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The Actuary The magazine of the Institute & Faculty of Actuaries

A focus on risk

John Ryan outlines the profession’s ‘risk and regulation’ activities

Towards the end of 2002, the Faculty and Institute Management Committee invited me to bring together colleagues from across the practice areas, as well as from the education, CPD, and communications areas, to co-ordinate and promote the profession’s agenda for ‘risk and regulation in financial organisations’. A group of interested colleagues (see left) subsequently came together to consider its brief. We decided that ‘risk’ should be interpreted widely as risk in all its aspects – that is it should include upside risk (ie return). This interpretation would lead the group to consider organisations’ treatment of risk from the point of view of best practice rather than maintenance of minimum standards. Of course, the group would also consider risk as maintenance of minimum standards for solvency and regulatory purposes. On the other hand, ‘regulation’ would be covered in respect of its risk aspects only and not the full gamut of regulation.

The group has been active in identifying areas where the profession can do more to protect itself from external risks and changes and, more importantly, to promote its role in the management of risk. Much of the value of the work is in its multi-disciplinary nature. This enables it to cover issues that individual boards do not have at the top of their agendas and to apply lessons learned in one area to identify and solve problems in others. For example, the General Insurance Board’s working party on operational risk was encouraged to expand its work to life offices and pension funds. To enable it to fulfil its role in this respect, the group has maintained a continual review of relevant current and planned activity within the profession and a current summary is in the box on the right.

A major initiative was the profession’s input to the government’s risk-management programme. In August 2002, the Cabinet Office invited the profession to send representatives to meetings of its four-person team working on the introduction of better risk management in the public sector. In late 2002, the Cabinet Office published a lengthy report on the subject, with an introduction from the prime minister and an action plan for achieving change over the next two years. In early 2003, Chris Lewin met the team, since transferred to HM Treasury to supervise implementation of the plan. At the meeting, Chris learnt that each department (22 in all) had recently appointed a risk improvement manager and that implementation of the new policy would be largely decentralised to individual departments. The challenge of achieving a better risk-management culture throughout the public sector is clearly a major one and one where the profession could make a significant contribution. More specifically:

There are clear benefits in using a more disciplined approach to risk management so as to increase the chances of success. For example, fewer public sector IT projects would have failed, a new detention centre would not have been destroyed by fire because of the lack of a sprinkler system, and better contingency plans would have existed for a foot-and-mouth outbreak.
  • The profession’s experience with RAMP shows how we can develop practical frameworks for risk management. We can also help with training in risk management, establishing appropriate procedures, and helping to evaluate the risks and financial implications of individual decisions.
  • We are experts in methodologies that allow, in appropriate ways, for the financial aspects of risk, and we can, therefore, help decision-makers to decide whether particular risks need to be mitigated or what should be the terms on which risks could be shared with third parties.
  • Key officials in this area at the Treasury are well disposed towards the profession and are aware in general terms that we may be able to help, both in introducing the new policy and in providing expert advice/training in setting up departmental processes. We remain in touch with the Treasury team and are considering how the profession can assist with this major initiative.

    This is an example of the need for us to remain alert to what is happening outside the profession in the area of risk and regulation. In this context, the group has drawn up an external liaison list (see box right) – these organisations will be kept informed of the profession’s activities with a view to mutual information exchange and potential joint activity. Many of these organisations were invited to send a senior representative to the high-level seminar with the group planned for October.

    A particular issue currently exercising the group is how the profession should handle investment risk in the new environment of low inflation, and the group would be very interested to hear from volunteers to work in this area. Please contact Peter Dingwall, email peterd@actuaries.org.uk or tel 020-7632 2136.

    If you would like to keep abreast of the profession’s ‘risk and regulation’ activities, please visit the group’s web page, www.actuaries.org.uk/Display_Page.cgi?url=/profession/risk_regulation.html or contact Peter Dingwall.

    Organisations with a risk and regulation interest

    Academic institutions Association of British Insurers, Association of Consulting Actuaries, Association of Corporate Treasurers, Association of Insurance and Risk Managers,Association of Local Authority Risk Managers, Association of Project Managers,Australian regulators, Bank of England, Bank of International Settlements, British Bankers Association, Cabinet Office Strategy Unit,Casualty Actuarial Society, Construction Industry Research and Information Association,Consumers Association, European Commission,Groupe Consultatif, Financial Services Authority, General Insurance Standards Council, Global Association of Risk Professionals, HM Treasury,Institute of Chartered Accountants in England and Wales (ICAEW), Institute of Directors, Institute of Risk Management, Institution of Civil Engineers, International Actuarial Association, International Association of Insurance Supervisors, Lloyd’s, London Investment Banking Association,National Association of Pension Funds, Occupational Pensions Regulatory Authority, Office of Government Commerce, Operational Risk Research Forum,Project Management Institute, Rating agencies, Society of Actuaries, Strategic Planning Society, UK Inter-Professional Group, UK Society of Investment Professionals,World Bank