By Michael J. Moody, MBA, ARM

ERM--ANOTHER VIEW

Life actuaries get involved

The Society of Actuaries has several research projects under way and has established a separate membership section for enterprise risk management.

Over the past three to four years, the Casualty Actuarial Society (CAS) has developed a strong interest in and involvement with enterprise risk management (ERM). In fact, several of its members have been at the forefront of the early development of the ERM concept, serving as conceptual contributors to efforts to define and quantify ERM within the financial services industry. This early work has served as the basis for the current growth in ERM. In addition, CAS members have gone on to become chief risk officers for several financial services organizations.

For the most part, CAS was the only actuarial group that was involved with ERM. However, that has recently changed as the Society of Actuaries (SOA) has become more involved with the ERM concept as well. Within the last few months, SOA has begun a significant campaign to educate its membership about the ERM concept. Currently, it has several research projects under way and has established a separate membership section for enterprise risk management. In addition, SOA recently published its first issue of a newsletter directed at ERM. While much of SOA's work is specific to the life insurance industry, it does illustrate the increasing visibility of ERM.

Interest grows

One organization that has begun to take a more active position with regard to ERM is Northbrook, Illinois-based Allstate Insurance Company. Over the past four or five years, ERM has been a major agenda item for Allstate's board and executive management. They established a formal ERM program in that timeframe. Allstate's ERM program is decentralized with much of the authority resting with the individual operating units. Randy Tillis, FSA, MAAA, is the head of the Financial Enterprise Risk Management Department. Tillis moved to the Enterprise Risk Management unit about eight months ago. Prior to that, he worked in the Financial Corporate Modeling Unit of Allstate where he was involved in the actuarial opinion and random testing of the various Allstate life insurance products.

Tillis says he moved to the ERM department in large part because "my background gave me an understanding of what Allstate's projection assumptions were." Furthermore, he was also "aware of where profits were going to emerge, and what things were going to drive them." According to Tillis, his background helps him "get a better handle on quantifying possible corporate opportunities." And while Allstate does have a corporate ERM department, it deals more with planning-related issues and the property and casualty side of the business. Tillis, on the other hand, does most of the research with regard to the life side of the business. Once the research is complete, Tillis says he "presents the results to management and they decide what to do with it, including possible changes in strategy, if needed."

For the most part, Tillis' role within the ERM program is advisory. He does frequently interact with the corporate ERM department; however, risk mitigation is not currently part of his job function. Rather, he works with the business units and "offers suggestions on appropriate risk mitigation strategies. It is left to the individual operational managers to implement the selected strategies."

As with any new venture, implementing ERM can have its challenges. The individual operating units sometimes take actions that may not be the best strategy for the company. However, this is where ERM can really shine, since it takes a more global view.

Value creation

While SOA may have only recently begun to focus on ERM, it has quickly grasped the importance of value creation to the entire ERM concept. For example, in his recent article titled "Where is ERM Heading?" Dr. Shaun Wang, FCAS, ASA, research director of SCOR Group, points out that "value creation should be the hallmark of ERM, as it will be the ultimate thermometer for its degree of success." Dr. Wang notes that, while it is sometimes difficult to document or quantify results, "ERM has many aspects of value creation, including risk opportunities, robust risk intelligence information, alignment of incentives, cost reduction, and better coordination."

Allstate also realizes the importance of value creation. Tillis' work routinely quantifies the various risks facing the company and assists with setting strategy. Many times he is called upon to determine if a risk is material. For example, a recent project grew out of a concern about the "bird flu" outbreaks. Tillis' unit provided management with a study that measured this risk. An additional factor of the study was to "determine the risk's ultimate impact on Allstate's results," Tillis said. This was important because this risk crossed a number of operating units and rather than provide a narrowly viewed report from each individual unit, they were able to provide management with a study that was focused on a holistic, corporate view.

Another major area of involvement for Tillis is business continuity. A portion of the concern for risk came out of the power shortages that occurred in the Midwest and on the East Coast last year. In response to these situations, Tillis assisted in developing plans that considered several different scenarios in response to various continuity issues that arose. A number of contingency plans have emerged as a result of this work.

These projects are directed at assuring that Allstate maximizes its business opportunities. But, they also assist in the overall value creation aspects of ERM. First, by limiting the effects on the company's bottom line, they reduce earnings volatility. In addition, Allstate is showing regulators and rating agencies that it has an ERM plan in place. By advising these groups that it has a best practices ERM program, Allstate feels that it should be able to materially effect value creation and become more attractive to shareholders. It is these potential positive effects from ERM that Tillis finds so interesting and challenging.

Conclusion

As with many financial services companies, Allstate has embarked on developing its own proactive ERM program. To date, significant progress has been made. Based on his experience thus far, Tillis believes that ERM can provide a competitive advantage to those organizations that move forward and embrace the ERM concept. He notes that ERM can provide companies with a positive benefit because it offers management a "better perspective of how the various risks interact," and what can be done to better manage them. At the end of the day, Tillis says, "this broader view of risk management and the aggregation of risks is really just good business."

The author

Michael J. Moody, MBA, ARM, is the managing director of Strategic Risk Financing, Inc. (SuRF), an independent consulting firm that has been established to advance the practice of enterprise risk management and to actively promote the concept of enterprise risk management by providing current, objective information about the concept, the structures being used, and the players involved.