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Enterprise Risk Management

Enterprise Risk Management. Midwestern Actuarial Forum Chicago, IL March 26, 2002. André Lefebvre, FCAS, MAAA. Agenda. Description of Enterprise Risk Management Process CAS Activities Questions & Answers. Changes in the Business World.

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Enterprise Risk Management

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  1. Enterprise Risk Management Midwestern Actuarial Forum Chicago, IL March 26, 2002 André Lefebvre, FCAS, MAAA

  2. Agenda • Description of Enterprise Risk Management Process • CAS Activities • Questions & Answers

  3. Changes in the Business World • In the new economy, CEOs are facing unrelenting pressure to lead and improve their company’s performance • At the same time, the rules are changing: • Increasing complexity of the global economy • Higher customer expectations • Intense competition • Rapid changes in technology

  4. Master Risk  Create Value • Organizations are searching for and developing more comprehensive approaches to monitor and manage business risks • Business Risk: The threat that an event or action will adversely affect an organization’s ability to achieve its business objectives and execute its strategies successfully1 1Managing Business Risk: An Integrated Approach, The Economist Intelligence Unit, 1995

  5. Enterprise Risk Management ERM is an interactive process of well-defined steps which, taken in sequence, support better decision-making by contributing a greater insight into business risks and their impacts

  6. Elements of ERM Process C o m m u n i c a t i o n Establish Context M o n i t o r & R e v i e w Identify Risks Analyze/Quantify Risks Integrate Risks Assess/Prioritize Risks Treat/Exploit Risks

  7. Establish Context • Understand the: • strategic (external) context • organizational (internal) context • risk management context • Develop the risk evaluation criteria • Define the structure

  8. Identify Risks Document the conditions and events that represent material threats to the organization’s achievement of its strategic objectives or represent areas to exploit for competitive advantage

  9. Types of Risks • Strategic • e.g., competitor risk, shareholder relations risk • Operational • e.g., customer satisfaction risk, authority/limit risk • Financial • e.g., price risk, liquidity risk, credit risk • Hazard • e.g., catastrophic loss risk, health & safety risk

  10. Analyze / Quantify Risks • Analyze risks in terms of consequence and likelihood in the context of existing controls • Quantify the consequence and likelihood using qualitative, semi-quantitative, or quantitative (or a combination of these) analyses

  11. Integrate Risks Aggregating all risk distributions, reflecting correlations and portfolio effects

  12. Assess / Prioritize Risks • Evaluate the risk • Prioritize list of risks

  13. Treat / Exploit Risks • Identify options for risk treatment • Assess the options • Prepare risk treatment plans • Implement treatment plans

  14. Monitor & Review • It is necessary to monitor the risks, the effectiveness of the risk treatment plan, the strategies, and the management system that is set up to control the implementation • Ongoing review is essential to ensure that the management plan remains relevant

  15. Communicate Important to develop a communication plan for both internal and external stakeholders at the earlier stage of the process

  16. CAS Activities • CAS Task Force on Non-Traditional Practice Areas • CAS Advisory Committee on Enterprise Risk Management • CAS Risk & Capital Management Seminar

  17. CAS Task Force on Non-Traditional Practice Areas • Created in 1998 • Purpose was to formulate recommendations as to how the CAS can better support its members that are currently working, or wish to work in the future, in non-traditional practice areas • Report issued to CAS Board of Directors in late 1999

  18. CAS Task Force on Non-Traditional Practice Areas A recommendation was that the CAS should expand its education and research functions to support new, priority practice areas much as it did with DFA several years ago and it should concentrate on developing specific skill sets that have general applicability to a wide-range of practice areas, including Enterprise Risk Management

  19. CAS Advisory Committee on Enterprise Risk Management • Established in early 2000 as a result of the recommendation from the Task Force on Non-Traditional Practice Areas • Purpose is to identify research and education that the CAS should undertake in the area of Enterprise Risk Management and recommend methods, priorities, and timetables to the Executive Council for implementing that research and education • Report accepted by CAS Executive Council in late 2001

  20. CAS Risk & CapitalManagement Seminar • Replacement & expansion of the former Seminar on Dynamic Financial Analysis • Intended to provide continuing education opportunities for professionals interested in serving in a strategic role in managing risk for an enterprise • Topics • Dynamic Financial Analysis • Enterprise Risk Management • Capital Management and Allocation • July 8-9, 2002 - Toronto, ON

  21. Questions ?

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