Report on the IAA Activities in ERM

1. Report on the IAA Activities in ERM David Ingram, CERA Chairman Enterprise & Financial Risks Committee, IAA

2. IAA Background • Worldwide association of professional actuarial associations (62 Full Member and 26 Associate Member associations) MISSION: • To represent the actuarial profession and promote its role, reputation and recognition in the international domain; • To promote professionalism, develop education standards and encourage research, with the active involvement of its Member associations and Sections, in order to address changing needs.

3. ERM is new Focus of IAA • Now One of Top Priorities • Global CERA Treaty • Role of the Actuary in ERM Report • Enterprise & Financial Risks Committee • AFIR ==> AFIR/ERM

4. Global CERA Treaty • Not officially an IAA initiative • 13 Actuarial Organizations are signatories • Legal entity in Switzwerland owns CERA • 3 Associations are now certified to grant CERA • SOA – 700 awarded • IFA(UK) – 9 awarded • IAAust – 20 awarded • 3 Associations in process to be certified • CAS, South Africans, Netherlands

5. Role of the Actuary in ERM • Report to IAA Executive Committee – Summer 2010 • Actuarial USPs • Familiarity with strong range of quantitative risk management techniques • Rigor in approaching the assignment • Integrity in executing the assignment • Objectivity in communicating in business terms about the assignment • All Reinforced by the most demanding professional requirements.

6. Action Plan • Promote the position of actuaries in ERM Field • Support the Globalization of CERA • Provide Platforms for CPD in ERM for actuaries around the world • Support and direct research in ERM

7. Action Plan • To be executed by • Exec Committee • CERA committee • Enterprise & Financial Risks Committee • AFIR Section • Advice and Assistance Committee • Insurance Regulations Committee

8. Enterprise & Financial Risks Committee • Existing Work • ERM Report • CERA Report • Other Financial Crisis Report • New Work • Actuarial Review of Risk Management Practices

9. Enterprise & Financial Risks Committee • New Tasks from Role of the Actuary Report • Work with the IMF on projects relating to risk management • three projects subsequently initiated by Coleman & Ingram with Supranational Committee • Conduct a Survey of ERM Practices • to be started for Sydney • Construct a library of Case Studies • to be started by Sydney • Develop a package of material to promote ERM to actuaries • Work has started on document providing guidance on guidance for actuaries on ORSA – adapting a document prepared by the Groupe Consultatif

10. AFIR & ERM • AFIR is one of the longstanding sections of the IAA • AFIR objective - the promotion of actuarial research in financial risks • AFIR organises colloquia and publishes papers on the subject. • In 2011, is planning to adopt ERM as a key focus • AFIR will also take up new tasks from the Actuarial Roles in ERM report

11. AFIR & ERM New Tasks • Develop List of Top Outstanding ERM research questions • Develop a Web site for exchanging ERM Research References • Sponsor Local Meeting Panel Discussions on International approaches to ERM, Differences, Impact in Local Area • Find Speakers & Topics for Global ERM Colloquium in 2012 • Sponsor Webinars on ERM topics

12. ASB ERM Task Force • Two Discussion Draft Standard of Practice • Risk Assessment • Risk Treatment • Will be distributed for discussion in the spring

13. RISK MANAGEMENT THROUGH THE BUSINESS CYCLE Alice Underwood, PhD, FCAS Dave Ingram, FSA, CERA, FRM, PRM

14. Agenda The theory of plural rationalities The four seasons of risk The four risk management strategies Rational adaptability – a radical ideal Practical harmonization – the inelegant solution Risk attitudes and the insurance market 14 14

15. Plural RationalitiesFour views of risk Managers Maximizers Pragmatists Conservators 15 15

16. Maximizers’ view Risk is not very important – profits are important It’s fine to accept large risks, as long as the price is right Risk is mean reverting: Gains will always follow losses The best companies will have larger gains and smaller losses over time 16 16

17. Conservators’ view Increasing profit is not as important as avoiding loss Need to tightly limit risks The world is in a delicate balance Any major change could send things into ruin 17 17

18. Managers’ view Risk is measurable and controllable Risk and reward should be carefully balanced Experts are best suited to Help find risks offering the best rewards Manage these risks to keep firm safe 18 18

19. Pragmatists’ view The future is totally unpredictable You can’t control risk so there is no point in trying It is usually best to Avoid major commitments Keep options open Seek freedom to react to changing conditions 19 19

20. Would you say that your own risk attitude is: Managers Maximizers Pragmatists Conservators 20 20

21. Would you say that your own risk attitude is:

22. Would you say that your firm’s predominant risk attitude is: Managers Maximizers Pragmatists Conservators 22 22

23. Would you say that your firm’s predominant risk attitude is:

24. Dynamic beliefs Risk attitudes change with Changes in environment Changes in risk capacity New experiences This is true of Individuals Groups Firms 24 24

25. Agenda The theory of plural rationalities The four seasons of risk The four risk management strategies Rational adaptability – a radical ideal Practical harmonization – the inelegant solution Risk attitudes and the insurance market 25 25

26. Four seasons of risk 26 26

27. Four seasons of risk • Long term averages seem to hold up well • Hedging has the expected impact MODERATE 27 27

28. Four seasons of risk • Risky decisions pay off handsomely • Unhedged positions beat out carefully hedged positions BOOM 28 28

29. Four seasons of risk UNCERTAIN • Suddenly, things get really RISKY • Almost any course of action presents potentially fatal threats 29 29

30. Four seasons of risk • Many risks have turned into LOSSES • Risk management focuses on survival BUST 30 30

31. In 2007 and 2008, the risk environment for my business was: • Moderate • Boom • Uncertain • Bust

32. In 2007 and 2008, the risk environment for my business was:

33. Risk environment impacts risk attitude 33 33

34. Agent Based Model

35. How many times has your firm’s risk attitude changed between 2006 and now? • 0 • 1 • 2 • 3 or more

36. How many times has your firm’s risk attitude changed between 2006 and now?

37. Agenda The theory of plural rationalities The four seasons of risk The four risk management strategies Rational adaptability – a radical ideal Practical harmonization – the inelegant solution Risk Attitudes and the Reinsurance Market 37 37

38. Risk management strategies Diversification Loss controlling Risk trading Risk steering 38 38

39. Diversification Oldest type of risk management Spread exposures across different classes of risks Avoid large risk concentrations Formal diversification programs set targets for the spread of risk Maximums and minimums for various classes of risk ERM adds idea of interdependencies across classes Provides better quantification of the benefits of risk spreading 39 39

40. Loss controlling Most traditional form of risk management Identify and mitigate the most significant risks Commonly practiced by non-financial firms Also applies to financial risk Careful underwriting of loans / insurance policies Claims management & credit workout ERM has added inclusion of an aggregate, firm-wide view of risk 40 40

41. Risk trading Newer form of risk management Arose from trading desks and the insurance industry Focus on getting the price of risk correct Requires complicated models of risk, reward, and economic capital Can be applied on a transaction-by-transaction or other “siloed” basis Establishment of a consistent risk valuation on a firm-wide level is risk trading ERM 41 41

42. Risk steering Applies the ideas of risk trading at a macro level to the major strategic decisions of the firm Seeks the optimal risk / reward balance Tries to steer the firm in that ideal direction Fundamentally an enterprise-wide approach Some seem to think that only risk steering is “real” ERM 42 42

43. Favorite risk management strategies Conservators favor loss controlling Maximizers favor risk trading Managers favor risk steering Pragmatists favor diversification 43 43

44. The predominant risk management strategy of my firm is: • Diversification • Loss Controlling • Risk Trading • Risk Steering

45. The predominant risk management strategy of my firm is:

46. Pro-cyclical factors During each stage Group in control picks up followers The other groups shed followers Timing across firms not synchronized, but close enough to magnify the ups and downs of the market as a whole A retelling of the obvious? But the 4 risk strategies were identified over 25 years ago by anthropologists seeking to explain completely different situations Since then, these 4 groupings have been found over and over in many different contexts Can the insurance industry learn something useful from this framework? 46

47. Agenda The theory of plural rationalities The four seasons of risk The four risk management strategies Rational adaptability – a radical ideal Practical harmonization – the inelegant solution Risk Attitudes and the Reinsurance Market 47 47

48. Rational adaptability Discipline means sticking to your strategy no matter what Adaptability means aligning Risk attitude Risk environment Risk strategy 48 48

49. Rational adaptability 49 49

50. Agent Based ModelPreliminary Findings