پارسی   English   العربیه

Value and Capital Management: A Handbook for the Finance and Risk Functions of Financial Institutions


"Drawing on his rich experience as CRO in insurance, reinsurance and banking, Thomas Wilson provides a fascinating perspective on how CFOs and CROs create value for the firm, the customers and the shareholders by better managing capital and risk. The handbook offers a lot to many – from mathematical and technical foundations to strategic advice, from real-world examples to historical background, from challenges to solutions. It not only gives insights for risk and finance professionals, directors and regulators, but will also – and this is important – inspire students to pursue a career in financial services."
—Walter Kielholz, chairman of the supervisory board, Swiss Reinsurance

"Managing for value is not easy in the best of times. It is even more challenging given the fast-paced and fundamental changes affecting banking and insurance today, including new regulations, unprecedented low interest rates, weak global economic development and the emergence of non-traditional competitors. Tom's handbook represents a valuable and practical anchor for managing value and capital in banking and insurance, which currently faces a torrent of change."
—Paul Achleitner, chairman of the supervisory board, Deutsche Bank

"Financial firms build inventory on their balance sheets instead of selling from inventory, causing long balance sheets and inventory risk; in addition, financial products represent an inherent promise, sometimes far in the future, which may not always be possible to fulfill. Post crisis, financial institutions have learned the hard way the importance of aligning returns, capital requirements and risk acceptance. In this industry, valuation is complicated and must be looked at critically. Aligning returns, capital and risk is essential; three important challenges addressed by this handbook."
—Koos Timmermans, vice chairman, ING Bank

"Capital is the gasoline that keeps risk and balance sheet intensive businesses on the road. Actively managing capital – by allocating it to the best possible use and ensuring that the businesses are running at top capital 'fuel efficiency' – can mean the difference between winning the race for shareholders or being relegated to the 'also-ran' category of firms. This handbook is an essential reference to managing value and capital in banking and insurance."
—Dieter Wemmer, chief financial officer, Allianz SE

"Tom Wilson brings a unique combination of academic study and in-depth practical business experience to his authorship of value and capital management of financial institutions. He has been both an advisor to top management as well as a top manager in his own right. His handbook should be on the desk of every leader in the field. It is comprehensive, thorough and up to date. You will not find a more useful exposition of the tools of risk management as presented in a valuation framework."
—Thomas Copeland, cofounder, Copeland Valuation Consultants

"Practice as well as academia should be grateful to Tom Wilson for sharing with us his immense experience on and insight in value and capital management for insurance and banking. I personally could not have thought of a more appropriate person to guide us through the complexity of the modern risk and value landscape of financial institutions. The author not only early on contributed to the methodological development of some of the tools currently in use throughout industry and regulation, but experienced firsthand the reality of bringing these new tools to bear within a broad variety of companies. The result is a handbook to be read and studied by all stakeholders involved. From an academic point of view I very much want to stress the bridge-building function from theory to practice and back and very much hope that my academic colleagues will use this book as guidance for some of their more applied research."
—Paul Embrechts, Professor of Mathematics, RiskLab, ETH Zurich, Switzerland

THOMAS C. WILSON is the chief risk officer for Allianz Group, where he is responsible for global risk controlling and risk management policies and guidelines. He has spent nearly 30 years working in finance and risk for such companies as UBS, McKinsey & Company, Swiss Reinsurance, Oliver Wyman & Company, and ING.

List of Abbreviations xiii

Preface xvii

Acknowledgments xix

About the Author xxiii

PART ONE Introduction 1

CHAPTER 1 Why is Value Management Important? 3

Better Information 3

Better Insights 6

Better Decisions 8

Why Shareholder Value? 12

CHAPTER 2 How do CFOs and CROs Add Value? 15

The Evolution of the Corporate Center as “Shareholder Surrogate” 15

The Implications for the CFO 20

The Implications for the CRO 24

PART TWO Better Information - Measuring Value 29

CHAPTER 3 RAPMs - The Industry Standard 31

What Makes Financial Services Unique? 31

What do RAPMs do and How? 34

The RAPM (R)evolution 37

Three RAPMs for Three Distinct Purposes . . . 41

. . . Linking Directly to Shareholder Value 46

Insurance Example 49

Banking Example 50

CHAPTER 4 Two Challenges in Using RAPMs 51

Do RAPMs Influence Strategy? 51

Do RAPMs Give the Right Signals? 55

CHAPTER 5 Valuing Financial Services - The Theory 71

What Determines Share Value? Market Multiples, RoE and Growth . . . 71

. . . But What Determines Market Multiples? 73

Why a Market-Consistent Approach? 77

Value: Where it Comes from and How to Create More of it 80

CHAPTER 6 Valuing Financial Services - The Evidence 85

Evidence from the Insurance Industry 85

Evidence from Banking 96

Is it Just me or are Others Thinking the Same Thing? 98

CHAPTER 7 Market-Consistent Valuation for Insurers 101

Introduction to Fair Valuation for Insurers 101

Calculating Traditional Embedded Value 104

European Embedded Value 106

Market Consistent Embedded Value (MCEV) 109

How is MCEV Calculated in Practice? 115

From MCEV to MVBS 120

Final Comments: Whither MCEV? 122

PART THREE Better Insights - Managing Value 125

CHAPTER 8 Property and Casualty Insurance 127

History and Economic Rationale 127

From Principles to Rules of the Game 133

From Rules to the Valuation of PC Businesses 135

PC KPIs: Understanding and Managing Value 140

CHAPTER 9 Life and Health Insurance 151

History and Economic Rationale 151

From Principles to “Rules of the Game” 163

LH Valuation 167

Understanding Value Creation: Capital Intensity and Financial Risk Taking 171

CHAPTER 10 Banking 189

History 189

Products 195

Economic Rationale 197

From Principles to “Rules of the Game” 199

From “Rules” to Value 201

CHAPTER 11 Achieving Profitable Growth 211

Rules of the Game and KPIs 211

Management Actions - Three Horizons of Growth 217

Horizon 1 - Increasing Sales Productivity 218

Horizon 1 - Going Multi-channel 221

Horizon 1 - Getting More out of Existing Customers; cross sell, big data and customer loyalty 224

Horizon 1 - Managing the Customer Portfolio Skew 228

Horizon 2 - Anticipating Mega-trends 230

Horizon 2 - Exploiting Adjacencies 232

Horizon 2 - Transformational and Bolt-on Acquisitions 234

Horizon 3 - Creative Disruptions 238

CHAPTER 12 Achieving Operating Efficiency 241

The Importance of Operating Efficiency 242

Rules of the Game 248

Pay Less: Optimize Procurement 249

Pay Less: From Business Process Redesign to Outsourcing 250

Use Less, But More Effectively: Digitize and Automate 253

Use Less, But More Effectively: Re-engineer the Product Portfolio 254

Use Less, But More Effectively: Managing Acquisition Expenses 257

PART FOUR Better Decisions - Capital, Balance Sheet and Risk Management 261

CHAPTER 13 Corporate Strategy and Capital Allocation 263

Corporate Strategy, Capital Allocation and Performance Management 263

Capital Allocation: The Capital Budget, from Sources to Uses of Capital 265

Capital Allocation: Optimizing the Corporate Portfolio 273

Capital Allocation: Aligning Financial Resources within Constraints 278

CHAPTER 14 Strategic Planning and Performance Management 285

What is Strategic Planning? 285

Why does Strategic Planning Fail and What can be done About it? 295

Corporate Strategy 302

CHAPTER 15 Balance Sheet Management 311

Balance Sheet Management Activities 311

The Asset/Liability Committee (ALCO) Mandate and Agenda 314

The Asset/Liability Management (ALM) Unit 323

The Insurer ALM-Investment Value Chain 330

The Treasury Function 339

CHAPTER 16 The Economics of Asset/Liability Management 345

The Role of ALM Earnings 345

The Risks: Some Spectacular ALM Failures 349

The Returns: Are Shareholders Willing to Pay a Premium or a Discount? 361

CHAPTER 17 The Practical Aspects of Asset/Liability Management 371

ALM Performance and Risk Measures 372

Calculating Funds Transfer Prices (FTPs) 385

Measuring Alpha 406

CHAPTER 18 Cash and Liquidity Management 413

Managing Funding Liquidity Risk 413

What Happens if it Goes Wrong? 416

Measuring Funding Liquidity Risk 420

CHAPTER 19 Managing the Capital and Funding Structure 431

Capital Funding Management 431

Determining the Optimal Capital Structure 436

The Empirical Reality: What Determines Capital Structure? 446

CHAPTER 20 Risk Management 451

Enterprise Risk Management 451

Taking the Right Decisions 460

The Role of Culture 463

CHAPTER 21 Risk Governance and Organization 477

Risk Governance Principles 477

Role of the Board and Management 478

Three-Line-of-Defense Model 480

The Risk Function 484

CHAPTER 22 Risk Identification and Evaluation 491

From Risk Identification to Evaluation 491

Data-Driven Approaches 497

Evaluation-Based Approaches 499

Building a Resilient Organization 507

CHAPTER 23 Risk Underwriting - Strategy and Governance 513

Underwriting Context 513

Underwriting Strategy 518

Underwriting Governance 522

CHAPTER 24 Risk Underwriting - Technical Tools 527

Retail Segment: “Scoring” Models 527

Commercial Lines: Leveraging Expert Judgment 535

Underwriting Structured Solutions 541

Underwriting Controls, Validation and Learning 542

CHAPTER 25 Risk Underwriting - From Technical Pricing to Value Maximization 549

Technical Production Cost: RAPM Pricing 549

From Technical Pricing to Optimal Price 558

CHAPTER 26 Managing Operational and Reputational Risks 571

Defining Operational Risk 571

Managing Operational Risk 581

CHAPTER 27 Risk and Limit Controlling 589

Risk Reporting 589

An Effective Risk Limit Framework 601

Final Thoughts on Risk and Limit Reporting 606


Appendix A: Market Multiple Approaches 609

Appendix B: Derivation of Steady-State Valuation Multiples 613

Appendix C: Valuing Banks and Insurers: The Link Between Value and New Business and Investment RAPM 621

Appendix D: Beyond Debt and Equity 629



Index 675