Enterprise Risk Management & the Actuarial Profession in ......Enterprise Risk Management is the process by which organizations in all industries assess, control, exploit, finance,

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7 – 10 November 2010 Sheraton Mirage, Gold Coast

Enterprise Risk Management & the Actuarial Profession in General

Insurance

Gloria Yu & Melinda Howes


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Outline• Background• Our Aspirations• What we have done so far• Our Plan• Applications in GI


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Enterprise Risk ManagementEnterprise Risk Management is the process by which organizations in all industries assess, control, exploit, finance, and monitor risks from all sources for the purpose of increasing the organization’s

short and long term value to its stakeholders.

• Currently a key practice area for the actuarial profession• Significant opportunity exists for the profession to further contribute

and develop professional practice in this area.• Primarily focused across the financial services industry – banking,

insurance, wealth management, superannuation and general insurance

• Potential to expand into the non-financial services industry


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The Profession is well positioned• Experienced in the financial services industry• Education and training in the analysis and quantification of risk,

particularly in terms of market and insurance risk• Existing practitioners who have led the way in Chief Risk Officer and

other roles, both domestically and globally• History of combining quantitative analysis with commercial

judgement to advise all levels of management and the Board• Strong reputation for quality, supported by professional standards

and recognised internationally for a high level of professionalism• Existing roles in capital management, financial condition reports, etc,

which require an understanding of specific areas of risk


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Participating in ERM• A broad area• Actuaries successful in this industry have gone beyond their training to take

a holistic view of all risks and how they are managed• Many opportunities to work with, and learn from, other professions who

contribute to this important and growing area• Not an area where we can take a unique position (eg Appointed Actuary)

but rather where we will be successful by participating, contributing and earning the respect of others through what we can offer and can achieve

• No profession has yet provided education or training to encompass all aspects of ERM

If we are to build our position further in this industry, then we must participate well beyond the boundaries of our profession


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Background


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What’s the fuss all about?• Nothing new - actuaries have always been risk managers• Latest management fad• “I don’t want to know about health and safety, and our administration

problems …”• “I don’t want to be involved in the risk management function, I want

to work in the business”• “I want to work in a traditional role. Why is this relevant for me?”• Others already dominate this space – we’re too late• In any event, we need to learn from non-actuaries, not actuaries


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Two basic underlying principles differentiate ERM from traditional risk management:

• Holistic: All risks faced by the entity• Managing to create value for the owners / stakeholders, whilst

ensuring that promises made to customers are met

• Totality of systems, structures and processes that define risk appetite, identify, assess, treat, monitor, report and/or communicate internal and external risks

• Common language of risk• Systematic coordination of specialist risk functions• Management of both downside and upside of risks• Seeks to quantify, but not all risks measurable in financial terms• Behaviours and risk control processes• Holistic consideration of risk information from past events, present performances

and future outcomes. 2009 International Actuarial Association / Association Actuarielle InternationaleDealing with Predictable Irrationality (February 2009)

But what is ERM?


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There is a great need...• Rapidly evolving (with boost from GFC) • Management and Boards’ high awareness and need for help• Regulation (e.g. LPS 220 / GPS 220 – the Board’s responsibility)• Focus by rating agencies• Complexity and interdependency of today’s markets and risks (driven partly

by innovation)• Appreciation of risk-adjusted return and risk/reward and link to value-add by

ERM

Better financial outcomes


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A. In risk management roles (CRO & supporting roles)

B. In traditional actuarial rolesC. In broader business roles

ERM skills better equip an actuary for these roles

LI/WM GI ERM Super Others

... So there are great opportunities


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A. In risk management roles (CRO & supporting roles)

B. In traditional actuarial rolesC. In broader business roles

ERM skills better equip an actuary for these roles

LI/WM GI Super OthersERMPractice Area andArea of Expertise

... So there are great opportunities


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• But that’s not enough for comprehensive support for management / boards

• They need to be complemented with a deep understanding of ERM and broader business skills

• Such a package is hard to beat!

... Traditional skills provide a great foundation...


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Our Aspirations


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Short term

Among the pre-eminent risk management professionals in financial services

Long term

• Lift understanding amongst membership through communication, CPD etc

• Ensure all new Fellows have grounding in ERM

• Provide formal ERM qualification


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• ‘ERM is a clear growth opportunity’

• ‘… imperative to complement our pre-existing risk management skills and our “brand”.’

• ‘…is our core business as well as emerging business”

• ‘…partnership with other professionals…”

...Institute’s Strategic Plan …


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Financial Risks Other Risks- insurance- ALM

- market- credit- liquidity- currency- interest rate

- people- process- systems- strategy- business environment- others

LI/WMGISuperInv/FMInvest. Banking

Other Banking and FinanceNon Fin. Services

Aspiration …

Biggest opportunities

Least opportunities


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Aspiration …

clearly the pre-eminent experts in risk management in this space


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Aspiration …recognised as experts in financial risk management of all types


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Aspiration …knowledge and understanding of ERM which is both of a high standard and difficult to match by non-actuaries


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Aspiration …

the natural holders of CRO positions as they become established senior positions


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Aspiration …recognised as experts in risk management and are very competitive contenders for risk management work and CRO roles


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Aspiration …

very competitive contenders for ERM expert positions (e.g. CRO), in competition with other disciplines


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LPS 220 / GPS 220:Appointed Actuary to advise on the “suitability and adequacy of the riskmanagement framework (RMF)”

where the RMF is …“the totality of systems, structures, policies, processes and people within the insurerthat identify, assess, mitigate and monitor all internal and external sources of riskthat could have a material impact on an insurer’s operations.”

Actuaries can add real commercial value through ERM – and the regulator sees prudential value too …


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What we have done so far…


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Education- More ERM in Part II - Some ERM applications in Life, GI, GRIS- ERM in CAP course- Course 7A as Part III subject- Course 7A for existing Fellows CERA

CPD- Annual ERM Seminar- ERM Community sessions- ERM CPD course- Linked-In groups- ERM Newsletter


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1. We need to much more strongly engage our own members

2. We need to lift awareness of financial services senior management of what we have to offer

See Appendix for assessment against IAA ERM principles

But this is not enough...


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Our Plan


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Broadening actuarial participation in ERM (through both specialist and traditional roles)

Training and support for members to undertake such roles

Improved profile and reputation for the actuarial profession locally and globally

ERM Pathway in the profession


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• Capabilities & CPD• Education• Participation & Reputation• Professional Standards

Interdependence

ERM Operational Plan


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• Annual ERM Seminar• ERM Community events• Other CPD courses• Linked-In groups• ERM newsletter• Publications in Actuary Australia• Possibly develop education materials into

CPD modules for FIAAs

Capabilities & CPD


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• Global qualification (CERA) o Course 7Ao Experienced practitioner’s routeo Credential approved by the International Treaty

Board; awaits legal process regarding trademark issues

• Deepen ERM in Part II • Review ERM in Part III (Life, GI, GRIS)

Education


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Part III

Course 7A

Post FIAA

Part I Part II PER(3 yrs)

Control Cycle& Invest.

Increased ERM Content

Specialism in traditional area

Investments / Other

FIAA

CERA2-day ERM Workshop

UK ST9 Exam in ERM

Actuarial degree OR UK CT1-CT9 exams

“actuary”

Course 7A (see below)

FIAA

ERM Education Pathways


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• Review structure of risk management functions / business units in financial services organisations

• Identify senior ERM roles and their professional and educational backgrounds

• Contrast ERM route with traditional actuarial route

• Profile and career path for the ERM route

Participation & Reputation (1)


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• Interview senior management of large financial services companies decide on action to lift awareness

• Actuarial speakers at financial services events• Public contribution to risk issues• Research international ERM developments• Liaise with global professional ERM bodies

Participation & Reputation (2)


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• Support the actuarial profession in its current statutory risk management responsibilities

• Support Appointed Actuaries in their current risk management oversight responsibility

• Improve professional standards / guidance notes over time

Professional Standards


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• Is what we have done enough?• What else should we be doing to achieve the

aspiration?• Are we on the right track?• How should we measure our success?

What do you think?


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Practical perspectives on application of ERM in GI business

Bruce Lambert, SuncorpWarrick Gard, E&Y


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Questions?


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Appendix

Supporting Slides


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IAA ERM Principles (see slide 26)- “Dealing with Predictable Irrationality”February 2009

• How do we measure up?• Some thoughts and challenges


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• Totality of the systems, structures and processes that define risk appetite, identify, assess, treat, monitor, report and/or communicate internal and external risks• How active have actuaries been in ensuring the systems have been in place

over the years? • Has the decline in the level of seniority of the role of Appointed Actuary

weakened our position to influence?• Common language of risk

• If actuaries have met this requirement over the years then why do we have a poor reputation for communication?

• Coordination of specialist risk functions• In the Financial Condition Reports written over the years most will have

sought to bring together all of the risks as they impact upon the company. Have we done enough?

IAA ERM Principles - how do we measure up?


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• Management of downside and upside of risks• Are actuaries good at exploiting the upside opportunity in a measured

fashion or is there a tendency to wait until there is sufficient data to assess the risk by which time the opportunity has gone?

• Behaviours and risk control processes• How much attention have actuaries paid to the behavioural side of ERM?

• Holistic consideration of risk information from past events, present performances and future outcomes• Is GFC a reflection of the folly of relying on the past? • Are we good at considering current performance and future outcomes?

IAA ERM Principles - how do we measure up?

Documents

Enterprise Risk Management & the Actuarial Profession in ......Enterprise Risk Management is the process by which organizations in all industries assess, control, exploit, finance,