Requirements include examinations, an e-Learning module, validation of educational experiences outside the SOA Education system … By pooling risks together an insurance company can utilise actuarial science theory and loss distributions to predict with a high degree of accuracy the potential losses (claims) from year to year. However, the ERM actuary must consider whether the potential paybacks from ERM when weighed against the absorption of finance and human resources (which may be material for such an enterprise-wide undertaking) are worthwhile. Theory of the Firm: Managerial Behavior, Agency Costs and Ownership Structure. Furthermore, recent high-profile losses and failures, such as the 2010 oil spill in the Gulf of Mexico, which has since seen BP set aside $42 billion to deal with the repercussions (Reuters, 2015), have increased focus on operational and strategic risk. Beasley et al. Enterprise Risk Management Symposium The purpose of the ERM Symposium is to provide thought leadership to professionals and practitioners working in Enterprise Risk Management, including discussion of risk topics and challenges across a broad spectrum of industries, as well as to support the development of professionalism and best practices among ERM practitioners without regard to … Risk Management: Coordinating Corporate Investment and Financing Policies. The Economist, 2015a. Building on the work of Markowitz (1952), Sharpe (1964) created the Capital Asset Pricing Model (CAPM), which provides the theoretically appropriate required rate of return of an asset based on the additional systematic risk it contributed to the portfolio. Supporting this further, a 2008 study by Deloitte, reported that the major force behind ERM was an organisational need to respond effectively to regulation, with ERM seen as the appropriate mechanism to manage increasingly complex compliance requirements. Because even if the curriculum of FRM & Actuary consist of risk management, they’re of different domain and need separate focus. 6 Thoughts on Future Strategies for the Actuarial Profession, Risk Aggregation: A Holistic Approach to Risk Management, âThe Valuation Implications of ERM Maturityâ, relationship between ERM maturity and firm value. Whilst the growth of ERM has varied by organisation and industry, the transition away from the more silo-based and less aggregated traditional risk management practices can be attributed to a number of fundamental drivers, many of which are described in detail by the Casualty Actuarial Society (CAS) ERM Committee (2003). Pagach and Warr (2011) echoed this perspective by highlighting that attempts to reduce idiosyncratic risk is not a negative net present value project, due to the numerous market frictions and imperfections that exist within the corporate world. By diversifying a portfolio of financial investments (with varying levels of financial volatility risk) that were not 100% correlated, Markowitz showed that the variability in returns could be reduced. The aggregation of significant hazard, financial, operational and strategic risks marks a shift in focus from a defensive endeavour to a more offensive discipline. Stakeholders, in the pursuit of maximising their wealth for a given level of risk, have strong incentives to ensure that the board provides effective risk oversight by practising risk management in a value-additive and transparent manner. Report on the Current State of Enterprise Risk Oversight. This vantage point is very important for the ERM actuary, since from this new perspective, many ERM definitions stress value creation and how the implementation of the ERM discipline can help a business improve decision making, thus increasing the likelihood of achieving business objectives. From the firm-specific perspective it is evident that risk management has seen some catastrophic failures over the last 25 years. If the enterprise does not take on enough risk, they may err on the side of over-cautious risk aversion and may not be fully exploiting potential investment projects. (2015a) carried out a study of more than 1,000 members of the America Institute of Certified Public Accountants (AICPA) business and industry group and found that 59% of their respondents believed that the volume and complexity of risks had changed âextensivelyâ or âmostlyâ in the previous five years. Risk management should also be comprehensive and dynamic enough to react to changes as necessary. The problems and frailties that surround the silo-based approach have served as a significant driving force in the expansion and development of ERM. Value-at-Risk (VaR), as a probabilistic measure of market risk, is another risk-quantification methodology that has also been widely adopted since the 1990s and now forms a large part of modern regulatory requirements, such as the Basel Accords in the banking industry. The collapse of Lehman Brothers (2008), perhaps the most enduring event of the most recent financial crisis resulted from an explosion in underwriting activity in subprime mortgage related products combined with an arguable lack of understanding of risk exposures at the upper echelons. Furthermore, it often made sense to instead retain some of these risks within the company. Philosophies of Risk, Shareholder Value and the CEO. As previously emphasised, risk management is no longer solely concerned with minimising downside risk and the ERM actuary's focus will shift as a result. Just in case you need a simple salary calculator, that works out to be approximately $68.32 an hour. Risk management practises therefore do not simply attempt to mitigate risk exposures, but rather, they should strive to exploit opportunities and thus optimise the risk-adjusted return through managing a degree of risk that is within a pre-determined risk tolerance. This movement away from an exclusive focus on financial and insurable risks, towards encompassing the full spectrum of risks, is a key differentiator from traditional risk management approaches. More recently, in 2020, we have witnessed worldwide businesses struggling to maintain operations because of the Covid-19 pandemic. CAS (2003) state that: âOrganisations have become quite willing to share practises and efficiency gains with others with whom they are not direct competitorsâ (CAS, 2003). Why is Enterprise Risk Management (ERM) important for you as an actuary? This has therefore led to an advanced framework that can manage risk in a more integrated holistic fashion, such as ERM. Up until the mid-1990s, a silo approach to corporate risk management was habitually used, (often termed Traditional Risk Management (TRM)). It should also be noted that ERM goes beyond focusing on just risk avoidance activities to also recognise the value of embracing risks that provide a strategic competitive advantage. A further differentiator between TRM and ERM practices is the fact that ERM does not simply attempt to minimise an organisationâs risk threat, as TRM practices may have done, but instead focuses on risk opportunities and even how risk can be actively sought for competitive advantage. The world may arguably have become more uncertain, but there is evidence of this new posture towards risk taking. McShane, M.K., Nair, A. Most ERM actuaries will be familiar with the work of Black and Scholes who published the âOption Pricing Modelâ in 1973, ushering in more modern aspects of risk management where risks outside the aforementioned insurable hazard risks (e.g., financial risks) could be effectively priced and also mitigated.