Casualty Actuarial Society

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Risk Management Section Call for Essays – Round Two

08/04/2010 —

Systemic Risk, Financial Reform, and Moving Forward from the Financial Crisis

Our first call for essays, “Risk Management: The Current Financial Crisis, Lessons Learned and Future Implications,” which was published in early 2009, contained 35 short essays. They highlighted lessons learned, intended to inspire risk management practices for years to come. We learned how operational risk can combine with other risks and manifest in the breakdown of the entire financial system. We also learned the need for a risk culture that balances incentive compensation with desired performance at corporations. There is also a need to align the authority to make decisions with ultimate accountability. Ultimately, it becomes a story of risk that manifests itself through the decisions and behavior of people, and not necessarily through exogenous events.

The Joint Risk Management Section of the Society of Actuaries (SOA), the Casualty Actuarial Society (CAS), and the Canadian Institute of Actuaries (CIA) in collaboration with the SOA Investment Section, the International Network of Actuaries in Risk Management (“IN-ARM”) and the Enterprise Risk Management Institute International (“ERM-II”), propose publishing a second series of essays as a follow-up to the first to address “Risk Management: Part Two - Systemic Risk, Financial Reform, and Moving Forward from the Financial Crisis.

Systemic risk is the risk of the collapse of an entire financial system or market as opposed to risk associated with any one individual entity. Risk systems consist of social institutions, laws, processes and products designed to facilitate the transfer, sharing, distribution and mitigation/hedging of risks between various buyers and sellers. Examples of risk systems include insurance, banking, capital markets, exchanges, and government and private health and retirement programs. Historically, these risk systems are rarely analyzed in a manner that looks at the ability of the system to survive extreme risk events and still carry out their function – creating an ongoing market for the exchange of risk. The failure of a risk system may be due to asymmetric information, unbalanced incentives of its participants and/or the failure of trust amongst its participants. In reflecting on the events of the last two years, is it possible to effectively develop early warning indicators that trigger intervention in advance of a complete collapse of an entire financial system or market? Does it make sense to have a chief risk officer of, say, the United States of America, whose role it would be to manage/mitigate this risk?

The U.S. Congress recently passed the most sweeping financial reform measure since the Great Depression. The purpose of this legislation is to prevent the risky behavior and decision-making that led to the financial crisis, and to prevent future crises. The legislation provokes debate on the issues, effectiveness, and appropriateness of “too big to fail,” systemic risk, executive compensation, and regulation of financial instruments such as derivatives, securities, and hedge funds such as the “Volcker Rule,” among other topics. Does this legislation solve the problems of the past? Are there other significant issues not addressed? Does this legislation cause other concerns?

We invite the submission of essays to address these questions, and to offer thought leadership on the ERM discipline and the essential elements needed to maintain risk transfer systems in times of unusual stresses and unlikely events.

This topic has been intentionally left broad to allow essays that address industry-specific issues or a wide range of issues across industries. Each essay should be no more than two pages (approximately 1,500 words or less) and should be submitted no later than Friday September 15, 2010. Depending on the response, we may have to limit the number of essays that ultimately are published. SOA/CAS resources will be utilized to publish and promote the resulting publication, including leveraging public relations firms. Publication is planned for Fall of 2010. Submit your essay here.

Awards may be awarded for worthy papers:

1st Place Prize – $500
2nd Place Prize – $250
3rd Place Prize – $100

Feel free to pass along any questions to Robert Wolf, FCAS, CERA, ASA, MAAA, Staff Partner- Joint Risk Management Section and Investment Section, who will be coordinating the publication.

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