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A Life in ERM

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Bruce Paterson, FCIA, FCAS, MAAA, has spent his entire career in enterprise risk management (ERM) for, as he sees it, "the whole actuarial profession is in the business of ERM".

He explained: "Actuaries’ training and education are geared in this direction and they naturally think about it. As an actuary it defines you, and as such I’ve always been in ERM at some level. Pricing, reinsurance, portfolio management: each has a greater or lesser degree of risk management associated with it."

Extensive Experience

For the last nine years, Mr. Paterson and a colleague—also named Paterson, but no relation—have run their own boutique insurance/reinsurance advisory firm, Paterson2, and his current client base includes companies in the U.S., Barbados, Bermuda, Europe, the Middle East, and elsewhere. However, his career has included acting as an actuarial consultant, as chief actuary with Aon Re, chief actuary at an insurance firm, product manager, and chief operating officer.

He said: "My first actuarial job was in life insurance, constructing mortality tables, but I went into general insurance right away. I spent 10 years in the U.S., in consulting and reinsurance, and I became the first general insurance actuary hired by Aon Re in Chicago. I think their attitude was: ‘Our major competitors have one, we should too.’"

Subsequent work has involved tasks such as serving as a consultant to medical malpractice captives, as Appointed Actuary for private and public insurance entities, a developer of applications for catastrophe models, raising capital for start-ups such as LaSalle Re, serving on insurance/reinsurance company boards, among other roles. At one time or another, he has touched all lines of business in the non-life insurance field.

Staying Relevant

But now he is often focused on reinsurance/capital management. He said: "I spend half my time consulting and advising, and half on transactions designed to meet objectives created through the advisory process. People want to transfer their risk in a more efficient and effective manner, and we ask them to first imagine the reinsurance market is perfectly efficient (which usually brings some laughter) and then posit in this perfect world, ‘What would you like to buy?’ They are in many cases insurance entities, not necessarily a ‘pure’ insurance company—in one specific situation an industry mutual with $700 million to $800 million in surplus/net equity, and they came to us and asked: ‘Are we relevant today?’

"For example, for a few years prior to 2000 utilities companies around the globe were in a ‘froth’ over Y2K, and worried about the possible effects it could have on operations, could it lead to a possible meltdown of the industry. They turned to their various industry captives insurance entities for support/guidance and these entities in turn asked themselves: ‘If things like this happen, how are we supposed to behave? What can we do?’ The ‘regular’ insurance/reinsurance industry wasn’t as supportive as the industry captives had hoped at the time. As a result various non-traditional transactions were designed, created, and implemented to allow these entities to both continue to support their members and trade through during this difficult period. Shortly after the crisis passed the ‘regular’ insurance market returned to a more normal state and prices fell and coverage returned, but then Enron happened—it is a given that various crises/disruptions will occur over time but realistically how prepared are you or can you be?

"Chief executive officers and chief financial officers of insurance entities are well aware of their fiduciary responsibilities. They might have a couple of hundred million in portfolio/premium income, but they spend $60 million to $70 million of this to buy reinsurance or protection—usually their single largest expenditure. In reality the probabilities of various adverse outcomes are unknowable, but we try to give them a framework through which to evaluate the inevitable trade-offs between cost and risk transfer over time subject to their operating constraints both ‘real’ and ‘perceived’. Of course, there are situations where people take on much less risk than we have suggested in our framework. People are naturally risk averse and don’t like downside risk; they realize when something goes wrong there is a tendency in many places to look for people to blame even if these adverse outcomes were known and even if in the long run it is very inefficient/costly to do so."

Insurance Engineering

"There are many so-called ‘unmodellable’ situations, and forecasting is a ‘dark’ art, but we can attempt to grapple with unlikely situations and say: ‘How will we respond?’ Solvency II says you have to look at the one-in-200 year events, that event which doesn’t have a name but will happen. You have to assume that you cannot reinsure or transfer the risk of everything, so you calculate how much capital you will need to support these scenarios."

Actuaries have a unique set of skills and they are well suited to ERM, added Mr. Paterson, the holder of an engineering degree. "They are like insurance engineers; they design things that are on paper, and then have to look ahead 40 to 50 years. Who knows what will happen then? But people want that security, and we are able to help them plan that far ahead."
 

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