:ERM

20101116

EMBA

-2009-12-3 2

2010/8/29 Bill Chang 6

2010/8/29 Bill Chang 7

2010/8/29 Bill Chang 8

-

2010/10/12 NCCU

Initiation Ratification Implementation Monitoring

Fama & Jensen (1983)

(decision management)

(initiation) (implementation)

(decision control)

(ratification) (monitoring)

Separation of Ownership and Control

2010/10/12 NCCU

(Regulation)

(On-site Examination)

(Enforcement)

(Off-site Monitoring)

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2010/10/12 NCCU

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263637

2010/10/12 NCCU

Committee of Sponsoring Organizations of the Treadway Commission, COSO 2010/10/12 NCCU

COSO

Committee of Sponsoring Organizations of the Treadway Commission, COSO 2010/10/12 NCCU

2010.05The Institute of Internal Auditors, IIAKeynote

Who should we trust.

The new ground rules for internal audit.

Staying on your game with moving regulations and expectations.

Financial services - at the crossroads.

Could risk management tame the seas.

2010/10/12 NCCU

ABCDE

AStrong

BSatisfactory

C Fair 1

D Marginal 2

E Unsatisfactory2010/10/12 NCCU

The new ground rules for internal audit

IIA Global Chairman: Rod Winters - keynote 1The new ground rules for internal audit, 2010.05.10, Sydney Australia.

2010/10/12 NCCU

The new ground rules for internal audit3.

2010/10/12 NCCU

Risk mitigation strategies

2010/10/12 NCCU

2010/10/12 NCCU

2010/10/12 NCCU

7.54%1.58%

41.83%

29.27%

69.15%

0.00%10.00%20.00%30.00%40.00%50.00%60.00%70.00%80.00%

G

D

P

127200911

1

2010/10/12 NCCU

0.85%

2.63%

10.03%

6.55%

0.00%

2.00%

4.00%

6.00%

8.00%

10.00%

12.00%

1981 1984 1987 1990 1993 1996 1999 2002 2005 2008

200911

2 GDP

2010/10/12 NCCU

12.02% 11.02%

25.38%

14.64%

18.47%

1.96%0.06%

6.43%

-2.17%

6.30%

6.59%

-5.00%

0.00%

5.00%

10.00%

15.00%

20.00%

25.00%

30.00%

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

(%)

% %

20091130

3

2010/10/12 NCCU

1.2009112.20091130

186.79

285.54

355.67

441.51

87.63

426.25

648.71

143.95119.04

89.6062.66

34.5317.170.000

100

200

300

400

500

600

700

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

(1995)

(1995)

GNP(1995)

4 GNP

2010/10/12 NCCU

20091130

9,379,244

8,904,682

7,960,739

6,784,607

5,709,051

4,830,466

3,056,435

2,375,557

1,685,549

1,252,9001995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

5

2010/10/12 NCCU

6

7.468.15

8.86 9.4910.29

11.2311.66

13.09

15.18

16.4517.81

19.89

21.86 21.53

0.00

5.00

10.00

15.00

20.00

25.00

%

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

200911302010/10/12 NCCU

7 ()

4,904 4,6773,516 3,400 3,352 3,4623,857 3,943

4,054

4,988

5,2045,0894,8434,504

87,971

18,07720,09222,843

25,77129,118

32,05836,585

73328

6922062760

54949

43991

86,579

0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

80,000

90,000

100,000

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

2010/10/12 NCCU

8 (GDP)

0.87

15.55

1.09 0.92 0.99 0.961.041.040.890.98 0.82

16.42

12.8714.08

5.59

0.00

2.00

4.00

6.00

8.00

10.00

12.00

14.00

16.00

18.00

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

%

200911302010/10/12 NCCU

9

62

172

203.27

333.38

0

50

100

150

200

250

300

350(%)

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

% %

200911302010/10/12 NCCU

1,918,843

310,200

107,741

0

500,000

1,000,000

1,500,000

2,000,000

2,500,000

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

10

2010/10/12 NCCU

11 ()2007 2008 2009

2008

0.4445 0.4441 0.3694 0.3465 -22.0%

1.7108 1.6938 1.6463 1.6365 -3.4%

1.5511 1.4573 1.5133 1.5291 4.9%

0.5967 0.5725 0.3548 0.3249 -43.2%

0.8007 0.6264 0.5912 0.5776 -7.8%

1.5247 1.4578 1.1864 1.1195 -23.2%

0.8868 0.9829 1.0361 1.0852 10.4%

0.7853 0.8724 1.0038 1.0713 22.8%

0.2327 0.2752 0.2336 0.2281 -17.1%

1.1062 0.9377 0.8215 0.7846 -16.3%

:1.,

2. 2007~200912

3.

2009(412)

2010/10/12 NCCU

12 ()

1,019

1,077

1,1261,141

1,185

-5.5%-4.3%

-1.3%

-3.7%

2.6%

900

950

1000

1050

1100

1150

1200

2005 2006 2007 2008 2009

-8%

-6%

-4%

-2%

0%

2%

4%

%

2010/10/12 NCCU

13 ()

2009

200920085.5%3 %

64.2%

61.8%

62.2%

60.0%56.9%

55.1%52.0%

47.4%

45.6%46.6%

63.0%63.4%

40%

50%

60%

70%

2001 2002 2003 2004 2005 2006 2007 2008 2009/

1-3

2009/

1-6

2009/

1-9

2009/

1-12

/ %

2008/1-3 -2.6% 0.2%

2008/1-6 -2.7% 1.3%

2008/1-9 -3.2% 0.0%

2008/1-12 -4.3% -1.3%

2009/1-3 -3.9% -3.0%

2009/1-6 -7.7% -6.5%

2009/1-9 -5.9% -4.5%

2009/1-12 -5.5% -3.0%

2010/10/12 NCCU

Liability

Economic B-S

Assets

Equity

Treasury B-S

SAAportfolio

Overall risk tolerance

Investments B-S

SAAportfolio

Assets

TAA and stock selection

Replica-ting

Portfolio

Equity

Underwriting B-S

Insurance replication risk

Replica-ting

Portfolio

Liability

2010/10/12 NCCU

The portfolio of interest is the assets less the liabilities the ownerships equity (surplus)

Insurance balance sheet

PremiumsExpense (corporate)A/L ratio

Ownerships Equity (Surplus)

AssetsLiability (economic measure)

If we control the economic capital risk, we also control all the

accounting risks

Surplus optimization simultaneously satisfies all objectives

2010/10/12 NCCU

Hedging Portfolio: The assets arent well matched to the liabilities!

Asset Class Durations Real duration Inflation duration

Composition Duration $ Dur.(m) Duration $ Dur.(m)

Equity and Equity-like 75.% 8.00 $820 0.00 $0

Nominal bonds

(5.25 year nominal duration) 23% 5.25 $161 5.25 $161

TIPS (9 year real duration) 2% 9.00 $31 0.00 $0

Asset Portfolios 100% 7.41 $1,012 1.18 $161

Liability Durations Valuation Real duration Inflation duration

Weight Duration $ Dur.(m) Duration $ Dur.(m)

1) Annuity 55% 12.87 $926 12.67 $912

2) Life Insurance 45% 22.89 $1,335 8.41 $490

Liability Portfolios 100% 17.36 $2,261 10.76 $1,402

Duration can be used as a measure of risk in bond investing.

Duration approximates the percent change in pricefor a 100 basis point change in rates.

Change in value ~ -dollar duration x change in rates

,

1S r

PD

P r

,$ S rP

Dr

2010/10/12 NCCU

How much interest rate risk is left over?

Surplus durations represent uncompensated risk

For a 1% decrease in the real rate, surplus will go down by roughly 9.6%, or $1,249m

Summary:

The insurer has large bets on real rate increases

Surplus calculations based on using the market-valued benefit security A/L of 105%.

Real duration Inflation duration

Duration $ Dur. (m) Duration $ Dur. (m)

Liability 17.36 $2,261 10.76 $1,402

Assets 7.41 $1,012 1.18 $161

Surplus duration (9.60) ($1,249) (9.52) ($1,241)

2010/10/12 NCCU

Not everything what can be counted counts and not everything what counts can be counted

~Albert Einstein~

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(Basel II)

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Basel II and Solvency II

(three-pillar)

PILLAR 1

PILLAR 2

PILLAR 3

(internal model)

2010/10/12 NCCU

Basel II and Solvency II

Basel II

Solvency II

2010/10/12 NCCU

MCR

SCR SCR

()

Pillar I

Pillar II

Pillar III

1.