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SimCorp JOURNAL OF APPLIED IT AND INVESTMENT MANAGEMENT December 2009 7

culture par excellence

Among asset managers,

MEAG may well be the

envy of its peers. It manages

more than €180 billion of

assets, yet su ered no direct damage in

the nancial crisis. is is almost certainly

due to the risk management culture at the

rm and its heritage as part of Munich

Re.

All but €8 billion of the assets under its

management are from Munich Re

companies and, as Dr. Peter Schenk explains, insurance companies do things

di erently. “ e assets of insurance

MEAG, winner of the SimCorp StrategyLab Risk Management Excellence Award, is a risk management rm both by design and by culture. We spoke toDr. Peter Schenk, MEAG ’s Head of Investment Controlling, to learn about itsapproach to risk. by Richard Willsher

companies have to behave di erently

than assets belonging to other types of

investors. e assets must back the

liabilities of the insurance company.

What is more, life insurance company

assets have to be structured completely

di erently than those of a composite

insurer or rms that reinsure storm risks.

e risk content and asset behaviour

mean that they have to match, or

“Munich Re ’s mission statement is‘We turn risk into value ’. So that ’s

where we start from. We have to understand the investor ’s riskconcept.” Dr. Peter Schenk

Dr. Peter Schenk, Head of Investment Controlling, MEAG



December 2009 JOURNAL OF APPLIED IT AND INVESTMENT MANAGEMENT SimCorp8

management function at MEAG, Dr.

Schenk also plays a role in the integrated

risk management function of Munich Re

as a whole, where he reports directly to itschief risk ocer. As an indication of the

scale of the Group-wide risk management

task, it is worth noting that in the half year

to 30 June 2009, Munich Re generated

gross premium income of €20.7 billion.

Any new investment decision that is taken

involves the full participation of the risk

management function; it has to pass the

risk management test.

“It is very important to remember that

there always are two perspectives in our

decision processes: the front oce per-

spective and the risk perspective, which

are taken equally into account,” explains

Dr. Schenk. “ In order to come to a well-

balanced decision, the people with an

allocation idea must know that they will

be confronted with risk perspectives. An

example where we see this working in

practice is our ‘New Product Process’.

When an attractive new investment idea

comes out in the market, the front oce

may be thrilled with it. e investor may

be thrilled as well, because it may be a

good instrument to reect its liability

prole. But we will only take up on it if we

on the risk management side agree. We

have to be able to understand the product. We have to be able to adequately model it

in our systems. We have be able to access

the data we need to feed our models, so

that the output they give us is in the form

of useful information.”

BUSINESS ENABLERS

However, it would be a mistake to paint

the risk management function only as an

obstacle to doing business. e risk

management culture has evolved much

further than that and according to Dr.

Schenk, “ ere are conicts, but we have

found ways to deal with them as a routine.

What is necessary is intense com-munication and mutual respect. We work

together in one building. We meet at

lunch. Whenever issues arise, we sit down

approximately match, this liability

structure. Any deviation has to be de-

liberate. is means that when you

manage assets for insurance companies, you have to talk about risk. e liabilities

are risks. Insurance companies deal with

risk. Munich Re’s mission statement is

‘We turn risk into value’. So that’s where

we start from. We have to understand the

investor’s risk concept.”

PRIMARY FOCUS ON RISK

While many other fund managers may be

under greater pressure to focus on return,

MEAG’s primary focus is on risk. More

particularly, it has to understand very

clearly the ‘riskless position’ of the investor.

But what is risklessness? “For a private

individual it may mean cash in a drawer to

pay for tomorrow’s pizza,” says Dr. Schenk.

“For an insurance company that knows, or

expects from its models, that it will have to

be able to pay certain claims in a year’s

time, or, in life insurance, in 10 or 15 years’

time, your riskless position will not becash, because relative to the liabilities, the

return is quite di erent. To arrive at this

riskless position you have to do certain

calculations; you need to look at the asset

and liability values at risk. You need

processes that will meet the liability

structure when it changes. Insured events

may or may not occur. Claims may emerge

or not emerge.” Modelling but also

preparedness for the unexpected are key

ingredients of the process. As Dr. Schenk

adds without any hint of complacency, “A

nancial crisis is just another event that

makes you think about your risk prole.”

It follows, then, that understanding and

calculating risk at MEAG starts at the top

of the rm. As well as heading the risk

together and talk about them. We regard

our role explicitly as business enablers. We

supply the front oce with tools that they

can use for their allocation and try to assistin nding solutions when dealing with

narrow risk limits and other restr ictions. It

helps if they see that we really do not want

to hinder them and that we are not always

risk averse, but that we also try to nd

ways for them to take on risk.”

Dr. Schenk sets out the rst principles of

MEAG’s risk management operation. e

internal data has to be up to date and

complete. It has to be stored correctly and

securely so that all holdings are known at

any time. e details of holdings must be

transparent. e methods and processes

for handling the data have to be able to

transform it into information that is useful

and can ow into the decision-making

process. To achieve these things MEAG

uses a centralised data backbone that

includes SimCorp Dimension. ese

features are the basic building blocks, but

it is dealing with the unusual situations

that denes the risk culture at MEAG

and tests how e ective it is. As Dr. Schenk

elaborates, “When special situations

emerge, when there is a crisis or new

business opportunities – something un-

usual, you have to have all this data, and

the processes and governance rules mustbe set up perfectly. And you need a risk

culture that is able to change to another

gear; to move into crisis mode, if you like.

en, when you do, the culture of the rm

ensures that everybody really likes to work

with each other. Everybody keeps a close

eye on the risk system, but the gap

between it and the special situation can

only be bridged with communication and

action, with everybody really doing not

only what is in their job description, but

whatever is necessary at that moment.” As

Dr. Schenk adds, “ is is a ‘top-down

issue’ because everyone appreciates that

understanding, managing and controllingrisk is vital to our business and our

decision-making process.”

“We regard our role explicitlyas business enablers.”

Dr. Peter Schenk

culture par excellence



SimCorp JOURNAL OF APPLIED IT AND INVESTMENT MANAGEMENT December 2009 9

MULTIDISCIPLINARY TEAM

It is also key to the process that the risk

management function is sta ed in a way

that matches the demands of the businessin all its complexity. For example, Dr.

Schenk himself has a background in

mathematics and computer science and

holds a doctorate in economics. He notes

that his colleagues in the Risk

Management department are an

interdisciplinary team. ere are econo-

mists, people with technical computer

science backgrounds, but also physicists.

In addition, the company sponsors them

to gain Professional Risk Managers’

International Association (PRMIA)

qualications. Intellectual rigour and

professional competence are essential

prerequisites.

However, part of MEAG’s success in the

current nancial crisis is owed to the

2000-2003 equity bubble, which sharp-

ened the rm’s resolve to enhance its risk

culture. As Dr. Schenk explains, “We

looked at everything: at what worked and

what didn’t work so well. e problem is

always interfaces between di erent

departments; between the asset manager

and the investor. And there we learned

some lessons. One was that we really

intensied communication. We intro-

duced a mandate management concept which ensures that the tactical asset

allocation not only ts MEAG’s view of

the market, but also the investor’s overall

situation. One example of what this

concept entails are the regular asset/

liability management meetings now held

between investors and MEAG. Another

is the elaborate risk management process

with well-documented tasks and areas of

responsibility. Every objective that an

investor has is quantied and cor-

responding risk triggers are dened.

When a risk trigger is activated, a

predetermined process starts. is process

always has to do with distributing andexchanging information, meeting together

and deciding. Our processes now

encourage people to make decisions.”

Today, for example, risk modelling, stress

testing and reviewing and revisiting the

stress tests and models on a regular basis

are vital processes. And transparency is the

sine qua non. It is one of the chief reasons

that MEAG avoided the worst of the

crisis, as Dr. Schenk points out: “If you

have transparency, you can quickly manage

an asset’s risk. You can sell it or hedge it

faster than your competitors perhaps.

Nobody could ever understand what a

CDO of CDOs was, because you couldn’t

drill into the data that really exposed the

risk. If we were to buy these products and

somebody asked us, “What is your

exposure to US real estate, or to British

credit cards?,” we couldn’t see the answer.

We wouldn’t have the data. So we either

wouldn’t permit such instruments at all, or would at least classify them as ‘non-

standard’, which leads to strict limitation

in volumes and special pricing and

reporting rules.”

GLOBAL PROSPECTS

So in the bigger picture, considering the

raft of new controls and measures

currently under discussion, and in light of

MEAG’s experience, is Dr. Schenk

optimistic that products that are not

suciently transparent will be banned or

suciently de-risked in the future, so as to

not pose a threat?

“It is not black and white, but altogether

I’m not optimistic. Buy-side needs and

sell-side creativity will always lead to

interesting constructions that somehow

manage to comply with existing

regulation. So it will always be the task of

individual companies’ risk management to

make a judgement about the degree of

transparency,” he says. “ e other thing is

systemic risk. To prevent this we would

need a global risk management system. A

global risk management system means

global data pools, a global early warning

concept and global risk management

processes linked to these warnings. is is

now being thought about and discussed in

all kinds of forums, but the challenges are

huge. I think the desire is there, as well as

the basic willingness to collaborate, but it

will be cumbersome to arrive at concrete

decisions and to accept jointly shouldering

the pains risk management brings with it.

I think the train is moving in the right

direction, but if it is to reach its destination,

many components have to interlock, and

many parties who have not worked

together so far will have to do so in the

future. It is complicated, global, and thereare lessons to be learned along the way. It

might take a long time.”

“Our processes now encourage

people to make decisions.” Dr. Peter Schenk

“A strong process was already in place before the nancial crisis, and the institution performed well during the crisis.[MEAG] has a strong emphasis on the risk culture throughout the company group, where the risk management

units are structurally separated from the front o ce.…e risk policy is not only comprehensive and detailed; it also demonstrates that risk policy can be an active tool tocreate added value for the institution ’s stakeholders.”

Award speech by Professor Ingo Walter at the SimCorp StrategyLab Risk Management Excellence Award 2009 announcement

simcorp_meagoct09

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