Actuaries Assess ERM
A trio of risk managers weigh in on creating a culture of risk awareness.
From the fallout of the financial services meltdown to the specter of swine flu, risk man- agers have had their hands full.
Insurance Networking News asked Ron
Pridgeon, corporate property/casualty
actuary, Tim Kelly, director of corporate
risk and Dale Hall, chief life/health actuary of Bloomington, Ill.-based COUNTRY Financial how the carrier harnessed
its 15-member enterprise risk management (ERM) team to mitigate risk.
Ron Pridgeon
INN: What was your risk management
strategy for 2009?
DH: Our ERM team carefully reviewed
and tested its plan for two adverse situations: market risk and H1N1.
Regarding market risk, a dramatic
decline in the stock market and increased
bond impairment prompted the ERM
team to develop a stress test in April. The
stock market had dropped 20% since
January. Representatives of the actuarial,
corporate risk, controllers and investment
divisions developed a model to calculate
impact on surplus and unrealized
gain/loss under various scenarios.
Existing mitigation strategies included
diversification of asset types and indus-
tries. Stress test results prompted the team
to further consider reducing equity
exposure if conditions warranted. In
addition, risk reduction would be
weighed against the reward of equity
investment. Throughout the recession,
the team has monitored and analyzed
monthly income reports and financial
statements for changes in surplus and
unrealized gains/losses.
Dale Hall
inherent risk of losing this
data or having it stolen
can have significant financial and reputational
impact on the organization. COUNTRY management identified the area
of data encryption as one
that required stronger
controls and additional
technology to help mitigate risk.
Proper internal control
over financial reporting is
a requirement imposed
by Sarbanes-Oxley Act
and other federal regulations. The risk of not complying with these regulations would have significant impact. We acquired
new software to monitor
program change and
access controls in order to
strengthen internal control over financial reporting.
culture from the top down
• incorporating a wide variety of
economic scenarios for stress tests
• establishing a robust liquidity man-
agement system
• understanding the limitations of
models and related assumptions
• realizing that risk management is
most effective when used to prevent a
crisis rather than to manage one.
A strong risk management culture
must start at the top. It is important for
the lead risk officer to have access to
the CEO and the board. And, ERM
allows those within the organization to
ask questions and ensure we’re reviewing the same analysis from different
angles.
INN: What are the key technology
innovations you have implemented?
TK: The process of identifying risks
across the company highlighted the
need for some systems improvements.
Data security and privacy of customer information is a risk common to
any organization that relies on this
information to conduct business. The
INN: How does your
team’s approach to ERM
mirror industry strategies?
DH: Our ERM effort incorporates several strategies recently outlined in the
“The Financial Crisis and Lessons for
Insurers,” authored by the Society of
Actuaries and the Joint Risk
Management Section.
Those strategies include:
• securing a strong risk management
Tim Kelly
INN: What benefits have you seen
from your ERM efforts?
RP: ERM efforts have helped COUNTRY
identify risk and shape its risk appetite.
The never-ending endeavors to elevate
awareness of risk means we have fully
embraced its role as a risk shaper.
ERM is not so much a tool or process
as it is a culture of uncovering, understanding, quantifying and addressing
business risks. Developing an awareness
of risk throughout the organization
allows us to uncover the unknowns and
develop a response structure to minimize
their impact. INN
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