ERM, Towards an Holistic View
of Risk Management
Presented by Michel M. Dacorogna
Moscow, Russia, April 23-24, 2008
Important disclaimer
Although all reasonable care has been taken to ensure the facts stated herein are accurate and that the opinions contained herein are fair and
reasonable, this document is selective in nature and is intended to provide an introduction to, and overview of, the business of Converium. Where
any information and statistics are quoted from any external source, such information or statistics should not be interpreted as having been adopted or
endorsed by Converium as being accurate. Neither Converium nor any of its directors, officers, employees and advisors nor any other person shall
have any liability whatsoever for loss howsoever arising, directly or indirectly, from any use of this presentation.
The content of this document should not be seen in isolation but should be read and understood in the context of any other material or
explanations given in conjunction with the subject matter.
This document contains forward-looking statements as defined in the US Private Securities Litigation Reform Act of 1995. It contains forward-looking
statements and information relating to the Company's financial condition, results of operations, business, strategy and plans, based on currently
available information. These statements are often, but not always, made through the use of words or phrases such as 'expects', 'should continue',
'believes', 'anticipates', 'estimated' and 'intends'. The specific forward-looking statements cover, among other matters, the reinsurance market, the
outcome of insurance regulatory reviews, the Company's operating results, the rating environment and the prospect for improving results, the amount
of capital required and impact of our capital improvement measures and our reserve position. Such statements are inherently subject to certain risks
and uncertainties. Actual future results and trends could differ materially from those set forth in such statements due to various factors. Such factors
include general economic conditions, including in particular economic conditions; the frequency, severity and development of insured loss events
arising out of catastrophes; as well as man-made disasters; the outcome of our regular quarterly reserve reviews, our ability to raise capital and the
success of our capital improvement measures, the ability to exclude and to reinsure the risk of loss from terrorism; fluctuations in interest rates;
returns on and fluctuations in the value of fixed income investments, equity investments and properties; fluctuations in foreign currency exchange
rates; rating agency actions; the effect on us and the insurance industry as a result of the investigations being carried out by US and international
regulatory authorities including the US Securities and Exchange Commission and New York’s Attorney General; changes in laws and regulations and
general competitive factors, and other risks and uncertainties, including those detailed in the Company's filings with the US Securities and Exchange
Commission and the SWX Swiss Exchange. The Company does not assume any obligation to update any forward-looking statements, whether as a
result of new information, future events or otherwise.
Please further note that the Company has made it a policy not to provide any quarterly or annual earnings guidance and it will not update any past
outlook for full year earnings. It will however provide investors with perspective on its value drivers, its strategic initiatives and those factors critical to
understanding its business and operating environment.
This document does not constitute, or form a part of, an offer, or solicitation of an offer, or invitation to subscribe for or purchase any securities of the
Company. Any securities to be offered as part of a capital raising will not be registered under the US securities laws and may not be offered or sold in
the United States absent registration or an applicable exemption from the registration requirements of the US securities laws.
Economy of Risk in Insurance
Michel M. Dacorogna
April 23-24, 2008
2
Building blocks of ERM
Strategic Risk Management
Risk and
Economic
Capital
Modeling
Emerging Risk
Management
Risk
Control
Processes
Risk Management Culture
Economy of Risk in Insurance
Michel M. Dacorogna
April 23-24, 2008
3
Building blocks of ERM
Strategic Risk Management
Risk and
Economic
Capital
Modeling
Emerging Risk
Management
Risk
Control
Processes
Risk Management Culture
Economy of Risk in Insurance
Michel M. Dacorogna
April 23-24, 2008
4
Risk Management Culture
Establish a risk culture with strong awareness for policies and
guidelines at all levels of management, and execution for key risks
facing the organization:
 Clearly defined overall risk tolerance deduced from stakeholder
requirements
 Clearly defined risk preferences stating which risks to take at all and in
what proportion
 Clear vision of overall risk profile
 Limits for single risks deduced from overall risk tolerance, risk
preferences, and risk profile
Economy of Risk in Insurance
Michel M. Dacorogna
April 23-24, 2008
5
Overall Risk Tolerance Deducted from
Strategic Risk Targets
Strategic risk targets
Overall risk tolerance

Minimum Rating of A- (S&P) and
A- (A.M. Best)

Minimum Capital Adequacy Ratio of
x% (S&P) and x% (A.M. Best)

Target Rating of A+ (S&P) and A
(A.M. Best)

Target Capital Adequacy Ratio of
x% (S&P) and x% (A.M. Best)

No risk driver must contribute
more than 5% of risk supporting
capital when looking at the
average of 5% worst cases

Maximum contribution of M € XXX
per risk driver for 5% expected loss
cases analyzed within the group
portfolio

No stress test must result in a
loss larger than 15% of risk
supporting capital

Maximum loss of M € YYY per
company predefined stress test for
the entire group

Fulfillment of all regulatory
requirements incl. SST and S.II

Fulfillment of regulatory capital
requirements for each legal entity
Economy of Risk in Insurance
Michel M. Dacorogna
April 23-24, 2008
6
Process to Derive at Risk Preference
and Risk Profile
Definition of
Risk Appetite
GEC/BoD decision:
 RBC for asset risk is less than
25% of total risk based capital
 S&P capital for asset risk is
Total Capital
Allocated
less than 15% of S&P Net
Total Adjusted Capital
Investment/ALM
committee decision:
 Investment guidelines
 Strategic asset allocation
 Limit allocation
Asset Risk
Preference
GEC decision:
RBC
RBC
Assets Liabilities





Peak limit decision
Peak limit allocation
Product selection (NPI)
LoB/geographic growth areas
Underwriting guidelines
Liability Risk
Preference
Economy of Risk in Insurance
Michel M. Dacorogna
April 23-24, 2008
7
Governance and communication
Highly effective governance structure and principles embedded
in the organization
Consistent risk culture at all levels of the organization
Regular reporting to the top management on risks and
exposure
Clear communication of risk-return considerations to
shareholders
High level of transparency regarding risk tolerance, risk
preferences and risk-return considerations
Economy of Risk in Insurance
Michel M. Dacorogna
April 23-24, 2008
8
ERM affects the complete organization
Board of Directors
Risk monitoring and reporting
Group Executive Committee
Policies & Strategy
Prioritization and threshold setting
Appropriateness of risk mitigation plans
Decisions, guidance and “sponsorship”
Risk reporting
Performance monitoring
Risk Management
Risk identification & assessment
Mitigation plans + responsibilities
Performance reporting
Operational Processes
Process and guidelines improvement
Risk / tolerances adjustment / change
Risk plan execution
Operational Processes
Economy of Risk in Insurance
Michel M. Dacorogna
April 23-24, 2008
Mission and vision, risk policy and appetite
Governance and direction
Risk reporting
9
Building blocks of ERM
Strategic Risk Management
Risk and
Economic
Capital
Modeling
Emerging Risk
Management
Risk
Control
Processes
Risk Management Culture
Economy of Risk in Insurance
Michel M. Dacorogna
April 23-24, 2008
10
Risk and economic capital modeling (1/2)
Consistent model approach which properly addresses all types of
risk: underwriting risk, market and credit risk
Data quality and appropriateness ensured by regular validation
and processes to deal with potential deficiencies
Appropriateness of assumptions ensured through stress tests,
effective processes to derive at assumptions even when some
information are missing, and peer reviews
Identification of main risk drivers
Quality assurance of RBC modeling process and linkage with
ERM and planning processes
Accurate programming secured for actual status and for all future
changes
Economy of Risk in Insurance
Michel M. Dacorogna
April 23-24, 2008
11
SCOR integrates all models in its
ALM approach (consistent model)
Cash flow
Liabilities
Assets
Accounting
Investments
Lines of business (LoB)
Cash & Short term
investments
Fixed Income
LoB1
Economic
Indicator
Equities
Real Estate
LoB2
LoB4
LoB4
LoB4
LoB4
LoB9
Alternative
Investments
Economy
Equity indices
GDP
Yield curves
Forex
Economy of Risk in Insurance
Michel M. Dacorogna
April 23-24, 2008
12
Risk and economic capital modeling (2/2)
Careful analysis of the various dependences between risks
Segregation of duty between modelling and underwriting
Stress test model in order to verify results of stochastic
modelling
Incorporation of results into decision making and business
planning process
Deliberate decision to use either:
 internal models,
 or external models,
 or no models for specific purposes
Economy of Risk in Insurance
Michel M. Dacorogna
April 23-24, 2008
13
Covering All Risks
Calendar Year Risk Based Capital Consumption Y0 and Y1
In EUR million, illustrative
2286
Undiversified
Y0
Diversified
1480
1315
988
694
215
Liability Risk
Asset Risk
111
111
Operational Risk*
Total
*
2044
Y1
1530
1356
1066
431
207
Liability Risk
Asset Risk
83
83
Operational Risk*
Total
* Calculated based on Basel II Standardized Approach
Economy of Risk in Insurance
Michel M. Dacorogna
April 23-24, 2008
14
Stress Testing: Two forms of worst case
analyses should be part of the model
Named events / stress scenarios*
 Analysis of clearly defined and described
events
 Events can have happened in the past or
may be possible in the future
 Events can consist of a single risk factor
or of a combination of several risk factors
 Definition of direct and indirect impact,
management actions, and contingency
plans
Examples
Financial distress
Severe adverse development in reserves
Tokyo earthquake
Retrocessionaires default
* Based on Lloyd’s, RDS, scenario catalogue by the Swiss
Solvency Test (FOPI), and SCOR specific scenarios
Extreme tail scenarios
 Detailed analysis of the worst 5%
scenarios from the economic scenario
generator
 Bootstrapping from past market behavior
and heavy-tailed extrapolation of
distributions deliver truly extreme
scenarios
 Scenarios consist of a combination of P&L
and balance sheet developments
Risk driver examples
Aviation
Credit & Surety
Marine
Foreign exchange rates
Interest rates
Economy of Risk in Insurance
Michel M. Dacorogna
April 23-24, 2008
15
Building blocks of ERM
Strategic Risk Management
Risk and
Economic
Capital
Modeling
Emerging Risk
Management
Risk
Control
Processes
Risk Management Culture
Economy of Risk in Insurance
Michel M. Dacorogna
April 23-24, 2008
16
Emerging Risk Management (1/2)
Robust process to continuously identify, assess, mitigate
emerging risks and manage potential incidents
Continuous identification of emerging risks using internal and
external sources and central information gathering
Assessment of relevance of emerging risks by identifying
affected areas, estimate financial impact and correlation with
other risks
Mitigation of emerging risks using:
– hedging/retro strategies,
– setting exposure limits,
– changing terms and conditions,
– securing access to liquidity (contingent capital, securitization)
Economy of Risk in Insurance
Michel M. Dacorogna
April 23-24, 2008
17
Emerging Risk Management (2/2)
Developing watching system by the risk management
department to learn from the various governemental agencies
and other insurances and reinsurances
Installation of early warning system for potential emerging risk
incidences
Preparation for incidence management by setting up
contingency plans and processes to quickly identify losses and
settle claims
Set-up of learning procedures in order to continuously improve
emerging risk management based on experience
Economy of Risk in Insurance
Michel M. Dacorogna
April 23-24, 2008
18
Emerging risk:
Possible top-10 of emerging risks
Top-10 emerging risks
Options and measures
1) Global Pandemic
 Business continuity planning, retro options
2) IT / Network Centric Risks
3) Climate Change
4) Legal / Regulatory Shift
5) NBC – Terrorism
6) Technology (Nano, GM, chemicals)
7) Product Liability
 Pre-defined clauses, underwriting guidelines,
back-up systems
 Nat-Cat model update
 Anticipation and geographic diversification,
opt out (exit one market)
 Terrorism exclusion / model, retro cover
 NPI-process, exclusions, underwriting
guidelines
 Parameter risk assessment for long tail
business, dependencies calculation
8) New Chronic Diseases
 Pricing, exclusions
9) Mega – Projects
 Risk sharing, retro, scenario analysis, limits
10) Socio – Economic Breakdown
 Geographical diversification
Economy of Risk in Insurance
Michel M. Dacorogna
April 23-24, 2008
19
Building blocks of ERM
Strategic Risk Management
Risk and
Economic
Capital
Modeling
Emerging Risk
Management
Risk
Control
Processes
Risk Management Culture
Economy of Risk in Insurance
Michel M. Dacorogna
April 23-24, 2008
20
Risk Control Processes (1/3)
All risks are continuously identified, prioritized and control
processes defined and deliberately carried out
Limits and standards set for every risk and strictly enforced;
consequences for violating limits or standards are clearly
communicated and carried out
Every risk is measured regularly using appropriate measures
by nature of risk
Risk monitoring by comparing exposures to limits and
suggesting actions if necessary
Regular risk reporting to major decision makers
Economy of Risk in Insurance
Michel M. Dacorogna
April 23-24, 2008
21
Risk Control Processes (2/3)
Timing of measurement, monitoring, and reporting optimized
taking into account volatility of risk, mitigation period and costs
Clear process to translate measuring, monitoring and reporting
into risk mitigation actions as well as risk pricing
Proper consideration of risk mitigation actions within a period
(e.g., management actions)
Clear procedures for loss event management by following
predefined contingency plans
Economy of Risk in Insurance
Michel M. Dacorogna
April 23-24, 2008
22
Loss Event Management
Generic Headline Loss Process
Fostering transparency of numbers and process
Evaluate
Newsworthy
event occurs
High level
estimate of loss
coordinated by
Claims
48hrs
Initiate
Claims triggers the estimation
process based on significant
expected loss
Proposed guideline: > 1.5m
loss estimation process is
triggered with UW. Weekly
estimation + reporting of that
specific loss event by contract.
Monitor
Event moves into standard
portfolio review process for
HLL
Headline loss is
not actively
monitored
Online reporting and updating of all
HLL events. Monthly reporting to
management as a component part of
claims reporting process
1st Month
Ongoing
Clearly defined interfaces between Claims, UW, TA and Actuaries
Economy of Risk in Insurance
Michel M. Dacorogna
April 23-24, 2008
23
Risk Control Processes (3/3)
Control mechanisms and processes are properly defined,
communicated, and executed
Strict coordination and feedback loops between profitability
analysis, pricing, claims, risk underwriting and reserving
Learning process in place using experiences to make
adjustments to standards, limits, enforcement, risk mitigation,
pricing, event management
Economy of Risk in Insurance
Michel M. Dacorogna
April 23-24, 2008
24
Limit Setting and Enforcement
Gross to Net Impact - Plan for next year

Gross and Net distributions (including RI premiums):
USD Thousands
Single-event claims, 250-year return period
400'000
350'000
300'000
250'000
200'000
150'000
100'000
50'000
0
Europe
Windstorm
Turkey
Earthquake
Sw itzerland
Earthquake
Japan
Earthquake
Gross
Japan
Typhoon
USA
Earthquake
USA
Caribbean HU
Hurricane
Net of Retrocession / RIPs
Economy of Risk in Insurance
Michel M. Dacorogna
April 23-24, 2008
25
Risk Monitoring / Limit Control
Renewal Process: Risk View
Renewal Process: Monitoring
Example Eurowind
CRO Intervention
450
Risk Reporting
(Renewal Report)
Constant
Feedback
Loop
400
EUR Million
Limit Setting
(Net Appetite)
350
300
250
Estimated Exposure
Authorized
capacity
200
Risk Control
(Outwards Options,
additional limits,
scale-down)
Economy of Risk in Insurance
Michel M. Dacorogna
April 23-24, 2008
26
Building blocks of ERM
Strategic Risk Management
Risk and
Economic
Capital
Modeling
Emerging Risk
Management
Risk
Control
Processes
Risk Management Culture
Economy of Risk in Insurance
Michel M. Dacorogna
April 23-24, 2008
27
Framework to Strategic Risk Management
Risk appetite, risk preference, risk profile, risk limits
Strategic liability
risk-return-management
 Allocation between
Strategic asset and ALM
risk-return-management
 Strategic asset allocation
Lines of Business (LoB)
Perils
Markets
Regions
Contract types
 Hedging strategies
 Duration (mis-)matching
 Currency (mis-)matching
Clients
 Retro strategy
Economy of Risk in Insurance
Michel M. Dacorogna
April 23-24, 2008
28
Strategic Risk Management
Strategic decision making is oriented towards risk-return
optimization (e.g., target portfolio)
Requirements of regulators, rating agencies, shareholders and
internal capital view are incorporated as boundary conditions
Decisions are based on risk-reward orientation (e.g., pricing, terms
and conditions, product design, retro program, limits)
Risk-return relation is the major basis for capital and resource
allocation
Economy of Risk in Insurance
Michel M. Dacorogna
April 23-24, 2008
29
Risk adjusted financial management
There is a clear link between risk-return relation and
compensation of all decision makers in the company
Extensive use of risk adjusted financial management system
Analysis of strategic options based on risk-return positions
Economy of Risk in Insurance
Michel M. Dacorogna
April 23-24, 2008
30
Strategic Asset Allocation (SAA)
based on efficient frontier
The investment
strategy is based on:
risk/return
considerations for
the entire
shareholder’s
equity (including
liability risk)
Expected return
Risk versus return (Efficient frontier)
…
Scenarios of equity allocations
0% equity allocation
And risk aversion
as defined by top
management
Optimum equity allocation
Downside risk (based on expected shortfall)
Economy of Risk in Insurance
Michel M. Dacorogna
April 23-24, 2008
31
Strategic risk management means basing
business decisions on risk / return analysis
Timeline
Jan
Analysis
of the
renewal
results
Jun
Modeling
of current
portfolio
Strategic
targets
(capital
allocation)
 Risk appetite
 Limit definitions
for exposures
 Pricing
parameters
 New product
reviews
Business
planning
Nov
Modeling
of the
planned
portfolio
(Risk
budget)

Cat limits

Retro strategy

Capital
consumption
Strategic
asset
allocation
(investments)
Renewal
pricing
against
the
planned
portfolio

Alignment of the
asset portfolio to
the plan

Strategic Asset
Allocation

Allocation of
extra-capacity
ALM
Business planning
Economy of Risk in Insurance
Michel M. Dacorogna
April 23-24, 2008
32
Conclusion
ERM is nothing else than sound insurance practice:




It encompasses the whole organization and its processes
It helps defining the value drivers of insurance
It allows to measure the performance of the business
It makes the company more transparent to all stakeholders
ERM will not simply be a passing trend but a way to become
more professional in our business
ERM requires the long-term commitment for excellence of the
whole organization:
“We are what we repeatedly do. Excellence, therefore, is not an
act but a habit” (Aristotle)
Economy of Risk in Insurance
Michel M. Dacorogna
April 23-24, 2008
33