Enterprise Risk Management Case Study 5 Ron Harasym

Enterprise Risk Management Case Study 5 Ron Harasym Sun Life Financial Casualty Actuarial Society / Society of Actuaries Enterprise Risk Management Symposium July 30 2003, Washington DC

Outline of Presentation • • • 2 Market Risk Tolerance Limits (MRTLs) Progression to Earnings-at-Risk (Ea. R) Comparison with other tools Sample Earnings-at-Risk report ERM moving forward

Development of Market Risk Tolerance Limits • Senior management was surveyed as per risk tolerance. • Limits were established on interest, equity, and currency risk at the company and business group level. • Stylized capital market shocks were defined. • An income sensitivity testing standard was developed. • Income sensitivity is now tested against these limits. • Business groups must explain and justify if beyond these limits. • Compliance report is presented to the Executive Risk Committee and the Risk Review Committee of the Board. 3

Progression to Earnings-at-Risk • Quantifies both the frequency and severity of scenarios • Forward looking: • can identify exposures • can act as an early warning system • High information density: • identification of cross-operation risk diversification • identification of intra-operation risk diversification • Complex stochastic modeling required • heavy computational demands • use of representative scenarios helps • Communication challenges 4

Comparison: Business Plan, MRTL, Ea. R (1) Business Plan: consists of a single projection (2) Market Risk Tolerance Sensitivities: • 4 interest scenarios • 4 equity scenarios (3) Earnings-at-Risk , , , Sensitivities: • Additional 16+ , , joint interest/equity , , scenarios 5

Comparison of Approaches (Continued) (4) Earnings-at-Risk Simulation • simulation of typically 10, 000 economic scenarios via interpolation into the earnings surface 6

Comparison With Other Tools 7

Sample Earnings-at-Risk Report 8

Sample Earnings-at-Risk Chart 9

ERM Moving Forward • MRTL & Ea. R are decisions support tools, directed at supporting risk based decision making by senior management • It will take a number of years to: • to include other risk factors such as mortality/morbidity, credit risk, . . • to fully embed in the organization with • greater drill down • greater linkage between decisions made in front/operational lines and resultant impact on risk exposure • Finally, the process is still evolving. 10