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Actuaries Can Lead the Way on Risk Management

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Combining a background as a pension consultant with knowledge of investment, Patrick De Roy has spent years advising varied clients on the increasingly-important topic of risk management.

The holder of FSA, CERA, CFA and FRM designations besides his FCIA, he is a partner with Morneau Shepell in Montréal, and explained, "I am the national practice leader for the risk management practice. In that role, I work with clients, including chief risk officers and chief financial officers, to assess pension risks and develop risk mitigation strategies, using analyses such as asset liability modelling and risk attribution. For example, if the surplus/deficit volatility is 12 percent per year, I will have to give them additional information: that 12 percent is coming from what sources, and how much of it is market risk, interest rate risk, longevity risk, etc. Companies establish a risk budget as they want to take on some risks, but they need to know which ones and how much."

Patrick, who is also in charge of risk management research internally for Morneau Shepell, added, "Risk management is perceived very well here. It is not our core business, which are more traditional pension and benefits services. But other consultants in the firm are well aware of what we can do for our clients.
"There is more appetite now for risk management in pension funds. Clients are seeking dynamic solutions. If they have to invest a lot of money in pension funds in the next few years, at least, they do not want to face the same issues they had in the financial crisis of 2008. There is a risk, but how can we manage the volatility?

"A lot of pension funds are heavily invested in equities but with volatile markets they are facing a lot of risk. The other main risk is coming from interest rates, as not a lot of pension funds are immunized against the movement of the rates. But in the 1990s the asset returns were so good it was not easy to convince sponsors to take some of the risks off the table. It took crises in 2001 and 2008 to show them they were really in a risky position.

"Now we work with our clients to establish de-risking strategies. We will have action plans ready."

Establishing a continuous risk management framework is important, he said, as some companies might want to implement risk mitigation strategies only gradually and avoid an "all or nothing" approach. "It is not easy to convince people they have to do significant changes to their investment policy. They say, ‘We are not well funded or interest rates are too low’, so they do not want to change many things. Some even say risk management is only a buzzword for now. But I believe it is true value added for a company to put it in place. Most companies have to take pension and benefit risks into account in their enterprise risk management framework, as they face a lot of risks in contributions to pension funds."

As a profession, there are still challenges for actuaries to overcome, according to Patrick. "We are very good at risk management. We have a lot of expertise in designing complete risk management frameworks. But I do not see us as the frontrunner in the market. For example, accountants are having a lot of discussions about risk management. They have access to financial results from many lines of business with their clients, so they are well positioned. But we have all the background necessary to be more prominent in the marketplace. The CERA designation and the support for risk management will pay off over time.

"We can certainly be viewed as risk management professionals but the profession must continue to invest in that field. It will be challenging but it is not impossible for us to become No. 1."

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