R ISK M ANAGEMENT S ECTION “A JOINT SECTION OF SOCIETY OF ACTUARIES, CASUALTY ACTUARIAL SOCIETY AND CANADIAN INSTITUTE OF ACTUARIES” August 2008, Issue No. 13 Risk Published in Schaumburg, Ill. Management by the Society of Actuaries Table of Contents Diversity is the Spice of Life International Survey of Emerging Risks by Ronald J. Harasym ____________________ 2 by Max J. Rudolph _____________________ 33 ERM Perspectives Summary of “Variance of the CTE Estimator” by Wayne H. Fisher ______________________ 4 by John Manistre and Geoffrey Hancock _____ 37 An Enterprise Risk Management View of Global Best Practices in ERM for Insurers and Financial Supervision Reinsurers Webcast by Stephen W. Hiemstra __________________ 9 by Tsana Nobles _______________________ 43 Increasing the usefulness of ERM to ERM Symposium: Notes on a Conference insurance companies by Stephen W. Hiemstra and Valentina Isakina 50 Jean-Pierre Berliet ______________________ 18 Third Year a Charm for ERM Symposium Risk Identification: A Critical First Step in Scientific Papers Track Enterprise Risk Management by Steven C. Siegel _____________________ 55 by Sim Segal __________________________ 29 Risk Management w August 2008 Chairman’sChairperson’s Corner Corner Diversity is the Spice of Life! Ronald J. Harasym fabulous thing about Looking at some of the articles in this issue enterprise risk man- of the newsletter, there is a wide and exciting A agement (ERM) is range of topics. Wayne Fisher discusses what it the diversity of issues that takes to successfully embed ERM in a firm, the one can become involved in. development of models and setting parameters, Timing is everything! There and the importance of research. As discussed is no question that the operat- in the article by Stephen Hiemstra, supervisory ing environment keeps in- ERM differs from firm ERM because loss ex- creasing in complexity over posures and consequences differ. However, in time. Add to this a few emerg- order to be effective and efficient, the two need ing risks in concert with some to work and evolve in harmony with each other. systemic risks and you have ERM provides a company’s management the the ideal setting for the call to opportunity to inform and communicate with action of ERM professionals. supervisors. Without this window, supervisors must make risk assessments at a distance and It is the diversity of ERM issues that as actuar- with a lag—clearly not a good situation. ies, we have the opportunity to apply our train- ing, skills, and knowledge to many different Jean-Pierre Berliet’s article discusses how types of issues well beyond what we could have the application and integration of ERM into imagined just a few years ago. The basic train- the decision making process has faced many ing to become an actuary provides a great foun- challenges and how ERM will be more effective dation and solid grounding for an ERM role, but in companies that identify and correct design it is important to recognize that our training not weaknesses in their approach. Sim Segal’s only prepares us with the specific issues that article highlights that even common practice are part of our education, but also to apply those in risk identification is suboptimal in several principles to new, non-traditional areas. aspects and how companies can better execute the risk identification phase of the ERM process As is true for anyone who wants to do well in any cycle. As the results from a survey of emergings role, a critical element of success is to stay cur- risks for financial services by Max Rudolph rent and educated on the latest thinking, trends, show, any given group will have differing views practices, and experiences. From an ERM per- and bias based on their knowledge, location spective, an easy way to do this is to volunteer and experience. and get involved in the Joint Risk Management Section’s activities. Over the past several years, All in all, there is still much we can learn with the section has been actively involved in educa- respect to ERM. We have a strong foothold on tion, meetings, webcasts, networking sessions, ERM positions in the insurance industry and and research. The Joint Risk Management we have a basis for competing for ERM positions Section has been reaching further out into the outside of the insurance industry. The Section international risk management arena with Ronald J. Harasym, FSA, Council has acknowledged that acquiring and the translation of the section’s newsletter into CERA, FCIA, MAAA, is vice improving our skills is a critical part of the equa- French, Spanish, and Chinese. There are areas president and actuary at tion. Together, we can succeed. So get involved New York Life Insurance Co for all interests and opportunities for everyone in the section. Volunteer! F in New York, NY. He can be to actively participate, contribute, and share reached at experiences. ronald_j_harasym@ newyorklife.com w Page 2 Chairman’s Corner Risk Management w August 2008 Chairman’sERM Perspectives Corner ERM Perspectives Wayne H. Fisher Fortunately, CROs have now typically made it to the “C” suite, which is critically important for access to information and the ability to ensure remedial actions are actually imple- mented. But the challenge now, in these times, is staying in the “C” suite and balancing per- sonal risk management with the enterprise’s risk management. Personal experiences always influence our perspective and in my case I was fortunate to see just how an engaged CEO and board, with a real commitment to risk management, can build real value. Zurich Financial Services (ZFS) went through a “near death experience” in 2002 with financial guarantees emerging from the woodwork, reserve inadequacies, little data Note: A truncated version of this article on risk accumulations on the underwriting and originally appeared in the February investment side, subsidiaries operating very in- 2008 issue of the Casualty Actuarial dependently, and on and on. Jim Schiro entered Society’s Actuarial Review. Reprinted with as CEO and immediately launched a large num- permission. ber of critical improvement actions, including raising capital, selling assets, implementing iming is everything and these are expense measures, and putting a focus on core exciting times for chief risk offi- businesses and systems. And one of these T cers. The subprime phenomena has critical initiatives was a solid mandate to build led to such visibility that you can’t open a a state-of-the-art risk management program newspaper these days without mention of a and embed it in the organization. Thereafter, firm’s ability or, all too frequently, its in- in every move we made, we always knew we ability to manage its risk. And that’s where had the full backing and support of our CEO. we can step in. We’re the risk people! That’s unquestionably the single most impor- tant key to success in implementing a risk man- And as always, risk creates opportunity. agement framework. Personal risk is high as boards and regulators probe the adequacy of risk measures and In June 2007, five years later, S&P returned controls. Even CEOs have been fired. But ZFS to “double A” status, and in its press re- the opportunity to contribute to a firm’s value lease particularly noted improvements in risk is greater than ever with all of the focus on controls and management. Then in October identifying and quantifying risk, whether in 2007, it was announced that Jim Schiro would appropriately valuing assets and liabilities for receive an award from St. Johns University extreme scenarios, managing limits for a firm’s as “Insurance Leader of the Year,” which risk profile to minimize the next problem, and singularly noted that he was an “exceptional bridging the various risk elements to create a leader with a comprehensive view of risk taking truly enterprise view. and risk management.” This showed me that w Page 4 August 2008 w Risk Management Chairman’s Corner during all that time, when we had our meetings The board sets the tolerances at the highest and he was looking at his Blackberry, he really level. The risk framework then extends this was listening! tolerance to units at the operating level, with the intent of providing transparency and an This article will address three themes: internally consistent framework. Generally The lesson you always this leads to a risk policy with internal limits on learn is your defini- 1. Successfully embedding ERM in the firm almost everything, at unit and divisional levels, 2. Developing models and setting parameters and that allows such limits to be actionable tion of extreme is not 3. Incorporating and supporting the latest and monitored at the lowest levels. It’s the risk extreme enough. You ERM research modeling and the risk management function need the leadership that ensures and reports that the actionable 1. Embedding ERM in the Firm limits, when aggregated across the firm, reason- and involvement from ably meet the risk expectations implicit in the Most critical to embedding ERM in the firm the top to try to iden- board’s high-level tolerances. It’s also impor- is the interest and involvement of the board of tant for the board to review and agree on the tify Donald Rumsfeld’s directors. Today that might not be an issue, but internal operating risk limits, again, to engage today’s risk failure headlines won’t always be at “unknown unknowns”… the limits, but also to provide an element of clout the top of the mind. the risks “we don’t know within the firm to ensure adherence. we don’t know.” Risk tolerances, and how the firm monitors Another measure to engage the board is what compliance with the agreed tolerances, are a we call total risk profiling.