Optimizing ERM & Economic Capital

The above was the title of a conference in London that I attended this week.  Here are some random take-aways:

    • Sometimes it makes sense to think of risk indicators instead of risk limits.

    • Should MVM reflect diversification?  But who’s diversification?

    • Using a Risk and Control Self Assessment as the central pillar to an Operational Risk program

    • Types of Operational Losses:  Financial, Reputation, Opportunity, Inefficiency

    • Setting low thresholods for risk indicators/KRIs provides an early warning of the development of possible problems

    • Is your risk profile stable?  Important question to consider.

    • Number of employees correlates to size of operational risk losses.  May be a simple way to start thinking about how to assign different operational risk capital to different operations.  Next variable might be experience level of employees – might be total experience or task specific experience.  If a company goes into a completely new business, there are likely to be operational issues if they do not hire folks with experience from other firms.

    • Instead of three color indicators, use four – Red, Orange(Amber), Yellow, Green.  Allows for elevating situations out of green without raising alarm.

    • Should look at CP33

    • Controls can encourage more risk taking.  (See John Adams work on seatbelts)

    • Disclosures of safety margin in capital held might create market expectations that would make it impossible to actually use those margins as a buffer without market repercussions.

    • Serious discussions about a number of ways that firms want to deviate from using pure market values.  Quite a shift from the discussions I heard 2 -3 years ago when strict adherence to market values was a cornerstone of good financial and risk management.  As Solvency 2 is getting closer to reality, firms are discovering some ways that the MTM regime would fundamentally change the insurance business.  People are starting to wonder how important it is to adhere to MTM for situations where liquidity needs are very low, for example.

      All in all a very good conference.

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