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Going up!

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By Jean-Yves Rioux, FCIA

Have you ever been in an elevator with someone way above you on the organizational chart when they turn to you and ask, "Precisely what is it that actuaries do?", or "What is the difference between what you do and our economists do?" These experiences can test any actuary’s mettle. You have seconds to respond, and respond perfectly as well.

The Enterprise Risk Management Applications Committee (ERMAC) thought it would be a good idea to put together ‘elevator speeches’ on ERM topics for these occasions. Such tools give your captive audience the who, what, when, where and why in a minute or, preferably, less. And they won’t only work in elevators, but at networking events, cocktail parties and even on voicemails.

Here are four the committee has come up with:

Actuaries and ERM

Actuaries are the professionals who focus on financial and risk management for retirement plans, property/casualty and life insurance companies, governments and individuals. With increasing calls for transparency and more reporting of risk being required by stakeholders, regulators and rating agencies, managing risk on an enterprise level has intensified and actuaries are well positioned to undertake the challenge.

One definition of enterprise risk management says that it is the discipline by which an organization assesses, controls, exploits, finances, and monitors risk from all sources, to increase the organization’s short- and long-term value to stakeholders. The actuarial viewpoint covers all aspects of risk management, however; the profession looks at risk from managing of the downside—minimizing loss of assets, or reducing the loss of income—and managing of the upside, that is, seeking opportunities and taking measures to increase value by strengthening the organization’s balance sheet and return on capital employed.

The deep education requirements to qualify as an actuary and the expertise actuaries acquire managing retirement plans, property/casualty and life insurance companies provide excellent experience and competence to manage other financial and non-financial organizations. Actuaries may be seen as "conservative" in their financial and risk management of these organizations; however, this attribute, supplemented by actuarial standards of practice and professional requirements, is a cornerstone of all actuarial work including enterprise risk management.

Can’t economists do the same?

Both actuaries and economists use their professional expertise and mathematical models to analyze systems and operations. The key difference is in their approach to their work. Economists look at the world from a perspective of scarce resources, while actuaries are focused from a perspective of risk.

What is ERM?

Traditional risk management focuses on operational risk assessment and the development of strategies to manage and mitigate these risks. ERM improves upon these approaches by taking (and this is critical) an enterprise-wide view of risks and by considering reduction of downside risks and the exploitation of upside opportunities. It incorporates risk culture at all levels of the organization with a view of increasing the firm’s long-term value.

ERM is a process typically launched by a board of directors that involves people at every level of an enterprise. It is designed to identify and manage potential risks across the enterprise and, if the risk does exist, ERM minimizes its impact on the organization. It’s all about gathering and organizing knowledge and using it to make confident business decisions that will increase the organization’s long-term value.

Doesn’t ERM only really apply to financial services firms?

While it is true the insurance and banking industries have practised ERM for years, so have energy and oil businesses. Now firms in other sectors are taking advantage of the opportunities delivered by ERM. Micro-insurance organizations, social housing, mining companies and public utilities are just a few examples.

Jean-Yves Rioux, FCIA, is Chair of the Enterprise Risk Management Applications Committee.

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