June 13, 2011 - RiskMinds conference - Notes from presentation on Implementing Economic Capital for Effective Decision Making by Albert J. Schulman, VP, Enterprise Risk and Capital Modeling at Nation Wide.
“A Few Simple Questions
- How much capital does our company need to maintain its target credit rating?
- What is our current excess or deficit position?
- What risks jeopardize our solvency and our target rating?
- How much capital do our various products and businesses use?
- Which products achieve the best risk-adjusted returns?
- How should we invest our assets to optimize risk and return?
- How should we price our products to achieve a target return on capital?
- Which new opportunities will provide the best risk-adjusted returns in the future?
- How should we evaluate the performance the performance of individual managers and our management team?
(Value at risk (VaR) economic capital models are currently used to answer all these questions)
...
Final thoughts
- VaR and economic capital are useful tools to provide one perspective on risk
- Over-reliance on any single model is dangerous
- Need to understand “risk” over multiple time horizons and probability thresholds
- Find solutions that work rather than solutions that are mathematically pure or elegant
- Don’t believe model results unless you understand what assumptions you made, explicitly and implicitly, that generated those results”
Replies