The use of enterprise risk management will mean actuaries will have a new role as strategic risk manager, an expert told an industry conference.
Thomas Hettinger, managing director, EMB America, LLC, outlined that concept at the recent Casualty Actuarial Society annual meeting.
He explained that ERM is "explicit, organized decision-making under uncertainty," and a process of identifying risk, assessing risk, transferring risk and capitalizing on risk.
Many firms, he observed, "are already doing this by default, but not in a manner where people can study it or critique it." Actuaries have the tools to help develop the ERM process, but it requires actuaries to perform as risk managers, looking forward to all the risks that could be encountered in the future.
For example, "one of the key components is to develop an understanding of economic capital–understanding the difference between minimum capital and different thresholds of extra capital," he said.
Early attempts at ERM, such as the application of Dynamic Financial Analysis, failed, in part, because of a reliance on overly sophisticated and misunderstood models that were out of step with the organizations they intended to serve.
"The result was that the process lived within actuarial circles without senior level buy-in and was not incorporated into daily practice," Mr. Hettinger pointed out.
To succeed, "actuaries need to be able to demonstrate the value of what they talk about," he said.
Donald Mango, managing director, Guy Carpenter & Company Inc., said that if actuaries want to be ERM leaders, they must broaden their often-perceived role as collectors and interpreters of data and further develop their skills as leaders, educators and communicators, so they can explain the impact ERM will have on the organization.
"Everyone underestimates the resources committed and the time allocated to ERM," he said. "To put this into perspective in terms of the magnitude of impact on the firm, consider implementing a brand new general ledger or reserve review system."
© Arc, All Rights Reserved. Request academic re-use from www.copyright.com. All other uses, submit a request to TMSalesOperations@arc-network.com. For more information visit Asset & Logo Licensing.