QRM - The Risk Framework

General description of system

QRM's Risk Framework delivers the ability to directly model a full range of life, annuity and pension products and also extends its long-standing portfolio optimization functionality to the ability to create replicating portfolios (RP) based on cash flows taken from any traditional actuarial modelling systems, including those for health, general and P&C products. As an adjunct to the RP methodology, QRM has also extended its VaR and capital modelling functionality with the ability to deploy advanced "response surface methodology" (RMS) functionality as an alternative or an adjunct to the RP method.

QRM has extended its Basel II and regulatory capital offering to cover Solvency II, adding a flexible, comprehensive framework that directly leverages the underlying ERM framework. This offering makes it possible to model the full balance sheet of a complex insurance company in a single ERM framework for the first time.

Functions performed

QRM's Risk Framework addresses all forms of financial risk in the balance sheet, including market risks (interest rate, equity, credit spread, liquidity, foreign exchange and volatility) and actuarial assumption risks (lapse, mortality, longevity, expense, default and prepayment). QRM clients perform risk analysis based on deterministic or stochastic simulation of all risk factors, quantitatively assessing the impact of each factor on balance sheet value, both today and over time.

QRM's Risk Framework offers clients a choice for modelling capital:

• Direct cash flow modelling of each asset and liability based on detailed contractual characteristics and actuarial assumptions of each financial instrument.
• Replicating portfolios create portfolios of instruments to match the cash flows projected by the Risk Framework or any other external direct modelling application.
• Response surface modelling creates a series of response functions to approximate value change under any economic scenario.
• Capital aggregation uses the standard formula approach and advanced copula-based aggregation techniques.

Enterprise Risk Management

QRM offers a fully integrated ERM solution that includes:

• Data management/ETL
• ALM
• Market risk
• VA hedging
• Credit risk/economic capital
• Solvency II/regulatory capital
  • Replicating portfolios
  • Response surface method
  • Capital aggregation
• Planning and forecasting
• Portfolio optimization
• Reporting

QRM's analytical framework contains a state-of-the-art, fully integrated operating income simulation module, providing dynamic balance sheet analysis that produces financial planning, capital planning (including Solvency II capital planning), and business planning functionality. This module produces detailed projections of future income statements and balance sheets, based on industry standard accounting methods such as GAAP, statutory, and tax on both a book value and market value basis, based on user-defined growth, behavioural and reinvestment assumptions.

Specific Solvency II features

QRM's Risk Framework directly models assets and liabilities, and also creates nimble model approximations via replicating portfolios or response functions. It is a robust solution to Solvency II Pillar I's requirements regarding the valuation of assets, liabilities, and capital. Pillar II's focus on supervisory activities is easily satisfied, while QRM's powerful, integrated reporting tools easily satisfy Pillar III's supervisory reporting and disclosure requirements.

Key QRM functionality includes the ability to forecast Solvency II capital across the organization based on any client-defined future business strategy and any market scenario. This allows an organization to create effective strategies to mitigate the potential loss of capital.

Specifications

QRM pioneered delivering a multi-user, multi-processer based solution in the 1990s to handle Monte Carlo-based simulations. QRM clients can distribute their processing across any number of processors to handle complex calculations for institutions of any size using standard hardware and software platforms. QRM has developed a state-of-the-art, Microsoft Windows-based, N-tier platform, eliminating the need for the typical patchwork of data management, actuarial modeling, scenario generation, market risk, credit risk and reporting systems.

QRM's consultants work with a client's IT department and consultants to create an optimal environment that unites all data feeds, leverages legacy models (if preferred) and optimizes architecture based on the organization's budget, performance requirements and analytical aspirations.

Client relationship managers provide both guidance and, when necessary, hands-on support in the implementation stage. This guidance and support, in conjunction with QRM's educational curriculum, allows clients to take full advantage of QRM's Risk Framework. We are happy to work with our clients' approved third-party consulting and IT firms to facilitate the process whenever necessary.

Licensing/sales/support

QRM's single, all-inclusive fee provides clients with unlimited access to the following core services in addition to our risk management analytical framework:

• Client management (implementation, ongoing consulting)
• Practice and subject matter consulting
  • Insurance
  • Market risk/liquidity
  • Credit risk; capital planning; optimization
  • Planning and forecasting
  • Behavioural modelling
  • Trading analytics research
  • Systems integration
• QRM Market Service, an auto delivery of market prices and model fitting
• Comprehensive education curriculum (open enrolment)
• Annual client conference (open enrolment)
• Comprehensive online documentation
• Upgrades to the Risk Framework are included as part of the engagement fee

Types of user

QRM's enterprise risk management engagement is applicable to any financial institution.

Together, QRM's clients manage nearly $20trn in assets and liabilities, and range in size from under $1bn to well over $1trn in assets. Our clients include the world's leading commercial banks, government finance agencies, finance companies, mortgage banks and insurance companies. QRM is currently engaged at over 150 financial institutions, headquartered in 30+ countries.

Areas/countries with the most users

In the US, nine of the 10 largest banks and two of the top 10 insurance companies have long-term engagements with QRM. Over the last decade QRM has expanded it reach outside the US to Europe, Africa, Australia, Asia and the Middle East. We opened full-service support offices in London in 2004 and Singapore in 2006.

Contact person and details

Charles Richard
SVP, QRM
+1 (312) 782-2855
Charles.Richard@qrm.com

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