Implementation and Uses of Economic Capital ... - ERM Symposium

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Risk Aggregation – Three Step Approach AIG’s ECM uses a three step approach for ensuring that “accumulations” of risk are robustly estimated Hybrid Approach in ECM Capital Mobility Stress Testing Within risk types, aggregation is performed using consistent scenarios (e.g. the different components of market risk) Between risk types, risks are aggregated using a correlation matrix / copula approach to reflect the impact of “stress correlations” and increased interconnectedness of risks Some of the aggregations (e.g. between market and credit) are increasingly being performed using a consistent scenario approach Insurance operations are regulated along legal entities by different jurisdictions with varying minimum risk based capital (RBC) requirements Restrictions on dividend payments to the parent and other capital flow constraints and tax considerations give rise to a further “fungibility haircut” to determine realizable diversification benefits Bottom up “stress tests” (e.g. effect of a severe pandemic) are performed by simple addition of risk type effect, following detailed assessment of each category of loss (e.g. mortality, credit, interest rate and business interruption losses for pandemics) Provides a “reality check” on assumed modeled dependencies 17 17
Economic Capital – the Importance of Integrated Modeling Extreme Mortality & Interest Scenarios derived from Low Interest Rate Scenarios – Negatively Correlated with Extreme Credit Loss Scenarios (High Interest Scenarios) Case Study : UK Annuity Book with Credit Risky Cash flow Matching Strategy (Credit Composition = Globox Index) 100 95 90 100 RBC (GBP MM) Combining Standalone RBC Assuming Independence 93 Integrated M odelling - Reflects Negative Correlation in the Tail Source: Barrie & Hibbert, February 2007, “Annuity Risk Management : One-Year VAR Decomposition – A Case Study” 18 18
Page 1 and 2: Use of Economic Capital for Perform
Page 3 and 4: Definition of Economic Capital (“
Page 5 and 6: Economic Capital is a more complete
Page 7 and 8: EC/ERM requires continually improvi
Page 9 and 10: The Executive Board defines Risk Ap
Page 11 and 12: Risk Dashboard provides an overview
Page 13 and 14: Example of EC approach within the R
Page 15 and 16: Concluding Remarks • ING has been
Page 17 and 18: Key technical elements of the EC me
Page 19 and 20: The rationale behind using a stress
Page 21 and 22: The key risks that financial servic
Page 23 and 24: Example of Stressing Key Risks: Equ
Page 25 and 26: Aggregating results across risks fo
Page 27 and 28: Linkage of EC with capital manageme
Page 29 and 30: Evolution of usage for capital mana
Page 31 and 32: It should be noted that this presen
Page 33 and 34: ERM’s efforts “connect the dots
Page 35 and 36: Rating Agencies Four major rating a
Page 37 and 38: Source: Citigroup Global Markets,
Page 39 and 40: European Insurers Report Increasing
Page 41 and 42: Economic Capital at AIG By focusing
Page 43 and 44: CRO Forum Recommendations Re EC Tim
Page 45: Assessment of Financial Strength of
Page 49 and 50: $BN 101.68 GAAP Shareholders' Equit
Page 51 and 52: $BN 25.0 20.0 15.0 10.0 5.0 0.0 AIG

Implementation and Uses of Economic Capital ... - ERM Symposium

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