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Chief Risk Officer — the New Domain for Actuaries

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Chief Risk Officer — the New Domain for Actuaries Article from: Risk Management July 2005 – Issue 5 Risk Management Q July 2005 CRO Interviews Chief Risk Officer —The New Domain for Actuaries by Dorothy L. Andrews and Ken Seng Tan new frontier is unfolding on the geog- An Interview with Douglas W. raphy of insurance and it is yielding Brooks, FSA, FCIA, MAAA, A fertile ground for actuaries with tal- B.Math – Sun Life Financial ent, vision and a strong sense of responsibility. Risk management, sometimes called Enterprise Risk Management (ERM), and often inclusive of Operational Risk Management, is not a new concept to fields such as banking, manufacturing, informational technology and telecommunications. Even the armed forces have policies and procedures to mitigate opera- tional risks. So, why has it taken the insurance industry so long to recognize the need to install risk surveil- lance systems? And to appoint a team with full- time responsibilities to steer companies clear of activities that jeopardize the ability of insurer’s Dorothy L. Andrews, ASA, to make good on all those promises made to pol- MAAA, is second vice pres- icyholders? It may not be important to find the ident, risk management, Douglas W. Brooks attended the University of with Transamerica answers to these questions, but who is better Waterloo in mathematics and actuarial science, Reinsurance in Charlotte, suited to the task of risk management than actu- joining Mutual Life after graduation. At Mutual N.C. She can be reached aries—after all, studying and hedging risk Life (later Clarica), he spent a number of years at Dorothy.Andrews@ comes so naturally to us. However, we as actuar- in actuarial positions in group pension, comput- transamerica.com. ies no longer live in a world where C1, C2, C3 er systems and the individual division. In the in- and C4 risk can be our only focus. The environ- dividual division, he had increasing ment and our policyholders are more dynamic, responsibility for product design, pricing and with characteristics now studied using sophisti- dividends for individual insurance products, cated stochastic models. This alone charts the along with financial analysis and projections of course we must all follow into new territory and individual division products. He was heavily in- provides the impetus for developing effective volved with a number of acquisitions, including tools and prudent policies to mitigate risks that the acquisition of Prudential of England’s would adversely affect company value. Canadian business. This article is a conversation with four eminent In 1997, Brooks accepted a position as chief actuaries—Douglas Brooks of Sun Life actuary, overseeing the actuarial aspects of the Financial, Tony Coleman of Insurance Australia company’s demutualization, as well as the role Ken Seng Tan, ASA, Ph.D, Group, Beverly Margolian of Manulife Financial of the appointed actuary for the company. is Canada Research Chair and Craig Raymond of Hartford—discussing Additionally, he was involved with the acquisi- Associate Professor in their rise to the rank of Chief Risk Officer (CRO). tions of MetLife’s Canadian operation and Sun quantitative risk manage- The goal of this conversation is to guide others Life’s reinsurance business. In 2000, he was ment at the University of through the process of establishing CRO topogra- appointed senior vice president and chief ac- Waterloo in Ontario, phies in their companies. tuary, and added responsibilities for capital Canada. He can be reached management, risk management and internal at [email protected]. Let’s get started. audit. In June 2002, Brooks was appointed Q Page 4 July 2005 Q Risk Management vice president and CRO at Sun Life, upon the approaches to comprehensively measure and acquisition of Clarica, where he has accounta- manage on a consistent basis. bility for developing an enterprise-wide framework for risk management. 4. What is the mission statement of the of- fice of the CRO in your company? Brooks has acquired a number of industry in- The mission is to contribute to shareholder volvements, which include: involvement with value by providing a framework to ensure the or- actuarial education committees, the CLHIA ganization makes appropriate risk-adjusted committee on solvency and capital, and within business decisions. the Canadian Institute of Actuaries as a member of the CIA committee on the role of the 5. What do you see as your number one Appointed Actuary; past chairman of the Life challenge as CRO? Practice Committee of the Canadian Institute of Prioritization—putting the emphasis in the Actuaries; current chair of the CIA Committee areas that need the most attention while doing so on Risk Management and Capital as part of an integrated whole. Requirements and a member of the CIA’s Board of Directors, as well as leading a committee on 6. How would you describe the risk man- source of earnings disclosure. He is also on the agement function’s relationship with the Council of the SOA Risk Management Section. various business units in your company today? How has it evolved? What chal- Let’s look at his responses to our interview ques- lenges remain? tions: The company is operationally decentralized, and There“ are a number 1. It is clear that risk management is a its various businesses are quite different in nature much more important topic at your com- and business model. Therefore, what works in one of gaps inherent in pany today than several years ago. What business may not work in another. Building tech- traditional approaches do you see as the primary motivations for nical expertise in developing markets where re- to risk management, elevating the enterprise risk management sources are scarce and retention is challenging is function in your company? particularly difficult. which tend to be There are a number of reasons for the increased focused on individual 7. What risks get the most attention and importance of enterprise risk management. risks. These include the ever-increasing nature of both why? our products and the market instruments with Risks are prioritized based on assessments of which to hedge their risks, as well as an increas- probability and severity. The company has a lot ingly challenging regulatory environment. of equity exposure given its significant wealth ” management businesses and variable annuity 2. Who has sponsored the initiative? and segregated fund businesses. Legal and regu- Senior management and the board have spon- latory risk is also significant given the current en- sored the development of risk management as a vironment, particularly in the United States. function within the organization. 8. Creating a risk culture is part of the en- 3. How does your experience make the terprise risk management process. transition into this position easier, and Describe where your company is in the what gaps have you recognized? process, and what are some of the biggest Business experience is critical to building an ef- challenges? fective enterprise risk framework. There are a Culture is the single most important factor in the number of gaps inherent in traditional ap- success of enterprise risk management. Given the proaches to risk management, which tend to be sponsorship of risk management by the board and focused on individual risks. So, aggregation of senior management, there is a high level of risks and reflection of diversification is some- awareness of the importance of risk management. thing that hasn’t had a lot of attention or tools One challenge is to develop a “measure” of cul- with which to measure its impact. Operational ture to provide a basis for assessing improvement. risk is also an area that lacks tools and continued on page 6 Q Page 5 Q Risk Management Q July 2005 CRO Interviews Chief Risk Officer — The New 13. What type of reporting is routinely Domain for Actuaries done? What’s your vision for the future as Q continued from page 5 it relates to risk position reporting? We report on both financial and operational risks. 9. What functions are included in your port- This includes analysis of income sensitivities to folio of risk management responsibilities? market risks, as well as the effectiveness of hedg- The risk management function is accountable for ing programs and assessments of operational developing a framework within which all risks of risks. My vision would be to provide an overall pic- the organization are consistently measured. ture of the company’s risk profile, on a consistent These include financial risks, as well as opera- basis, with trending of key risk indicators. tional risks. The corporate role involves develop- ing the framework, communicating it, developing 14. What qualifications does someone tools if capabilities do not exist elsewhere and then need to function as a risk professional in monitoring and reporting on the management of your department? risks in the organization. Risk management requires different perspectives to be effective. The primary qualifications are an 10. Do you have a risk policy, and if so, understanding of the business and an inquiring what was your process for setting it up? mind—perhaps even healthy skepticism. Some We have a number of risk policies for the man- roles require specific technical expertise—actuar- agement of financial and operational risks, in- ial backgrounds are useful because of the training cluding risk tolerances. Policies are developed in the insurance-based businesses, but other skills “ by the corporate “function owners,” including I believe that risk add to the mix. risk management. management is a 15. What do you see as the future impot- vital function in any 11. What are some of the main regulatory tance and prospects for the office of the organization, guidelines you need to be cognizant of in CRO? performing your duties as CRO, or to what particularly financial I believe that risk management is a vital function extent does the Sarbanes-Oxely Act help to in any organization, particularly financial insti- institutions.
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