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

Risk typeRisk type

Systematic Risk Systematic Risk

Non-systematic RiskNon-systematic 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

Role of a Chief Risk OfficerRole of a Chief Risk Officer

Use caution to enhance, not impede, progress.Use caution to enhance, not impede, progress.

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