The first company to offer dental insurance as an employee benefit was a dental supply company. This was not done because its employees had especially bad teeth, or because its workers were clamoring for better dental hygiene. It was a strategic business decision. If dental insurance became a popular employee benefit (which it did) the demand for dental supplies would increase dramatically and the company would profit from increasing sales. By demonstrating that dental insurance could be a valuable employee benefit, this firm helped start an employee benefit trend that provided significant returns to the organization. Smart move!
|If the CAS develops a successful ERM program, we not only improve the way we handle risk, we also give our members hands-on experience to develop their proficiency in the ERM arena.|
Enterprise risk management (ERM) presents the CAS with a similar opportunity. The actuarial profession is one that stands to gain if ERM becomes a common practice. The first organizations to adopt ERM tended to be financial corporations (banks and investment firms) with ERM spreading more recently to insurers and nonfinancial companies. However, the basic principles of ERM are applicable to all entities, including nonprofits. If the CAS develops a successful ERM program, we not only improve the way we handle risk, we also give our members hands-on experience to develop their proficiency in the ERM arena, demonstrate that nonprofits can benefit from ERM practices, and draw attention to our expertise in this competitive field. To accomplish this task, the CAS has established an ERM Task Force with the following charge and scope:
This task force is charged with recommending a process under which the CAS could become an example of ERM best practices within the nonprofit arena. The task force is expected to conduct an ERM audit of the CAS, generate recommendations for dealing with the significant risks, and establish an ongoing ERM process for the CAS.
Lee Smith chairs the task force, which includes CAS members Craig Allen, Tom Conway, Jerry Degerness, and Chuck Emma; Todd Rogers, CAS director of finance and operations; and Mark Vonnahme, a faculty member at the University of Illinois. Mark previously served as CEO of CNA Surety and currently teaches a graduate-level ERM course. The task force submitted its interim report in May 2005 and will complete its final report this month. This topic will then be on the agenda of the August Executive Council meeting and the September Board of Directors meeting. (The CAS Board meeting will be held in Chicago September 15-16. Members are welcome to attend this meeting. Contact the CAS office for details.)
- Hazard risks, including both direct and indirect losses due to terrorism
- Financial risks relating to both assets and liabilities, including pension exposure
- Operating risks, including the credentialing process
- Strategic risks, including the effect of competing organizations both within the actuarial profession and in the broader area of risk analysis
Thus, this is an opportune time for you to become involved in this new adventure. The field of ERM, which is only a decade old, is undergoing rapid growth and significant development. ERM began as an attempt to prevent the financial disasters that were caused by the misuse of derivatives. However, ERM is evolving into a method for optimizing the value of an organization by dealing with risk in the most cost-effective manner. Although there are common approaches to ERM, there is no standard method or single template that can be applied. Each organization has developed its own ERM application to fit its unique circumstances or the expertise of the individuals charged with this task. In most cases, the ERM process is kept confidential to
maintain a competitive advantage for the organization or to avoid drawing attention to significant risks or opportunities the organization faces. This approach is good in that it encourages experimentation but unfortunate in that it makes it difficult to build on successful applications to advance the field.
Determining appropriate measures and developing models for each element would be daunting. Fortunately, a key tenet in ERM, according to James Lam, one of the first chief risk officers and a key writer and speaker on ERM is, "Don't boil the ocean."
The CAS intends to create an ERM model for a nonprofit organization that is conducted in the open and is shared with all interested parties. By publicizing our approach we hope to gain valuable insights from other experts who can suggest improvements and also to provide a roadmap for other nonprofits to follow. In this way we intend to improve and expand the use of ERM. By announcing and then meeting this challenge, we intend to draw attention to our approach and have it become recognized as a best practice in this area.
How can the CAS become a role model in the ERM arena? As stated in the interim report of the ERM Task Force: "The CAS will become an exemplar ERM organization by using best practices to develop their ERM program." This task force seeks to identify best practices by reviewing the approaches used by other organizations or creating a best practice, if none exists, for nonprofits. We then need to follow this approach to identify our key risks and opportunities with due consideration to how the risks are integrated, develop appropriate measures and models for the key risks, evaluate the different methods for dealing with these risks, select the optimal method, and monitor the results. These steps, the standard steps in traditional risk management, have not changed as risk management has evolved into ERM, but the risks and opportunities considered have grown from pure risks to all types of risks and opportunities. As almost all ERM applications include one or more hazard risks in the key risks involved, the expertise of CAS members in quantifying these risks is an essential element to successful ERM approaches. This is why the CAS has a significant advantage over other organizations in developing a best practice in this area.
At first glance, establishing an effective ERM program appears overwhelming. The risks and opportunities that the CAS or any nonprofit faces are extensive-property or liability exposures, financial losses due to market conditions or fraudulent activity, business interruption risks, competitive pressures, regulatory sanctions, technological changes, international growth, and new areas of actuarial applications are only some of the risks and opportunities confronting the CAS. Determining appropriate measures and developing models for each element would be daunting. Fortunately, a key tenet in ERM, according to James Lam, one of the first chief risk officers and a key writer and speaker on ERM is, "Don't boil the ocean." A successful ERM program will identify the critical risks and opportunities and address them first, and not try to deal with every risk at once. Thus, prioritization is an essential initial step in ERM. We can take that step and model how other nonprofits can do the same. In fact, becoming an exemplar for ERM is, in itself, one step in ERM, as it can create a strategic opportunity for our members.
There is a tremendous need for research on a variety of ERM topics, including developing methods to deal with operating risk, risk aggregation, risk integration, and strategic risk. Actuaries can add value to this field by using our skills and experience to develop new methods of quantifying risks identified in the ERM process, particularly relating to operating risk. The CAS is doing its best to showcase casualty actuaries as leaders in ERM. It will be up to you, our members, to take advantage of the opportunities this attention will generate. Casualty actuaries need to be in the forefront of developing solutions to ERM's unanswered questions. The value that we bring to the ERM process will determine our success as ERM practitioners.