17th Enterprise Risk Management & the Actuarial Profession in General Insurance Gloria Yu & Melinda Howes
Outline Background Our Aspirations What we have done so far Our Plan Applications in GI
Enterprise Risk Management Enterprise 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
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
A broad area Participating in ERM 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
Background
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
But what is ERM? 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 Internationale Dealing with Predictable Irrationality (February 2009)
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
... So there are great opportunities A. In risk management roles (CRO & supporting roles) B. In traditional actuarial roles C. In broader business roles ERM skills better equip an actuary for these roles LI/WM GI ERM Super Others
... So there are great opportunities A. In risk management roles (CRO & supporting roles) B. In traditional actuarial roles C. In broader business roles ERM skills better equip an actuary for these roles LI/WM GI ERM Super Others Practice Area and Area of Expertise
... Traditional skills provide a great foundation... 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!
Our Aspirations
Short term Lift understanding amongst membership through communication, CPD etc Ensure all new Fellows have grounding in ERM Provide formal ERM qualification Long term Among the pre-eminent risk management professionals in financial services
...Institute s Strategic Plan 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
Aspiration Biggest opportunities LI/WM GI Super Inv/FM Invest. Banking Other Banking and Finance Non Fin. Services - insurance - ALM Financial Risks - market - credit - liquidity - currency - interest rate Other Risks - people - process - systems - strategy - business environment - others Least opportunities
Aspiration LI/WM GI Super Inv/FM Invest. Banking Other Banking and Finance Non Fin. Services - insurance - ALM Financial Risks - market - credit - liquidity - currency - interest rate Other Risks - people - process - systems - strategy - business environment - others clearly the pre-eminent experts in risk management in this space
recognised as experts in financial risk management of all types Aspiration LI/WM GI Super Inv/FM Invest. Banking - insurance - ALM Financial Risks - market - credit - liquidity - currency - interest rate Other Risks - people - process - systems - strategy - business environment - others Other Banking and Finance Non Fin. Services
Aspiration LI/WM GI Super Inv/FM Invest. Banking - insurance - ALM Financial Risks - market - credit - liquidity - currency - interest rate knowledge and understanding of ERM which is both of a high standard and difficult to match by non-actuaries Other Risks - people - process - systems - strategy - business environment - others Other Banking and Finance Non Fin. Services
Aspiration LI/WM GI Super Inv/FM Invest. Banking Other Banking and Finance Non Fin. Services - insurance - ALM Financial Risks - market - credit - liquidity - currency - interest rate Other Risks - people - process - systems - strategy - business environment - others the natural holders of CRO positions as they become established senior positions
recognised as experts in risk management and are very competitive contenders for risk Aspiration management work and CRO roles LI/WM GI Super Inv/FM Invest. Banking - insurance - ALM Financial Risks - market - credit - liquidity - currency - interest rate Other Risks - people - process - systems - strategy - business environment - others Other Banking and Finance Non Fin. Services
Aspiration LI/WM GI Super Inv/FM Invest. Banking Other Banking and Finance Non Fin. Services - insurance - ALM Financial Risks - market - credit - liquidity - currency - interest rate Other Risks - people - process - systems - strategy - business environment very competitive contenders for - others ERM expert positions (e.g. CRO), in competition with other disciplines
Actuaries can add real commercial value through ERM and the regulator sees prudential value too LPS 220 / GPS 220: Appointed Actuary to advise on the suitability and adequacy of the risk management framework (RMF) where the RMF is the totality of systems, structures, policies, processes and people within the insurer that identify, assess, mitigate and monitor all internal and external sources of risk that could have a material impact on an insurer s operations.
What we have done so far
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
But this is not enough... 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
Our Plan
ERM Pathway in the profession 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 Operational Plan Capabilities & CPD Education Participation & Reputation Professional Standards Interdependence
Annual ERM Seminar ERM Community events Other CPD courses Linked-In groups ERM newsletter Capabilities & CPD Publications in Actuary Australia Possibly develop education materials into CPD modules for FIAAs
Global qualification (CERA) o o o Course 7A Education Experienced practitioner s route 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)
ERM Education Pathways Part I Part II PER (3 yrs) Actuarial degree OR UK CT1-CT9 exams Control Cycle & Invest. Increased ERM Content actuary Specialism in traditional area Part III Investments / Other Course 7A (see below) Post FIAA FIAA UK ST9 Exam in ERM 2-day ERM Workshop CERA FIAA Course 7A
Participation & Reputation (1) 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 (2) 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
Professional Standards 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
What do you think? 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?
Practical perspectives on application of ERM in GI business Bruce Lambert, Suncorp Warrick Gard, E&Y
Questions?
Appendix Supporting Slides
IAA ERM Principles (see slide 26) - Dealing with Predictable Irrationality February 2009 How do we measure up? Some thoughts and challenges
IAA ERM Principles - how do we measure up? 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? 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?