PD-26_DeToro

Slide 1: 

2008 General Meeting Assemblée générale 2008 Toronto, Ontario Canadian Institute of Actuaries L’Institut canadien des actuaires

Issues with ERM in Banking : 

Issues with ERM in Banking Siloed risks not managed at enterprise level Different techniques used for different risks Lack of Enterprise Management Product Complexity Tool Limitations Failure of Imagination Recent entry into highly complex products Unexpected risk correlations/concentrations Simplified tools used for complex products Short-duration models only Relied on historical data that did not reflect magnitude of potential downside risk Actuarial techniques and skills could have addressed many of these shortfalls.

Transferable actuarial skills : 

Transferable actuarial skills Standardized stress testing models designed to incorporate multiple risks Lack of Enterprise Management Product Complexity Tool Limitations Failure of Imagination Familiarity with complex products Knowledge of probabilities / correlations Determination of risk appetite Long-duration stochastic models to test multiple complex scenarios Quantitative approaches to scenario setting Issue Applicable Actuarial Skills

Slide 4: 

Description Applicable actuarial skills Development of deterministic models to assess individual strategic and operational risks Extension of models to consider combinations of risks with correlations Familiarity with a range of modeling tools (including Excel) and model-building approaches Judgment as to level of detail required in model to get a significant result without losing flexibility or speed Change in Enterprise Value ($M) Stress testing

Knowledge of probabilities : 

Knowledge of probabilities Description Applicable actuarial skills Fitting of known probability distributions to random events Development of appropriate risk correlations Application of lapse and mortality study concepts to other types of risks to create custom distributions Comfort with probability concepts, such as expected value, variance, correlations and copulas Knowledge of characteristics of various probability distributions

Assessment of risk appetite : 

Assessment of risk appetite Description Applicable actuarial skills Use of financial estimation and modeling techniques to quantify a company’s risk appetite Application of an efficient frontier approach to assess the risk v. return trade-offs associated with different risk appetite profiles Comfort with risk exploitation, as well as risk mitigation Knowledge of risk appetite quantification methods and assessment of risk v. reward trade-offs

Slide 7: 

Description Applicable actuarial skills Generation of multiple scenarios of various risks based on probability distributions fitted to those events Correlations between risks used to accurately model financial results Expertise with stochastic approaches and sophisticated financial modeling Stochastic modeling

Actuaries and risk management : 

Actuaries and risk management Overall, the following skills make actuaries well-qualified for risk management roles across a range of industries Understanding of financial risks Mastery of risk quantification techniques Comfort with risk exploitation in addition to risk mitigation Focus on financial measurement of risk Ethics and judgment

Additional skills for actuaries : 

Additional skills for actuaries In order to compete effectively for risk management roles in other industries, actuaries will need to expand their abilities in the following areas: Deeper knowledge of operational risks and ability to identify risks beyond financial and insurance Better communication skills to communicate technical topics and results to non-technical audience Creative thinking and applications of techniques to non-traditional areas

Summary : 

Summary Actuaries have several skills and methods that could be applied to banks Stress testing Knowledge of probabilities Assessment of risk appetite Stochastic modeling Important to use a range of techniques – no single technique is a “silver bullet”