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The Actuary The magazine of the Institute & Faculty of Actuaries

Soapbox: ERM one year on

A year has now passed since the Actuarial Profession established Enterprise Risk Management (ERM) as a separate practice area. It’s certainly been an eventful year, with seismic shifts in the environment in which actuaries of all types are now working. We have seen failures and nationalisations in the financial services industry around the globe that were almost unimaginable a year ago. What will be the impact of these failures on risk management practices and, in turn, the actuarial profession?

At present, the authorities and most financial institutions are too busy dealing with the current crisis to implement wholesale changes to regulatory and risk management practices. It is certain, however, that comprehensive reviews of the financial crisis will follow and a wave of enhanced regulations will ensue. I am confident that an enhanced role of ERM will be one of the outcomes of such reviews with minimum standards set for risk management practices in financial institutions.

A more significant role
This presents a unique opportunity for actuaries to influence change and to play a more significant role in risk management across a wider range of financial institutions. A number of groups have been established in the UK and internationally to examine the financial crisis and provide a response. Looking at system-wide regulatory issues, the Profession has the opportunity to push for more effective regulation that operates on a more counter-cyclical basis than the current system, which tends toward pro-cyclical features. We should also push for the best ERM practices to be adopted by government when considering the whole financial system.

Within organisations there will be many opportunities for actuaries to demonstrate their skills and help to enhance risk management practices. The actuarial profession has served the UK insurance industry well during the current crisis, with companies generally well prepared for the extreme events we have recently experienced. In the banking sector there is strong evidence of over-reliance on complex risk models. Users of the models and senior management may have been blind to the inherent weaknesses of their models, which were reliant on a range of assumptions — many of which were crude approximations at the best of times. Actuaries bring great skills in the development of effective financial models but, I believe, they have retained a strong appreciation of the limitations of these models, and continue to apply judgment and simple common sense when using the models and providing advice.

Actuaries will need to continue to enhance their skill-set. Having moved from a chief actuary role to a chief risk officer role, I am very aware of the additional responsibilities and areas of expertise that a CRO must possess. Central to this is an holistic view of risk and an understanding of the need for robust enterprise-wide processes that support effective risk management at every level in an organisation. ERM goes beyond the numbers, models and financial calculations that are the core focus of the traditional actuary and seeks to establish effective governance, processes and controls to systematically identify and manage risks of all types. There are many examples where the failure of operational controls or the failure to manage strategic risks has led to the downfall of a company.

Key initiatives
Looking at the initiatives taking place in the UK Profession we have, as already mentioned, increased the focus on ERM through the establishment of a focused practice area. There has been a very positive response from actuaries in supporting a series of workstreams with the aim of delivering our vision that “actuaries are recognised as leading professionals in the field of ERM”.

One key initiative worthy of special mention is the development of a new specialist technical examination, ST9, in Enterprise Risk Management. This has been developed in consultation with other overseas actuarial associations to form a globally recognised ERM credential. This is a very exciting development that will allow the Actuarial Profession to compete effectively with other risk management organisations.