5 determining risk appetite

Determining
g Risk Appetite
pp
Sim Segal, FSA, CERA, MAAA
President
SimErgy Consulting LLC
ERM Symposium
S
Session
i 5F:
5F Ri
Risk
k Aggregation
A
ti L
Leading
di tto Ri
Risk
k Appetite
A
tit
April 14, 2010


Traditional approach does not support
t
i l
l aggregation
ti
enterprise-level
Traditional Approach

NO  Only financial risks
All risks quantified?

Is risk interactivity
captured?
Unifying metric?

robustly quantified

 Violates “significant
digits” rule

NO  Quantified on silo /
standalone basis

 Correlation matrices
common
Multiple competing
O  Multiple,
NO
metrics

2
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Value-Based ERM Framework
Risk Appetite
Strategy
Qualitative

Assessment

Risk
Mgmt
Tactics

ERM
Committee

Scenario
Development

Value Impact
Enterprise Risk
Exposure

24
32
22
21

17

18

5
15
26

12

3

25
34

1

16
35 27
2

31

19

28
6

23

30

13

11

4
8
20

All
Risks

14
10
9
7

Likelihood

Key Risk
Scenarios

Correlation

Likelihood

Severitty

33
29

Mostly Objective

X

Enterprise Value

FINANCIAL

Market
Credit
…

STRATEGIC

Key
Risks

Strategy

1+ events / sim

1 event / sim
Mostly Subjective

Execution
…

ERM
Model
Baseline
Value
▪ ΔValue

OPERATIONAL
HR

“Pain Point”

Likelihood

ΔValue ≤ -10%

15%

ΔValue ≤ -20%

3%

Individual Risk
Exposures
Enterprise Value Impact

IT Risk 1
Legislatiion Risk

Process

Loss of Critical EEs

…

M&A Risk
Execution Risk
International Risk 1
Loss of Keyy Supplier
pp
Loss of Key Distributor
IT Risk 2

International Risk 2
Union Negotiations
Competitor Risk 1
Consumer Relations Risk

0.0% -5.0% -10.0% -15.0% -20.0% -25.0%

Identification

Quantification

Decision-Making

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ILLUSTRATIVE
EXAMPLE

Likelihood

Enterprise risk exposure “pain points” are
d to
t define
d fi risk
i k appetite
tit
used

Enterprise Value

Likelihood

|
-10%

What is it
now?

What do we
want it to be?

“Pain Point”

Likelihood

Likelihood

ΔValue ≤ -10%

15%

?

ΔValue ≤ -20%
20%

3%

?

C
t exposure
Current
(calculated)
|
-20%

T
t exposure
Target
(defined by ERM
Committee)

Enterprise Value

RISK APPETITE

4
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Modified case study: Other key metrics
supplement
l
t enterprise
t
i value
l metrics
ti

“Pain Point”

Modified
Case
Study

Likelihood

Decrease in enterprise value of more
than
th 10%

5%
15%

Ratings downgrade – one level

7%

g short of Planned revenue
Falling
growth by more than 200 basis points

11%

Falling short of Planned earnings by
more than 2¢
per share
¢p

10%

5
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Value-based approach provides enterprisel
l aggregation
ti
level
Traditional Approach
NO  Only financial risks
All risks quantified?

Is risk interactivity
captured?
Unifying metric?

robustly quantified

 Violates “significant
digits” rule

NO  Quantified on silo /
standalone basis

 Correlation matrices
common
Multiple competing

O  Multiple,
NO
metrics

Value-based Approach
YES  All risks quantified
consistently

 Apples-to-apples
math

YES  Quantified on

integrated basis

 Direct calculation of
interactivity
Single unifying
S  Single,
YES
value metric

6
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Contact
Co
tact information
o at o

Sim Segal, FSA, CERA, MAAA
President
SimErgy Consulting LLC
Chrysler Building
405 Lexington Ave., 26th Flr
New York, NY 10174
(917) 699-3373 Mobile
(646) 862-6134 Office
((347)) 342-0346 Fax


www.simergy.com

7
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