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Friday 25th May 2012
A pragmatic partnership between actuarial approaches and risk management can benefit many businesses, says Cristina Martinez
31 MAY 2012 | CRISTINA MARTINEZ
What do risk managers and actuaries have in common? Both make their living from risk. Yet, they are often seen as different. Typically, risk managers work to understand all an organisation's processes to determine the overall risk to management strategy, while actuaries analyse and quantify the effect of risk.
Combined efforts between these professions can benefit almost any type of business. The value of actuarial approaches is not limited to insurance and other financial services or, indeed, to insurance-related areas. Actuarial techniques can help determine the capabilities of an organisation to achieve its strategic goals, particularly in large, complex companies.
The process of managing risk follows the same basic principles, irrespective of the type of organisation: identify the types of risks inherent to the business, analyse their probability and potential impact, and assess the best ways of controlling, mitigating and treating them within the company's tolerance for risk.
For risks that arise as a result of the culture, structure and strategy of the business, a second part of the process - enterprise risk management (ERM) - links management of those risks to the achievement of the company's strategic goals.
How each business approaches risk management depends on its maturity. The Federation of European Risk Management Associations (FERMA) uses a multi-criteria approach to defining maturity in its benchmarking survey, a major pan-European exercise conducted every two years. This considers three categories (risk governance, risk practices and tools and risk communication) and assesses respondents by four maturity levels (emerging, moderate, mature or advanced).
The 2012 FERMA survey is now under way. The 2010 survey revealed that two-thirds of respondents were at emerging or moderate levels of maturity and did not systematically include a risk analysis in their strategic decision-making process. Risk assessment processes remained mainly qualitative.
There are several stages in the process of managing risk where actuarial techniques can create greater understanding of likely events and how they link to objectives. For example, most businesses have historical loss records, but actuarial examination can optimise use of this data.
The balanced scorecard or risk dashboard are common methods of displaying likely frequency and potential impact of risks, but sophisticated analysis techniques, such as hazard and operability studies (HAZOP), Monte Carlo simulations, Markov chains and what-if analyses, can strengthen the analysis of the data used to reach the conclusions. This is especially the case in terms of drawing out and quantifying interdependencies between risks that could have a material effect on the severity assessment. Actuarial techniques may also allow increased understanding of severity in terms of impact on strategic objectives or business performance.
Going beyond historical exposures means identifying new and evolving risks, using a number of techniques. Many of these are qualitative. Actuarial techniques, however, could allow the business to optimise its understanding of risks that may not be insurable or measurable using traditional techniques, such as reputational risks.
Neglecting how risks will affect non-financial aspects of the business, such as customer perception, can result in negative, even disastrous, effects, for example through falling sales or increased costs of capital.
To achieve sustainable results, a company requires an overview of the uncertainties it faces and techniques to measure their probability and severity. This is why I believe a combined effort between operational risk management and actuarial techniques can add value to all businesses.
Cristina Martinez is group corporate risk management director for Campofrio Food Group and a member of the board of the Federation of European Risk Management Associations (FERMA)
Actuaries involved in risk management are invited to take part in the 2012 FERMA benchmarking survey. Please send your details (name, business title, company and country) to [email protected] for a password. The results will be announced at the FERMA Seminar in France on 22 -23 October
Combined efforts between these professions can benefit almost any type of business. The value of actuarial approaches is not limited to insurance and other financial services or, indeed, to insurance-related areas. Actuarial techniques can help determine the capabilities of an organisation to achieve its strategic goals, particularly in large, complex companies.
The process of managing risk follows the same basic principles, irrespective of the type of organisation: identify the types of risks inherent to the business, analyse their probability and potential impact, and assess the best ways of controlling, mitigating and treating them within the company's tolerance for risk.
For risks that arise as a result of the culture, structure and strategy of the business, a second part of the process - enterprise risk management (ERM) - links management of those risks to the achievement of the company's strategic goals.
How each business approaches risk management depends on its maturity. The Federation of European Risk Management Associations (FERMA) uses a multi-criteria approach to defining maturity in its benchmarking survey, a major pan-European exercise conducted every two years. This considers three categories (risk governance, risk practices and tools and risk communication) and assesses respondents by four maturity levels (emerging, moderate, mature or advanced).
The 2012 FERMA survey is now under way. The 2010 survey revealed that two-thirds of respondents were at emerging or moderate levels of maturity and did not systematically include a risk analysis in their strategic decision-making process. Risk assessment processes remained mainly qualitative.
There are several stages in the process of managing risk where actuarial techniques can create greater understanding of likely events and how they link to objectives. For example, most businesses have historical loss records, but actuarial examination can optimise use of this data.
The balanced scorecard or risk dashboard are common methods of displaying likely frequency and potential impact of risks, but sophisticated analysis techniques, such as hazard and operability studies (HAZOP), Monte Carlo simulations, Markov chains and what-if analyses, can strengthen the analysis of the data used to reach the conclusions. This is especially the case in terms of drawing out and quantifying interdependencies between risks that could have a material effect on the severity assessment. Actuarial techniques may also allow increased understanding of severity in terms of impact on strategic objectives or business performance.
Going beyond historical exposures means identifying new and evolving risks, using a number of techniques. Many of these are qualitative. Actuarial techniques, however, could allow the business to optimise its understanding of risks that may not be insurable or measurable using traditional techniques, such as reputational risks.
Neglecting how risks will affect non-financial aspects of the business, such as customer perception, can result in negative, even disastrous, effects, for example through falling sales or increased costs of capital.
To achieve sustainable results, a company requires an overview of the uncertainties it faces and techniques to measure their probability and severity. This is why I believe a combined effort between operational risk management and actuarial techniques can add value to all businesses.
Cristina Martinez is group corporate risk management director for Campofrio Food Group and a member of the board of the Federation of European Risk Management Associations (FERMA)
Actuaries involved in risk management are invited to take part in the 2012 FERMA benchmarking survey. Please send your details (name, business title, company and country) to [email protected] for a password. The results will be announced at the FERMA Seminar in France on 22 -23 October
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