Enterprise Risk
Management – The Present
and the Future CAS
James E. Rech, ACAS, ASA, MAAA,
CFA, FRM, PRM, MBA
November 2005
Enterprise Risk Management
• Something Old
– Legislation
– Regulation
– Rating Agencies
• Something New
– AAA ERM TF
– ERMII
– Risk Management Section
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Enterprise Risk Management
Legislative 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 Management
Regulatory 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 Management
Regulatory 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
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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 Management
Regulatory Influences
• USA Regulation
– Federal Reserve
• GLB Financial Modernization Act
• Securitizations
– NAIC
• Risk-Focused Surveillance Process
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Enterprise Risk Management
Market & Professional Influences
Rating Agencies
• Standard & Poors
• Moody’s
• A.M. Best
Other Professional and Academic Groups
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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 Management
Actuarial Contributions
• Early Contributions
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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 Management
Actuarial 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 Management
AAA ERM Task Force
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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 ERMfocused 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 Management
Future of Actuarial Education
• The actuarial profession must embrace
broad-based risk management
• The best way going forward is universityprofession 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 Management
Today’s Panelists
Applied ERM
Banking Approaches
Operational Risk
Panelist
Gary G. Venter
Christopher David Bohn
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