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Enterprise Risk Management CONFIDENTIAL - DO NOT DISTRIBUTE1 Implementing and Transitioning Enterprise Risk Management Vinaya Sharma and Randy Tillis Allstate.

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Presentation on theme: "Enterprise Risk Management CONFIDENTIAL - DO NOT DISTRIBUTE1 Implementing and Transitioning Enterprise Risk Management Vinaya Sharma and Randy Tillis Allstate."— Presentation transcript:

1 Enterprise Risk Management CONFIDENTIAL - DO NOT DISTRIBUTE1 Implementing and Transitioning Enterprise Risk Management Vinaya Sharma and Randy Tillis Allstate Financial ERM Symposium – Chicago CS 6-A April 26/27, 2004

2 Enterprise Risk Management CONFIDENTIAL - DO NOT DISTRIBUTE2 About Allstate Financial Vision To be the company financial service professionals choose for their clients' financial protection, savings and retirement needs Mission To assist financial service professionals in meeting their clients' financial protection, savings, and retirement needs by providing top-tier products delivered with reliable and efficient service

3 Enterprise Risk Management CONFIDENTIAL - DO NOT DISTRIBUTE3 About Allstate Financial Strategies –Broadly distribute a focused portfolio of top-tier products through a multi-channel network of financial service professionals –Drive operational scale, efficiency and effectiveness in all that we do –Leverage investment and risk management expertise to deliver growth and superior risk- adjusted returns. –Capitalize on the strength of the Allstate brand –Operate as a high performance organization

4 Enterprise Risk Management CONFIDENTIAL - DO NOT DISTRIBUTE4 Life Insurance –Term –Whole Life –Universal Life Deferred Annuities –Fixed –Variable –Equity-Indexed –Market Value Adjusted –T-Link Payout Annuities –Immediate –Structured Settlements Health –Disability –Long Term Care –Accident Banking services Institutional Markets

5 Enterprise Risk Management CONFIDENTIAL - DO NOT DISTRIBUTE5 Risk Analysis Current: Risks are addressed/owned, but fragmented Desired: Enterprise view of risks (e.g. equity, default, interest rate, disaster recovery, etc) Current: Each product viewed independently Desired: Capture offsets from other lines of business Current: Infrequent selected measurements of risk Desired: Routine measurement of risk levels Current: Limits to risk, if any, are at micro level Desired: Enterprise level bounds to risk tolerances

6 Enterprise Risk Management CONFIDENTIAL - DO NOT DISTRIBUTE6 Why Enterprise Risk Management Provide company-wide scope/assessment to risk analysis which currently doesn’t exist Present how a single relevant economic event affects the company Reveal natural hedges and portfolio effects Enhance capital allocation process Clarify roles/responsibilities Best Practice in today’s environment

7 Enterprise Risk Management CONFIDENTIAL - DO NOT DISTRIBUTE7 Enterprise Risk Mgmt Approach Analysis of significant risks (e.g. equity, default, interest rates, etc) –Risk Dashboard (See Appendix 1) –Quarterly Risk Profile Report Aggregate risks throughout Enterprise –Catalog of risks –Monthly updates –Risk Forum ‘Point’ team on large events that impact the enterprise

8 Enterprise Risk Management CONFIDENTIAL - DO NOT DISTRIBUTE8 Enterprise Risk Mgmt – Significant Risk Analysis Aggregate information –Equity: VA, EIA, Unaffliated common stock, etc –Default: Private Placements, Inv Grade Corp Bonds, Real Estate, etc. Establish Metrics –Not subject to manipulation –Must be used/understandable to the practitioner –Samples: Income, Capital, Cash Flow

9 Enterprise Risk Management CONFIDENTIAL - DO NOT DISTRIBUTE9 Enterprise Risk Mgmt – Significant Risk Analysis Establish Tolerance –Considerations Insurance Departments Investors Rating Agencies Establish scenarios –Stochastic vs Deterministic –Goal of scenarios Determine how often risk profile to be measured

10 Enterprise Risk Management CONFIDENTIAL - DO NOT DISTRIBUTE10 Enterprise Risk Mgmt – Aggregate Risks Catalog of risks within Areas of Responsibility (See Appendix 2) Monthly updates from ERM liaisons Risk Forum –Day long event –15 minutes of fame –Goals Share information Quantify risks/opportunities Clarify roles (See Appendix 3)

11 Enterprise Risk Management CONFIDENTIAL - DO NOT DISTRIBUTE11 Enterprise Risk Mgmt – Point Team Terrorist Attacks NIMBDA Virus Bush 2003 Tax Proposals

12 Enterprise Risk Management CONFIDENTIAL - DO NOT DISTRIBUTE12 Enterprise Risk Mgmt Successes Conduit of information Aggregation of exposure Increased discipline Broader understanding/measurement of risk

13 Enterprise Risk Management CONFIDENTIAL - DO NOT DISTRIBUTE13 Enterprise Risk Mgmt Lessons Turf issues on Significant Risks Witch hunts on aggregating risks Risk Mgmt is different to different people Can not satisfy all of the people all of the time Senior Management buy-in is essential Quantifying ERM value can be difficult

14 Enterprise Risk Management CONFIDENTIAL - DO NOT DISTRIBUTE14 Transitioning Enterprise Risk Management Creating Value Handling Change

15 Enterprise Risk Management CONFIDENTIAL - DO NOT DISTRIBUTE15 Creating Value from ERM - A beginners perspective A Three prong approach to ERM Dashboards Aggregate Risks Reactive Risk Management

16 Enterprise Risk Management CONFIDENTIAL - DO NOT DISTRIBUTE16 Creating Value from ERM Dashboard Variable Annuity changes in 2003/04 that impact the dashboard include Market Recovery SOP (GAAP GMDB/IB reserving) RBC Phase II (Statutory capital) New Product developments (GMWB,GMAB) RiskColourMetricAcceptable Range ($millions)Current Measurement from expected ($millions) Equity------STAT Income Surplus $AA annual income variance vs expected $BB surplus variance Stress Equity Scenario 1: ($--), ($--), ($--) in Yr 1,2,3 Surplus variance in Equity Scenario: ($--)

17 Enterprise Risk Management CONFIDENTIAL - DO NOT DISTRIBUTE17 Risk identification Culture shift Witch hunts Creating Value from ERM – Aggregate and Catalog Risk

18 Enterprise Risk Management CONFIDENTIAL - DO NOT DISTRIBUTE18 Business Recovery Investment Advisors Parmalat 2003 Flu Deaths Creating Value from ERM – Reactive Risk Management Examples

19 Enterprise Risk Management CONFIDENTIAL - DO NOT DISTRIBUTE19 Transitioning Enterprise Risk Management Handling Change

20 Enterprise Risk Management CONFIDENTIAL - DO NOT DISTRIBUTE20 Early Learnings involved Research Practicality Communication Timeliness

21 Enterprise Risk Management CONFIDENTIAL - DO NOT DISTRIBUTE21 Changes in the Industry by COSO Basel II International Accounting Standards Involvement with CAS PRMIA SOA

22 Enterprise Risk Management CONFIDENTIAL - DO NOT DISTRIBUTE22 Integrating ERM with a parent/subsidiary involves Communication Clearly defined roles/responsibilities Demonstrating Value added by ERM

23 Enterprise Risk Management CONFIDENTIAL - DO NOT DISTRIBUTE23 Implementing and Transitioning Enterprise Risk Management Vinaya Sharma and Randy Tillis Allstate Financial ERM Symposium - Chicago April 2004 Appendices

24 Enterprise Risk Management CONFIDENTIAL - DO NOT DISTRIBUTE24 RiskColourMetricAcceptable Range ($millions)Current Measurement from expected ($millions) Equity------STAT Income Surplus $AA annual income variance vs expected $BB surplus variance Stress Equity Scenario 1: ($--), ($--), ($--) in Yr 1,2,3 Surplus variance in Equity Scenario: ($--) Default------STAT Income Capital $DD annual income variance vs expected Capital > EE Stress Default Scenario: ($--) in Yr 1,2,3 Capital: -- Interest Rates STAT Income Duration Capital $FF annual income variance vs expected GG duration tolerance, Capital > HH Interest Rates Up: ($--), ($--), ($--) in Yr 1,2,3 Interest Rates Down: ($--), ($--), ($--) in Yr 1,2,3 Duration: --base, Capital > --

25 Enterprise Risk Management CONFIDENTIAL - DO NOT DISTRIBUTE25 Catalog of Risks

26 Enterprise Risk Management CONFIDENTIAL - DO NOT DISTRIBUTE26 Responsibility Template


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