The Edge in ERM
Dear Editor:
I read Stephen's D'Arcy's column ("From the President: The CAS as an ERM Role Model," AR August 2005) and want to share my perspective as an outsider (not currently an actuary). It seems to me that actuaries already do ERM in their work, especially in reinsurance. I don't see why you have to re-invent anything. In fact, your colleague Donald F. Mango in the other article ("Opinion: Risk Management Research Imperatives," AR August 2005) even says (rightly so) that casualty insurance is a form of operational risk. Companies manage this risk by either retaining it (and earning premium), by rejecting business or by reinsuring for a premium-something like that (I am not an actuary!). Well I hope you see what I am saying, but I think you people already have the edge in ERM-by leaps and bounds.
Ramzi AbuJamra

Stephen D'Arcy responds:
Ramzi,
Thanks for your comments. I agree with you that casualty actuaries already work in the area of ERM. Under some definitions of operational risk, especially that proposed by the accounting profession (under COSO), insurable event risks are considered to be a part of operational risk. Under other definitions, event risks are termed hazard risk and operational risk refers to processes, such as the supply chain or computer systems.

Although casualty actuaries have a good start in [ERM], and perhaps are ahead of many other specialties that focus only on a single type of risk, we could still need to do a better job on integrating the different types of risk.

- Stephen D'Arcy

True ERM involves integrating all types of risks by considering the correlations among different risks and developing an overarching strategy for dealing with the most critical risks an organization faces. Although casualty actuaries have a good start in this area, and perhaps are ahead of many other specialties that focus only on a single type of risk, we could still need to do a better job on integrating the different types of risk. That is what I am trying to encourage actuaries to do.

Mutual Recognition-Another Perspective
Dear Editor:
I read John Rollins letter with disappointment ("From the Readers," AR August 2005). I fully sympathize with John's comments and the misunderstanding that mutual recognition causes. The fault for this must lie with the extremely poor explanation the CAS leadership made in 2003 when the constitutional changes were made. From my perspective, CAS tried to sell it as a means of allowing CAS to expand throughout the world and to make the CAS qualification the preeminent designation and the one of choice. This is far from a realistic proposition-the reality is that an actuarial student, studying say in the U.K., wishing to gain an actuarial qualification would be a fool to do anything but the local, i.e., U.K., professional exams.

As an FIA, I qualified in the U.K. and subsequently spent three happy years working in the U.S. I know a number of CAS Fellows who have enjoyed the reverse journey. All of these have been before mutual recognition and the lack of FCAS/FIA was no bar to any of us being employable.

In addition, in the U.K., we have successfully operated mutual recognition for a number of years within Europe and with parts of the Commonwealth. The number of FIAs who have gained their qualification through mutual recognition is small and only occurs when people move geographically.

In my opinion, the sole reason for mutual recognition is to allow professionals to move easily between countries and to ensure that nonsensical roadblocks are not put up in their way. From an actuarial viewpoint, the principle reason for allowing mutual recognition is to allow actuaries to undertake roles that have some sort of "signing" responsibility. In the U.K. for P&C business, this is currently limited to opining on Lloyd's syndicates. Equally, in the U.S. there are a wide number of roles that do not require such a signing ability. Mutual recognition also enables actuaries to join the local actuarial community on an equal footing and keep up to date with local issues.

In practice, the biggest obstacle to free movement of actuaries is the immigration system of the relevant nation. From personal experience, getting a work permit to the U.S. even when moving with one's own employer is a nightmare. (Note: The views expressed above are mine alone and do not reflect the views of my employer.)
David Innes, FIA

Ethics Discussion Lacked Context Consideration
Dear Editor:
The discussion in the "Ethical Issues" column ("To Revise or Not to Revise," AR August 2005) unfortunately was silent on a major issue-under what rules were the CFO and company operating with respect to financial reporting? As such, the discussion was lacking a major component to the issue.

The situation described in the August article is what accounting rules call a "material subsequent event." (For U.S. statutory accounting, this is discussed in SSAP 9.) U.S. statutory accounting rules categorize material subsequent events as either Type I or Type II. Type I events "provide additional evidence with respect to conditions that existed at the date of the balance sheet," and are reflected in the booked estimate.

By ignoring the context of the assignment, the ethics discussion was deficient.

-Ralph Blanchard

Type II events "provide evidence with respect to conditions that did not exist at the balance sheet date but arose subsequent to that date," and are disclosed but not reflected in the booked estimate.

In the August 2005 case study, the debate should have been whether the favorable development between January and February on year-end claims reflected conditions that existed on December 31. If the closed claim values are considered to have reflected what the claims were really worth on December 31, then the CFO should adjust the booked reserves downward and the actuary should adjust her estimate downward. If the closed values reflected new information and new conditions, e.g., they reflected a favorable roll of the dice that was better than what a December 31 unbiased estimate would normally expect, then the favorable development should be disclosed but not booked in the year-end financials.

By ignoring the context of the assignment, the ethics discussion was deficient. Actuaries working on an assignment should probably be aware of such context when performing their work.
Ralph Blanchard, FCAS