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Report on the IAA Activities in ERM. David Ingram, CERA Chairman Enterprise & Financial Risks Committee , IAA. IAA Background . Worldwide association of professional actuarial associations ( 62 Full Member and 26 Associate Member associations) MISSION:

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report on the iaa activities in erm

Report on the IAA Activities in ERM

David Ingram, CERA

Chairman

Enterprise & Financial Risks Committee, IAA

iaa background
IAA Background
  • Worldwide association of professional actuarial associations (62 Full Member and 26 Associate Member associations)

MISSION:

  • To represent the actuarial profession and promote its role, reputation and recognition in the international domain;
  • To promote professionalism, develop education standards and encourage research, with the active involvement of its Member associations and Sections, in order to address changing needs.
erm is new focus of iaa
ERM is new Focus of IAA
  • Now One of Top Priorities
  • Global CERA Treaty
  • Role of the Actuary in ERM Report
  • Enterprise & Financial Risks Committee
  • AFIR ==> AFIR/ERM
global cera treaty
Global CERA Treaty
  • Not officially an IAA initiative
  • 13 Actuarial Organizations are signatories
  • Legal entity in Switzwerland owns CERA
  • 3 Associations are now certified to grant CERA
    • SOA – 700 awarded
    • IFA(UK) – 9 awarded
    • IAAust – 20 awarded
  • 3 Associations in process to be certified
    • CAS, South Africans, Netherlands
role of the actuary in erm
Role of the Actuary in ERM
  • Report to IAA Executive Committee – Summer 2010
  • Actuarial USPs
    • Familiarity with strong range of quantitative risk management techniques
    • Rigor in approaching the assignment
    • Integrity in executing the assignment
    • Objectivity in communicating in business terms about the assignment
    • All Reinforced by the most demanding professional requirements.
action plan
Action Plan
  • Promote the position of actuaries in ERM Field
  • Support the Globalization of CERA
  • Provide Platforms for CPD in ERM for actuaries around the world
  • Support and direct research in ERM
action plan1
Action Plan
  • To be executed by
    • Exec Committee
    • CERA committee
    • Enterprise & Financial Risks Committee
    • AFIR Section
    • Advice and Assistance Committee
    • Insurance Regulations Committee
enterprise financial risks committee
Enterprise & Financial Risks Committee
  • Existing Work
    • ERM Report
    • CERA Report
    • Other Financial Crisis Report
  • New Work
    • Actuarial Review of Risk Management Practices
enterprise financial risks committee1
Enterprise & Financial Risks Committee
  • New Tasks from Role of the Actuary Report
    • Work with the IMF on projects relating to risk management
      • three projects subsequently initiated by Coleman & Ingram with Supranational Committee
    • Conduct a Survey of ERM Practices
      • to be started for Sydney
    • Construct a library of Case Studies
      • to be started by Sydney
    • Develop a package of material to promote ERM to actuaries
      • Work has started on document providing guidance on guidance for actuaries on ORSA – adapting a document prepared by the Groupe Consultatif
afir erm
AFIR & ERM
  • AFIR is one of the longstanding sections of the IAA
    • AFIR objective - the promotion of actuarial research in financial risks
    • AFIR organises colloquia and publishes papers on the subject.
  • In 2011, is planning to adopt ERM as a key focus
  • AFIR will also take up new tasks from the Actuarial Roles in ERM report
afir erm1
AFIR & ERM

New Tasks

  • Develop List of Top Outstanding ERM research questions
  • Develop a Web site for exchanging ERM Research References
  • Sponsor Local Meeting Panel Discussions on International approaches to ERM, Differences, Impact in Local Area
  • Find Speakers & Topics for Global ERM Colloquium in 2012
  • Sponsor Webinars on ERM topics
asb erm task force
ASB ERM Task Force
  • Two Discussion Draft Standard of Practice
    • Risk Assessment
    • Risk Treatment
  • Will be distributed for discussion in the spring
risk management through the business cycle

RISK MANAGEMENT THROUGH THE BUSINESS CYCLE

Alice Underwood, PhD, FCAS

Dave Ingram, FSA, CERA, FRM, PRM

agenda
Agenda

The theory of plural rationalities

The four seasons of risk

The four risk management strategies

Rational adaptability – a radical ideal

Practical harmonization – the inelegant solution

Risk attitudes and the insurance market

14

14

plural rationalities four views of risk
Plural RationalitiesFour views of risk

Managers

Maximizers

Pragmatists

Conservators

15

15

maximizers view
Maximizers’ view

Risk is not very important – profits are important

It’s fine to accept large risks, as long as the price is right

Risk is mean reverting:

Gains will always follow losses

The best companies will have larger gains and smaller losses over time

16

16

conservators view
Conservators’ view

Increasing profit is not as important as avoiding loss

Need to tightly limit risks

The world is in a delicate balance

Any major change could send things into ruin

17

17

managers view
Managers’ view

Risk is measurable and controllable

Risk and reward should be carefully balanced

Experts are best suited to

Help find risks offering the best rewards

Manage these risks to keep firm safe

18

18

pragmatists view
Pragmatists’ view

The future is totally unpredictable

You can’t control risk so there is no point in trying

It is usually best to

Avoid major commitments

Keep options open

Seek freedom to react to changing conditions

19

19

would you say that your own risk attitude is
Would you say that your own risk attitude is:

Managers

Maximizers

Pragmatists

Conservators

20

20

would you say that your firm s predominant risk attitude is
Would you say that your firm’s predominant risk attitude is:

Managers

Maximizers

Pragmatists

Conservators

22

22

dynamic beliefs
Dynamic beliefs

Risk attitudes change with

Changes in environment

Changes in risk capacity

New experiences

This is true of

Individuals

Groups

Firms

24

24

agenda1
Agenda

The theory of plural rationalities

The four seasons of risk

The four risk management strategies

Rational adaptability – a radical ideal

Practical harmonization – the inelegant solution

Risk attitudes and the insurance market

25

25

four seasons of risk1
Four seasons of risk
  • Long term averages seem to hold up well
  • Hedging has the expected impact

MODERATE

27

27

four seasons of risk2
Four seasons of risk
  • Risky decisions pay off handsomely
  • Unhedged positions beat out carefully hedged positions

BOOM

28

28

four seasons of risk3
Four seasons of risk

UNCERTAIN

  • Suddenly, things get really RISKY
  • Almost any course of action presents potentially fatal threats

29

29

four seasons of risk4
Four seasons of risk
  • Many risks have turned into LOSSES
  • Risk management focuses on survival

BUST

30

30

agenda2
Agenda

The theory of plural rationalities

The four seasons of risk

The four risk management strategies

Rational adaptability – a radical ideal

Practical harmonization – the inelegant solution

Risk Attitudes and the Reinsurance Market

37

37

risk management strategies
Risk management strategies

Diversification

Loss controlling

Risk trading

Risk steering

38

38

diversification
Diversification

Oldest type of risk management

Spread exposures across different classes of risks

Avoid large risk concentrations

Formal diversification programs set targets for the spread of risk

Maximums and minimums for various classes of risk

ERM adds idea of interdependencies across classes

Provides better quantification of the benefits of risk spreading

39

39

loss controlling
Loss controlling

Most traditional form of risk management

Identify and mitigate the most significant risks

Commonly practiced by non-financial firms

Also applies to financial risk

Careful underwriting of loans / insurance policies

Claims management & credit workout

ERM has added inclusion of an aggregate, firm-wide view of risk

40

40

risk trading
Risk trading

Newer form of risk management

Arose from trading desks and the insurance industry

Focus on getting the price of risk correct

Requires complicated models of risk, reward, and economic capital

Can be applied on a transaction-by-transaction or other “siloed” basis

Establishment of a consistent risk valuation on a firm-wide level is risk trading ERM

41

41

risk steering
Risk steering

Applies the ideas of risk trading at a macro level to the major strategic decisions of the firm

Seeks the optimal risk / reward balance

Tries to steer the firm in that ideal direction

Fundamentally an enterprise-wide approach

Some seem to think that only risk steering is “real” ERM

42

42

favorite risk management strategies
Favorite risk management strategies

Conservators favor loss controlling

Maximizers favor risk trading

Managers favor risk steering

Pragmatists favor diversification

43

43

the predominant risk management strategy of my firm is
The predominant risk management strategy of my firm is:
  • Diversification
  • Loss Controlling
  • Risk Trading
  • Risk Steering
pro cyclical factors
Pro-cyclical factors

During each stage

Group in control picks up followers

The other groups shed followers

Timing across firms not synchronized, but close enough to magnify the ups and downs of the market as a whole

A retelling of the obvious?

But the 4 risk strategies were identified over 25 years ago by anthropologists seeking to explain completely different situations

Since then, these 4 groupings have been found over and over in many different contexts

Can the insurance industry learn something useful from this framework?

46

agenda3
Agenda

The theory of plural rationalities

The four seasons of risk

The four risk management strategies

Rational adaptability – a radical ideal

Practical harmonization – the inelegant solution

Risk Attitudes and the Reinsurance Market

47

47

rational adaptability
Rational adaptability

Discipline means sticking to your strategy no matter what

Adaptability means aligning

Risk attitude

Risk environment

Risk strategy

48

48

slide51
The chance that my firm could “get it right” and identify the changing risk environment and adapting our risk management strategy is:
  • 0%
  • 25%
  • 50%
  • 75%
  • 100%
slide52
The chance that my firm could “get it right” and identify the changing risk environment and adapting our risk management strategy is:
agenda4
Agenda

The theory of plural rationalities

The four seasons of risk

The four risk management strategies

Rational adaptability – a radical ideal

Practical harmonization – the inelegant solution

Risk Attitudes and the Insurance Market

53

53

be realistic
Be realistic

Rational adaptability is an ideal strategy

Almost impossible to simultaneously

Know when the risk environment shifts

Do what it takes to

Shift the firm's risk attitude

Execute the new risk strategy competently

54

54

harmonization
Harmonization

A practical alternative

An inelegant solution

Keep all four risk attitudes in the discussion

Create compromise strategies

55

55

conclusions
Conclusions

As with any other strategy, harmonization must be more than superficial

Important to truly value all views of risk

Really believe that there is no totally wrong view

Keep your eye on the rational adaptability ideal

Your course should be somewhere between “stay the course” and rational adaptability

Over time getting closer and closer to the ideal

56

56

agenda5
Agenda

The theory of plural rationalities

The four seasons of risk

The four risk management strategies

Rational adaptability – a radical ideal

Practical harmonization – the inelegant solution

Risk Attitudes and the Insurance Market

57

57

risk attitudes and the insurance business
Risk Attitudes and the Insurance Business

Insurance Market is interplay of

  • Risk Attitudes of Customers
  • Risk Attitudes of Insurers
  • Risk Environment – current and recent history

What are the current dynamics?

DISCUSSION

contact information
Contact information

David Ingram

dave.ingram@willis.com

+1 212 915 8039

Alice Underwood

alice.underwood@willis.com

+1 212 915 8439

59

59

erm through the business cycle

ERM THROUGH THE BUSINESS CYCLE

Alice Underwood, PhD, FCAS

Dave Ingram, FSA, CERA, FRM, PRM