From the President: Opportunity and the Risk of Circling the Wagons
By Roger Hayne 

Friday, 13 November 2009 was an historic date for the actuarial profession worldwide. On that day the CAS joined 13 other actuarial associations in 12 countries in signing a treaty establishing CERA as a credential in enterprise risk management (ERM) to be awarded to actuaries by each of those associations. For the first time, actuaries around the world will share a common designation—one that will allow our principals to be assured of consistent rigorous standards in training, continuing education, and professionalism across multiple nations.

The CAS Centennial Goal calls for the advancement of CAS members in ERM, so our signing of the treaty is quite consistent with our long-term plan. Why would 13 other actuarial organizations abandon their respective historical practice of acting alone and join together in this treaty? Some observations may shed some light.

ERM has at its core the evaluation and assessment of all risks that an enterprise faces. Every day, casualty actuaries deal with risks from a very wide array of hazards, each with its unique characteristics, and most of which have very complex and not often fully understood loss-generating processes. Who better than actuaries to assess all the risks facing an enterprise than these risk professionals accustomed to not only uncertainty in outcomes but, more importantly, uncertainty in the understanding of the underlying loss-generating process?   

Actuaries are not alone, however. A number of groups, many with a global reach, are trying to position their members to become THE necessary risk professionals. With this background, it is not difficult to see at least one incentive for the 14 treaty signatories to set aside their individual paths and join together.

Stepping back, though, we see that this is only the most recent of a number of risks we have recognized. Statisticians using data mining and predictive modeling methods have taken over some jobs previously filled by casualty actuaries. Mathematicians, physicists, and other quantitative scientists have made their mark on the investment community. Products that they have developed look very much like insurance, again a traditional domain of actuaries.

The CAS Board has recognized this risk to our profession in establishing an initiative on technical excellence. The board realizes that, unless we can assure our principals that casualty actuaries remain quantitatively competent and, more importantly, up-to-date in the tools that we can bring to bear to assess risks our principals are facing, we will continue to lose ground.

ERM best-practices teach us that the worst way to address a recognized, significant risk is to ignore it. As the profession-wide Image of Actuary campaign says, “Risk is Opportunity.” The best way to address a recognized risk is to turn it into an opportunity.

The technical excellence initiative lets us step back and take a holistic review of our entire educational structure. Significant risks and challenges often require new approaches. Conversely, “circling the wagons”* in the face of these challenges may only forestall inevitable failure.

Quantitative techniques used in predictive modeling and data mining, emerging techniques to assess variability in our forecasts, and sophisticated models used in dynamic financial analysis are all finding their way into the daily tasks of casualty actuaries. If we cannot assure our principals that we are up to these challenges we will continue to lose ground to “quants” who can.

Something else that these techniques have in common is that mastery of them cannot be verified in a traditional timed, short-answer or multiple-choice examination, whether paper and pencil or computer-administered. Because of this we have a dilemma.   

We could circle the wagons and insist on only using traditional exams to test mastery. Doing that though may very well mean that we will be doomed to a shrinking and possibly less interesting profession, as outsiders come in to provide services our principals need yet we are unwilling or unable to provide. Alternatively, if we can find more creative and imaginative ways to assure our principals that our members are well-versed in advanced techniques, we can only solidify and expand our position as the leading risk professionals.

We cannot survive in this new and changing world by circling the wagons and refusing to consider alternatives to our traditional examinations. We need to continue to evolve our means of educating our candidates and members, assuring the high quality that our principals have come to rightfully expect from us.

* In settling the western part of what is now the United States, settlers would set out from the East in groups with a number of wagons. If they perceived they were threatened either from brigands or natives the settlers would form the wagons into a rough circle and take up defensive positions inside. This is one way to address risk but completely stops progress.