Committee Develops Introductory Treatise on ERM
Aimed at P/C Actuaries

by Jerry A. Miccolis, Chairman, CAS Enterprise Risk Management Committee

In March of this year, the CAS Board of Directors adopted the following as the Society's goal for its 2014 Centennial:

"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]."

One component of this statement is a call to action for CAS members who are not yet up to speed on enterprise risk management (ERM) to get there quickly. Fortunately, they now have considerable help.

In its November 2001 report to the CAS Executive Council and the Board, the ERM Advisory Committee spelled out specific research and education priorities over the next several years to prepare the CAS membership to be active players in the emerging ERM movement. Existing CAS Admissions and Professional Education Committees took up the education priorities, including those detailed in a set of ERM Learning Objectives, developed by the Advisory Committee. Evidence of their work can be seen in the July 2003 Joint CAS/SOA ERM Symposium, for example. The research priorities were assigned to a new research committee; thus, the ERM Committee (ERMC) was formed in February 2002. The ERMC's work to date includes the compilation, organization, and annotation of a comprehensive ERM bibliography, and the creation and population of a new Web site for ERM.

Perhaps the most significant early undertaking of the ERMC is its research into, and drafting of, an original introductory treatise on ERM specifically for property/casualty actuaries and students. This work is now complete. The article, "Overview of Enterprise Risk Management," is available on the CAS Web Site and is published in the Summer 2003 Forum.

This document is intended primarily to further the risk management education of candidates for membership in the CAS, but current CAS members and other risk management professionals should also find this material of interest.

The document (34 pages of text, and another 28 of appendix material, both liberally illustrated) begins with an explanation of the evolution to and rationale for ERM. The ERM movement is seen to be driven by both internal (e.g., competitive advantage) and external (e.g., corporate governance) pressures.

The document then defines ERM for CAS purposes and lays out its conceptual framework. The definition makes clear that ERM is a value-creating discipline. The framework describes both the categories of risk and the types of risk management processes covered by ERM. ERM extends well beyond the hazard risks with which casualty actuaries are particularly familiar, and well beyond the quantification of risks with which they are particularly skilled, but it is clear that the casualty actuarial skill set is extremely well suited to the practice of ERM.

The "vocabulary" of ERM is established in the lengthiest chapter of the document, which also describes the measures, models, and tools supporting the discipline. The close linkage between ERM and corporate performance management is made clear in this discussion. Dynamic financial analysis (DFA) is introduced, along with alternative approaches to capture hazard and financial risks, and their roles within an ERM context is explained. Models that treat operational and strategic risks are also discussed. Applications of these measures, models, and tools to support management decision-making conclude the chapter.

With the conceptual and technical foundations of ERM thus established, the last two chapters turn to the actual practice of ERM. One chapter presents relevant case studies from various industries; the other offers some practical considerations in implementing ERM.

For the reader interested in pursuing additional sources of learning on the subject, a short-form version of the ERM bibliography is included as one of the appendices. (A continually updated, annotated, and topically organized road map through the literature can be found on the CAS ERM Web Site.)

Enterprise risk management is a "big idea." Among other things, ERM can be viewed as the broad conceptual framework unifying the many varied parts of the actuarial discipline. ERM provides a logical structure to link these subject areas together in a compelling way to form an integrated whole. In so doing, ERM addresses critical business issues such as growth, return, consistency, and value creation. It expresses risk not just as threat, but also as opportunity—the fundamental reason that business is conducted in a free enterprise system. Through ERM, the clear linkage between business fundamentals and actuarial theory and practice should engage students and professionals from various backgrounds in the study of actuarial science—a logical career strategy in a global business environment that has embraced ERM as a modern management discipline.

It is little wonder the CAS has likewise embraced ERM as part of its defining vision for its own Centennial.