CIA (e)Bulletin/(e)Bulletin de l'ICA
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April 2014

Expect More ERM-Specific Guidance Soon

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By Bruce Langstroth, FCIA

"So what’s happening in Canada with enterprise risk management (ERM)?" you ask.

The answer varies a little bit depending on who you ask and what your perspective is. The following is an overview of some of the important things happening in this practice area, and activity that may emerge within the Practice Council within the coming years.

Many CIA members have well-established roles within insurance companies that involve ERM. Outside of practice within insurance companies, though, either ERM practice is less well developed (e.g., within pensions) or the role of actuaries within ERM in other organizations is less clear (e.g., banks). The CIA’s Enterprise Risk Management Applications Committee (ERMAC) was established "to promote the role of actuarial science to enterprise risk management and to market actuaries as knowledgeable experts in this field." One may reasonably expect the involvement of actuaries engaged in ERM both within traditional employers and without to increase.

Generally speaking, there is no guidance—neither standards nor guidance material—relating specifically to ERM practice. One might reasonably argue that certain aspects of the insurance-specific standards, such as Dynamic Capital Adequacy Testing, are more related to ERM (with insurers) but those aspects are relatively minor in relation to the potential width and breadth of ERM practice.

Other parts of the world have been more active in the ERM field. For instance, the American Academy of Actuaries has adopted two standards in relation to ERM:

  • 46 – Risk Evaluation in Enterprise Risk Management addresses risk evaluation (models, economic capital, stress testing, and emerging risks in particular).
  • 47 – Risk Treatment in Enterprise Risk Management addresses risk treatment (determination of risk tolerance, setting risk appetite, establishing risk limits, and performing risk mitigation activities).

The International Actuarial Association has two International Standards of Actuarial Practice in the course of development:

  • 5 – Insurer Enterprise Risk Models is intended to address topics related to risk models, including data quality, assumption setting, model selection, model validation, review of results, and related topics.
  • 6 – Enterprise Risk Models is intended to broadly address risk management topics, including risk identification; techniques for risk quantification; risk aggregation and diversification; processes for measuring, analyzing, and modelling risks; and ERM framework and policy statements.

The CIA’s Committee on Risk Management and Capital Requirements (CRMCR) has four projects at various stages of completion. Two research papers, one on aggregation and diversification and the other on capital for operational risk, are well advanced with delivery dates later in 2014. Work on two other research papers, one on risk limits and risk appetite and the other on lapse risk and capital, is expected to begin this year.

The mandate of the CRMCR is limited to risk management considerations within insurance companies. In conjunction with a review of the ERMAC’s mandate, consideration of an ERM practice committee was initiated earlier this year with a mandate to produce guidance material for general ERM practice and respond to the development of standards and guidance by other bodies.

In short, while the development of ERM-specific guidance in Canada is not well advanced, there are lots of reasons to expect that to change in the foreseeable future.

Bruce Langstroth, FCIA, is Chair of the Practice Council.



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