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Manulife and Market and Model Risk Management

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Sir John A. Macdonald, Canada's first Prime Minister, was ... 2004: Manulife Financial and John Hancock merge. 4. Canada. United States. Barbados. China ... – PowerPoint PPT presentation

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Title: Manulife and Market and Model Risk Management


1
Manulife and Market and Model Risk Management
  • Joseph Campos
  • VP Market and Model Risk Management
  • Manulife Financial
  • October 2008

2
Agenda
  • Manulife Financial A Canadian Company
  • Manulife Financial A Global Presence
  • Risk Management at Manulife Financial
  • Market and Model Risk Management
  • Questions

3
Manulife Financial A Canadian Company
  • 1887 Manulife Financial was incorporated by an
    Act of Parliament. Sir John A. Macdonald,
    Canada's first Prime Minister, was elected
    President of the Company.
  • 1992 Manulife becomes the first Canadian life
    insurer to open a representative office in China
    (Beijing).
  • 1999 The Manufacturers Life Insurance Company
    demutualizes. Manulife shares begin trading on
    the TSX, the NYSE, the SEHK and the PSE.
  • 2004 Manulife Financial and John Hancock merge

4
Global Presence
Canada
United States
Australia
5
Manulife Financials Vision
  • To be the most professional insurance company in
    the world, providing the very best financial
    protection and investment management services
    tailored to customers in every market where we do
    business.

6
Manulifes Community Involvement
  • Focus on four main areas
  • Health care, education, community service and
    local volunteering
  • Local Management choose the areas of focus for
    their philanthropy
  • 25.5 million donated to more than 600 non-profit
    organizations in 2007
  • Employee time valued at an additional 1.4
    million

7
Financial Strength
  • Manulife is among the most profitable life
    insurance companies in North America
  • It was the first Canadian life insurer to top
    1.5 billion in earnings in 2003. By the end of
    2006 earnings had reached almost 4 billion
  • AAA Rating from SP
  • One of only two public life insurance companies
    rated AAA worldwide
  • Factors contributing to upgrade include
  • Leading well-diversified business positions
  • Superior performance relative to peers
  • Well-diversified investment portfolio
  • Extremely strong capital adequacy position
  • Excellent enterprise risk management framework.

8
Risk Management at Manulife
  • Vision
  • To strategically optimize risk taking and risk
    management in support of long term revenue and
    earnings growth and shareholders value growth.
  • In optimizing risk, we will seek to
  • Capitalize on business opportunities that are
    aligned with our risk taking philosophy, risk
    appetite, and return expectations
  • Identify, monitor, and measure all key risks
    taken and
  • Proactively execute effective risk control and
    mitigation programs.

9
Risk Management at Manulife
  • Strategy
  • To adopt an integrated, enterprise wide risk
    management strategy to guide all risk taking and
    risk management activities across the
    organization.
  • Also have in place separate strategies for the
    management of each specific risk category
    Strategic, Credit, Market, Insurance, and
    Operational.

10
Corporate Risk Management Organization Structure
11
Market and Model Risk Management
12
Quantitative Analytics and Modeling (QAM) Group
  • The Quantitative Analysis and Modeling (QAM)
    Group is comprised of 9 Quantitative
    Professionals.
  • The majority of QAMs team members have graduate
    degrees in a quantitative disciplines including
  • Physics
  • Mathematics
  • Mathematical Finance
  • Engineering
  • Statistics
  • Economics
  • Actuarial Sciences

13
QAM Group - Model Risk Management
  • Market and Model Risk Management (MMRM) is
    responsible for the development and maintenance
    of Manulifes model risk management framework.
  • The model risk management framework is designed
    to mitigate the model risk associated with
    business critical models validating that they
    are conceptually sound, used as intended, and
    executed in a substantially error-free manner.
  • Model Risk is principally mitigated through
  • Clearly identifying model ownership
  • Documentation
  • User Acceptance Testing
  • Independent Model Validation/Vetting
  • End-to-End Model Controls

14
QAM Group - Model Risk Management
  • QAM involvement in model risk management is via
    the independent model validated services it
    provides to the Business Unit model owners.
  • All new models must be validated before they are
    implemented in the production environment.
  • QAM provides independent model validation
    services to a variety of Business Units
  • Investment Division Derivative Pricing Risk
    Analytics
  • Asset Liability Management Risk Metrics

15
QAM - Economic Scenario Generation (ESG)
  • Economic Scenario Generation (ESG)
  • In-house developed software used to generate
    stochastic market scenarios
  • ESG to stochastically simulate market scenarios
    in both real world and risk neutral settings
  • ESG applications include
  • Actuarial reserve valuation for financial
    reporting under CGAAP and USGAAP
  • Insurance Product Pricing (i.e., for insurance
    products with guarantees)
  • Economic market risk capital determinations

16
QAM Model Efficiency
  • Modeling efficiency looks to examine ways in
    which modeling techniques can help ease the
    burden of huge processing requirements without
    impacting the credibility of results.
  • The following techniques are used by the QAM
    Group in a variety of areas
  • Data compression
  • Scenario reduction

17
Market Risk Group
  • Team is comprised of 6 individuals.
  • The majority of Market Risk team members have
    graduate degrees in a quantitative disciplines
    including
  • Engineering
  • Mathematical Finance
  • Economics

18
Market Risk Model Development
  • The Model Development group is directly
    responsible for the development of models related
    to the measurement and management of Market Risk
    at the Corporate level.
  • In addition, the group provides consulting
    expertise to help in the development of models,
    which are used to value transactions and assess
    market risk, to client areas such as Derivative
    Operations, Investment Division, and Business
    units.

19
Market Risk Market Risk Management
Infrastructure
  • Manulifes Derivative Usage Framework seeks to
    ensure that derivatives are used as an effective
    tool to achieve the Companys investment and risk
    management objectives.
  • That risks associated with the use of derivative
    are understood and controlled effectively.
  • Considering Legal, accounting, tax, operational,
    settlement, operational and pricing issues
  • The Company also seeks to meet the expectations
    set out by OSFI in Guidelines B-7 Derivatives
    Best Practices (May 1995), Guideline B-1
    Prudent Person Approach and in the Standards
    of Sound Business and Financial Practices.

20
Market Risk Market Risk Management
Infrastructure
  • Market Risk Managements knowledge of the
    intended derivative application is captured
    through the complete documentation process which
    includes detailed descriptions of
  • Whether the derivative strategy represents a
    prudent and acceptable method to achieve the risk
    management, investment or other objective of the
    Company or particular entity, division or
    segment.
  • A review of the anticipated outcome(s) of a
    particular strategy. Including market,
    accounting, capital, actuarial, legal,
    regulatory, and tax regimes that may impact the
    outcome and desirability of a particular
    strategy.
  • Legal and regulatory compliance requirements.
  • The anticipated strategy volumes and any need to
    place quantitative limits on the use of the
    particular derivative strategy. The need to place
    restrictions on the use of the particular
    strategy.
  • The need to require specific controls.

21
Financial Risk Management Resource Committee
(FRMRC)
  • Manages Manulifes Quantitative Finance and
    Financial Risk Management Professional Resources.
  • The Committees mandate is the development of a
    program for the recruitment and on-going
    development of Quantitative Finance and Financial
    Risk Management Professionals including
  • Needs Assessment
  • Talent Assessment
  • Job Rotation
  • Compensation Management
  • Qualitative Finance and Financial Risk Management
    Professionals are currently employed in many
    business units including
  • Corporate ALM
  • Market and Model Risk Management
  • Corporate Treasury
  • Manulife Bank
  • Derivative Operations and Middle Office
  • Investment Division Front Office

22
Typical First Assignments
  • Financial Engineer, QAM Group
  • Model vetting Interacting with QAM staff, model
    developers and users as required to understand
    the specifics of the algorithm, the target
    application in order to assess the
    appropriateness of the algorithm and identify
    impacts associated with its use.
  • Duties and responsibilities include replicating
    model analytics to ensure models implemented
    according to specification, benchmarking model
    results, run tests to assess business impacts
    associated with model assumptions, stress testing
    the model to ensure it functions as expected, and
    provide user-focused quantitative and business
    reports.

23
Typical First Assignments
  • Financial Engineer, Model Efficiency Group
  • Conduct research and develop models to improve
    efficiency of the existing financial
    applications. As a member of Model Efficiency
    group, the incumbent will get involved in the
    development of advanced quantitative financial
    methodology, especially the research on improving
    the scenario reduction techniques.

24
Questions?
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