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
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culture par excellence
approximately match, this liability
structure. Any deviation has to be de-
liberate. This means that when you
manage assets for insurance companies,
you have to talk about risk. The 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.”
“We regard our role explicitly
as business enablers.”
Dr. Peter Schenk
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 be
cash, because relative to the liabilities, the
return is quite different. 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
financial crisis is just another event that
makes you think about your risk profile.”
It follows, then, that understanding and
calculating risk at MEAG starts at the top
of the firm. As well as heading the risk
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 its
chief risk officer. 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 office 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 office
may be thrilled with it. The investor may
be thrilled as well, because it may be a
good instrument to reflect its liability
profile. 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. The risk
management culture has evolved much
further than that and according to Dr.
Schenk, “There are conflicts, 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
SimCorp
together and talk about them. We regard
our role explicitly as business enablers. We
supply the front office with tools that they
can use for their allocation and try to assist
in finding solutions when dealing with
narrow risk limits and other restrictions. 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 find
ways for them to take on risk.”
Dr. Schenk sets out the first principles of
MEAG’s risk management operation. The
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. The details of holdings must be
transparent. The methods and processes
for handling the data have to be able to
transform it into information that is useful
and can flow into the decision-making
process. To achieve these things MEAG
uses a centralised data backbone that
includes SimCorp Dimension. These
features are the basic building blocks, but
it is dealing with the unusual situations
that defines the risk culture at MEAG
and tests how effective 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 must
be 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.
Then, when you do, the culture of the firm
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, “This is a ‘top-down
issue’ because everyone appreciates that
understanding, managing and controlling
risk is vital to our business and our
decision-making process.”
SimCorp
MULTI-DISCIPLINARY TEAM
It is also key to the process that the risk
management function is staffed in a way
that matches the demands of the business
in 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. There 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)
qualifications. Intellectual rigour and
professional competence are essential
prerequisites.
However, part of MEAG’s success in the
current financial crisis is owed to the
2000-2003 equity bubble, which sharp-
ened the firm’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. The problem is
always interfaces between different
departments; between the asset manager
and the investor. And there we learned
some lessons. One was that we really
intensified communication. We intro-
duced a mandate management concept
which ensures that the tactical asset
allocation not only fits 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 quantified and cor-
responding risk triggers are defined.
When a risk trigger is activated, a
predetermined process starts. This process
always has to do with distributing and
exchanging information, meeting together
and deciding. Our processes now
encourage people to make decisions.”
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
throughout the company group, where the risk management
units are structurally separated from the front office.…
The risk policy is not only comprehensive and detailed; it
also demonstrates that risk policy can be an active tool to
create added value for the institution’s stakeholders.”
Award speech by Professor Ingo Walter at the SimCorp StrategyLab Risk Management Excellence Award 2009 announcement
Today, for example, risk modelling, stress interesting constructions that somehow
testing and reviewing and revisiting the manage to comply with existing
stress tests and models on a regular basis regulation. So it will always be the task of
are vital processes. And transparency is the individual companies’ risk management to
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
crisis, as Dr. Schenk points out: “If you systemic risk. To prevent this we would
have transparency, you can quickly manage need a global risk management system. A
an asset’s risk. You can sell it or hedge it global risk management system means
faster than your competitors perhaps. global data pools, a global early warning
Nobody could ever understand what a concept and global risk management
CDO of CDOs was, because you couldn’t processes linked to these warnings. This is
drill into the data that really exposed the now being thought about and discussed in
risk. If we were to buy these products and all kinds of forums, but the challenges are
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
“Our processes now encourage
wouldn’t permit such instruments at all, or
would at least classify them as ‘non-
people to make decisions.”
standard’, which leads to strict limitation Dr. Peter Schenk
in volumes and special pricing and
reporting rules.”
huge. I think the desire is there, as well as
GLOBAL PROSPECTS the basic willingness to collaborate, but it
So in the bigger picture, considering the will be cumbersome to arrive at concrete
raft of new controls and measures decisions and to accept jointly shouldering
currently under discussion, and in light of the pains risk management brings with it.
MEAG’s experience, is Dr. Schenk I think the train is moving in the right
optimistic that products that are not direction, but if it is to reach its destination,
sufficiently transparent will be banned or many components have to interlock, and
sufficiently de-risked in the future, so as to many parties who have not worked
not pose a threat? together so far will have to do so in the
future. It is complicated, global, and there
“It is not black and white, but altogether are lessons to be learned along the way. It
I’m not optimistic. Buy-side needs and might take a long time.”
sell-side creativity will always lead to
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culture par excellence
Dr. Schenk concludes by saying that while
the world has probably learned how to
avoid another sub-prime crisis, it is the
unexpected we have to prepare for. “To
deal with the unexpected you need global
risk management systems, a global risk
culture and global risk governance, so that
the relevant key persons will sit down
together and make decisions, fast.” This,
he says, will be very difficult to achieve on
a global scale, but for MEAG’s own
business, with the highly evolved risk
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
parties, including other institutions
and public funds.
Munich Re is the world’s largest
reinsurance group. It conducts
both insurance and reinsurance
business in an integrated model,
with premium income of €38
billion, net profit of €1.5 billion
and 44,000 employees around the
world. ERGO, the group’s primary
insurance group, has 40 million
clients in more than 30 countries
and earned premium income of
€17.7 billion in 2008. ERGO
offers a range of insurance products
and is Europe’s leading health and
legal expenses insurer.
management capability that Dr. Schenk
describes, there is plenty of cause for
optimism.
Richard Willsher is a London-based finan-
cial journalist and former investment
banker.
SimCorp
The SimCorp StrategyLab Risk
Management Excellence Award
has been established by SimCorp
StrategyLab for the purpose of
rewarding and promoting best prac-
tise within risk management in the
global investment management in-
dustry.
MEAG was named the 2009
winner by an international jury
including Professor Caspar Rose
of Copenhagen Business School,
Professor Renée Adams of Uni-
versity of Queensland, Professor
and Director of SimCorp Stra-
tegyLab Ingo Walter of Stern
School of Business (NYU), and
SimCorp‘s CEO, Peter L. Ravn.
The assessment was based on
MEAG’s achievements and devel-
opments in the field of risk
management in the period from
1 August 2008 to 31 July 2009.
SimCorp StrategyLab is the
independent research arm of
SimCorp. Read more about
SimCorp StrategyLab and its Risk
Management Excellence Award at
simcorpstrategylab.com/riskaward