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The Actuary The magazine of the Institute & Faculty of Actuaries

Raising the profile of ERM

The recent financial crisis has certainly helped to raise the profile of risk management practices – although not in a particularly positive light. However, actuaries with a strong skill-set in enterprise risk management (ERM) can play a leading role in helping recover confidence. The challenge, however, is to demonstrate this ability and the introduction of ST9 is a step towards more formal training and recognition within this developing area.

There is also an international angle. The UK Actuarial Profession has contributed to a multinational working party so that ST9 follows an agreed syllabus and offers global ERM qualification accreditation. The first step in the development of the UK ERM syllabus was a fundamental review of subject CA1, including a change of name to ‘Actuarial Risk Management’. This is already in place, with the first exams due this April. Risk management techniques are introduced to all students at the Core level — even those not intending to specialise. Subsequent development work has been undertaken by an experienced team led by professor Andrew Cairns of Heriot-Watt University, aiming to introduce ST9 in June 2009 for first examination in April 2010.

Main elements of the ST9 syllabus
1 Concept and framework: What is meant by ERM?; risk management and control, governance and cultural issues; regulatory and global risk; role of credit agencies

2 Process: Relevance of ERM to different stakeholders; conflicts of interest; risk appetite; structuring a successful ERM function; best practice case studies

3 Risk categories and classification: Risk taxonomy, including what is meant by ‘risk’

4 Risk modelling: Risk aggregation and correlation; modelling techniques such as copulas, extreme value theory and scenario analysis; operational risk assessment; use of models in decision-making

5 Risk measurement: Types of risk measure; quantitative analysis using financial time series; credit risk evaluation

6 Risk management tools and techniques: Risk optimisation; responses to risk; risk mitigation

7 Economic capital: Economic capital models; capital allocation techniques.

The proposed subject covers both qualitative and quantitative areas, extending concepts developed in the CT subjects and in CA1. In style, it sits between the largely description and discussion-based ST exams in, say, life insurance or pensions, and the more mathematical derivatives subject (ST6).

The Core Reading material will largely be sourced from ERM textbooks and practice notes, enhanced by written material — similar to the approach for ST6. ActEd is developing its own supporting tuition material, and it is expected that ST9 will feature in some university accreditation programmes. For those studying to become actuaries, the following alternative routes are proposed:

>> ERM associateship: Gained via the usual approach but replacing CT5 (Life Contingencies) with ST9. The aim is for this level of qualification to gain the Global ERM accreditation.

>> Fellowship: Gained via the usual approach, including ST9 as one of the chosen ST subjects. Covering generic risk management techniques, ST9 will be complementary to any of the other ST subjects and therefore may be a useful ‘second’ ST for anyone choosing a different area of specialism. Alternatively you may wish to qualify as an ERM specialist, by studying ST9 together with ST6 (or perhaps ST5) and SA5 — these having a generic risk-management focus.

Open to all
However, ST9 is not just for students. It is open to all UK members and can be used for CPD or reference purposes. There will be plenty of opportunities to educate yourself in the ways of ERM, and no excuse not to know what it actually means. The omission from this article of the precise definition is intentional — partly to encourage you to study ST9 in order to find out, but largely because it seems to be rather difficult to pin down. The Core Reading is likely to contain at least seven different definitions — you will have to wait and see.

Further information will be available on the Professions website in early April.

Lindsay Smitherman is a staff actuary of the UK Actuarial Profession responsible for the life, health and care, derivatives and ERM subject areas

Have you registered for the April 2009 exam sitting? The closing date for UK registrations is 23 March. Also, look out for next month’s student page, where we feature top exam tips from an examiner’s point of view.