Actuaries Assume New Role In Age of Enterprise Risk Management

December 8, 2006

Enterprise Risk Management (ERM) requires actuaries to assume the role of strategic risk managers in instituting what is essentially a cultural change in a company’s operations, actuaries were told at the Casualty Actuarial Society annual meeting .

Calling ERM “explicit, organized decision-making under uncertainty,” Thomas Hettinger, managing director, EMB America, LLC, explained that ERM is a process of identifying risk, assessing risk, transferring risk, and capitalizing on risk.

He observed that “many firms are already doing this by default, but not in a manner where people can study it or critique it.” Actuaries have the tools to help develop the ERM process, but it requires actuaries to perform as risk managers, looking forward to all the risks that could be encountered in the future.

For example, “one of the key components is to develop an understanding of economic capital – understanding the difference between minimum capital and different thresholds of extra capital,” he said.

Early attempts at ERM, such as the application of Dynamic Financial Analysis, failed, in part, because of a reliance on overly sophisticated and misunderstood models that were out of step with the organizations they intended to serve. The result was that the process lived within actuarial circles without senior level buy-in and was not incorporated into daily practice, Hettinger pointed out. To succeed, “actuaries need to be able to demonstrate the value of what they talk about.”

Donald Mango, managing director, Guy Carpenter & Co., Inc., said that if actuaries want to be ERM leaders, they must broaden their often-perceived role as collectors and interpreters of data and further develop their skills as leaders, educators, and communicators, so they can explain the impact ERM will have on the organization.

“Everyone underestimates the resources committed and the time allocated to ERM,” he said. “To put this into perspective in terms of the magnitude of impact on the firm, consider implementing a brand new general ledger or reserve review system.”

“Done right,” Mango said, “ERM will be the hub of risk decision-making, impacting planning, pricing, reinsurance buying, capacity allocation, and rating agency interaction.”

In developing ERM, actuaries must bring together people in the company who do not talk frequently, for example, underwriters, IT professionals, and investment managers, according to Mango. He used the example of catastrophe risk as one that impacts not only underwriting losses, but a company’s investments as well.

Mango pointed out that actuaries should embrace ERM not as something new or different, because their traditional practice areas of pricing and reserving are already the cornerstones of insurance ERM. “If you don’t think you are in risk management,” Mango told the actuaries, “I’m telling you we already are.”

He also recommended that actuaries become familiar with the approaches being taken by rating agencies to ERM, encouraging in particular that “actuaries recognize that the future will not be the same as the past.”

While the task of developing ERM models may appear overwhelming, Mango observed “you don’t have to start from scratch,” noting that there are resources available to help actuaries build knowledge and skills.

Source: The Casualty Actuarial Society

Topics Risk Management

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