Enterprise Risk Management
and the Casualty Actuary
Midwest Actuarial Forum
March 22, 2005
Kevin Dickson, FCAS, MAAA
Allstate
ERM and the Casualty Actuary
Objectives
1. History
– CAS Activities
– SOA Activities
– ERM Symposium
2. Define Terms
3. Implications – how does this impact me?
4. The case for involvement
1
CAS ERM Activities
CAS Centennial Goal
“The CAS will be globally recognized as the
preeminent 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.”
[emphasis added]
3
CAS Centennial Goal
SAM Goals – “Interim Milestones
SAM – Significant, Obtainable, Measurable
3.
7.
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.
… material available through the CAS website will
frequently appear in the top 10 results … when
searching for topics in our area of expertise, such as:
a.
b.
c.
d.
e.
f.
g.
Casualty actuarial science
Quantitative risk analysis
Hazard risk
Property-liability insurance risk
Casualty insurance risk
Enterprise risk management
Integrated risk management
4
CAS Efforts to Date
• CAS ERM Advisory Committee (2000/1)
– ERM Definition and Framework
– CAS Research & Education Priorities
• CAS ERM Research Committee (2002-)
– Research Priorities
– Progress to Date
• Original Research
• Directed Research
– Future Plans
5
CAS Advisory Committee on
ERM: Goals
•
•
•
•
•
•
•
Define ERM; develop conceptual framework
Determine current/desired knowledge level
Identify research needs to close gaps
Identify education needs to close gaps
Recommend methods, priorities, timetable
Compile initial ERM bibliography
Recommend additional efforts of
existing/new CAS committees
6
CAS ERM Definition
• “The discipline by which an organization in any
industry assesses, controls, exploits, finances
and monitors risk from all sources for the
purpose of increasing the organization’s shortand long-term value to its stakeholders”
• Key elements:
– Dual nature of risk
– Value creation
– CAS relevance beyond insurance industry
7
CAS ERM Conceptual
Framework: Two Dimensions
Risk Management
Process Step
Risk Type
•
•
•
•
Strategic
Operational
Financial
Hazard
•
•
•
•
•
•
•
Establish context
Identify risks
Analyze/quantify risks
Integrate risks
Assess/prioritize risks
Treat/exploit risks
Monitor and review
8
CAS ERM Framework Grid
Risk Management Process Step
Risk Type
Establish Identify
Context
Risks
Analyze/
Assess/
Quantify Integrate Prioritize
Risks
Risks
Risks
Treat/
Exploit
Risks
Monitor
and
Review
Strategic
Operational
Financial
Hazard
9
Compare to COSO Framework
• CAS has greater
emphasis on
quantification,
integration of risks
• COSO has greater
emphasis on
internal controls
• Generally
consistent
conceptual design
10
CAS Recommendations -Research
• Highest priority topics
– ERM overview
– Value creation through ERM
– Risk quantification (financial, operational,
strategic)
– Risk correlation & integration
• Other priority topics
– Risk tolerances, risk/reward metrics, portfolio
optimization, monitoring, treatment, integrated
products
11
Recommendations -- Research
(cont’d)
• For each topic:
– Priority by industry focus
• P/C Industry
• Other Financial Services
• Other
– Recommended research method
• Original research
• Funded research
• Call Paper programs
• Compile existing research
12
CAS Recommendations -Research (cont’d)
• Form standing ERM Research Committee
– Direct & monitor research per above
– Expand, update, organize, maintain ERM
bibliography
– Work with other CAS committees to
coordinate ERM research and provide content
for education
– Partner with other organizations
– Develop internal and external
communications, designate spokespersons
13
CAS Recommendations -Education
• Codified 2005 CAS ERM education needs
– For each element of ERM framework
– By degree of desired knowledge level
– By type of education vehicle
• Syllabus
• Continuing Education
• Developed detailed Learning Objectives
for each element of ERM framework
• Publish ERM bibliography
• Accomplish through existing committees
14
ERM Research Committee -Research Priorities
•
•
•
•
•
•
•
“ERM Overview” document
Financial risk quantification
Risk correlation/concentration/integration
Value creation through ERM
ERM bibliography
Coordination with other CAS committees
Coordination with other professions
15
“ERM Overview” Document
• Associate-level exam material
• Contents
– History/evolution of risk management
– Reasons/motivations for ERM
– ERM definition/framework
– Language/measures/models/tools
– Applications/case studies
– Practical considerations in implementation
– Bibliography
• Published May 2003
16
Financial Risk Quantification
• Literature review: wealth of existing
material
• Road map/reviews
– The Practice of Risk Management – Goldman Sachs & SBC
Warburg Dillon Read
– Risk Management – Crouhy, Galai and Mark
– FRM Handbook, Jorion
– Market Models: A Guide to Financial Data Analysis Alexander
• Reviews on CAS – ERM Website
17
Risk Correlation/
Concentration/Integration
•
•
•
•
Literature review: limited material available
Call for papers
Coordination with other CAS committees
Call Papers published July, 2003
– Advanced Modeling for the New Risk Landscape – Lee Smith and
Lilli Segre-Tossani
– ERM and DFA using Active Knowledge Structures – James Brander
and Sam Manoff
– The Aggregation and Correlation of Insurance Exposure – Glenn
Meyers, Fredrick Klinker and David Lalonde
• Additional Research
18
Other Priority Topics
• Operational & Strategic Risk
Quantification
• Risk Tolerances
• Optimization, Risk-Reward Metrics
• Preliminary Findings
– Material exists
– Not consolidated
– May or may not need additional research
• Next Steps – develop roadmaps
19
Coordination with
Other CAS, AAA Committees
• DRMC: joint meetings, joint call for papers
• VFIC: joint research project
• Syllabus/Ed Policy/Continuing Ed/SIS/etc.:
working to develop syllabus materials
• RCMS: ERM Symposium
• COTOR – Risk Measurement
• AAA P/C Extreme Events Committee
• AAA ERM Committee
• SOA Risk Management Section
20
Coordination with
Other Professions
• GARP – Banking & Finance, others
• PRMIA – Banking, Finance, Insurance,
Energy, others
• AIMR – Investment Research
• RIMS – Risk Management & Insurance
• Academia – GSU Center for ERM and
Assurance Services
21
ERM Research Committee -Future Plans
• Continue research material production
orientation of committee
• Pursue remaining research priorities
established by ERM Advisory Committee
• Monitor research activities of other
professional organizations, academia
22
SOA ERM Activities
SOA Efforts to Date
• Established a Risk Management Task
Force within the SOA Finance Practice
Area in 2002
– to address the growing need for information
on risk management
– to make risk management a regular part of
actuarial practice
– to advance professional recognition and
career opportunities for actuaries in the arena
of risk management
24
SOA Risk Management
Task Force
•
Implementing Task Force Goals
– promotion of actuarial expertise in areas of
risk management,
– promotion of opportunities for actuaries in
the arena of risk management,
– sponsorship of seminars on risk
management, and
– development of new risk management
educational materials.
25
Task Force Research Committees
– Credit risk management
– Economic capital calculation and allocation
– Enterprise risk management
– Equity modeling
– Extreme value models
– Health risk management
– Policyholder behavior in the tail
– Pricing for risk
– Risk-based capital covariance
– Risk management metrics
26
Risk Management Section
•
The purposes of this Section are to further the
education and research in the area of risk
management and to establish leading risk
management techniques. These efforts should
be rigorous and based on sound principles
such that resulting techniques are broadly
transportable across disciplines and industries.
These efforts should help to increase the
profile of the actuarial profession as being
leaders in the field of risk management.
(emphasis added)
27
Other SOA Activities
• Co-sponsorship of ERM Symposium
• Course 8 offers an ERM extension
• Joint effort with CAS on public relations
effort to raise awareness of the actuary as
chief risk officer
• RFP for Internal Hedging Programs for
Life Insurance Companies
28
ERM Symposium
• Joint sponsorship of ERM Symposium SOA and CAS
• Participation of Bowles Foundation and
PRMIA (Professional Risk Managers
International Association)
• 2003 – Washington D.C.
• 2004 – Chicago
• Developed into world-class event
• 2005 – May 2 & 3, Chicago Sheraton –
ermsymposium.org
29
How does this impact me?
• It might not!
• Need to know – industry developments
“integration of hazard risk with strategic,
financial, and operational risk”
• Opens up new career possibilities –
- CRO
- CFO
- Risk Aggregators
- Risk Coordinators
30
Why actuaries are prime candidates to
be ERM leaders
(& other reasons actuaries ought to take interest)
1. Don Mango argument – ‘we’re already
practicing risk management’
2. Educational background
3. Currently, no clear professional leaders
4. Expands career opportunities
5. Professionally challenging, rewarding
31
GS: Structure and Skills of
Centralized Risk Mgmt Group
1.
2.
3.
4.
5.
Risk Monitoring and Analysis
Quantitative Analysis
Price Verification
Model Development
Systems Development and Integration
32
Derivatives Risk Management
Role
Responsibility
In Insurance and
Pensions
Risk Monitoring and
Analysis
•
•
•
•
•
•
•
•
Monitor position and
price data
Evaluate risk exposures
Identify and monitor
limit violations
Analyze potential
scenarios
Summarize and report
on risk exposures
Reconcile with other
areas
Perform back testing
•
•
•
•
•
•
Monitor reserve and
price data
Evaluate risk exposures
N/A (usually UW risk
mgmt)
Analyze potential
scenarios
Summarize and report
on risk exposures
Reconcile with other
areas
Perform back testing
(e.g., reserve run-off,
actual versus
expected)
33
Derivatives Risk Management
Role
Responsibility
In Insurance and
Pensions
Quantitative Analysis
•
•
•
•
Price Verification
•
•
Determine modeling for
new products
Design new
quantitative models
Test new models
•
•
Verify prices of complex •
derivatives
Track changes in
pricing models
•
Determine modeling for
new products
Design new
quantitative models
Test new models
Verify prices of complex
policies, treaties, or
books of business
Track changes in
pricing models and
rates
34
Derivatives Risk Management
Role
Responsibility
In Insurance and
Pensions
Model Development
•
Develop new models
for system
Develop risk analysis
tools
Maintain historical
return data
•
Develop infrastructure
to support processing
Accept feeds from
other systems
Automate data
scrubbing and
translation
Develop database to
support risk data
•
•
•
Systems
Development and
Integration
•
•
•
•
•
•
•
•
•
Develop new models
for system
Develop risk analysis
tools
Maintain historical
reserving and pricing
data
Develop infrastructure
to support processing
Accept feeds from
other systems
Automate data
scrubbing and
translation
Develop database to
support risk, pricing
and reserving data
35
Concluding Thoughts
What can I do if I’m interested?
1. Personal Research
a. CAS ERM website
b. SOA Risk Management section
c. Continuing Ed
2. ERM Symposium
3. CAS, SOA Committees
4. Seek out opportunities in your organization
36