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Enterprise Risk Management
Risk management is fundamental to how companies perform and more generally how capital markets
behave. How do we balance demand for financial growth and success with the need to pay enough
attention to the risk levels that are building up within businesses?
So what is ERM and why is it important for companies?
ERM is a holistic management of all risks a company faces. At its best, it cuts across the whole organisation,
touching on each business unit and developing an integrated approach to risk management. The key
objective of any company is to maximise and protect shareholder value - ERM achieves this through balancing
limitation of downside risk with exploitation of the upside potential.
What does ERM typically look like?
ERM is about creating a framework from which risks and opportunities can be identified and managed.
Typically this includes:
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Identifying current and emerging risks
Adopting standard risk language and definitions
Setting out the company’s risk appetite and tolerance
Consideration of concentration of and diversification between risks
Modelling, monitoring and reporting mechanisms and tools
Provision of management information to stakeholders
What industries is ERM applied to?
ERM has traditionally been used in the banking industry due to regulatory requirements under Basel II. With
the arrival of solvency II in 2012 ERM will also play a key role for European insurers. .However, ERM is
increasingly being employed in non-financial industries that are looking at ways of using their resources more
efficiently.
What risks are typically covered by ERM?
The main risks you would expect to see within an ERM framework include:
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Financial risks, such as market, credit, liquidity and insurance risks
Strategic risks, for example the risk of making a poor business decision
Operational risks, perhaps a failure in process or a project being executed poorly
Compliance risks, such as not meeting regulatory or legislative requirements
Reputational risks, where an action could damage the brand value of the business
Importantly, with ERM, these risks are not managed individually, but the risks of interdependencies and the
benefits of diversification are taken into account.
Why is there an increase in ERM now?
Companies are finding that ERM provides additional benefits in a tough economic climate including:
 Ability to respond better in crisis
 Key indicator for rating agencies such as Moody’s and S&P.
 Creating transparent risk reporting for the benefit of investors
What role can actuaries play?
Actuaries today are extremely well placed to take key roles in the emerging field of ERM and many actuaries
are already working in this area. There are expected to be increasing numbers of actuaries acting as
important members of risk functions as they become more regularly established into business practice.
Where there is uncertainty then actuaries use mathematical and statistical techniques to undertake financial
modelling to illustrate possible outcomes. They do so under a professional code and standards designed to
give assurance on quality and consistency.
Membership of the Actuarial Profession equips actuaries with:
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An acknowledged and deep understanding of how risks can affect organisations (companies,
government, social systems and others).
Renowned training in the modelling and quantification of financial risks to provide a sound technical
foundation to the broader understanding of risk.
Understanding of the dynamics of organisations and the perspectives of different stakeholders.
o Governments who seek the attainment of broader political and social goals;
o Insurance and pensions beneficiaries who seek security and attractive product;
o Regulators who seek systemic stability; and
o Capital providers who seek value creation.
Training which has a specific focus on the communication of concepts and technical details clearly to
a wide variety of audiences.
The support of a respected professional body, with an effective disciplinary scheme, continuing
development programme and a track record of mutual support.
An education programme that covers ERM and a community of actuaries already practicing in the
field.
Membership of the Actuarial Profession, aligned with hands on experience in key business roles within
insurance and other relevant areas, is accompanied by:
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A general capability to consider long term outlook and understand relative probabilities, which fits
naturally with the comprehensive assessment of risks.
A mastery of quantitative business mathematics – putting numbers on and constructing models
around scenarios and probabilities – that marks them out from other numerical professions.
Expertise in marrying together numerical skills with business and market acumen and understanding
An ability to construct and apply feedback loops and control cycles to risk assessments and
management techniques.
A facility to use quantitative approaches and mindsets when considering and communicating Risk
topics, including, in ERM, risk appetite.
A longstanding professional ethos that understands the importance of taking account of the needs
and views of all different stakeholders
Effective communication of risk characteristics, impacts and likelihoods
Experience operating within a tightly regulated environment.
The Actuarial Profession has also recently adopted the Chartered Enterprise Risk Actuary (CERA)
qualification, which provides a globally recognised demonstration of ERM expertise.