One could argue that virtually everything one does, and does not do, influences thinking and decisions, so where are the boundaries?
ARLINGTON, Va., Dec. 11 -- The Casualty Actuarial Society issued the following news release:
As Enterprise Risk Management (ERM) has grown from buzzword to corporate must-have, the Chief Risk Officer, or CRO, has emerged as an important corporate position.
At insurers and other financial firms, actuaries commonly fill the CRO role. And the job is growing in complexity while rising in prominence, as three risk officers pointed out at the Casualty Actuarial Society's Annual Meeting, held in Lake Buena Vista, FL, November 11-14.
Moderator Stephen Lowe, a managing director at the consulting firm of Towers Watson, led a broad roundtable discussion with Barry Franklin, senior vice president and CRO of general insurance for Zurich North America; Patricia Matson, vice president of financial risk management at MassMutual Financial Group; and Mark Verheyen, a senior vice president and CRO of CNA Insurance Companies.
Most major insurers have a CRO in their senior management team, and even in these uncertain financial times, their offices are growing, Matson said. Companies new to ERM are figuring out how to structure a program while regulators worldwide are hoping to use a company's ERM program to help them monitor the company's financial strength.
Not all companies design their ERM programs the same way. At CNA, Verheyen said, he works with approximately 20 people in three core areas:
* Risk and capital modeling, in which a team of people develop computer models that help determine how much capital each business area requires. This knowledge helps the company determine whether an area's profits justify the amount of capital it needs. The group also helps in evaluating reinsurance purchasing.
* A catastrophe modeling group which builds tools for use by each business area to better assess and price for catastrophe risk.
* A core risk management and purchasing group, which performs more traditional risk management functions, such as helping CNA purchase its own workers' compensation insurance.
Within Zurich, the work is organized by segment - life insurance, general (property-casualty) insurance, group operations and a separate function for Farmers Insurance Group, a major subsidiary. Each of these segments across the world has both global and regional CROs, said Franklin, who fills the role for general insurance in North America. Worldwide the group employs about 150 in ERM activities, he said, if you include the central modeling team and those responsible for internal controls over financial reporting. The Zurich North American ERM operation has a team of five, including people with backgrounds in actuarial, finance, underwriting, claims and internal audit. "As we continue to build the team," Franklin said, "we'll likely add more people with an actuarial background."
At MassMutual, Matson said, the central ERM function includes about 20 employees, including six that handle control testing similar to that required by Sarbanes-Oxley. Matson leads a team that develops economic risk metrics, such as economic capital, to support enterprise decisions based on consideration of risk and reward.
All this enjoys significant support from company executives and boards of directors, the CROs agreed. It helps businesses take intelligent risks, Franklin said.
As the C-suite learns to depend on ERM, regulators are following suit. By 2015, the National Association of Insurance Commissioners will require an ERM-style Own Risk and Solvency Assessment, or ORSA. It will require that a company carry out one of the fundamental parts of enterprise risk management - a self-assessment of how well the company manages the risks raised by its business plan.
The panel generally welcomed the regulators' approach - trying to avoid making the ORSA rules prescriptive. Insurers generally prefer regulations that focus on the goals of the regulation rather than a "check-the-box" approach that generates a lot of busywork for companies but might not accomplish the regulators' goal.
"The NAIC was very flexible" in its original requirements to find out how insurers assess their own ability to manage risk, Verheyen said. He noted the approach may cause confusion for some insurers, because the flexibility the NAIC provided means there isn't a detailed checklist of items to provide.
While Franklin liked the idea of an ORSA, the regulators' inquiries raise questions for him. He observed that the regulators require a formal statement of risk appetite, in which the company states which risks it wishes to assume and which it wishes to minimize or avoid.
Such a statement would be difficult at Zurich, a company that writes both life insurance and property-casualty and does so across the globe.
"Is it possible to construct a single risk appetite statement that covers the entire Zurich Group and satisfies the preferences of multiple regulators?" he asked rhetorically. "We decided that would end up being a camel with a dozen humps. How could that be summarized in an ORSA report?"
Complicating matters is a drive to harmonize financial services regulation worldwide. This would, in theory, subject companies in different countries to similar levels of regulation. And it could streamline regulation, in theory, for global carriers. But there are challenges.
Even a simple balance sheet can get complicated across political boundaries, as moderator Lowe pointed out. Some countries rely on GAAP standards. Others use IFRS. Many U.S. insurers report on a statutory basis. And ERM often focuses on economic value - the fair market value of everything the insurer owns - and economic capital - the economic cost of the risks an insurer takes on. Which should a regulator require? Lowe asked. He responded that any of them would be acceptable "as long as it's not all of the above."
Matson worried that regulators could seek harmony by writing more regulations. "I think the intent is very good," she said. But the level of detail is amazing "in a bad way." It's hard, she said, to have a common framework that all regulators accept and can still satisfy the business needs of management in their strategic decision making processes.
To make sure U.S. insurance concerns are heard, top risk officers formed the CRO Council. The council tries to advise regulators on any issues relating to ERM practices and is analogous to the CRO Forum, which focuses on European issues. The council also develops papers outlining sound practices in the fast-evolving trade, Verheyen said.
Actuarial training, with its focus on understanding both the underwriting and financial aspects of insurance, is a great starting spot for a would-be CRO, Franklin said. "But you don't know everything," he said. "You need to understand at a ground level how things are done within an insurance company."
Getting involved with industry committees is an important way to start working toward the CRO chair, especially with committees looking into emerging risks, according to Matson and Verheyen. Active participation is important in an emerging field like ERM, Verheyen said. "The playbook for how we do our job is being developed as we speak," he said.
The Casualty Actuarial Society fulfills its mission to advance actuarial science through a focus on research and education. Among its 5,700 members are experts in property-casualty insurance, reinsurance, finance, risk management, and enterprise risk management.
TNS rd43 121214-JF78-4140667 StaffFurigay