Enterprise Risk Management Credential Report

Transcription

1 Knowledge Management SAT Enterprise Risk Management Credential Report June, 2005 Page 1 of 33 Item M2d

2 ERM Credential Task Force Report June, 2005 EXECUTIVE SUMMARY... 3 INTRODUCTION... 5 ASSIGNMENT... 5 PRIOR INITIATIVE... 5 CREDENTIALS AS A MEGA-ISSUE... 5 BACKGROUND MATERIAL... 7 PRIOR SOA EXPLORATION OF NEW CREDENTIALS... 7 ERM WITHIN THE EXISTING SOA CREDENTIALING PROCESS... 8 INTERNATIONAL ACTUARIAL ASSOCIATION (IAA) INITIATIVES... 9 INITIATIVES OF OTHER ACTUARIAL ORGANIZATIONS... 9 ERM INSTITUTE INTERNATIONAL CREDENTIALS OF COMPETITORS IN RISK MANAGEMENT MEGA-ISSUE DISCUSSION QUESTIONS WHAT DO WE KNOW ABOUT OUR MEMBERS /PROSPECTIVE MEMBERS /CUSTOMERS NEEDS, WANTS AND PREFERENCES THAT ARE RELEVANT TO THIS DECISION? WHAT DO WE KNOW ABOUT THE REALITIES AND EVOLVING DYNAMICS OF OUR MEMBERS/ MARKETPLACE/ INDUSTRY/PROFESSION THAT IS RELEVANT TO THIS DECISION? WHAT DO WE KNOW ABOUT THE CAPACITY AND STRATEGIC POSITION OF OUR ORGANIZATION THAT IS RELEVANT TO THIS DECISION? WHAT ARE THE ETHICAL IMPLICATIONS OF OUR CHOICES? WHAT DO WE WISH WE KNEW BUT DON T? ISSUES WHAT ARE WE TRYING TO ACCOMPLISH WITH THE ERM INITIATIVE? WHAT ARE THE GOALS? REASONS GIVEN FOR CREATING A NEW CREDENTIAL RISKS AND CONCERNS ASSOCIATED WITH CREATING A NEW CREDENTIAL IMPLEMENTATION ISSUES CONTENT RELATION TO CREDENTIALS/CERTIFICATES OFFERED BY OTHER ORGANIZATIONS SECONDARY ISSUES ALTERNATIVES KEY COMMON ELEMENTS OF PROPOSED CREDENTIAL PROGRAMS XYZ1 - SOA CREDENTIAL/SUBSET OF SOA EXAMINATIONS XYZ2 - SOA CREDENTIAL/WITH SOME ALTERNATIVE MATERIAL NOT IN THE SOA EXAMINATIONS XYZ3 - PARTNER CREDENTIAL NO SOA-SPONSORED CREDENTIAL TASK FORCE RECOMMENDATION APPENDIX 1 LEARNING OUTCOMES/OBJECTIVES FROM EXAMS P, FM, 8F&ERM EXAM P PROBABILITY EXAM FM FINANCIAL MATHEMATICS COURSE 8 FINANCE AND ENTERPRISE RISK MANAGEMENT ERM EXTENSION APPENDIX 2 ERMII STATEMENT Page 2 of 33 Item M2d 2 of 33

3 Executive Summary The SOA Board has had several mega-issue discussions concerning the appropriate role for the SOA in the area of Enterprise Risk Management. At the February 2005 meeting, the Board approved the following SOA Enterprise Risk Management Strategy Statement, as recommended by the ERM Strategy Task Force: The SOA will work to further and establish the position of the actuarial profession as the preeminent profession in the field of Enterprise Risk Management. The SOA will work as full partners with the Casualty Actuarial Society as the leaders of research and education initiatives within the actuarial profession. One of the specific recommendations of the ERM Strategy Task Force was to have the SOA work with the CAS and CIA to develop accreditation and credentials for risk managers. The Board charged the Knowledge Management SAT to complete the exploration of a new risk management credential. The task force put in place by the KMSAT included the following members: David Gilliland Thomas Herget Clive Keatinge Cheryl Krueger Michael McLaughlin Craig Raymond Shaun Wang Kathleen Wong officially representing CIA officially representing CAS SOA staff partner The CIA and CAS members worked as full participants in our group. This report and the recommendations approved by the SOA Board will be provided to the leadership of the CIA and CAS for their review. We are hopeful that those organizations will support the SOA initiatives and in particular that any credential developed could be jointly sponsored by the SOA, CAS and CIA. Process The task force was asked to provide a progress report for the June Board meeting. Due to the urgency of this topic, the group quickly agreed that we wanted to go beyond just a progress report. We recognized that the Board s directive did not provide specific guidance to the task force in terms of scope and parameters. We concluded that one of our goals should be to produce a report that would force the Board to confront and make decisions on the issues that arise if the SOA contemplates issuing a new credential, and provide additional guidance for the future direction of the Task Force s efforts. The task force reviewed recent reports to the Board of Governors on ERM, the reports of prior working groups that considered development of new credentials, and the initiatives or stated positions of other actuarial organizations. We also reviewed the credential offerings of competitors and updated our knowledge of trends in the industry. This information is presented in the Background Material and Mega-Issue Discussion Questions sections of our report. Task force members brought a diversity of views to the discussion. This enabled us to produce what we feel is a balanced report -- arguments supporting the need to offer a new credential as well as a discussion of the risks and concerns associated with such an offering. We recognized that in the timeframe available we would not be Page 3 of 33 Item M2d 3 of 33

4 able to conduct market research and develop detailed cost estimates. That type of information will need to be developed as part of any implementation plan. Issues and Alternatives Considered The task force strongly supports the strategy of establishing the actuarial profession as the preeminent profession in the ERM field. The ERM discipline is still forming and there is a need for the skills that actuaries possess in the ERM arena. ERM represents a major opportunity for expansion of the profession. Arguments for a New Credential: There is not yet a dominant ERM credential in the market. We believe there is room in the marketplace for a rigorous approach to ERM that makes use of actuarial approaches to risk. However, competing professions are working to claim the ERM turf and there is a short window if we hope to stake our claim. Our evaluation of the marketplace indicates that it will not be possible to compete in the ERM field with credentials such as the FSA/ASA. The travel time is not acceptable, and the existing SOA designations contain too much depth of insurance knowledge and, with the possible exception of Course 8 ERM, too little breadth of other ERM topics. All of this argues in support of the development of a new credential for the ERM market with requirements that are at a lower level than the ASA. Arguments against a New Credential: The SOA s strategy is to establish the actuarial profession s position in the ERM field. The members who earn any new credential will be members of the SOA and therefore have ties to the actuarial profession, but they will not be actuaries. The new credential might in fact compete with the FSA in terms of attracting new entrants and in terms of acceptance in the marketplace. Our members have indicated that one of the SOA s top priorities should be maintaining the value of the FSA. It is not clear whether members will view a new credential as adding more value to their FSA or as taking SOA resources away from the support of the FSA. Partnerships The task force gave consideration to various types of partnership relations with other organizations. We did not feel that developing a joint credential with another non-actuarial group would best serve the interests of the SOA. We believe that there may be value in developing relationships with groups such as ERMII for research and education and in continuing to partner with appropriate groups on other projects. Recommendation The task force was able to reach a conclusion on these issues and is prepared to make a recommendation to the Board. However, we believe that it is premature to formalize our recommendation until the Board has had its own discussion of the issues and reached decisions on the appropriateness of a new credential. We are not providing a motion in advance of the Board meeting, but will be prepared to develop and present a motion during the meeting, based on the direction the Board s discussion provides. It is critical that the Board pass a motion at the June meeting that will move this process forward. The task force s conclusion is that the benefits of offering a new credential, if done in an appropriate manner, outweigh the concerns. Our preferred approach would be a new credential with requirements that are a subset of the existing SOA examinations. The credential should be developed in full partnership with the CAS and CIA. This approach to a new credential could be implemented in the shortest period of time, in a situation where time is of the essence. It would be the most cost-effective method and cause the least drain on SOA resources. The close tie to the existing SOA credentials might also enhance the reputation of FSAs in the ERM field, thus raising fewer concerns among existing FSAs than other less-related alternatives. Page 4 of 33 Item M2d 4 of 33

5 We feel it is most important that the Board recognize the urgency of this issue and reach a decision on it expeditiously. We encourage the Board to thoughtfully review the material provided and give careful consideration to these issues. Introduction Assignment At its February 2005 meeting, the Board of Governors of the Society of Actuaries assigned to the Knowledge Management Strategic Action Team exploration of a new risk management credential as described in Section II.5 of the February 2005 report of the ERM Strategy Task Force. The Board asked the KMSAT to report progress at the June 2005 board meeting. The KMSAT assembled an ERM Credentials Task Force to accomplish this assignment. The Task Force includes members from the KMSAT, the MVSAT, the former ERM Strategy Task Force, and representatives from the Canadian Institute of Actuaries and the Casualty Actuarial Society. Section II.5 of the ERM Strategy Task Force report suggests that the credential would certify a person as expert in all types of risks (financial, strategic, operational and hazard), as well as the aggregation of risks. The Task Force presumed that the focus of this risk expertise, at least initially, would be broader financial institutions. Prior Initiative About five years ago, SOA leadership discussed the possibility of creating a subset designation. The analysis was subordinated to other issues and no formal resolution was ever reached. Credentials as a mega-issue As the Task Force contemplated the development of credentials, it realized it was going into an area where the Board of Governors had not previously ventured, the offering of credentials other than the long-established ASA and FSA. While the Task Force can present various paths to credentials, the Task Force realizes the Board must evaluate and prepare for many aspects of the credential, such as Impact on Existing Members Will a new credential affect the value of the ASA/FSA? How can existing members ride the tails of ERM credentials? Examination Resources How many volunteers and staffers will it take? Financing What is the cost and how much is the SOA willing to invest? Sales/Marketing How will the SOA help these credential-holders to be hired? How will it cause this designation to be recognized and valued by the public and financial institutions? A sales campaign that goes beyond a market awareness campaign will be needed. Legs How will the SOA foster the enthusiasm to carry this designation forward? Professionalism how will it be instilled, monitored and disciplined if necessary? Page 5 of 33 Item M2d 5 of 33

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7 Background Material Prior reports to the Board on ERM have provided extensive general background. We focus here on background topics that relate to establishing a credential. Prior SOA Exploration of New Credentials Development of a possible new credential, known initially as the QRS (Quantitative Risk Specialist) was explored from 1998 through The name evolved to QRA (Qualified Risk Analyst) because some felt the word specialist implied a higher level credential. The impetus for the new credential came from the Big Tent philosophy, which involved broadening the concept of actuary and attracting new types of practitioners into our profession. There was an international component to the QRA idea in that it would essentially be jointly sponsored by the SOA, CAS, UK and Australian actuaries. The July 2000 report of the SOA Strategic Planning Committee to the Board of Governors recommended establishing a QRS designation with the following characteristics: The requirements for QRS should be high (i.e., tougher than a CFA designation). The QRS designation would clearly be pre-asa. The QRS would not have an experience requirement. The QRS would be well suited to being provided within a university program. The QRS skill set would define a common door to entry into any risk profession. The QRS education would be international. There would be no practice-specific materials (nation-specific and practice specific education would be post QRS). It was hoped that the QRS would result in the following positive attributes: More candidates, in particular the best and brightest, would be attracted to the profession. Students would find their career path because of their early recognition of the value of the QRS designation. The QRS would become an internationally recognized credential and the entry requirement for a large number of risk professionals. Universities around the world design programs around the QRS requirements. All risk professionals would see the QRS as the base requirement, and thus identify closely with the traditional actuarial profession. No action was taken on this issue by the SOA Board in 2000 or Proponents of the QRS believe that the discussion was shelved until the EQ2005 syllabus revisions could be completed. Opponents of the QRS felt that the no action decision was effectively killing an idea that did not have merit. The EQ 2005 task force was put in place to define the skills that actuaries will need in the future, identify a curriculum to meet those needs, and create an implementation plan. The Board approved the formation of two working groups to move the effort forward. The first working group was charged with addressing the issues involved in the development of the QRA and other issues relating to preliminary education. In particular, the Page 7 of 33 Item M2d 7 of 33

8 working group was directed to consult formally with current and future employers and practitioners in defining the competency requirements for a QRA. The second working group was asked to define post-qra education and qualification. The Summer, 2002 Report to the Membership Education and Qualification 2005 contained the following comments: Readers of this document will note that the Quantitative Risk Analyst (QRA) designation, prominent in the original Task Force report, is not noted in this framework. This is a deliberate omission. The working group charged with preliminary education chose to focus on the development of a core syllabus. (Executive Summary) 7. QRA: The group expressed little support for the Quantitative Risk Analyst syllabus if proposed as a separate and new designation for the SOA to offer. The group may not be opposed to a QRA designation offered separately from the SOA. However, the group is cognizant and supportive of the value of developing and identifying a common preliminary education syllabus that would match those of our United Kingdom and Australian counterparts. The preliminary education phases of the proposed framework are a first step toward this goal. (Significant Pending Issues section) The ERM Strategy Task Force came out in support of a new credential. The task force report to the Board in February 2005 contained the following summary of the QRA initiative: Several years ago, the SOA leadership discussed the idea of creating a subset designation, called QRA ("Quantitative Risk Analyst"). Proponents of the idea felt the new designation would help grow the influx of new members into the profession, position the profession as the leader in quantitative risk education, and help advance actuaries as experts in risk management beyond traditional areas of practice. They felt that a fastertrack designation that did not require all the elements of actuarial science would have high value in the marketplace, whether in insurance or broader financial services. Others were concerned that the new designation would diminish the value of the FSA and ASA designations. The idea never got much support at the leadership level or much enthusiasm at the membership level. In hindsight, those who suggested such a designation should be considered visionaries. ERM within the Existing SOA Credentialing Process The current SOA Fellowship requirements include a 6-hour Course 8 examination in a specialty track of the candidate s choosing. Prior to 2004, the specialty track options consisted of Finance, Group Health (with extensions in either Group Life or Managed Care), Individual Insurance, Investments, and Retirement Benefits. In 2004, at the direction of the Board of Governors, a specialty track was developed in the ERM area. The task force charged with developing the track determined that the Course 8 Finance requirements already included a fair amount of risk management material. It was decided that the most appropriate approach was to key off of the Finance material and convert the exam to a core portion and two extensions. Beginning in October 2004, the track became the Finance and Enterprise Risk Management specialty, with extensions in either Finance or ERM. A new Education and Examination system is being phased in from 2005 to The Preliminary Education exams, which are being offered in 2005, do not explicitly contain ERM topics. The Fundamentals of Actuarial Practice modules, which will be offered beginning in 2006 and which will be required of all candidates, will incorporate ERM concepts and exercises. Thus, all candidates who earn the ASA under the new system will have some familiarity with ERM. At the Fellowship level, under the new system there will be two 6-hour exams plus several modules required in the candidate s area of specialization. ERM will be one of six specialty tracks offered. It may share an exam and/or some modules with Finance and Investment, as common topics are expected to be included in the three specialties. Page 8 of 33 Item M2d 8 of 33

9 International Actuarial Association (IAA) Initiatives The IAA Taskforce on Risk Management (a task force of the Financial Risks Committee) has been reviewing the actuarial role in risk management. This task force has reached general agreement that there is market demand for a comprehensive approach to risk management. To date, the IAA has not approved a course of action to meet this demand, but is considering several options including the possibility of awarding a certificate based on qualifying criteria and development of a risk management syllabus to be incorporated as an alternative in basic education. Initiatives of Other Actuarial Organizations CAS In March 2003, the CAS Board adopted the following as the CAS Centennial Goal: "The CAS will be globally recognized as the pre-eminent resource in educating casualty actuaries and conducting research in casualty actuarial science. CAS members will be recognized as the leading experts in the evaluation of hazard risk and the integration of hazard risk with strategic, financial and operational risk." With respect to ERM, the following interim goal was adopted: "At least 20% of the CAS curriculum and 20% of CAS continuing education programs will focus on strategic, financial or operational risk, or the integration of hazard risk with these risks." Currently, the CAS Investments and Financial Analysis exam (Exam 8) is the only CAS exam that could be considered to be significantly ERM-related. The material related to insurance financial reporting on Exams 6 and 7 could also be considered relevant to ERM. In 2004, 13 pages were added to Exam 6 to give an overview of ERM. A Task Force on FCAS Education is evaluating how to restructure the upper CAS exams and is scheduled to report to the CAS Board in September, One of the problems that this task force is dealing with is the CAS Board's desires to both increase coverage of ERM and to reduce travel time. To this point, there has been no serious discussion within the CAS about offering a separate ERM certification. The CAS Board held a discussion of ERM at its March 2005 meeting. The recurrent theme of the materials and discussion is that the CAS is currently not as far advanced as the SOA and several non-actuarial organizations in the pursuit of ERM goals, and that it must act now and move quickly to catch up or even to remain at the table as this area emerges. CIA The CIA convened a "Task Force on Investment Professionals" to consider creating a new membership category within the CIA for investment professionals. Their report released in June 2001 recommended "the CIA support the development of the QRS designation and consider creating a membership category for such persons. In this way the profession and the CIA have a chance to retain as members those persons who obtain the QRS designation and subsequent non-actuarial designations rather than losing them as is now the case." The report is available online at More recently, the CIA and its members have been active in the ERM discussions, including having representation on the ERM Task Force and on the Council of the Risk Management Section. The CIA supports the ERM Task Force recommendation to study possible accreditation and credentials for risk managers - this is consistent with the CIA Task Force's recommendations in Institute of Actuaries in Australia The Institute of Actuaries in Australia (IAAust) has developed a preliminary proposal for a partnership with ERMII (see description below) to offer a risk management credential. The Institute s proposal encompasses an actuarial and a non-actuarial route to a Chartered Risk Analyst designation. The proposal is divided into two Page 9 of 33 Item M2d 9 of 33

10 stages, with the first stage delivered by the Institute and universities in the actuarial track, or delivered entirely by universities for the non-actuarial track. The second stage would be the same for both the actuarial and nonactuarial track and would be delivered by the Institute. Reasons to pursue this alternative include the following: Attract a wider, more diverse membership base to the IAAust Build on the value of the IAAust brand in the new area of Enterprise Risk Management Enhance the IAAust name as an innovator in financial and risk management This proposal is in its initial stages. Institute of Actuaries (UK)/Faculty of Actuaries (Scotland) The Institute (and Faculty) offer Associateship, Fellowship, and other credentials. Associateship is awarded on completion of all but the Specialist Technical and Specialist Application examinations. Fellowship is awarded after completing one set of specialist examinations and meeting an experience requirement. In addition to Associateship and Fellowship, several additional credentials or certificates are available. These additional credentials (including certificates) serve two purposes, (i) pre-fellowship, as an intermediate qualification, and (ii) post-fellowship, to identify CPD (continuing professional development). Specifically, the credentials offered are: Diploma in Actuarial Techniques 9 exams awarded automatically to all persons who complete the prescribed exams an intermediate qualification Certificate in Finance and Investment 7 exams awarded automatically to all persons who complete the prescribed exams an intermediate qualification Certificate in Practical Financial Economics 1 exam CPD CPD Certificates can be issued in one of approximately 12 subjects, for example the Certificate in Derivatives. There are exams at three levels, core, specialist technical, and specialist application. Generally, these are the Fellowship exams, any of which can be taken as a CPD certificate, though the Certificate in Practical Financial Economics above differs in that it is not mapped to the Fellowship exams. Additional certificates in new subjects are added from time to time. "Advanced" certificates are examined at a level above Fellowship level. CPD Certificates may be offered to nonmembers under certain circumstances. Practicing certificates are also issued. These allow the holder to serve in certain statutory positions such as pension scheme actuary, life insurance Actuarial Function Holder, With- Profits Actuary, Reviewing Actuary or Peer Reviewer. The holder must complete CPD requirements, demonstrate relevant experience and meet certain other requirements. It is possible for an individual to stop taking exams after receiving one of the intermediate qualifications and seek employment on that basis. However in the U.K. most actuaries progress to completion of the FIA/FFA; it is not common to become a career associate. Traditional employers expect the Fellowship qualification. Statistics on the number of certificate holders are not tracked specifically. Certificate holders are members of the Institute by virtue of joining as students, associates or fellows. Page 10 of 33 Item M2d 10 of 33

11 ERM Institute International The ERM Institute International, Ltd. (ERMII) is a private, not-for-profit, independent educational and research organization, co-sponsored by an international group of universities and professional organizations. The missions of ERMII are: to conduct multi-disciplinary research in the emerging discipline of enterprise risk management, by engaging leading scholars and practitioners to take a fresh look at the fundamental concept of risk, valuation, and dominant risk issues in financial, insurance, and other economic sectors; to set a new international standard for broad-based risk education, with an emphasis on quantitative risk modeling skills and ERM thinking, to be delivered by accredited university programs worldwide; and to develop training courses and executive education programs in ERM, tailored for the needs of various industry sectors and geographic regions. A group of universities worldwide took the initiative and invited professional organizations and risk management firms to jointly sponsor the ERM Institute International, Ltd, with the goal to develop an interdisciplinary approach to ERM and build on the value that different sponsoring organizations provide. This will be accomplished by bringing together the intellectual capital from different organizations and supporting the advancement of enterprise risk management in a holistic framework. Through its member universities, ERMII aims to establish a university-based educational standard that will serve as the foundational requirement for risk professionals in all areas of practice where risk management is critical to long term financial performance including banking, insurance, investment banking, energy and other utilities, and non-financial industries (manufacturing, transportation, health services, government, etc.). ERMII is not offering a professional certificate per se. Member universities are developing what could be considered a highstandard international education certificate in quantitative risk management. It is envisioned that the current leading riskrelated professional organizations will provide at least partial credit towards the requirements of their professional designation for students graduating from an ERMII accredited program. On top of that, professional organizations can add their own professional exams to make it a professional certificate in ERM. Credentials of Competitors in Risk Management At least three other organizations offer examinations which are recognized in the ERM marketplace. The Chartered Financial Analyst (CFA) charter, offered by the CFA Institute, focuses on investment topics rather than risk management, but attracts similar types of candidates. The Professional Risk Manager (PRM) program, offered by PRMIA (Professional Risk Management International Association), and the Financial Risk Management (FRM) exam, offered by GARP (Global Association of Risk Professionals), are competing to become the accepted risk management designation. The SOA s Finance Practice Area Advancement Committee completed a review of the CFA, PRM, and FRM during and compared each of the programs with the SOA exam system. The detailed report is available upon request; summary comments are included here. The CFA program consists of a series of three exams, which cover investment valuation tools and concepts, asset valuation, and portfolio management. Basic accounting, financial statement analysis, economics, and quantitative methods are included, as well as standards of professional conduct and ethics. Compared to the SOA exams, the CFA exams cover investment topics in more depth but overall are less technical and much less mathematically oriented. The CFA program has expanded rapidly in the past 15 years and the designation is accepted internationally. There are approximately 100,000 members of the CFA Institute, of which 60,000 hold the CFA credential. PRMIA s PRM is a four-exam program, covering finance theory, financial instruments, the mathematical foundations of risk measurement, and risk management practices. The PRM also has standards of practice and ethics components. FSAs automatically receive credit for two of the exams and ASAs for one of them. While Page 11 of 33 Item M2d 11 of 33

12 PRMIA has a membership of about 24,000 globally, the number of PRMs is believed to be less than 1,000. Currently only eight SOA members are listed in the membership directory as having this designation. The FRM exam is offered by GARP. The main topics on the exam are quantitative analysis, measurement and management of market risk, credit risk, and operational and integrated risks, as well as a legal and ethics component. GARP has a total membership of about 46,000, of which approximately 6,500 are qualified as FRMs. Currently forty-three SOA members are listed in the membership directory as having this designation. Page 12 of 33 Item M2d 12 of 33

13 Mega-Issue Discussion Questions The October 2004 Backgrounder for the Board on ERM and the Actuarial Profession responded to the mega-issue questions in detail. We chose here to provide brief responses that relate specifically to the development of an ERM credential. What do we know about our members /prospective members /customers needs, wants and preferences that are relevant to this decision? Members and future members want employment opportunities that are rewarding, both financially and intellectually. In the membership surveys conducted in 2002, maintaining and enhancing the value of our credentials ranked as the most important service that members want from the SOA, with 62% of the members listing it as one of their top three priorities. Many members have shown strong interest and participation in risk management activities and see it as a growth area for the profession. The image campaign, which uses actuaries capabilities in risk management as its cornerstone, has received positive feedback from members who participated in a survey on the topic. What do we know about the realities and evolving dynamics of our members/ marketplace/ industry/profession that is relevant to this decision? The public, regulators and employers are seeking greater transparency in corporate practices. This generates opportunities for actuaries to utilize their risk management skills in ways not previously contemplated. This is an opportunity for the 35,000 actuaries around the world. Significant obstacles to optimizing the actuarial profession s place in the ERM sun may be summarized in four categories: Lack of critical mass, limited resources and existing fragmentation of the profession. Current members enjoy near full-employment; there are not enough SOA members to fill the emerging ERM jobs. Existing hurdle of examination and accreditation. An accreditation program involving more than 3 4 exams will not be tolerated. Narrow scope of the profession, with an image issue and minimal recognition outside of a few industries. Actuaries lack business skills needed by ERM employers. Weak connection to an academic base. This leads to minimal leading-edge research contributions. Several organizations now supply credentials and professions to the ERM marketplace: GARP, PRMIA, IAFE, CFA Institute, Geneva Association, QWAFAFEW, RMA and RIMS. Four ERM initiatives are in various stages: The SOA s Image campaign The SOA s ERM Strategy Implementation Task Force International Risk Section/Board creation under the auspices of the IAA Page 13 of 33 Item M2d 13 of 33

14 ERM Institute International The image campaign is underway. The initial campaign focus is ERM. The campaign will a) create awareness of ERM as a strategic business tool, b) build awareness of actuaries as enterprise risk managers, c) provide grassroots opportunities for all actuaries to be involved, d) build a network of pioneers, leaders and change agents, and e) increase awareness of ERM opportunities. The campaign is targeted at three separate audiences: a) CEOs and CFOs at insurers, actuarial firms and selected financial service firms, b) actuaries, and c) business media. The ERM Strategy Implementation Task Force was put in place at the February 2005 Board meeting to develop implementation plans for the various recommendations of the ERM Strategy Task Force. Initiatives are being addressed in the areas of research, education and training, publications, publicity, and expansion outside traditional areas of practice. Discussion of IAA activities and the ambitions of the ERM Institute are summarized above in the Background section of this document. What do we know about the capacity and strategic position of our organization that is relevant to this decision? Strategic Position The vision of the SOA is for actuaries to be recognized as the leading professionals in the modeling and management of financial risk and contingent events. Each of the four themes in our strategic map supports the vision, and each has relevance to this discussion. Specific strategic initiatives that are closely related to an ERM credential include: 2.6 Offer new certificates and enhanced credentials. 1.9 / 2.8 Partner to create new educational opportunities, leverage current offerings & knowledge to promote business and thought leadership skills for tomorrow. 3.9 Grow actuarial employment within the Broader Financial Services Market. Capacity Any new initiative will require financial and volunteer resources. If a new credential were to be developed, the impact would depend largely on how closely related it is to the existing credentialing processes for ASA and FSA. The task force did not attempt in this limited timeframe to determine the capacity requirements associated with the various alternatives. What are the ethical implications of our choices? What are our obligations to current members, who value the existing credential, as compared to candidates or prospective members, who may welcome the opportunity for a new type of credential? Can we as a Board make the decision to offer a new credential without seeking membership input? How do we allocate scarce resources between existing programs and new start-ups? What do we wish we knew but don t? The task force believes this is a time for decisions on the actions that the SOA wishes to take. There will always be more things that it would be nice to know, but at some point we just need to move forward. Page 14 of 33 Item M2d 14 of 33

15 Issues The task force spent substantial time discussing the pros and cons of offering a new credential, and members of the task force had diverse views on many of the topics. We felt it would be useful to the Board to list some of the issues we identified and task force members comments on these issues. You will not see consensus responses to the questions raised and you will see conflicting comments. What are we trying to accomplish with the ERM initiative? What are the goals? As a professional body, the SOA is trying to continue to meet the needs of its constituencies, namely employers, current members, future members and last but not least, the general public. We have to adapt from time to time as these needs change. The goal of the SOA's overall ERM initiative is obtaining a leadership position for actuaries in the ERM marketplace. In the words of the ERM Task force Being a well-recognized player in the field of risk management is critical for the long-term success of the actuarial profession. The SOA is committed to further the Enterprise Risk Management area of practice. The goal is to establish the actuarial profession as the preeminent profession in ERM. Related Goals Expand influence of actuaries by bringing more people and areas of practice into the profession. Expand the demand for actuaries outside our traditional roles. Create employment opportunities for current and future actuaries. Identify new entrants to the profession. Compete for the best and the brightest. Serve the public interest in this new area by doing more to advance the state of knowledge in ERM. Opportunities The ERM discipline is still forming and provides a current market opportunity to play a role in the formation of ERM practice. There is a rapidly emerging need for skills that actuaries possess in the ERM arena. Other risk management designations are far less rigorous than FSA or ASA. There is currently no ERM-related designation accepted as the dominant credential in the marketplace. Many SOA members involved in risk management activities strongly believe that risk management is the future of the profession. The actuarial profession has been recognized as having such characteristics as being ethical, possessing risk management skills and industry knowledge in the traditional areas of practice, being able to solve Page 15 of 33 Item M2d 15 of 33

16 Challenges complex problems, possessing financial assessment and reporting expertise and quantitative modeling skills. Actuaries have been very successful at remaining relevant in the traditional areas of practice. However, the extent of their influence has shrunk in recent years. According to market research other less rigorous designations are no less valuable to risk management employers and have already diminished the influence of actuaries in risk management. The external environment is changing rapidly and more players are stepping forward claiming their place in ERM. There are not enough actuaries to fill the tens of thousands of enterprise risk manager jobs - from risk management analysts to CROs - needed across all industries. The risk management market will not tolerate a lengthy accreditation process; other professional bodies are quickly moving to claim this opportunity. The ERM market forces are clearly telling us a new risk professional is in demand and a traditional actuarial path does not fit the requirements. Our current members, as educated today and in the past (with the exception of those few who have taken the Course 8 ERM specialty track), do not qualify as risk management experts for any industry. Actuaries lack skills and business credibility needed by the risk management profession. The relationship of the actuarial profession with its academic base is weak. This contributes to a situation where our academic base as a whole is not strong enough to make a sizable contribution to the cutting edge developments in risk management. Reasons given for creating a new credential Generic risk management methods applicable to all industries do not fit easily into the actuarial syllabus, which is designed to serve traditional employers of actuaries and is highly national in nature and practice area specific. To contrast, e.g., all CFA charterholders have completed the same curriculum. Even if determined to be desirable, it would be impossible to sufficiently modify the current examination process for ERM in time to claim the market while retaining acceptability to current employers. Shorter travel time is a requirement for this market - it is impossible, within the current system, to reduce the requirements to the level they need to be (similar to a CFA 3 or 4 exams). The need is for a subset of our skills; for example, certain insurance-specific knowledge is not needed. We can meet the needs of this marketplace without qualifying people as FSAs. We need a recognizable credential so that the ERM skill set we provide will be readily identifiable. There are other credentials out there (FRM, PRM), offered by other risk management organizations, and by not offering a competing credential, we may be conceding the market to them. The credential would meet a marketplace need (by creating a more rigorous standard for risk management than the existing FRM, PRM). The credential would meet an SOA need (by increasing membership and revenues and getting the SOA name out there in the ERM market). The new designation could help grow the influx of new members into the profession. Page 16 of 33 Item M2d 16 of 33

17 The credential could position the profession as the leader in quantitative risk education and help advance actuaries as experts in risk management beyond traditional areas of practice. Risks and concerns associated with creating a new credential Impact on existing credentials - We already have a credential, the FSA. If the goal is to obtain a leadership position for actuaries in the ERM arena, shouldn't we be trying to position the FSA as "the" risk management credential? To some extent, developing a new credential looks like abandoning the fight to get actuaries accepted as the premier professionals in the ERM market. - The new credential may compete with the FSA in terms of attracting new entrants and in terms of acceptance in the marketplace. It is almost like consigning FSAs to the traditional roles (which are gradually diminishing in importance and quantity) and instead devoting SOA resources to this new professional who doesn't go through the long process of becoming an FSA. How will a new credential maintain or enhance the value of the FSA? - If the new credential is seen as a rigorous designation that is considered an entry requirement for all risk professionals, then by its association with the traditional actuarial syllabus and the SOA, it will enhance the recognition of the actuarial profession. Does the new credential do anything to help existing FSAs? - If those who earn the new credential are not actuaries, how will the new credential help actuaries advance in the ERM arena? For most actuaries, to be recognized in this new area will require additional training. If actuaries want a credential as part of their training it will either be an ERM credential supported by the SOA, or actuaries will need to go somewhere else to get an ERM credential. - FSAs are not likely to be able to directly capture the emerging ERM marketplace because the actuarial brand is perceived as too narrow in focus and the travel time to Fellowship is too long. Is it fair to grant only a credential in ERM? Would the SOA then need to develop credentials for other specialty areas - Health, Pension, Life, etc.? In 1974 we needed a pension credential, but couldn't, or wouldn't do it. So the government stepped in and created Enrolled Actuaries to compete with FSAs. The EA credential is pretty much a subset of the FSA, designed to serve a specific need. As other specific needs emerge we have to be prepared to respond, while maintaining our identity and quality, with distinguishable credentials and/or certificates. If we look at the possibility of existing FSAs earning certification in ERM following their FSA, then maybe there should be similar certifications in health, pensions, life insurance, investments. An actuary wishing to advance his/her career in a specific area or, maybe more importantly, an actuary wishing to change career paths could demonstrate expertise in the area through the certification program. One concern with this approach is that it could change how the FSA is viewed. Currently all FSAs are officially equal, though of course some employers insist on experience in a specialty area. Would employers start requiring the applicable specialty designation, making it more difficult for actuaries to move through different career paths? Implementation issues Membership Approval Can the SOA offer a new credential without obtaining the agreement of the existing members? The answer from a legal standpoint still needs to be investigated. Page 17 of 33 Item M2d 17 of 33

18 Even if the new credential could legally be created by the Board without membership approval, do we feel an obligation to give the membership an opportunity to express their opinions and/or vote on the proposal? Those of us who are on the Board or who have been involved with the various risk management initiatives may well have a broader view of the marketplace and the forces that are affecting our profession and may be able to conclude that a new credential is something that makes sense. However, the idea is likely to be more controversial with the rank and file members who may be concerned about the impact on their existing FSA. Timing Time is of the essence. How would we make this credential available quickly enough to assist in capturing our share of the ERM market? We could reduce the timing substantially by using part of our existing syllabus. Most of the needed content is in place (although of course it will get better over time). We could also consider using university courses, perhaps in connection with the ERMII. Why would our credential be recognized by the public? This is clearly one of the risks in developing a new credential. There are a number of things we can do to manage this risk, and a detailed implementation plan would have to be designed to do this. A marketing campaign to publicize the new credential to employers, prospective credential holders, regulators, CROs, CFOs and the public would be required. This could take a large public relations effort, and the allocation of resources away from other initiatives and the support of existing actuaries would have to be addressed. A sales campaign, in addition to any marketing campaign, will be important: Students will need to be convinced to aspire to this credential; candidates will need to be encouraged to complete the exams; employers must be convinced to hire those attaining the credential. What if the new credential is not successful? While being associated with a less successful venture could cause some harm to the reputation of the SOA, this risk could be balanced by the positive perception created by showing that the SOA was willing to take a risk and try something new. Content Should the new credential be a subset of FSA/ASA? The requirements for an ERM designation may not simply be a subset of our current syllabus. This is an emerging area of practice and actuaries do not have all the answers - but we have a set of tools that is deeper and a better starting point than the other designations that currently exist. It may be that most of the appropriate ERM material is embedded within our actuarial course of study, but it is not organized in such a way that 3 or 4 exams can be chosen directly to become the ERM credential requirements. Traditional actuarial models are not well suited for measurement and management of systematic risks. While some actuarial models (primarily casualty models) are used to quantify insurable operational risks, other process-driven methodologies (e.g. Six Sigma) have received significant exposure in addressing other operational risks of an enterprise. While the new credential requirements should have much in common with the current actuarial syllabus, there could also be a separate professional requirement (e.g. an experience requirement) that is not part of the FSA syllabus. Page 18 of 33 Item M2d 18 of 33

19 Relation to credentials/certificates offered by other organizations ERMII Professionals may look to ERMII for general guidance on concepts and frameworks in ERM, while referring to the supporting associations for practice-specific and industry-specific guidance in applying those principles. This effort will also benefit cross-pollination of cultures, best practices, standards, and interdisciplinary exchange of intellectual and professional capital of the organizations/industries involved. In order for ERMII to be successful, it must be supported by the organizations that are well recognized by the membership masses and industry stakeholders. This effort will also receive more credibility when it is connected to a strong academic base. Without a strong academic base, no profession has a future. In order for the risk management discipline to become a rightful player in the professional community, it needs to link to and encourage the development of the academic community who can help attract, shape, and graduate the future cadres of the profession, while pushing the envelope of the cutting-edge risk management research. ERMII will not act as a professional certifying body in the short term. To de-politicize the cause and speed up the efforts, there is no current proposal for professional accreditation and certification. Appendix 2 is a statement from ERMII providing further details on its goals and proposed collaboration with the SOA. PRMIA The SOA has worked with PRMIA in sponsoring the ERM Symposium and currently FSAs automatically receive credit for two of the PRM exams and ASAs for one. CRO discussion (held during the ERM Symposium) suggested SOA should not have their own designation for insurance ERM but should partner with someone like PRMIA for a basic ERM designation. PRMIA envisions partnering with various organizations to offer a follow-up specialty designation; e.g., the SOA would offer the insurance ERM specialty. There is room for a joint ERM insurance credential that is deeper than what is currently available. Actuary may already be too strong a brand to change the meaning. Secondary issues Should we grandfather people in? The Task Force discussed the possibility of grandfathering certain actuaries who are already CROs, to ensure that they hold the new credential. This could increase the credibility of the new designation and acknowledge actuaries who are already active in this area. The task force did not see this as a critical question in deciding how we move forward. We also discussed an option for existing FSAs to convey their knowledge in the ERM area. For example, those who complete the ERM track of Course 8 have likely met any requirements we would devise for a new credential. Those who are already FSAs without having taken the ERM track might demonstrate ERM knowledge through an exam or a course and receive an ERM certificate to go along with their FSA. Current FSAs who want to work and succeed in the area of ERM in general cannot rely on their examinations and past training (with the exception of a handful who recently completed the F&ERM Course 8). Current FSAs who do want to work in this area need to embark on continuing study. For these actuaries, there are available programs of self study, academic study, continuing education (for example, SOA seminars), and the Risk Management Section. One possibility is to have a certificate program for existing FSAs, as well as a new credential for new members. Page 19 of 33 Item M2d 19 of 33