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The Increasingly Broad Scope of Risk Management
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The growing importance and popularity of enterprise risk management (ERM) means that it can cover many aspects of an actuary’s work, even if they do not formally specialize in that aspect of actuarial practice.
Health expert Claude Ferguson, FCIA, FSA, is a case in point: his current position as director of actuarial services at Medavie Blue Cross might not be focused on ERM, but he says his career path naturally led him to take on a role that puts ERM at its centre.
He explained: "Health actuaries do play their traditional roles in corporate and product development areas. But their expertise in traditional roles also leads them to more easily get a sense of what might go wrong, whether it’s simply actual income not following pricing expectations, or adjusting utilization and severity trends for specific business segments with the appropriate exposure to identify any under-performing processes."
Thanks to a career that allowed him to embrace most aspects of running a successful insurance operation—from pricing to financial reporting—and learn about product design, marketing, distribution and claim processing, M. Ferguson said he now finds himself in an ideal position.
"It helped me develop this high-level and connected view of our business to be able to readily explain what might go wrong, assess its potential impact, and better be able to quickly spot it through your financial results.
"ERM is not officially my key role. Yet I find that it is everywhere, whether it be helping to develop key risk assessments through the company’s Dynamic Capital Adequacy Testing or stress-testing exercises, or monitoring various claim adjudication processes and assessing their performance in order to identify any unexpected trend."
M. Ferguson, Chair of the CIA Risk Management Committee, also finds himself helping to identify and quantify risk components that are typically, or at least currently, not measured on an ongoing basis, and designing and implementing initiatives that should better mitigate risks—for example, by adapting Medavie Blue Cross’ investment strategies to achieve more predictable financial outcomes, given possible developments in the economic environment.
He added: "The company’s management is expected to meet benchmarked performance targets and protect its intrinsic value. ERM is one of the key tools that will allow managers to be reasonably confident that they will be able to deliver what is expected.
"ERM is becoming the common lens through which management, regulators and related companies assess any business’ ability to achieve the promised level of performance. By embracing the ERM framework, you are also embracing an analytical tool that not only applies to your immediate environment, but also to a very broad array of industries and markets.
"ERM is a solid framework that’s there to stay, and will continue to play a central role in assessing and managing any company’s solidity and performance in the future. Investing in your ability to deliver better ERM is a great investment to make."
A business looking to develop such a framework would do well to rely heavily on actuaries’ extensive expertise, he said: "Actuaries are well trained and experienced in modelling and managing financial outcomes in a world with multiple contingencies and incomplete information.
"For these reasons, they typically excel in helping management understand how financial performance will develop and how it could evolve under different environments, depending on whether certain risks materialize or not, and whether certain mitigation strategies are implemented or not."