Risk Metrics CS-18 Max J. Rudolph, FSA CFA RHU FLMI MAAA Vice President and Actuary Mutual of Omaha Enterprise Risk Management July 29, 2003

Risk Metrics Audience Key individuals have differing backgrounds, education, perspectives and goals internal audiences senior corporate management actuarial, accounting and investment professionals external audiences securities analysts, rating agencies, regulators Absence of common risk management language Graphics are the key…but not always

Risk/Return Profile OAVDE 42,296

Alternative Investment Strategy OAVDE 27,000

Deferred Annuity - Value of X% Interest Guarantee

Risk/Return Profile Strengths distribution of returns identify challenging scenarios tail of distribution is “THE RISK” test hedges compare against deterministic scenarios provide summary statistics mean, median, quartiles Weaknesses scenarios must cover universe - do they? model run time accuracy doesn’t always follow large volumes of data - GIGO (garbage in, garbage out)

Economic Surplus Difference between the market value of cash inflows and outflows asset and premium cash flows are combined liability cash flows Spirit of fair value accounting D S = D L + (D A -D L ) * MV A /MV S D S,D A,D L duration of surplus,assets,liabilities MV A,MV S market value of (all) assets,surplus Mismatch D A -D L Leverage MV A /MV S

Price Behavior Curves

Economic Surplus Strengths drives duration/convexity puts assets and liabilities on level playing field you can’t eat a rate - based on cash flows create values at lowest level - can roll up intrinsic value - starting point for market value discussion Weaknesses learning curve see David Babbel papers model run time sensitive to interest rates reliance on canned software

Additional Risk Metrics Internally measured liquidity ratio RBC diversification ratio Key Rate (Partial) Durations

The key is to use multiple tools, leverage off of what you are already doing and know your audience (graphics)