Institute of Actuaries releases new enterprise risk management paper

The principles of enterprise risk management are playing an ever more important role in identifying and protecting against risk in financial services industries. This is the message of a timely report, ‘ERM for insurance companies - adding the investor's point of view’, which was published this week by the Institute of Actuaries.

The paper examines how the fundamentals of enterprise risk management can be applied to insurance companies and examines the roles of:

* Systemic risk; i.e. the potential correlation of the firm’s risks with those macroeconomic trends that are of concern to the general stock market investor
* Sources of model risk within a company; the willingness of a Board to accept significant extra risk arising from business models and strategies failing, such as potential breakdowns in liquidity or hedging instruments in times of crisis
* Agency risk; how the behaviour of management may or may not be aligned with the risk management of investors, including the influence of different remuneration packages.

Andrew Hitchcox, one of the authors, explains the potential importance of the paper: “The Walker Report into corporate governance of banks and other financial services recommended that Boards of financial services companies, in addition to the management and control of risk and decision-taking against current risk appetite and tolerance, known as ‘known risk’, should also bring more focus onto the forward looking aspects of risk taking.

“This means giving an explicit and dedicated focus to current and forward-looking aspects of risk exposure which may involve a complex assessment of the firm’s vulnerability to risks both known and unknown.

“The three types of risk identified and discussed in this paper were all features exposed in the recent financial crisis. The challenge now, and the challenge this paper rises to, is to seek ways to identify and prepare for them.”

Read the paper (PDF)

•Date: 27th Jan 2010 • Region: UK/World •Type: Article •Topic: Operational risk
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