with its standard variable annuities. But based on the same logic
– the under-pricing of risks combined with a weak value proposition for its client base – the firm refrained.
TIAA-CREF may thus be a leading example of what Gruppo
says is increasingly taking hold across the industry: risk management as an important determinant of a company’s strategy. He
notes that the risk group has been helping “drive the financial
planning process. It has been critical in looking forward and creating a five-year financial plan.”
But this is not to say that the vast institutional buy side has yet
fully embraced ERM at its highest levels of comprehensiveness
and sophistication. Deloitte Touche Tohmatsu’s risk management survey earlier this year showed that only 36 percent of
financial institutions had an ERM program at the end of 2008.
Input Into Pricing
Some insurers still have to “grasp how to price some of the
different options like guarantees into their product mix,” says
Gruppo. “In general, the industry will be more sensibly pricing those kinds of risks in the future.” When asked whether ap-
lowed since mid-2004.
“Some people said, ‘No, it can’t happen,’ but we looked at
it and said why it could happen, and we decided to design our
architecture accordingly,” says Rallis, a 25-year veteran of the
firm. MetLife credits its equity and interest rate hedging programs with saving nearly $4 billion in 2008.
To be sure, as right and timely as their risk preparations have
been, TIAA-CREF and MetLife have not been unscathed by
the crisis. On October 5, Moody’s Investors Service downgraded TIAA’s long-term and unsecured debt rating from Aaa
to Aa1, and analysts have a close eye on MetLife. But these
firms are also indicative of how CROs and the risk function
have gained a more critical and appreciated management role
in the post-crisis world, taking into account the full gamut of
market, operational, reputational and regulatory risks.
Reflecting risk’s rising prominence, U.K.-based Prudential
this year brought in Thibaut Le Maire, formerly head of Société Générale’s insurance group for Europe, as group CRO.
In a change of reporting lines, Le Maire reports to Prudential’s
CEO, Tidjane Thiam, rather than to the chief financial officer
All of the people need to be engaged in risk management.
propriate pricing was in place now, his emphasis was on “the
future.”
A stronger risk management function is key to better pricing. Says Andrew Rallis, head of asset-liability management at
New York’s MetLife, “In terms of risk management, we always
feel the priority is to sell a product that is prudently designed.
That is always the first line of defense. Once you understand
the risks, you must engage in hedging . . . To me, the organization should facilitate those two things, but the organizational
structure won’t always do it for you.”
MetLife began preparing early for the shocks that would
rock world markets.
In 2003, MetLife had recently demutualized, and top managers were concerned about how its new variable annuity business might affect earnings. The company had some reinsurance in place, but it had reached its capacity. At an executive
committee meeting, Rallis suggested the firm hedge against
the most extreme economic eventuality: the Great Depression.
He presented an options strategy that would protect MetLife
against a 40% decline in equity markets, with interest rates
dropping to 2%. The strategy was adopted and has been fol-
as was the case in the past.
ING Group of Amsterdam, which recently announced plans
to split its insurance and investment management divisions off
from its core bank, in May reduced its executive board from
nine members to three: CRO Koos Timmermans joined the
CEO and CFO in that elite office. Jeroen Potjes, chief insurance risk officer, says, “We will be in the unique position where
the risk officer is a very important player” in all of ING’s business lines as currently constituted.
On the other hand, TIAA-CREF, MetLife and some other
U.S.-based firms say that risk management is embedded sufficiently in their operations and divisions that they do not require big organizational or reporting-line overhauls. The guiding principle, as asserted by Rallis of MetLife: “In a financial
institution, all of the people need to be engaged in risk management all the time.”
Fresh Starts Needed
Insurers that, like mortgage-market players, were lusting after
profits or market share, or were overconfident or unrealistic
about their potential rewards and loss exposures, have some
