Enterprise Risk

Management – The Present and the Future CAS

James E. Rech, ACAS, ASA, MAAA,

CFA, FRM, PRM, MBA

November 2005

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Enterprise Risk Management

• Something Old– Legislation– Regulation– Rating Agencies

• Something New– AAA ERM TF– ERMII– Risk Management Section

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Enterprise Risk ManagementLegislative Influences/Response

• USA Legislation– Gramm, Leach, Bliley Financial

Modernization Act (1999)• Privacy

– Sarbanes Oxley (2003)• Corporate Governance• Section 404

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Enterprise Risk ManagementRegulatory Influences

• International Regulation– Basel II Capital Accord (1999-2005)

• First Pillar: Minimum capital requirements• Second Pillar: Supervisory review process• Third Pillar: Market discipline

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Enterprise Risk ManagementRegulatory Influences

• International Regulation– International Association of Insurance Supervisors (IAIS)

• Seven (7) Principles Papers (1999-2004)• Cornerstones Papers (2004)• Roadmap for a common structure and common standards for the

assessment of insurer solvency – Outlines 2005-2006 activities– Structure Paper– IAA Study– Governance: Asset Liability Management by insurance companies– Governance: Risk Management by insurance companies– Financial: Determination of insurance liabilities and technical provisions– Financial: Determination of capital requirements– Financial: Suitability and valuation of assets for insurance companies– Financial: Suitable forms of capital– Supervisory: Validation of internal models

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Enterprise Risk ManagementRegulatory Influences

• USA Regulation– Federal Reserve

• GLB Financial Modernization Act• Securitizations

– NAIC• Risk-Focused Surveillance Process

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Enterprise Risk ManagementMarket & Professional Influences

Rating Agencies• Standard & Poors• Moody’s• A.M. Best

Other Professional and Academic Groups• ERM Institute International, Ltd. (Shaun Wang, PhD, FCAS)• Global Association of Risk Professionals (GARP)• Professional Risk Managers International Assoc (PRMIA)• Committee of Sponsoring Organizations of the Treadway

Commission (COSO)• CFA Institute• Chicago Board of Trade (CBOT) – Derivative Markets• American Strategic Management Institute (ASMI)

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CAS Centennial Goal

Casualty Actuaries be recognized as leading experts in the evaluation and integration of hazard risk with strategic, financial and operation risk.

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Enterprise Risk ManagementActuarial Contributions

• Early Contributions– Risk Based Capital– Dynamic Financial Analysis– Asset Liability Management– Credit Risk: Actuarial Method

• Current Realms of Influence– Risk Management Section (joint sponsors SOA & CAS)– ERM Symposium (SOA, CAS, PRMIA)– GARP Annual Meeting

• Workshop D: Enterprise Risk Management – Essentials for Decision Makers, March 2, 2006

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Enterprise Risk ManagementActuarial Contributions

• Recent Expansion of Actuaries into ERM– AAA ERM Task Force (Jim Rech)– ERMII (Shaun Wang)– Risk Management Section (Kevin Dickson & John

Kollar)

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Enterprise Risk ManagementAAA ERM Task Force

• Mission: The Enterprise Risk Management Task Force serves as the U.S. actuarial profession’s hub for discussing research, educational, and public policy initiatives relating to enterprise risk management, and seeks to develop work on ERM-related public policy issues that affect multiple areas of actuarial practice. The Task Force adheres to the following guidelines:

– The ERM Task Force serves as the entity where the U.S. actuarial profession can voluntarily discuss and if necessary coordinate the various ERM-focused projects underway within the Academy and the other U.S. actuarial organizations.

– The ERM Task Force, with the consent of any involved group, capitalizes on the research and findings of these ERM-focused projects and tailors this information to address or respond to public policy issues.

– With respect to the other U.S. actuarial organizations or Academy groups dealing with ERM, the ERM Task Force serves solely as a forum for communication and holds no authority over any aspect of a project or work product developed outside of the ERM Task Force.

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Enterprise Risk ManagementFuture of Actuarial Education• The actuarial profession must embrace

broad-based risk management • The best way going forward is university-

profession partnership– One provides the basic education– The other focuses on professional training

• This vision was behind a major international initiative(Slide Courtesy of Shaun Wang, PhD, FCAS)

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• ERMII had its first Board Meeting in NYC on Sept 25/26, 2005

• 24 participants from 5 countries (Australia, Canada, France, United Kingdom, and the U.S.)

• 8 major university programs in actuarial science and financial engineering(Slide Courtesy of Shaun Wang, PhD, FCAS)

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ERMII Objectives

• ERMII wishes to accredit 40+ university programs worldwide in quantitative risk management within 4 years

• ERMII aims - research driven university education

(Slide Courtesy of Shaun Wang, PhD, FCAS)

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ERMII Accreditation of University Programs

• What is best practice now and what needs to change to adapt

• Extent of coverage of major areas in risk management and risk modelling

• Strong emphasis on quantitative modelling• Academic staff and qualifications• Program entry requirements and student

backgrounds• Research program in risk management and related

areas(Slide Courtesy of Shaun Wang, PhD, FCAS)

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Risk Management Section (RMS)• SOA/CAS Joint Sponsorship

– Approved by both Boards– SOA changed section by-laws

• Why?– Common & complementary skill set– Broader solutions

• Evolution of insurance and financial services• Need more risk management practitioners to

serve beyond the insurance industry

– Pooled resources ($, staff)

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Risk Management Section (RMS) Objectives

1.  Increase level of communication and interaction with Section members.

2.  Expand ERM educational opportunities for Section and CAS/SOA members, especially in areas where we have not traditionally had training, such as operational risk and credit risk.

3.  Continue to foster risk management research.

4.  Support the Society's initiatives in promoting the Actuarial profession as risk managers.

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Risk Management Section (RMS)• Mission

– Advance actuarial profession in risk management

• educational• research• networking, etc.

• Focus – Develop solutions to unsolved problems– Communicate value of actuaries in providing solutions– Educate actuaries to meet market demands

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Risk Management Section (RMS)• Joint Ongoing Initiatives

– Risk tolerances– Risk metrics– Operational risk– ERM Specialty Guide (Published: August

30, 2005)– ERM Symposium (3 years & Growing)

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Risk Management Section (RMS)• New Research

– Risk adjusted performance measurement and attribution

– On-line ERM guide (ERMII website)– Correlations/diversification– Operational risk survey or research– ERM monograph on measuring risks– Infrastructure to link risk, capital, and financial

management– How time horizons affect risk– Credit research– Policyholder behavior research

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Risk Management Section (RMS)

• Join and participate– Increase your knowledge– Research unsolved problems– Expand your career opportunities

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Enterprise Risk ManagementToday’s Panelists

Applied ERM Panelist

Banking Approaches Gary G. Venter

Operational Risk Christopher David Bohn