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SimCorp JOURNAL OF APPLIED IT AND INVESTMENT MANAGEMENT December 2009 7

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culture par excellence
MEAG, winner of the SimCorp StrategyLab Risk Management Excellence
Award, is a risk management firm both by design and by culture. We spoke to
Dr. Peter Schenk, MEAG’s Head of Investment Controlling, to learn about its
approach to risk. by Richard Willsher

Dr. Peter Schenk, Head of Investment Controlling, MEAG

A
mong asset managers, companies have to behave differently assets have to be structured completely
MEAG may well be the than assets belonging to other types of differently than those of a composite
envy of its peers. It manages investors. The assets must back the insurer or firms that reinsure storm risks.
more than €180 billion of liabilities of the insurance company. The risk content and asset behaviour
assets, yet suffered no direct damage in What is more, life insurance company mean that they have to match, or
the financial crisis. This is almost certainly
due to the risk management culture at the
firm and its heritage as part of Munich
Re.
“Munich Re’s mission statement is
All but €8 billion of the assets under its
‘We turn risk into value’. So that’s
management are from Munich Re
companies and, as Dr. Peter Schenk
where we start from. We have
explains, insurance companies do things
differently. “The assets of insurance
to understand the investor’s risk
concept.” Dr. Peter Schenk
8 December 2009 JOURNAL OF APPLIED IT AND INVESTMENT MANAGEMENT SimCorp

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culture par excellence

approximately match, this liability management function at MEAG, Dr. together and talk about them. We regard
structure. Any deviation has to be de- Schenk also plays a role in the integrated our role explicitly as business enablers. We
liberate. This means that when you risk management function of Munich Re supply the front office with tools that they
manage assets for insurance companies, as a whole, where he reports directly to its can use for their allocation and try to assist
you have to talk about risk. The liabilities chief risk officer. As an indication of the in finding solutions when dealing with
are risks. Insurance companies deal with scale of the Group-wide risk management narrow risk limits and other restrictions. It
risk. Munich Re’s mission statement is task, it is worth noting that in the half year helps if they see that we really do not want
‘We turn risk into value’. So that’s where to 30 June 2009, Munich Re generated to hinder them and that we are not always
we start from. We have to understand the gross premium income of €20.7 billion. risk averse, but that we also try to find
investor’s risk concept.” Any new investment decision that is taken ways for them to take on risk.”
involves the full participation of the risk

“We regard our role explicitly management function; it has to pass the
risk management test.
Dr. Schenk sets out the first principles of
MEAG’s risk management operation. The

as business enablers.”
internal data has to be up to date and
“It is very important to remember that complete. It has to be stored correctly and
there always are two perspectives in our securely so that all holdings are known at
Dr. Peter Schenk decision processes: the front office per- any time. The details of holdings must be
spective and the risk perspective, which transparent. The methods and processes
are taken equally into account,” explains for handling the data have to be able to
PRIMARY FOCUS ON RISK Dr. Schenk. “In order to come to a well- transform it into information that is useful
While many other fund managers may be balanced decision, the people with an and can flow into the decision-making
under greater pressure to focus on return, allocation idea must know that they will process. To achieve these things MEAG
MEAG’s primary focus is on risk. More be confronted with risk perspectives. An uses a centralised data backbone that
particularly, it has to understand very example where we see this working in includes SimCorp Dimension. These
clearly the ‘riskless position’ of the investor. practice is our ‘New Product Process’. features are the basic building blocks, but
But what is risklessness? “For a private When an attractive new investment idea it is dealing with the unusual situations
individual it may mean cash in a drawer to comes out in the market, the front office that defines the risk culture at MEAG
pay for tomorrow’s pizza,” says Dr. Schenk. may be thrilled with it. The investor may and tests how effective it is. As Dr. Schenk
“For an insurance company that knows, or be thrilled as well, because it may be a elaborates, “When special situations
expects from its models, that it will have to good instrument to reflect its liability emerge, when there is a crisis or new
be able to pay certain claims in a year’s profile. But we will only take up on it if we business opportunities – something un-
time, or, in life insurance, in 10 or 15 years’ on the risk management side agree. We usual, you have to have all this data, and
time, your riskless position will not be have to be able to understand the product. the processes and governance rules must
cash, because relative to the liabilities, the We have to be able to adequately model it be set up perfectly. And you need a risk
return is quite different. To arrive at this in our systems. We have be able to access culture that is able to change to another
riskless position you have to do certain the data we need to feed our models, so gear; to move into crisis mode, if you like.
calculations; you need to look at the asset that the output they give us is in the form Then, when you do, the culture of the firm
and liability values at risk. You need of useful information.” ensures that everybody really likes to work
processes that will meet the liability with each other. Everybody keeps a close
structure when it changes. Insured events BUSINESS ENABLERS eye on the risk system, but the gap
may or may not occur. Claims may emerge However, it would be a mistake to paint between it and the special situation can
or not emerge.” Modelling but also the risk management function only as an only be bridged with communication and
preparedness for the unexpected are key obstacle to doing business. The risk action, with everybody really doing not
ingredients of the process. As Dr. Schenk management culture has evolved much only what is in their job description, but
adds without any hint of complacency, “A further than that and according to Dr. whatever is necessary at that moment.” As
financial crisis is just another event that Schenk, “There are conflicts, but we have Dr. Schenk adds, “This is a ‘top-down
makes you think about your risk profile.” found ways to deal with them as a routine. issue’ because everyone appreciates that
What is necessary is intense com- understanding, managing and controlling
It follows, then, that understanding and munication and mutual respect. We work risk is vital to our business and our
calculating risk at MEAG starts at the top together in one building. We meet at decision-making process.”
of the firm. As well as heading the risk lunch. Whenever issues arise, we sit down
SimCorp JOURNAL OF APPLIED IT AND INVESTMENT MANAGEMENT December 2009 9

“A strong process was already in place before the financial


crisis, and the institution performed well during the crisis.
[MEAG] has a strong emphasis on the risk culture
MULTI-DISCIPLINARY TEAM
It is also key to the process that the risk
throughout the company group, where the risk management
management function is staffed in a way
that matches the demands of the business
units are structurally separated from the front office.…
in all its complexity. For example, Dr. The risk policy is not only comprehensive and detailed; it
also demonstrates that risk policy can be an active tool to
Schenk himself has a background in
mathematics and computer science and
holds a doctorate in economics. He notes
that his colleagues in the Risk create added value for the institution’s stakeholders.”
Management department are an Award speech by Professor Ingo Walter at the SimCorp StrategyLab Risk Management Excellence Award 2009 announcement
interdisciplinary team. There are econo-
mists, people with technical computer
science backgrounds, but also physicists.
In addition, the company sponsors them
to gain Professional Risk Managers’ Today, for example, risk modelling, stress interesting constructions that somehow
International Association (PRMIA) testing and reviewing and revisiting the manage to comply with existing
qualifications. Intellectual rigour and stress tests and models on a regular basis regulation. So it will always be the task of
professional competence are essential are vital processes. And transparency is the individual companies’ risk management to
prerequisites. sine qua non. It is one of the chief reasons make a judgement about the degree of
that MEAG avoided the worst of the transparency,” he says. “The other thing is
However, part of MEAG’s success in the crisis, as Dr. Schenk points out: “If you systemic risk. To prevent this we would
current financial crisis is owed to the have transparency, you can quickly manage need a global risk management system. A
2000-2003 equity bubble, which sharp- an asset’s risk. You can sell it or hedge it global risk management system means
ened the firm’s resolve to enhance its risk faster than your competitors perhaps. global data pools, a global early warning
culture. As Dr. Schenk explains, “We Nobody could ever understand what a concept and global risk management
looked at everything: at what worked and CDO of CDOs was, because you couldn’t processes linked to these warnings. This is
what didn’t work so well. The problem is drill into the data that really exposed the now being thought about and discussed in
always interfaces between different risk. If we were to buy these products and all kinds of forums, but the challenges are
departments; between the asset manager somebody asked us, “What is your
and the investor. And there we learned exposure to US real estate, or to British
some lessons. One was that we really
intensified communication. We intro-
credit cards?,” we couldn’t see the answer.
We wouldn’t have the data. So we either
“Our processes now encourage
duced a mandate management concept
which ensures that the tactical asset
wouldn’t permit such instruments at all, or
would at least classify them as ‘non-
people to make decisions.”
allocation not only fits MEAG’s view of standard’, which leads to strict limitation Dr. Peter Schenk
the market, but also the investor’s overall in volumes and special pricing and
situation. One example of what this reporting rules.”
concept entails are the regular asset/ huge. I think the desire is there, as well as
liability management meetings now held GLOBAL PROSPECTS the basic willingness to collaborate, but it
between investors and MEAG. Another So in the bigger picture, considering the will be cumbersome to arrive at concrete
is the elaborate risk management process raft of new controls and measures decisions and to accept jointly shouldering
with well-documented tasks and areas of currently under discussion, and in light of the pains risk management brings with it.
responsibility. Every objective that an MEAG’s experience, is Dr. Schenk I think the train is moving in the right
investor has is quantified and cor- optimistic that products that are not direction, but if it is to reach its destination,
responding risk triggers are defined. sufficiently transparent will be banned or many components have to interlock, and
When a risk trigger is activated, a sufficiently de-risked in the future, so as to many parties who have not worked
predetermined process starts. This process not pose a threat? together so far will have to do so in the
always has to do with distributing and future. It is complicated, global, and there
exchanging information, meeting together “It is not black and white, but altogether are lessons to be learned along the way. It
and deciding. Our processes now I’m not optimistic. Buy-side needs and might take a long time.”
encourage people to make decisions.” sell-side creativity will always lead to
10 December 2009 JOURNAL OF APPLIED IT AND INVESTMENT MANAGEMENT SimCorp

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culture par excellence

MEAG (Munich ERGO Asset


Management GmbH) is part of
Munich Re. It provides advice on
strategic asset allocation, risk
management and asset-liability
management, combined with
professional investment manage-
ment. It manages approximately
€186 billion worth of assets on
behalf of Munich Re and for third The SimCorp StrategyLab Risk
parties, including other institutions Management Excellence Award
and public funds. has been established by SimCorp
Munich Re is the world’s largest StrategyLab for the purpose of
reinsurance group. It conducts rewarding and promoting best prac-
both insurance and reinsurance tise within risk management in the
business in an integrated model, global investment management in-
with premium income of €38 dustry.
billion, net profit of €1.5 billion
and 44,000 employees around the MEAG was named the 2009
world. ERGO, the group’s primary winner by an international jury
insurance group, has 40 million including Professor Caspar Rose
clients in more than 30 countries of Copenhagen Business School,
and earned premium income of Professor Renée Adams of Uni-
€17.7 billion in 2008. ERGO versity of Queensland, Professor
offers a range of insurance products and Director of SimCorp Stra-
and is Europe’s leading health and tegyLab Ingo Walter of Stern
legal expenses insurer. School of Business (NYU), and
SimCorp‘s CEO, Peter L. Ravn.
The assessment was based on
MEAG’s achievements and devel-
Dr. Schenk concludes by saying that while management capability that Dr. Schenk opments in the field of risk
the world has probably learned how to describes, there is plenty of cause for management in the period from
avoid another sub-prime crisis, it is the optimism. 1 August 2008 to 31 July 2009.
unexpected we have to prepare for. “To
deal with the unexpected you need global Richard Willsher is a London-based finan-
risk management systems, a global risk cial journalist and former investment SimCorp StrategyLab is the
culture and global risk governance, so that banker. independent research arm of
the relevant key persons will sit down SimCorp. Read more about
together and make decisions, fast.” This, SimCorp StrategyLab and its Risk
he says, will be very difficult to achieve on Management Excellence Award at
a global scale, but for MEAG’s own simcorpstrategylab.com/riskaward
business, with the highly evolved risk