Writing and editing a variety of thought leadership articles for this Danish asset management systems business.

MEAG:  risk management culture par excellence

Filed in: risk, fund managers, insurance, asset management, risk management, credit rating, simcorp, meag, reinsurance

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.


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MEAG:  risk management 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
Richard Willsher

Among asset managers, MEAG may well be the envy of its peers. It manages more than €180 billion of assets, yet suffered no direct damage in the financial crisis.This is almost certainly due to the risk management culture at the firm 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 differently. “The assets of insurance companies have to behave differently than assets belonging to other types of investors. The assets must back the liabilities of the insurance company. What is more, life insurance company assets have to be structured completely differently than those of a composite insurer or firms that reinsure storm risks. The risk content and asset behaviour mean that they have to match, or 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.”

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.”

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 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.”

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.”

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.”

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 sufficiently transparent will be banned or sufficiently 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 tointeresting 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. “The 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. This 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 there are lessons to be learned along the way. It might take a long time.”

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 management capability that Dr. Schenk describes, there is plenty of cause for optimism.

Richard Willsher is a London-based financial journalist and former investment banker.


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.


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

Credit ratings: IT in the spotlight

Filed in: risk, solvency ii, it, asset management, credit rating, fitch, rating, schroder, moody's

When Schroders Investment Management received a rating upgrade, the strength of its technology platform was a key factor in the rating agency’s opinion.

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Credit ratings: IT in the spotlight

When Schroders Investment Management received a rating upgrade, the strength of its technology platform was a key factor in the rating agency’s opinion.
by Richard Willsher

In November 2008 Fitch Ratings revised the London-based asset manager’s rating from M2 to M2+. It noted, “The rating also factors in the extent of Schroders research resources and the solid risk management framework. The addition of the ‘+’ modifier emphasises strength in the company’s investment infrastructure and the technological platform with notable progress being made in data management and integration (...)”2.

Other recent upgrades where Fitch made specific reference to technology as a determining factor included Groupama Asset Management, RFM Investment Management, Rothschild & Cie Gestion and Robeco.

That Fitch should include technology in its set of five rating categories3 - company & staffing, risk management & controls, portfolio management, investment administration and technology - is not altogether surprising. As Andrew Cox, partner, and head of regulatory capital at actuaries and consultants Lane Clark & Peacock explains, “Data and information is the oxygen of any kind of insurance or asset management business. If you don’t know what business you’re running then how can you expect to run it well or to react to changing environments and situations? The ability to know what your business is and to know what your business is doing quickly is, we think, vital. And that in the end comes down to IT systems, most of all because there arevast amounts of information that any asset manager will need about all the holdings of different individuals, contracts that they’ve got in place etc. So the ability to be able to turn that vast amount of very detailed information into usable and useful summaries in a matter of days rather than weeks is pretty important.”

Moody’s InvestorsService takes this into account when evaluating and assigning its Investor Manager Quality ratings. “Moody’s believes,” it explains, “that the successful operation of an investment management firm relies also on the ability of the firm to set up an appropriate investment infrastructure, including the use of real-time portfolio management systems and various external data service providers to deliver targeted levels of portfolio management, accounting, shareholder services, and legal/control functions. In this area, face- to-face discussions are reinforced by on-site reviews.

It is also recognised that the failure of IT operations could threaten an investment management company’s ability to manage and monitor efficiently its offerings and provide adequate client services. For this reason, while stopping short of an assessment of enterprise-wide operations risk, we review the content and frequency of back-up systems as well as the tests of reliability of the key information feeds.”4

A spokesman for Standard & Poor’s notes that, “For financial institutions ratings, technology is not a major area of focus [for us]. Rather, we are more interested in the broader enterprise risk management of the firm (risk governance, credit risk etc.) and the degree to which senior management can answer our questions and present credible, timely management reports. Within this, we do also focus upon operational risk, which is important to asset managers, for example disaster recovery, how management monitor operational risk etc.”

The rating agencies then do not offer themselves as detailed analysts of data systems and technology platforms. It is quite clear however that they do attach a significant degree of importance to the technological underpinning of an asset management or fund management business when apportioning ratings. With hindsight it was inevitable that IT’s role in risk management and capital adequacy would become more important, even before the financial crisis beginning with the US sub-prime fiasco. Information and the efficiency of systems lie just below the surface of the criteria of Basel II for non-life business and Solvency II for insurance and asset managers with a life insurance aspect to them. There is a strong emphasis on risk management and controls and on operational risk in Basel ‘Pillar 1.’ And quality information and robustness of systems falls within the view of regulatory oversight in ‘Pillar 2.’

The stakes however have become considerably heightened in light of the recent volatility in financial markets. Anything other than a rapid response to marking assets to market and speedy quantifying of positions poses a reputational risk to an institution.

“Both Basel II and Solvency II are, in the end, about risk management,” says Andrew Cox, “and the first step to managing risk is identifying risk. The only way you do so is by knowing what your business is doing, what risks it’s running and what its exposures are and this derives from the IT system. There at the heart of it a good data system is a pre- requisite for good risk management.” He goes on to say that the UK’s Financial Services Authority is particularly keen to focus upon the integrity of data.

“From my personal experience in working with clients to help them with both regulatory capital and Solvency II,” concludes Cox worryingly, “it is remarkable how difficult it is to get information or even to find someone who actually understands what the information means. There is a lot of room for improvement. Different companies are at different levels. Above all people must not think that this is a solved problem.”

With the current pressure from regulators, pressure from markets and pressure on the models applied by rating agencies in arriving at their ratings, it looks inevitable that IT will be further thrust into the spotlight. Ratings criteria will have to place increased emphasis on technology, even more than they currently do and anything less will again draw criticism of the rating agencies themselves. In the rating process there will be winners and losers. Ratings will go up or down depending on how flexible, scalable, robust and quick their systems are in the way they respond to the stresses placed on their asset managers’ businesses.

Richard Willsher is a London-based financial journalist and former investment banker.

2     “...Schroders has achieved key milestones in its London operations with respect to its technological platform following implementation of SimCorp Dimension as the main accounting and repository tool. Risk management routines have been responsive to the volatile market environment and included heightened surveillance of certain risks…”.
3 ‘Reviewing and Rating Asset Managers,’ Fitch Ratings report, 29th May 2007.
4 ‘Approach to Evaluating and Assigning Investor Manager Quality Ratings to Asset Management Companies’, Moody’s Investor Service, 31st August 2005.

Preparing for UCITS IV

Filed in: fund managers, asset management, ucits iv, ucits, funds

European Parliament approval for the Undertakings for Collective Invest- ment in Transferable Securities (UCITS) IV has been greeted with enthusiasm by trade bodies and the asset management industry as a whole. Now everyone is asking how it’s going to work. This article gathers views on what industry professionals think the UCITS IV future may hold. by Richard Willsher

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Preparing for UCITS IV

European Parliament approval for the Undertakings for Collective Invest- ment in Transferable Securities (UCITS) IV has been greeted with enthusiasm by trade bodies and the asset management industry as a whole. Now everyone is asking how it’s going to work. This article gathers views on what industry professionals think the UCITS IV future may hold. by Richard Willsher

If UCITS IV fulfils its promise then the package of measures it ushers in could make a very real difference to scope, scale and organisation of fund management in Europe. The European Funds and Asset Management Association has described it as ‘a new milestone in the creation of an effective single market for investment funds’. And its president, Mathias Bauer commented, “Efficiency and confidence are crucial if the investment fund industry is to remain competitive, in particular under thecurrent difficult market circumstances. UCITS IV will enable asset managers to deliver these efficiency gains, increase confidence in the existing UCITS framework and help promote the UCITS brand even more…”

Jarkko Syyrilä, of the London-based Investment Management Association is similarly upbeat. “The new directive,” he says, “will simplify the regulatory environment; create cost savings through economies of scale; give greater choice of investment funds to investors; and increase investor protection by making sure that retail investors receive clear, easily understandable and relevant information when investing in UCITS funds.”

Market practitioners agree that it will have significant effect on the market. “I think it will,” comments Adam Fairhead, global head of product development at HSBC Global Asset Management. “The master feeder arrangement could encourage a lot of consolidation of funds thereby cutting costs. The management company passport could lead firms to domicile all their resources in a single location instead of having them spread about. Fund mergers cross border should certainly be easier though there is no solution on the tax side, which is important.”

He adds that the structural change that UCITS IV will bring about will mean that businesses may alter the way they set up and organise their fund management operations though not what products they sell to investors or the way the sell them.

Jamie MacLeod CEO of Skandia Investment Group says that his firm “very much welcomes the variety of new initiatives being pursued with the development of the UCITS IV regime. However,” he continues, “while we have noted [a number of ] benefits… and the desire of regulators to work more closely together, there remains a lack of detail… The result is that we cannot make business decisions until these proposals have been fully worked through…”

Indeed many firms have a number of wide ranging business decisions to make regarding how they are structured, locally, cross border in Europe and globally. Aegon Investment Management among a number of others, is in the process of reorganising its business into a global asset management structure and Helen Webster Aegon’s head of products says that UCITS IV provides her firm with some of the tools to do so. At Standard Life Investments Phil Barker who is head of European Business Development adds that it will help reduce costs and help increase efficiency.

Richard Pettifer KPMG’s director of investment management identifies three key areas that firms will now be focusing on. The first is where to locate their principal management company. The second is where to put their master-feeder agreements and thirdly, where will fund administration be carried out?

Pettifer queries whether Luxembourg and Dublin will continue to grow as centres for all or some of these activities. Or will, for example, firms with head offices in say Frankfurt, London or Paris, place their management operations, and master-feeders in those centres and transfer fund administration to low cost centres elsewhere, such as, he suggests, Poland or India?

The counter to such suggestions lies in the deep pools of expertise and excellent regulatory environments that Dublin and Luxembourg already have in place. To replicate that elsewhere would take a great deal of time and cost. Moreover these two centres will compete tooth and nail to hold on to all aspects of asset management work because of their significance to their local economies both in terms of income and the employment of human resources.

Meanwhile before many firms can begin to address such issues KPMG’s Pettifer goes on to point out that they need to better understand their existing businesses especially where they are spread across several locations around Europe. “Just preparing an inventory and understanding their own cost structures will be a challenge for some firms,” he says.
In summary, UCITS IV’s impending implementation addresses a number of longstanding industry issues. But it also raises a number of structural and strategic questions that many firms are not yet necessarily well positioned to answer. Meanwhile those that are, could be best placed to seize valuable first-mover advantages in the new, Europe-wide investment management market.

UCITS IV – Key features
UCITS IV ushers in several measures intended to promote grater efficiency in pan-European management of funds:

␣␣ Management Company Passport – A management company located in one country will be able to set up and run a fund in another (A fund’s nationality will be determined by the country where it has been authorised);
␣␣ Supervision – a management company will be subject to the supervision and regulation of the country where it is based;
␣␣ Notification Procedure – quicker, more simplified regulator-to-regulator communication;
␣␣ Key Investor Information – to be simpler than the existing ‘simplified’ prospectus;
␣␣ Mergers – framework governing both domestic and cross-border mergers between funds;
␣␣ Master-Feeder Structures – allow funds to build economies of scale across borders.

UCITS IV – Timetable
Following approval by the European Parliament, the remaining timetable is clear and is unlikely to change:

␣␣ Level 2 detail is currently being worked through and Directive is due to be issued in summer 2010;
␣␣ Member states to adopt and implement rules which should be effective through the EU by 1 July 2011;
␣␣ Economies of scale across borders.

Richard Willsher is a London-based f inancial journalist and former investment banker.