ABC Learning … • Fannie Mae, Freddie Mac 2 What is it? • No agreed definition • Appetite, Tolerance Risk appetite is a high‐level view of the risks the insurer is willing to accept in pursuit of value. Risk tolerance is the acceptable level of variation around profit targets, aligned with the risk appetite. (Wason, 2006) Risk tolerance is the acceptable variation relative to the achievement of objectives. (Kamiya et al, 2007) 3 Source: Bennetand Cusick 2007 Whose appetite is it anyway? • Shareholders focus is usually here • Customers but needed here too • e.g. Lifeco Par Policyholders • e.g. Debentureholders • e.g. depositors What about : • Regulators?? • Rating Agencies?? 4 Articulation “conservative”; “aggressively pursue opportunities in ..”; Qualitative “we have a low appetite for risk except where directly related to our core skills” “we have no appetite for systemic operational risk” “we have considerable appetite for new ventures” “we have a war chest for …” “guaranteed” “backed by first mortgages” “low risk” “speculative” “aggressive” “less than a 10% chance of a loss each year”; “maintain S&P rating of …” Quantitative “no more than X% decline in embedded value with 95% probability” “Cost of rectification for operational issues no more than …. “AAA rated” 5 “a negative return once in about every 7 years” Translation ‐ can be difficult! Company Appetite (fuzzy?) Bus. Unit Tolerance (specific) Risk by Type 6 Co‐ordination Company Appetite (fuzzy?) Bus. Unit Tolerance (specific) Risk by Type 7 Monitoring & Corrective Action Company Appetite (fuzzy?) BBuuss.. UUnniitt Tolerance (specific) Risk by Type 8 All this is difficult to do well (see first slide) • Articulation • Translation • Co‐ordination • Monitoring & Corrective Action 9 Actuaries can play key role …. • Articulation • Translation vv • Co‐ordination vv • Monitoring & Corrective Action 10
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