Enterprise Risk Management and the Casualty Actuary Midwest Actuarial Forum March 22, 2005

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Enterprise Risk Management and the Casualty
ActuaryMidwest Actuarial ForumMarch 22, 2005

• Kevin Dickson, FCAS, MAAA
• Allstate

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ERM and the Casualty Actuary

• Objectives
• History
• CAS Activities
• SOA Activities
• ERM Symposium
• Define Terms
• Implications how does this impact me?
• The case for involvement

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CAS ERM Activities
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CAS Centennial Goal

• 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

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CAS Centennial Goal SAM Goals Interim
Milestones

• SAM Significant, Obtainable, Measurable
• At least 20 of the CAS curriculum and 20 of CAS
  continuing education programs will focus on
  strategic, financial or operational risk, or the
  integration of hazard risk with these risks.
• material available through the CAS website will
  frequently appear in the top 10 results when
  searching for topics in our area of expertise,
  such as
• Casualty actuarial science
• Quantitative risk analysis
• Hazard risk
• Property-liability insurance risk
• Casualty insurance risk
• Enterprise risk management
• Integrated risk management

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CAS Efforts to Date

• CAS ERM Advisory Committee (2000/1)
• ERM Definition and Framework
• CAS Research Education Priorities
• CAS ERM Research Committee (2002-)
• Research Priorities
• Progress to Date
• Original Research
• Directed Research
• Future Plans

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CAS 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

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CAS 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 organizations short-
  and long-term value to its stakeholders
• Key elements
• Dual nature of risk
• Value creation
• CAS relevance beyond insurance industry

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CAS ERM Conceptual Framework Two Dimensions
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CAS ERM Framework Grid
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Compare to COSO Framework

• CAS has greater emphasis on quantification,
  integration of risks
• COSO has greater emphasis on internal controls
• Generally consistent conceptual design

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CAS 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

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Recommendations -- Research (contd)

• 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

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CAS Recommendations -- Research (contd)

• 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

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CAS 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

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ERM Research Committee -- Research 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

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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

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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

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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

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Other Priority Topics

• 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

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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

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Coordination with Other Professions

• GARP Banking Finance, others
• PRMIA Banking, Finance, Insurance, Energy,
  others
• AIMR Investment Research
• RIMS Risk Management Insurance
• Academia GSU Center for ERM and Assurance
  Services

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ERM Research Committee -- Future Plans

• Continue research material production orientation
  of committee
• Pursue remaining research priorities established
  by ERM Advisory Committee
• Monitor research activities of other professional
  organizations, academia

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SOA ERM Activities
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SOA Efforts to Date

• Established a Risk Management Task Force within
  the SOA Finance Practice Area in 2002
• to address the growing need for information on
  risk management
• to make risk management a regular part of
  actuarial practice
• to advance professional recognition and career
  opportunities for actuaries in the arena of risk
  management

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SOA Risk Management Task Force

• Implementing Task Force Goals
• promotion of actuarial expertise in areas of risk
  management,
• promotion of opportunities for actuaries in the
  arena of risk management,
• sponsorship of seminars on risk management, and
• development of new risk management educational
  materials.

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Task Force Research Committees

• Credit risk management
• Economic capital calculation and allocation
• Enterprise risk management
• Equity modeling
• Extreme value models
• Health risk management
• Policyholder behavior in the tail
• Pricing for risk
• Risk-based capital covariance
• Risk management metrics

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Risk Management Section

• The purposes of this Section are to further the
  education and research in the area of risk
  management and to establish leading risk
  management techniques. These efforts should be
  rigorous and based on sound principles such that
  resulting techniques are broadly transportable
  across disciplines and industries. These efforts
  should help to increase the profile of the
  actuarial profession as being leaders in the
  field of risk management.
• (emphasis added)

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Other SOA Activities

• Co-sponsorship of ERM Symposium
• Course 8 offers an ERM extension
• Joint effort with CAS on public relations effort
  to raise awareness of the actuary as chief risk
  officer
• RFP for Internal Hedging Programs for Life
  Insurance Companies

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ERM Symposium

• Joint sponsorship of ERM Symposium - SOA and CAS
• Participation of Bowles Foundation and PRMIA
  (Professional Risk Managers International
  Association)
• 2003 Washington D.C.
• 2004 Chicago
• Developed into world-class event
• 2005 May 2 3, Chicago Sheraton
  ermsymposium.org

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How does this impact me?

• It might not!
• Need to know industry developments
• integration of hazard risk with strategic,
  financial, and operational risk
• Opens up new career possibilities
• - CRO
• - CFO
• - Risk Aggregators
• - Risk Coordinators

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Why actuaries are prime candidates to be ERM
leaders ( other reasons actuaries ought to take
interest)

• Don Mango argument were already practicing
  risk management
• Educational background
• Currently, no clear professional leaders
• Expands career opportunities
• Professionally challenging, rewarding

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GS Structure and Skills of Centralized Risk Mgmt
Group

1. Risk Monitoring and Analysis
2. Quantitative Analysis
3. Price Verification
4. Model Development
5. Systems Development and Integration

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Derivatives Risk Management
Role Responsibility In Insurance and Pensions
Risk Monitoring and Analysis Monitor position and price data Evaluate risk exposures Identify and monitor limit violations Analyze potential scenarios Summarize and report on risk exposures Reconcile with other areas Perform back testing Monitor reserve and price data Evaluate risk exposures N/A (usually UW risk mgmt) Analyze potential scenarios Summarize and report on risk exposures Reconcile with other areas Perform back testing (e.g., reserve run-off, actual versus expected)
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Derivatives Risk Management
Role Responsibility In Insurance and Pensions
Quantitative Analysis Determine modeling for new products Design new quantitative models Test new models Determine modeling for new products Design new quantitative models Test new models
Price Verification Verify prices of complex derivatives Track changes in pricing models Verify prices of complex policies, treaties, or books of business Track changes in pricing models and rates
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Derivatives Risk Management
Role Responsibility In Insurance and Pensions
Model Development Develop new models for system Develop risk analysis tools Maintain historical return data Develop new models for system Develop risk analysis tools Maintain historical reserving and pricing data
Systems Development and Integration Develop infrastructure to support processing Accept feeds from other systems Automate data scrubbing and translation Develop database to support risk data Develop infrastructure to support processing Accept feeds from other systems Automate data scrubbing and translation Develop database to support risk, pricing and reserving data
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Concluding ThoughtsWhat can I do if Im
interested?

• Personal Research
• CAS ERM website
• SOA Risk Management section
• Continuing Ed
• ERM Symposium
• CAS, SOA Committees
• Seek out opportunities in your organization