Enterprise Risk
Management – The Role
of the Actuary
James E. Rech, ACAS, ASA, MAAA,
CFA, FRM, PRM, MBA
May 16, 2005
Enterprise Risk Management
Governance Issues
Poor Enterprise Governance
• Financial Entities
– Metallgesellschaft AG
(1993)
– Orange County
(1994)
– Barings (1995)
– Long Term Capital
Management (LTCM)
(1998)
– Enron (2001)
• Insurance Entities
– Superior National
Insurance Company
(1999)
– Reliance Insurance
Company (2000)
– Equitable Life Insurance
Company (UK) (2000)
– HIH Insurance Group
(Australia) (2001)
2
Enterprise Risk Management
More Vocal Stakeholders
Regulators – State
– Federal (e.g., SEC)
Rating Agencies
Financial Analysts
Investors
Management
3
Vision - The Future
“In the next five or six years, the rules
that govern insurers will increasingly
resemble the regulatory capital regime
for banks.”
Alan McNee, The Next Generation of
Insurance Regulation, August 2001,
ERisk.com
4
Enterprise Risk Management
Legislative Influences/Response
• USA
– Legislation
• Gramm, Leach, Bliley Financial Modernization Act
(1999)
– Formal link between Banks & Insurers
– “Privacy” Issues
• Sarbanes Oxley (2003)
– Corporate Governance
– Section 404
5
Enterprise Risk Management
Regulatory Influences
• International Regulation
• Global Derivatives Study Group of the Group of 30 (1993)
– “Derivatives: Practices and Principles”
• Basel II Capital Accord (1999-2004)
– First Pillar: Minimum capital requirements
– Second Pillar: Supervisory review process
– Third Pillar: Market discipline
• International Association of Insurance Supervisors (IAIS)
– Seven (7) Principles Papers (1999-2004)
– Cornerstones Papers (2004)
• FSA Prudential Rules (UK) (2001)
• USA Regulation
• NAIC – Risk-Focused Surveillance Process
• Federal Reserve – GLB Financial Modernization Act
6
Enterprise Risk Management
Market & Professional Influences
Rating Agencies
• Standard & Poors
• Moody’s
• A.M. Best
Professional and Academic Groups
•
•
•
•
•
•
•
•
COSO
Global Association of Risk Professionals (GARP)
Professional Risk Managers International Assoc (PRMIA)
CFA Institute
ERM Institute International, Ltd.
SOA & CAS – Risk Management Section
Chicago Board of Trade (CBOT) – Derivative Markets
American Strategic Management Institute (ASMI)
7
Enterprise Risk Management
Actuarial Contributions
• Early Contributions
–
–
–
–
Risk Based Capital
Dynamic Financial Analysis
Asset Liability Management
Credit Risk: Actuarial Method
• Current Realms of Influence
– SOA Risk Management Section (joint sponsors SOA
& CAS)
– ERM Symposium (SOA, CAS, PRMIA)
– GARP Annual Meeting
8
Vision - The Future
“The Actuarial profession is looked to as
the most credible source for the
analysis, modeling and management of
financial risk.”
Terri Vaughn, Iowa Insurance Commissioner,
Contingencies article
9
Financial Actuaries
Primary Area of Practice – Finance
Financial
AAA
Actuaries
Actuaries
(6/1/04)
(12/23/03)
FSA/ASA
969
10,640
FCAS/ACAS
27
2,943
Combined
992
13,464
Percent
9.1%
0.9%
7.4%
Source: www.actuary.org
10
Other FRM Organizations
• CFA Institute – 70,000 + Members
• Global Association of Risk Professionals
(GARP) – 45,850 + members
• Professional Risk Managers International
Association (PRMIA) – 24,350 + Members
11
CFA Institute
Actuaries that hold CFA Charters
CFA
Charterholders
(6/1/04)
FSA/ASA
495
FCAS/ACAS
18
Combined
507
AAA
Actuaries
(12/23/03) Percent
10,640
4.6%
2,943
0.6%
13,464
3.8%
Source: www.actuary.org
12
PRMIA
•
•
•
•
Started in 2002
30,000+ members/5,000+ PRMs
26 Primary Area of Practice is Insurance
Professional Risk Manager (PRM) Designation –
– Exam 1: Finance Theory, Financial Instruments and
Markets (1.5 Hours)
– Exam 2: Mathematical Foundations of Risk
Measurement (2 Hours)
– Exam III: Risk Management Practices (1.5 Hours)
– Exam IV: PRMIA Standards of Best Practice,
Conduct and Ethics (1 Hour)
13
What’s the Future?
•
•
•
•
•
Vision
Opportunities Created
Strengths/Opportunities
Threats/Challenges
Strategic Initiatives
14
Vision - Opportunities Created in
FRM
• Expansion consistent with our history
– Value-added contributions in new areas
– Development of new tools, applications and
products
• Facilitate bridging the knowledge gap
– Banking, Insurance, and Securities
– Continuing education for members
• New growth areas for our members
– Non-Traditional Roles
15
Vision Strengths/Opportunities
• Our image and presence
– Professionalism
– Standards of Practice
• Insurance knowledge
– Products
– Hazard Risk management
– Financial reporting
– Operations
16
Vision Threats/Challenges
• Our image and presence
– Weak at best outside pricing and reserving
– Many skills are not unique to the actuarial profession
• Banking and Securities knowledge gap
–
–
–
–
Products
Risk management -- Risk in Assets
Financial reporting
Operations
17
Strategic Initiatives
• Increase the awareness of actuaries in the
area of Financial Risk Management
• Enhance our professional skills and
standards
• Expand the scope of the profession
18