The Role of Risk Analytics

Transcription

1 Global Risk Management Webcast Wednesday February 15, 10AM EST Speakers: Curt Burmeister, Vice President, Algorithmics Gordon Burnes, Worldwide Marketing Leader, IBM s Risk Analytics business Moderator: Michael Loney, Managing Editor, Reactions

2 Speaker profiles Curt Burmeister is the Vice President of Risk Solutions at Algorithmics, an IBM Company, where he manages the products group for the Buy-Side Business Line. In this role he is responsible for Algorithmics risk solutions for asset managers, hedge funds, and insurance companies. Curt holds an MBA in Financial Engineering from MIT and a BA in Computer Science and Mathematics from Cornell University. Gordon M. Burnes runs worldwide marketing for IBM s Risk Analytics business. Gordon joined IBM through the acquisition of OpenPages, where he ran marketing and strategy for five years. IBM s Risk Analytics business includes the OpenPages operational risk and GRC business, as well as the Algorithmics financial risk management and capital analytics business. Gordon brings to the role over 20 years of experience working with high growth companies in the sales, marketing and product management functions. He holds an MBA from Columbia University and a BA from Harvard University. 2

3 IBM Software Group Internal Capital Models for Insurance Curt Burmeister, Vice President of Risk Solutions, Algorithmics Gordon M. Burnes, WW Marketing Leader, Risk Analytics

4 One model, multiple uses Economic Capital Capital Allocation Stress Testing Sensitivity Testing External Stakeholders Rating Agencies Stock Analysts Shareholders Business Decisions Solvency II Solvency Capital Requirement ORSA and Risk Management Reporting and Disclosure Strategic/Tactical Portfolio Management Asset/Liability Management 4

5 The Internal Capital Model Process Topics Data Management Model Selection/Integration Workflow Controls and Audit Process Define Enterprise and Risk Exposures Model Risk Exposures Revalue Balance Sheet Measure and Allocate Capital Monitor and Manage Risk Goals Clear and Consistent View of Capital Across the Enterprise Forward-looking Risk/Reward Profile Risk-Driven Business Decision-Making

6 Internal Model Pros Align Economic/Solvency Capital Apply Best/Proprietary Practices Reduced Capital Competitive Advantage Promote Common Risk Culture Cons Significant Investment Improved Data Management New Modeling/Systems Buy-in across the organization 6

7 IBM Software Group Internal Capital Modelling Challenges

8 The Organization Challenge CFO Finance Internal Capital Model Project

9 The Data Challenges Challenges Data Silos Manual Data Collection Inconsistent/redundant Data No Controls on Data No Data/Model Separation No Data Archiving Opportunities Centralized Data Warehouse Automated Data Collection Consistent Data Secure Data Separate Data from Models Data Archival Process 9 Strong IT/Risk/Actuarial Commitment

10 The Model/Systems Challenge Challenges Multiple Systems with Spreadsheets for Modeling and Aggregation Manual Intervention Lack of Workflow & Controls Lack of Scalability Opportunities Enterprise System without Spreadsheets Workflow and Data controls around all inputs including inputs from spreadsheets Automated Processes Scalability for Growth Strong IT/Risk/Actuarial Commitment

11 IBM Software Group Integrating Assets and Liabilities

12 Asset Modeling Considerations Asset Granularity - Asset Classes vs. Individual Instruments Risk Factor Granularity What countries Separate credit spread for each Industry/Country Accuracy vs. Speed Issues Sourcing Asset Data Relationship to Asset Modeling to ALM Portfolio Management 12

13 Liability Modeling Considerations Challenges Simulate the models for 100, ,000 economic scenarios Existing liability models are typically slow Multiple liability systems Options Run nested stochastic simulation Use liability cash flows from existing systems and proxy methodology Use empirical loss distributions from existing systems Develop light liability models for economic capital 13

14 Integrating Assets and Liabilities Asset Portfolio Liability Portfolio Approximation Technique Proxy Liability Portfolio

15 Techniques For Integrating Assets and Liabilities Method Speed Economic Probabilities Balance Sheet Approximation Economic Interpretation Covariance Matrix Curve Fitting Replicating Portfolios Least Squares Monte Carlo Nested Stochastic

16 IBM Software Group Operational Risk

17 Addressing the operational risk component to your economic capital model Many insurers are rethinking their approach to operational risk Risk-based solvency regimes require capital allocated to operational risk Regulators and rating agencies are demanding increasing transparency into risk management processes A fragmented approach to operational risk and compliance is expensive to manage and maintain An integrated approach to operational risk addresses these challenges Provides required inputs to capital model Standardizes the operational risk management process across the enterprise Lowers total cost of ownership 17

18 An integrated approach drives a better program Risk Assessments Internal Loss Events External Loss Events Scenarios KRIs 18

19 Siloed efforts result in complexity and expense Business Unit Process Owners Internal Audit Risk Management Regulatory Compliance IT Operations 19

20 Convergence provides process improvement Business Unit Process Owners Shared Risk and Compliance Framework Internal Audit Risk Management Regulatory Compliance IT Operations 20

21 Operational Risk Capabilities: Risk Control Self-Assessments Top-down Bottom-up Purpose Audience/Owner Roll Out: To find key areas of risk in the business (risk-based scoping) Senior Management Program Heads All locations and processes Include shared functions (IT, HR) Deep dive into areas of higher risk Fulfillment of regulatory requirements Senior management (aggregated data) Process Owners Frequency of RCSA Annual/semi-annual Quarterly Where business needs or regulations require it (e.g. financial processes for SOX) Technology solution essential since too labor intensive to maintain on manual basis 21

22 Operational Risk Capabilities: Loss Event Management Internal and external loss events Internal losses help improve assessment process and control environment External loss data can be used for benchmarking, scenarios, capital modeling Requires consistent categorization Critical for back-testing the assessment process Need to integrate loss events, assessments, and issue management GL doesn t provide event management Key features: Life cycle of loss events (occurrence, discovery, recognition; impacts and recoveries); root cause analysis; remediation; review and approval 22

23 Operational Risk Capabilities: Scenario Analysis Assessment Key Risks Internal Incidents External Incidents Scenario Analysis Simulations Senior Mgt Assessment 23

24 IBM Software Group Risk Aggregation

25 Incorporating Non-market Risk Distributions Examples of Non-Market Risks Life Risk (e.g., mortality risk, lapse risk) Non-Life Risk (cat risk, premium risk) Credit Risk Operational Risk Health Risk Sources of Non-Market Risk Distributions Third-party systems Internal company systems 25

26 Capital Calculation Risk Aggregation Identify relevant risks Insurance Risk Operational Risk Market Risk Credit Risk Develop loss distribution functions Combine distributions Measure & allocate required capital

27 Copula Approach Historical Time Series Data for Market Risk Factors Generate VCV Matrix for Market Risk Factors Other Correlations between Risk Factors Create Augmented VCV Matrix for Market and Non Market Risk Factors Correlated Scenarios Market Risk Scenarios Non-Market Risk Scenarios 27

28 IBM Software Group Workflow & Managing the Reporting Cycle

29 Workflow & Governance Report Management Produce reports on time Ensure the reports are accurate Data management The correct data is loaded The data is valid/approved/complete User permissions Control the operations a user can perform Control the data a user can access Ensure multiple user actions cannot collide Audit capabilities Review the data used to generate the reports Review the user actions used to create the reports 29

30 Challenges Workflow and governance often considered a second priority to analytics at the start of a project Common to underestimate the effort required The interactions between multiple users and multiple data objects becomes more complex the larger the organization 30

31 IBM Software Group Top Benefits From Internal Model

32 Capital Savings Capital Savings Ability to relax conservative assumptions in existing models Commonly leads to a 20-40% reduction in capital Capital Allocation/Attribution Business units lines of business Products etc 32

33 Risk Transparency Promotes a common understanding of the risks facing the organization Provides forward projections of risk Enables the ability to run sensitivity and stress test analyses Increase in interest rates Greece default Increase risk factor volatility Change of risk factor correlations 33

34 Risk based decision making Produce Economic Capital numbers in timely manner Typical goal is ten days after quarter end Produce updated capital analyses for senior management What if we add a new product What if we sell a business unit What if our estimate for a risk exposure is wrong 34

35 Questions?