ERM Committee Priorities, Progress and Findings Jerry Miccolis, Tillinghast - Towers Perrin Kevin Dickson, Allstate Barry Franklin, Aon Risk Consultants

1 CAS “Big Audacious Goal” for 2014 Centennial “The CAS will be globally recognized as the preeminent resource in educating casualty actuaries and conducting research in casualty actuarial science. CAS members will be recognized as the leading experts in the evaluation of hazard risk and the integration of hazard risk with strategic, financial, and operational risk.” [emphasis added]

2 Discussion Outline CAS ERM Advisory Committee (2000/1) –ERM Definition and Framework –CAS Research & Education Priorities CAS ERM Research Committee (2002-) –Immediate Priorities –Progress to Date Original Research Directed Research –Future Plans

3 Advisory Committee on ERM: Goals Define ERM; develop conceptual framework Determine current/desired knowledge level Identify research needs to close gaps Identify education needs to close gaps Recommend methods, priorities, timetable Compile initial ERM bibliography Recommend additional efforts of existing/new CAS committees

4 ERM Definition “The discipline by which an organization in any industry assesses, controls, exploits, finances and monitors risk from all sources for the purpose of increasing the organization’s short- and long-term value to its stakeholders” Key elements: –Dual nature of risk –Value creation –CAS relevance beyond insurance industry

5 Risk Type Strategic Operational Financial Hazard Strategic Operational Financial Hazard Risk Management Process Step Establish context Identify risks Analyze/quantify risks Integrate risks Assess/prioritize risks Treat/exploit risks Monitor and review Establish context Identify risks Analyze/quantify risks Integrate risks Assess/prioritize risks Treat/exploit risks Monitor and review ERM Conceptual Framework: Two Dimensions

6 ERM Framework Grid Risk Type Establish Context Identify Risks Analyze/ Quantify Risks Integrate Risks Assess/ Prioritize Risks Treat/ Exploit Risks Monitor and Review Risk Management Process Step Operational Financial Hazard Strategic

7 Recommendations -- Research Highest priority topics –ERM overview –Value creation through ERM –Risk quantification (financial, operational, strategic) –Risk correlation & integration Other priority topics –Risk tolerances, risk/reward metrics, portfolio optimization, monitoring, treatment, integrated products

8 Recommendations -- Research (cont’d) For each topic: –Priority by industry focus P/C Industry Other Financial Services Other –Recommended research method Original research Funded research Call Paper programs Compile existing research

9 Recommendations -- Research (cont’d) Form standing ERM Research Committee –Direct & monitor research per above –Expand, update, organize, maintain ERM bibliography –Work with other CAS committees to coordinate ERM research and provide content for education –Partner with other organizations –Develop internal and external communications, designate spokespersons

10 Recommendations -- Education Codified 2005 CAS ERM education needs –For each element of ERM framework –By degree of desired knowledge level –By type of education vehicle Syllabus Continuing Education Developed detailed Learning Objectives for each element of ERM framework Publish ERM bibliography Accomplish through existing committees

11 ERM Research Committee -- Immediate Priorities “ERM Overview” document Financial risk quantification Risk correlation/concentration/integration Value creation through ERM ERM bibliography Coordination with other CAS committees Coordination with other professions

12 “ERM Overview” Document Associate-level exam material Contents –History/evolution of risk management –Reasons/motivations for ERM –ERM definition/framework –Language/measures/models/tools –Applications/case studies –Practical considerations in implementation –Bibliography Published May 2003

13 Financial Risk Quantification Literature review: wealth of existing material Road map/reviews –The Practice of Risk Management – Goldman Sachs & SBC Warburg Dillon Read –Risk Management – Crouhy, Galai and Mark –FRM Handbook, Jorion –Market Models: A Guide to Financial Data Analysis - Alexander Reviews on CAS – ERM Website

14 Risk Correlation/ Concentration/Integration Literature review: limited material available Call for papers Coordination with other CAS committees Call Papers published July, 2003 –Advanced Modeling for the New Risk Landscape – Lee Smith and Lilli Segre-Tossani –ERM and DFA using Active Knowledge Structures – James Brander and Sam Manoff –The Aggregation and Correlation of Insurance Exposure – Glenn Meyers, Fredrick Klinker and David Lalonde Additional Research

15 Value Creation Through ERM Literature review: not enough useful material available to demonstrate objective value measurement Non-insurance industry –Original research needed –RFP to professionals, practitioners, academics –Co-sponsors from other organizations Insurance industry –Case study documentation

16 ERM Bibliography Abstracts Organization Maintenance On-line access established May 2003

17 Coordination with Other CAS, AAA Committees DRMC: joint meetings, joint call for papers VFIC: joint research project Syllabus/Ed Policy/Continuing Ed/SIS/etc.: working to develop syllabus materials RCMS: ERM symposium COTOR – Risk Measurement AAA P/C Extreme Events Committee AAA ERM Committee SOA Risk Management Section

18 Coordination with Other Professions GARP – Banking & Finance AIMR – Investment Research RIMS – Risk Management & Insurance Academia – GSU Center for ERM and Assurance Services

19 ERM Research Committee -- Future Plans Continue research material production orientation of committee Pursue remaining research priorities established by ERM Advisory Committee –See following slide Monitor research activities of other professional organizations, academia

20 Additional Research Priorities Operational & Strategic Risk Quantification Risk Tolerances Optimization, Risk-Reward Metrics Preliminary Findings –Material exists –Not consolidated –May or may not need additional research Next Steps – develop roadmaps

21 Concluding Thoughts ERM is a value creation tool ERM is a unifying framework ERM is a recruitment tool ERM is the CAS’s future

22 ERM is a Value Creation Tool Systematically identifies material threats/ opportunities (re: business objectives) Rigorously analyzes capital requirements –Financial efficiency (shareholder view) –Solvency protection (customer view) Optimizes strategies under uncertainty -- for improving growth and return Exploits natural hedges, portfolio effects Enhances stability

23 ERM is a Unifying Framework Actuarial subject areas Logical structure/integrated whole/ business-relevant Cross-silo Chief Risk Officer training –Pricing –Reserving –Risk modeling –Accounting –Financial performance measurement –Capital management –Asset/liability management –Reinsurance –Portfolio management

24 ERM is an Actuarial Recruitment Tool Strong business focus Re-engagement of CAS candidates and recent Fellows/Associates Coordination with AIMR (CFA), GARP (FRM), et al The membership wants to go there –ERM Committees oversubscribed –ERM survey response –ERM Seminar attendance/response

25 ERM is the CAS’s Future “The CAS will be globally recognized as the preeminent resource in educating casualty actuaries and conducting research in casualty actuarial science. CAS members will be recognized as the leading experts in the evaluation of hazard risk and the integration of hazard risk with strategic, financial, and operational risk.” [emphasis added]