Enterprise Risk Management in Life Insurance Company_Yi Zheng

7/21/2019 Enterprise Risk Management in Life Insurance Company_Yi Zheng

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Manulife Financial Corporation operates as John Hancock in the United States, and Manulife in other parts of the world.

Enterprise RiskManagement in Life

Insurance Company

Yi Zheng

Portfolio Modeling Analyst,

Manulife Investment DivisionUniversity of Connecticut 12!2"1#



Agenda

2

What is Risk Management?

The Definition of Enterprise Risk Management (ERM

Risk I!entification (Risk Types

Risk Measurement (Risk "uantification

Risk #ppetite (Risk Decision Making

Risk Cu$ture%&hi$osophy

'enefit of Enterprise Risk Management (ERM



What is Risk Management?

!

Definition of Risk

$isk is uncertainty

$isk includes upside volatility

$isk is deviation fro% e&pected

Risk Management

'alancin( risk and reward

'alancin( art and science

'alancin( process and people

$isk Mana(e%ent is ulti%ately a)out people



Definition of Enterprise Risk Management

#

ames Lam) Enterprise Risk Management-From Incentivesto Controls ! nd edition"*

*+$M is a co%prehensive and inte(rated fra%ework for %ana(in(key risks in order to achieve )usiness o)ectives, %ini%i-e

une&pected earnin( volatility, and %a&i%i-e fir% value.

+im +ega$) Corporate #alue of Enterprise RiskManagement-$%e &e't (tep in )usiness Management *

*/he process )y which co%panies identify, %easure, %ana(e, anddisclose all key risks to increase value to stakeholders.



Risk Identification

0



Risk Measurement

Three popu$ar risk measures

alue at $isk 3a$45 /he a%ount of losses that an entity is note&pected to e&ceed, at a specified confidence level and period ofti%e 3i.e. 607 18day a$ is a level of loss that is e&pected to )e

e&ceeded only 07 of days4

olatility5 9 %easure that provides infor%ation a)out uncertainty ofreturns over a defined ti%e period 3i.e. %ay )e e&pressed as astandard deviation of returns over the specified ti%e period or thestandard deviation of *trackin( error vs. a specified inde&4

+&pected Shortfall5 /he e&pected si-e of loss that for all lossese&ceedin( a defined threshold





Risk Measurement Example

<



Why Risk Appetite?

6



Risk ortfolio in Life Insurance Company

1"



!he ro"lem of #perationali$ing Risk !aking

11

=nvestors and %ana(ers are faced with decisions a)out how%uch and what types of risk to take

=t is a si%ple concept with %aor e&ecution challen(es

>hat is the relevant universe of risk?

How can risk )e %easured?

>hich risks do we want and how %uch of each?

How can the desired risk profile )e achieved?

/he (oal of the $isk 9ppetite fra%ework is to %ake thatoperationali-ation possi)le



Risk Appetite %rame&ork

12

+sta)lishes and defines the risk types that are relevant3e.(., *@u)lic +;uity $iskArisk fro% the chan(es in the levelthe e;uity %arkets4

Befine how risk will )e %easured 3e.(., *how %uch %oneydo we lose if the S@ 0"" drops )y 07 to%orrow4

Befines a risk appetite throu(h ;uantitative li%its and;ualitative state%ents

*>e want to lose no %ore than D1"" %illion if the S@ 0"" drops )y07 to%orrow.



Risk Appetite "y Risk Category

1!

Risk Categories -ey Consi!erations

+trategic /he )usiness on the (lo)al %arket? Should we enter a new produce %arket 39, E/C, etc.4?

.enera$ Interest Ratesan! Interest +prea!s

/his risk is difficult to inherent in the products and invest%ents. /he hed(in( Strate(y?

&u/$ic E0uity =nvestors have %ore efficient ways of takin( this risk than investin( in a financial institution.

Rea$ Estate) #LD#) Cre!it'enefit fro% this risk )y su)ectin( to diversification, li;uidity, capital i%pacts, lia)ility

%atchin(, etc.

Currency =t is difficult to (et paid or hed(e this risk over a lon( ter% for a (lo)al co%pany.

Morta$ity an! Mor/i!ity)&1C C$aims

)li(ation of =nsurance Co%pany to take this risk. >ide financial swin(s if key assu%ptionsare incorrect.

&o$icyho$!er 'eha2ior +&perience can chan(e ;uickly and hard to %easure.

3perationa$ Unintended conse;uences and natural )yproduct of the e%ployeeGs activities.

Li0ui!ity /he a)ility to sell assets. Chan(e in li;uidity de%and.



Risk Appetite %rame&ork 'ummary

1#



Dri(ers of Risk Management

10



Risk Culture)hilosophy

1

/raditionally, co%panies %ana(ed risk in or(ani-ationalsilos. Market, credit, and operational risks were treatedseparately and often dealt with )y different individuals orfunctions within an institution.

/he pro)le% is that individual risk functions %easure andreport their specific risks usin( different %ethodolo(ies andfor%ats.

$isk %ana(e%ent should act like a fund %ana(er and setportfolio tar(ets and risk li%its to ensure appropriatediversification and opti%al portfolio returns.



Risk Culture)hilosophy

1:

9 key )arrier for %any life insurance co%panies ini%ple%entin( +$M is that each of the financial risks withinthe overall )usiness portfolio is %ana(ed independently.

/he actuarial function is responsi)le for esti%atin( lia)ility risksarisin( for the co%panyGs insurance policies.

/he invest%ent (roup invests co%panyGs cash flows in fi&ed8inco%eand e;uity invest%ents.

/he interest rate risk function hed(es %is%atches )etween assetsand lia)ilities.



*enefit of Enterprise Risk Management

1<

+nterprise $isk Mana(e%ent 3+$M4 provides inte(ratedanalyses, inte(rated strate(ies, and inte(rated reportin(with respect to an or(ani-ations key risks, which addresstheir interdependencies and a((re(ate e&posures. =naddition, an inte(rated +$M fra%ework supports the

ali(n%ent of oversi(ht functions such as risk, audit, andco%pliance. Such an ali(n%ent would rationali-e riskassess%ent, risk %iti(ation and reportin( activities.

+nterprise $isk Mana(e%ent has three %aor )enefits5

=ncrease or(ani-ational effectiveness

'etter risk reportin(

=%proved )usiness perfor%ance



*enefit of Enterprise Risk Management

16

9 life insurance co%pany which has i%ple%ented +$Mwould %ana(e all of its lia)ility, invest%ent, interest rate,and other risks as an inte(rated whole in order to opti%i-eoverall riskreturn. /he inte(ration of financial risks is one

step in the +$M process, while strate(ic, )usiness, andoperational risks %ust also )e considered in the overall+$M fra%ework.



Manulife Financial Corporation operates as John Hancock in the United States, and Manulife in other parts of the world.

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"uestions are We$come

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Enterprise Risk Management in Life Insurance Company_Yi Zheng