Understanding enterprise risk appetite - table3

ERA is expressed in terms of the group's risk strategy and limit structure.

Local and global business and investment decisions are monitored to ensure that they remain within the appetite and tolerance limits that are set for all "foreseeable" risks.

"Allianz is well positioned to deal with potential future adverse events, in part due to our internal limit framework… and economic solvency ratios.

The group's management is confident that, through this risk appetite, we have achieved an appropriate balance between potential earnings, earnings volatility and solvency considerations." (p149)

Has created individual risk appetite statements for a range of quantifiable risk categories (e.g. catastrophe, reserving, investment and operational risk). These are supported by "risk tolerance limits", to ensure that risk appetites are not exceeded. Tolerance limits are allocated across operating entities.

Includes "event risk appetites" which limit the amount of net loss the group is prepared to expose itself to in relation to a range of catastrophe risk scenarios.

Has an internal risk model (target operating model) to aid the quantification of risk and the assessment of risk appetite and tolerance.

"Our approach to investment management is directed by our investment risk appetite. This is based on, amongst other things, the perceived risk and returns of the different asset classes, the outlook for underwriting profits and the strength of our balance sheet. We do not simply target an absolute investment return. Rather, we seek to maximise returns for the level of risk that we are prepared to accept." (p48)

"For policyholders' funds our risk appetite is relatively low." (p48)

Has set broad risk appetite limits for:

• Economic capital (which must be sufficient to maintain a AA credit rating).
• Liquidity.
• Franchise value – in terms of reputation with customers.

More detailed risk appetite levels, tolerance limits and control standards are set out in risk management policies across the group.

Common models/metrics are used to measure risk across the group. Actual exposure to risk is then compared against the group's consolidated risk appetite limits.

Different appetite levels are set for different risk types: financial, operational, insurance and "other" exposures.

ERA is reviewed by the audit committee. Appetite is "defined and monitored" by the risk management function.

Local business units set own risk appetite within the limits of the group ERA.

CIS's risk appetite requires working capital to be maintained above an internal tolerance level which is applied relative to the internal capital guidance.

In addition "key risk criteria" are used to measure whether the organisation is in "compliance with risk appetite".

"We have a conservative investment policy: our overriding concern is to not lose money or to put at risk the group's capacity to underwrite. Our policy is designed to maximise returns within an overall risk appetite." (p25)

"The group's underwriting risk appetite seeks to ensure that it should not lose more than one year's profit plus 15% of core capital as a result of a 1-in-250 bad underwriting year." (p63)

Utilise a variety of quantitative and qualitative measures and limits:

• Capital adequacy.
• Adequacy of the group's liquid and readily realisable assets.
• Earnings volatility.
• Enterprise value: the appropriateness of the size of the group's investment in future growth opportunities.
• Capability and stretch – the appropriateness of the group's strategic change agenda given the size and capabilities of its staff.
• Regulatory relationship with the UK FSA.
• Brand and reputation – covers behaviour that could cause unacceptable reputation damage. Includes complaint levels and customer service.

"During 2010, we comprehensively reviewed and updated our risk appetite, strengthening governance arrangements and risk management policies." (p35)

"The group seeks to create value for its members by maintaining an appropriate balance between the capital available to support risk, and the level and type of risk it takes on in order to achieve returns for policyholders." (p83)

Economic capital model forms the basis of risk appetite framework. Heavy reliance on risk limits, though value generation is also emphasised.

Five quantitative measures are used:

• Economic capital at risk
• Financial group directive surplus capital at risk
• Earnings at risk
• Cash flow at risk
• Operational risk loses

Qualitative "risk appetite principles and statements" are also used.

"We view risk not only as a threat or uncertainty, but also as an opportunity to grow and develop the business, within the context of our risk appetite. So our approach to risk management is not limited to considering downside impacts or risk avoidance; it also encompasses taking risk knowingly for competitive advantage." (p89)

"The group's overall capital risk appetite is managed with reference to the requirements of the relevant stakeholders and seeks to maintain sufficient, but not excessive, financial strength to support stakeholder requirements." (p278)

Risk appetite is expressed in terms of quantitative and qualitative limits:

Quantitative: where group-wide risk appetite is expressed using a combination of VaR (99%), sensitivity and stress testing limits.

Qualitative: in terms of "principles, policies and procedures" also includes the management of reputational risk and the maintenance of a "strong risk culture".

"A key part of the group's risk appetite is the macro reshaping of the balance sheet through the downsizing of non-core [assets]. The group will manage down previous concentrations in line with the strategic objectives for 2013."(p119)

"The group risk appetite framework was developed significantly during 2010 and continues to be enhanced." (p255)

Different appetite limits are set for different categories of risk.

Risk appetite is set and monitored at a group, regional and business level.

Business volumes are set for certain higher risk insurance classes. In addition, loss retention limits, reinsurance protection levels, credit rating targets and solvency margins are also set.

From a qualitative perspective the group's policy statements set minimum standards for risk management which are consistent with the board's appetite for risk. Economic capital analysis is used to provide an overall indication of appetite. The aim is to maintain sufficient capital to support an "A" rating.

"Expanding our appetite in our core specialised segments through the development of new products." (p20)

"The group has no tolerance for liquidity risk and is committed to meeting all liabilities as they fall due." (p100)

"The maintenance of a capital position in excess of regulatory requirements is an absolute requirement for all of the group's regulated entities. There is no tolerance for breaching capital requirements for any regulated entity." (p102)

"Our risk tolerance is an expression of the extent to which the board of directors have authorised the group to assume risk. It presents the maximum amount of risk that Swiss Re is willing to accept within the constraints imposed by its capital resources, its strategy, its risk appetite, and the regulatory and rating agency environment within which it operates." (p43)

"Risk appetite - the amount of risk we seek to take." (p43)

Limit-based framework – applied across all risk categories. Individual limits are set for different risks.

VaR-based capital modelling is used to help express appetite within this limit framework. Confidence intervals are typically 99% or 99.5%.

"We maintain a conservative underwriting approach to managing the soft cycle in mature economies. At the same time, we continue to pursue attractive growth opportunities in commercial insurance in the growth economies of Latin America and China." (p16)

"We will remain prudent in our investment management approach."(p30)

"The group's major risk management objectives are to:

• Protect the capital base by monitoring that risks are not taken beyond the group's risk tolerance.
• Enhance value creation and contribute to an optimal risk-return profile by providing the basis for an efficient capital deployment.
• Support the group's decision-making processes by providing consistent, reliable and timely risk information.
• Protect Zurich's reputation and brand by promoting a sound culture of risk awareness and disciplined and informed risk taking." (p104).