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C ASUALTY A CTUARIAL S OCIETY. Enterprise Risk Management – Post 9/11 A Benefit or a Fad?. Jean-Pierre Berliet Ernst & Young LLP Casualty Actuarial Society Risk and Capital Management Seminar July 8-9, 2002. Risk Management Post 9/11 and Enron Events.

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Enterprise risk management post 9 11 a benefit or a fad


Enterprise Risk Management – Post 9/11A Benefit or a Fad?

Jean-Pierre Berliet

Ernst & Young LLP

Casualty Actuarial Society

Risk and Capital Management Seminar

July 8-9, 2002

Risk management post 9 11 and enron events
Risk Management Post 9/11 and Enron Events

  • Do “unthinkable” events undermine the value of ERM initiatives?

  • Is ERM just another fad?

  • What should insurance company be doing in the present environment?

Erm s objective
ERM’s Objective

  • Protect and enhance company value by optimizing risk return tradeoffs across all major risks

    • Insurance Risk

      • Underwriting (including Cats)

      • Market

      • Credit

    • Operational Risks

    • Strategic Risks

The erm process




Evaluate Return

Develop Alternative Strategiesand Optimize

The ERM Process

  • The process links risk management and strategic planning

Key erm assumptions
Key ERM Assumptions

  • All material risks can be identified and measured

  • All risk types generate an increase in economical capital

  • Combination of alternative business and risk management strategies can be compared with regard to their impact on

    • Economic capital

    • Expected return

    • Return volatility


  • ERM analytical framework does not distinguish appropriately between risks that destroy the value by

    • Increasing economic capital

    • Increasing investors’ required rate of return

  • ERM process can overcomplicate the development of risk management strategies

Risk Type

Primary Effect

Risk ManagementApproach


Increase in Capital

Exposure Management &Risk Retention Strategy


Increase in“Market RiskPremium”

Enhanced ManagementProcesses

Changes in CompanyInfrastructure &Risk Transfer


The debate on the benefits of erm


Return on ERM is very high

Huge opportunity cost of not implementing “ERM”


Identifying significant incremental benefits from comprehensive approach is difficult

Developing approach to managing each risk type does not require costs and complexity of “ERM”

The Debate on the Benefits of ERM


Insurance companies are establishing risk management functions
Insurance Companies are establishing risk management functions

  • Specialized underwriters may be closest to “ERM”

    • Renaissance Re

    • Financial guarantee companies

  • Large companies addressing market conduct issue

    • MetLife

    • Prudential

  • Large European Multinationals

    • Multiline

    • Bancassurance

  • Domestic P/C companies appears to be focusing on narrow issues

    • Reinsurance

    • ALM

    • Development of Risk Adjusted Performance Measurement Systems (“RAPM”)

9 11 and enron events
9/11 and Enron Events functions

  • These surprises revealed that most insurers do not have adequate knowledge and control of their exposures, especially:

    • Aggregations/concentrations within lines

    • Aggregations across lines of coverage

    • Losses from assumed reinsurance (London market)

  • Insurers have an urgent need to gain control of their exposures

    • Market, rating agencies and reinsurers will require it

    • ERM initiatives will lack credibility if basic identification and control on exposures are not in place

Responses to 9 11 and enron

Terrorism Risk functions

Analysis of exposures by insurance line

Underwriting guidelines

Concentration limits

Loss modeling/analysis



Credit-Triggered Risk

Analysis of direct exposure in investment portfolio

Analysis of indirect exposure through issuance of risk covers

Financial guarantees

D&O liability

Exposure management approach

Responses to 9/11 and Enron

  • Companies are developing specific tools and approaches to deal with terrorism and credit triggered risks

Balance of erm activities appear to be shifting
Balance of ERM activities appear to be shifting functions

  • Increasing focus on addressing new risks (terrorism, credit triggered)

  • Growing interest in establishment of RAPM systems

  • Increasing focus on applications with immediate pay-off

    • Reinsurance strategy

    • Asset allocation

Conclusion functions

  • Risk management issues have become less tractable but more important

  • Focus needs to be on basic risk and capital implications of the core insurance process

  • Longer term, expect the ERM framework to be modified