Determining g Risk Appetite pp Sim Segal, FSA, CERA, MAAA President SimErgy Consulting LLC ERM Symposium S Session i 5F: 5F Ri Risk k Aggregation A ti L Leading di tto Ri Risk k Appetite A tit April 14, 2010 Traditional approach does not support t i l l aggregation ti enterprise-level Traditional Approach NO  Only financial risks All risks quantified? Is risk interactivity captured? Unifying metric? robustly quantified  Violates “significant digits” rule NO  Quantified on silo / standalone basis  Correlation matrices common Multiple competing O  Multiple, NO metrics Copyright © SimErgy All rights reserved Value-Based ERM Framework Risk Appetite Strategy Qualitative Assessment Risk Mgmt Tactics ERM Committee Scenario Development Value Impact Enterprise Risk Exposure 24 32 22 21 17 18 15 26 12 25 34 16 35 27 31 19 28 23 30 13 11 20 All Risks 14 10 Likelihood Key Risk Scenarios Correlation Likelihood Severitty 33 29 Mostly Objective X Enterprise Value FINANCIAL Market Credit … STRATEGIC Key Risks Strategy 1+ events / sim event / sim Mostly Subjective Execution … ERM Model Baseline Value ▪ ΔValue OPERATIONAL HR “Pain Point” Likelihood ΔValue ≤ -10% 15% ΔValue ≤ -20% 3% Individual Risk Exposures Enterprise Value Impact IT Risk Legislatiion Risk Process Loss of Critical EEs … M&A Risk Execution Risk International Risk Loss of Keyy Supplier pp Loss of Key Distributor IT Risk International Risk Union Negotiations Competitor Risk Consumer Relations Risk 0.0% -5.0% -10.0% -15.0% -20.0% -25.0% Identification Quantification Decision-Making Copyright © SimErgy All rights reserved ILLUSTRATIVE EXAMPLE Likelihood Enterprise risk exposure “pain points” are d to t define d fi risk i k appetite tit used Enterprise Value Likelihood | -10% What is it now? What we want it to be? “Pain Point” Likelihood Likelihood ΔValue ≤ -10% 15% ? ΔValue ≤ -20% 20% 3% ? C t exposure Current (calculated) | -20% T t exposure Target (defined by ERM Committee) Enterprise Value RISK APPETITE Copyright © SimErgy All rights reserved Modified case study: Other key metrics supplement l t enterprise t i value l metrics ti “Pain Point” Modified Case Study Likelihood Decrease in enterprise value of more than th 10% 5% 15% Ratings downgrade – one level 7% g short of Planned revenue Falling growth by more than 200 basis points 11% Falling short of Planned earnings by more than 2Â per share Âp 10% Copyright â SimErgy All rights reserved Value-based approach provides enterprisel l aggregation ti level Traditional Approach NO  Only financial risks All risks quantified? Is risk interactivity captured? Unifying metric? robustly quantified  Violates “significant digits” rule NO  Quantified on silo / standalone basis  Correlation matrices common Multiple competing O  Multiple, NO metrics Value-based Approach YES  All risks quantified consistently  Apples-to-apples math YES  Quantified on integrated basis  Direct calculation of interactivity Single unifying S  Single, YES value metric Copyright © SimErgy All rights reserved Contact Co tact information o at o Sim Segal, FSA, CERA, MAAA President SimErgy Consulting LLC Chrysler Building 405 Lexington Ave., 26th Flr New York, NY 10174 (917) 699-3373 Mobile (646) 862-6134 Office ((347)) 342-0346 Fax sim@simergy.com www.simergy.com Copyright © SimErgy All rights reserved  ... Framework Risk Appetite Strategy Qualitative Assessment Risk Mgmt Tactics ERM Committee Scenario Development Value Impact Enterprise Risk Exposure 24 32 22 21 17 18 15 26 12 25 34 16 35 27 31 19... ΔValue ≤ -10% 15% ΔValue ≤ -20% 3% Individual Risk Exposures Enterprise Value Impact IT Risk Legislatiion Risk Process Loss of Critical EEs … M&A Risk Execution Risk International Risk Loss of... Supplier pp Loss of Key Distributor IT Risk International Risk Union Negotiations Competitor Risk Consumer Relations Risk 0.0% -5. 0% -10.0% - 15. 0% -20.0% - 25. 0% Identification Quantification Decision-Making