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The Actuary The magazine of the Institute & Faculty of Actuaries
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Actuarial Profession funding two ERM research projects

The Actuarial Profession has announced funding support for research projects by Milliman and the universities of Bath and Bristol systems centre, and the University of Kent.

>> The Milliman and the universities of Bath and Bristol systems centre project will examine risk appetite and hard-to-define risks. This project will be led by Neil Cantle.

Mr Cantle said: “Risk appetite is fundamental to the communication of how much uncertainty a board is prepared to accept in the pursuit of its strategy. This aspect of the research will deliver a robust and practical framework that enables firms to look at risk appetite holistically but also to connect it to the underlying risk limits attaching to the drivers of the risk profile. This will permit actuaries to help their organisations build more coherent risk management systems, allowing for the underlying interconnectivity of risk factors.

“Some risks appear hard to understand because they are complex, so this part of the research will develop methods based upon complexity science, which are designed to reveal the underlying dynamics of these hard risks and their drivers.

“By uncovering the hidden behaviours, actuaries will be well placed to communicate the risks more effectively and integrate such risks into risk models. The understanding of such complex risks is particularly relevant to the operation of an effective and robust emerging risk process.”

>> The University of Kent project will consider the third aspect of examining the ways in which tail dependency can be measured and communicated to stakeholders. This project will be led by Professor Paul Sweeting.

Professor Sweeting said: “Tail dependencies are an important aspect of risk modelling, since it is the accumulation of risks that can be most dangerous to financial institutions. However, there are no agreed measures of association for extreme co-movements that allow the comparison of assumptions between firms. Nor are there widely recognised ways of communicating these relationships. This research therefore has two areas. The first is to consider measures of co-movement in relation to extreme observations, while the second is to look at both the numerical and the visual reporting of tail dependencies. The results will enable firms not only to understand the implicit relationships that they are assuming, but also to convey this information clearly and effectively.”

The Profession recognises enterprise risk management as an area where actuaries can play a pivotal role in the development of this discipline. Earlier this year, the Profession issued a call for research proposals focussing on measurement of risk ‘appetite’, identification of hard-to-define risks, and how firms should report and communicate tail dependencies and correlations to stakeholders.