Role of Actuaries in Enterprise Risk Management Sonjai_Rajiv(17 GCA) Final Copy

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Global Conference of Actuaries

Role of Actuaries in Enterprise Risk Management

Rajiv Mukherjee and Sonjai Kumar

Executive Summary

The paper discusses the role of actuary in the area of Enterprise Risk Management and to explore this

new field because of their good understanding of the insurance business. The paper discusses the

components of risk management where actuaries can be involved in the risk management in insurance

business and also in other wide financial area such as banking, mutual funds etc. The paper advocates

that the actuaries have the required technical skills to excel in other financial areas in risk

management, however they have to ramp up their financial risk management skills. The paper

identifies the Liquidity, Credit risk and Operational risk as the areas where actuaries have to focus to

make a foray in the other financial market in risk management. The paper also recommends the steps

for the actuarial profession to make to market actuarial skills in the area of ERM in wider field.

1. Introduction

The last two decades have been a focal point in the history of financial services. The multiple failures

in the risk events witnessed during this periods which had brought risk management into sharp focuss.

It is into this backdrop that Enterprise Risk Management has emerged as one of the major areas of

work within risk management.

It is now seen as a potent answer to the “Changing risks expecting the unexpected”. The idea of

integrated risk culture has become a talking point. The position of Chief Risk Officer has now been

recognised as a critical position. This can become wider fields for actuaries in Insurance and other

areas opening up new avenues of opportunities and enhancement in visibility to wider public.

2. Evolution of ERM

There are many debacles happened majorly in the last two decades leading to billions in claim

settlements, lost revenue and bad reputation. Some of the few well know losses are Bearing Bank (1

billion USD), Morgan Stanley (79 million GBP), Equitable Life ( closed to new business) etc. This

over the years have led to change from silo based thinking of risk management towards a more

integrated approach which is taking shape as ERM.

It was felt strongly that a risk management culture needs to be made an integral part of all areas of the

business thought process that will lead to a proper allocation of capital and performance measurement

on risk adjusted basis. This captures the reality as to where the company is heading. Insurers and other

organisations are giving enterprise-level risk management increasing attention, high-level

accountability and clear responsibilities befitting a legitimate strategic function and discipline

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Changing priority focus to risk management towards ERM

In 1992, the London Stock Exchange introduced new regulations following a series of high profile

corporate frauds and accounting scandals. Following the debacle in the insurance industry resulting

from the collapse of insurers and their failure to honour insured pensions and other guaranteed

benefits, the U.S. Department of Labour promulgated an interpretive bulletin in 1995 dealing with the

selection of safe annuity providers. A year earlier, the NAIC (National Association of Insurance

Commissioners) issued a major solvency regulation in the form of risk-based capital requirements for

property/casualty insurance companies.

The development of national standards on Risk Management began with the first-ever Australia/New

Zealand Risk Management Standard in1995 creating a generic framework for the risk management

process as part of an organization‟s culture. The supervisory authorities for the financial services

industry include Canada‟s OSFI, the United Kingdom‟s Financial Services Authority system of risk

based supervision and rest of the world is following it up.

In 2004 Basel II moved banking practices towards risk sensitive capital requirements and assessments

based on banks‟ internal systems as inputs to capital calculations.Minimum capital standards under

pillar 1 were a robust implementation of supervisory review of capital assessments (pillar 2) and

market discipline (pillar 3).

Similarly, the Solvency-II programme is also based on three pillar approach in the insurance sectors

started in 2008 and is slated to be implemented in 2016 involving all EU countries. Strength of

Actuaries

The key working areas of actuaries historically have been Pricing, Valuation, Modelling ,Asset

liability management (ALM) and Experience analysis etc. The key strengths of actuaries are

Long term understanding of financial business and cash flows e.g long term

assumption setting

Applying the quantitative skills/tools to price and value risk

Knowledge of insurance business and its application

Dealing with various stakeholders to communicate complex results in simple terms.

Dealing with such projects as Solvency-II successfully which shows ability to adapt

rapidly in a completely new business environment.

Historically, actuaries have been active in managing the mortality, lapse, expense and interest rate risk

on silo basis. However, over the last decade or so the playing field changed a lot with increasing

complexity of the products being developed today and the increased competition from banks, mutual

funds, and other financial institutions, are forcing actuaries to increase their risk analysis skills and

perform more testing before launching a new product into the market. In our opinion, actuaries have

very good understanding on the liability side of the insurance business; however they have to develop

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themselves in the financial side of the business. These strengths of actuaries make them a good a

candidate for the ERM as risk based capital is central to the ERM culture and risk management help

improve the shareholder‟s value..

Evolution Solvency-II

Solvency II is based on economic risk-based solvency requirements across all EU Member States. The

insurance companies are required to hold capital against market risk, credit risk, operational risk and

underwriting (life, non-life and health) risk. Solvency-II is designed on three pillars approach:

Pillar 1: contains the quantitative requirements designed to capture insurance, credit, market,

operational, liquidity risk and set aside the capital for each risk and allow diversification of risks to

arrive at overall capital requirement.

Pillar 2: contains qualitative requirements on undertakings such as risk management as well as

supervisory activities. Specifically, insurers must carry out their Own Risk and Solvency Assessment

(ORSA) to quantify their ability to continue to meet the SCR and MCR in the near future, given their

identified risks and associated risk management processes and controls.

Pillar3:serves to strengthen market discipline by introducing disclosure requirements.

Role of actuaries

Actuaries are actively involved in the determination of economic capital under the Pillar-I based on

risks of the company, using the internal model or using the standard formula. As capital is a function

of risk, therefore, there is a direct value addition in optimization of capital by managing the risks

better. This will also enhance the profit of the company in terms of embedded value or yearly profit.

Actuaries have been at the forefront of this modelling exercise as they know the intricacies of the

business.

Under the Pillar-II, there is a plenty of space available for actuaries to get involved in insurance and

financial risk as the risk management helps in optimizing the use of capital and maximizing the profit.

Actuaries are also involved in Own Risk and Solvency Assessments (ORSA) reporting

Under Pillar-III, producing the end results templates for the final implementation-This is most critical

of all. As it is anticipated that under Solvency-II the solvency reporting will be more frequently done

so an automated template is required to be built. Many companies are using this opportunity to discard

the resource deployed in these activities by completely revamping the reporting methods and IT

infrastructure to support that. This is a huge endeavour and actuaries are at the forefront of that.

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The importance of Solvency-II lies in the fact that it has thoroughly challenged the profession‟s ability

to handle a project of such scale and brought out the fact that actuaries can handle end to end risk

management in insurance industry. This suggests that profession can foray into the ERM area which

is applied across the company and has much bigger scale and complexity. In order to perform the risk

management exercise, there is a need to define the risk management framework. Apart from other

requirements under the risk management framework, one of the key components of risk management

framework is risk management control cycle which actuaries have been aware and using in their

regular working cycle.

3. Risk Management control cycle

The key components of risk management control cycle are Risk Identification, Risk Measurement,

Risk Management, Risk Monitoring and Risk Reporting (IMMMR).

Risk Identification

Risk identification is based on top down and bottom up approach where in top down approach risk is

identified at entity level while in bottom approach risk is identified at function level. The key places

of risk identification are at a time of business planning, product pricing, ongoing product management

etc.

Risk Measurement

Risk is assessed in the context of the risk appetite of an organisation. In practice, the risk appetite

should be agreed and given in clear terms before risks are actually measured. Risk assessment

includes the question of whether a risk can be quantified, as well of the question of how to sensibly

aggregate risks. The key techniques of risk measurements are calculation of Economic Capital, VaR,

SST etc.

Risk Management

Risk management is performed through (Transfer risk)- to third party by paying small premium;

(Risk Removal)- by not venturing into the risky opportunities; (Risk Reduction) - by managing

through setting up processes and control; ( Risk Avoidance)-if it possible to avoid such as not to

write options or guarantees under the product; ( Risk retention) - if it is not possible to transfer,

remove, reduce or avoid. Risk management is a key area in managing the residual risk and risks lying

on extreme left tail of the distribution.

Risk Monitoring

Key risks are monitored through management information; Monitor impact on key metrics such as

economic capital, liquidity and monitor early warning signals through SST, trend information and

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analysis of forecast. Risk monitoring helps in feedback loop to risk identification and risk

measurement. Without this process, the risk management exercise would be incomplete, so this is a

very important link the risk management control cycle.

Risk reporting

4. Risk reporting is performed by informing the key stakeholders such as Senior Management,

Board, and Board sub-committees such as ALCO, Risk Management Committees Regulator,

Rating Agencies and Policyholder/Bank customer. Application of risk management in

Life Insurance and Banking

Actuaries with their current knowledge and enhancing it to risk management can be very useful in

entering into ERM area not only in insurance sector but also in other financial institutions such as

Banking, Mutual fund etc. In order to enter into the other wider financial areas, actuaries have to

enhance their skills towards financial risk management.

Actuaries can help in managing the risk using the risk management framework of IMMMR.Risk

identification is the first key step in moving towards the risk management. The key risks in life

insurance are

Insurance risk ( Mortality/morbidity, Lapse risk, Expense risk)

Financial risk ( Market risk, Interest rate risk, Equity risk, Foreign exchange

riskLiquidity risk, Credit risk)

Operational risk

Others- Regulatory risk,Legalrisk,Catastrophe risk

The key risks in banking area are

Credit risk, Liquidity risk, Interest rate risk, Market risk, Operational risk, Other risks

(regulatory ,legal, reputation )

Risk identification

Life Insurance Sector

The key strength of actuaries lies in the understanding and quantification of liability. Traditionally

actuaries have been involved in risk identification of mortality risk, lapse risk, expense risk and

interest rate risk. They have also been active to limited strength in identifying the credit and liquidity

risk based on credit rating and cash flow profile of assets and liability respectively.

Risk identification under the Operational risk have been in a qualitative way, however over the

recent times there have been efforts to quantify the operational risk. The area of operational risk is in

evolving stage with common consensus that it is very inconsistent and difficult to measure and

manage. Actuaries can develop the tools and techniques to quantify the operational risk as they are

conversant with skewed statistical distributions and extreme value theory required for such

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quantifications. This will provide them with big opportunity to enter into the other financial areas

such as banking and mutual funds facing similar operational risk. The key to the identification of

operational risk is good understanding of business within the company.

Operational risk could be the area of opportunity for actuaries in insurance and other financial

sector

The example below helps in understanding the risk management control cycle of IMMMR show using

life insurance and banking products.

The key risks under the life insurance company selling Term, Non-par traditional product and unit

linked products would be

Products Class Key Risks

Term

*Mortality

*Lapse and

*Expense

Non-Par Traditional

Product *Interest rate

*Lapse

Unit linked

* Equity risk

*Policyholder bear the most of the

risk, however there are marketing

risk,regulatoryrisk,misselling risk

impacting revenue and reputation

Banking Sector

Actuaries may venture into the banking industry by enhancing their risk management skills in the

financial risk area. The key difference between the insurance and banking sector is the nature of

assets and liability. In the insurance sector, liabilities are longer and assets are generally not as

long as tenure of liability which gives duration mismatch risk to life insurance. On the other hand

in the banking area, liabilities are of shorter tenure such as Savings and Current account, Fixed

Deposits, Recurring deposits etc. whereas assets such as loan given to customers are longer in

tenure. The key risks arising out of the banking business are:

Products Class Key Risks

*Savings and Current

accounts

*Fixed Deposits

*Recurring account

*Interest rate risk

*Liquidity Risk

*Credit risk

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Risk measurement

The key tools available to measure the risks in a quantitative way are

Assets and Liability (ALM) Management

Value at Risk (VaR)

Economic Capital (EC)

Stress and Scenario testing (SST)

Others- There are other ways to measure the risks but not discussed here.

Life Insurance Sector

Actuaries get heavily involved in quantification of risks using all the above tools. ALM management

is used to quantify the interest rate risk either by calculating the duration of assets and liability or by

observing the gap between the assets and liability cash flows. Any mismatch between the duration of

assets and liability is an indication of exposure of portfolio against change in the rate of interest. The

interest rate risk arises due guarantees given and the risk is of not meeting the guarantees.

The VaR is defined as the maximum loss to the portfolio over a given period of time ( often a day or

year) at a given confidence level ( 95% or 99% etc) due to movement in the market risk factors such

as equity, commodity prices, interest rate, foreign exchange. The calculated value at risk is the

maximum exposure that a financial institution would be at, if event occur.

Historically, actuaries have not used VaR as a risk management tool, however given their application

to Statistics; they can equip themselves to use the VaR in the calculation of financial risk exposure

due to equity, interest rate and foreign exchange (if any) and its impact on the portfolio. The three

methods used in the calculation of VaR are Historical method, Variance and Co-variance method

and Monte Carlo Simulation; actuaries can apply themselves in the management of market risk

arising due to guarantee non-par traditional products and Unit linked products in life insurance

business using above methods.

The Economic Capital(EC) is the amount of financial resources that an institution to hold to ensure

the solvency of the company at a given level of confidence level and given time period. The EC

concept is similar to VaR concept to work out the cost of loss at a specified level. In the developed

market, capital based on risk is becoming more of norm than “ good to do” thing, the entire capital

calculation under Solvency-II is based on the Economic Capital either using the internal model or

using the stresses specified in the QIS-5.Actuaries are getting heavily involved in the implementation

of Solvency-II in the calculation of capital under the Pillar-I and in Risk Management under the

Pillar-II. As the implementation of Solvency-II starts, Actuaries would be soon be involved in the

Pillar-III where the Company has to do lot of disclosures (both public and regulatory).

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The insurance company selling term, non-par traditional and unit linked product would calculate the

EC for each risk and also allow for diversification as shown in the (example) graph below.

In this example, it can be seen that post diversification risk capital is lower than sum total of

individual risks. Actuaries have been heavily involved in this exercise.

Stress and Scenario Testing (SST)

VaR provide summary of risk through a single number; this is a good measure at describing adverse

event that occur three or four times a year, however, VaR is relatively poor at capturing the tail of the

extreme events distribution. Stress and Scenario testing (SST) is more appropriate as they focus on

only on extreme event.

Stress testing quantifies the loss under the extreme event without assigning the probability of

happening of event. Its goal is to provide insight into the portfolio behaviour that may result from

large movements in key risk factors and to pre-empt the management action if such event is to happen

in practice.

Scenario analysis is a top down approach which help the management understand the impact of

unlikely catastrophe event such as major change in the external macro-economic environment that

will have effect well beyond any immediate impact on the value of the portfolio. The design of the

scenario analysis is a complex and difficult process that draw expertise of many different people from

diverse background.

The SST can be used to recognize the impact on the key metrics of the insurance company such as

Annual Profit (AP)

Embedded Value (EV)

Solvency Margin (SM)

New Business Margins (NBM)

050

100150200250300350400450

10050 75

150

60

435

125

310

Fig in Cr

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The chart below describes the mapping of risks with the products, stressed output to take risk base

decision.

The bubbles in extreme right show the range of outputs from the stresses. Based on these outputs of

the Key metric (AP, EV, SM and NBM) actuaries can advise the management which risk affect which

product adversely and require management focus. The key in the assessment and success of SST is the

identification of Stress and Scenarios that is likely to happen with remotest possibility in order for

management to keep ready the mitigation plan.

Banking Sector

The same four tools (ALM, VaR, EC and SST) described in the insurance sector for the quantification

can be applied to the banking industry as well. The key to the application of these tools is to

understand the banking business, mapping of the risks to the products and its link to the stresses to

take risk based decision. In the banking business, assets are longer than liability, so the duration of

assets would often be longer than liability duration which leads to assets and liability mismatch risk,

liquidity risk and interest rate risk. In term lending Financial Institutions or Housing Finance

subsidiaries of Banks the ALM mismatch is significant as they work on „borrow short lend long‟

scenario. When the assets are longer than liability, economic uncertainty may lead to more withdrawal

from the banking system leading to the liquidity risk and if the interest rate rises, there is a risk of loss

on the assets. Adverse economic activity may also lead to credit default. Given such risks, actuaries

can venture into the banking business and use the skills to convey the message to key stakeholders.

This is credit risk

Mortality

Interest

Lapse

Expense

Equity

Term

Non-Par

Unit Linked

AP

EV

SM

NBMMM

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The other two key risks which require more in-depth understanding by actuaries‟ are Liquidity and

Credit risk quantification in the banking system.

Liquidity Risk

Liquidity risk in banks arises due to two reasons, one on the liability side and other on the asset side.

The liability side reason occur when the bank‟s account holders seek cash immediately, in this event

the bank has to raise additional fund or sell assets to meet the withdrawal. This scenario is also

noticed when interest rates move up. Existing deposits may be pre closed (without penalty) and new

deposits at a higher rate may be made depending on the duration completed on existing deposit and

financial feasibility to do this type of transaction. Similarly when the interest rates drop, short term

working capital loans may be pre closed (without penalty) and fresh drawings may be made by the

borrowers at a revised rate. The asset side liquidity risk arises when borrower draws on loan

commitment either by way of unutlised cash credit line or undrawn short term loan, This is essentially

interest rate risk that can lead to „liquidity risk‟ and impact profitability. The bank must fund the loan

immediately which creates liquidity risk. Banks can raise liquid fund from three sources, one is by

selling the liquid assets such as T-bills immediately with little price risk and low transaction cost,

second way is to borrow money from the market to the maximum amount and third is to use any

excess cash reserve over and above the amount held to meet the regulatory reserve requirement. This

may lead to forced sale of liquid assets with good yield. The measures of liquidity risks are:

Net Liability Statement

Peer Group Ratio Comparison

Liquidity Ratio

The other key area in Banking is the behaviour of low cost Savings and Current Accounts (CASA).

Behaviour of CASA and term deposits are performed through simulation exercises – the type of

exercise the actuaries are comfortable with.

Interest rate swaps (IRS) and credit line with other banks are to judiciously exercised by the fund

managers in the Banks to optimise the profitability. As Actuaries understand the pricing mechanism

well, they can contribute heavily in offering advise to the ALM, Investment committees.

Net Liability statement

A net liability statement is list of sources and uses of liquidity which provide banks net liability

position.

Peer Group Ratio Comparison

This method compares certain ratios and balance sheet features of banks such as “Loan to Deposit”

ratio, “Borrowed Fund to Total Assets ratio” with the similar size and geographical location. A high

ratio of loan to deposit and borrowed fund to total assets means that banks relies heavily on short term

money market rather than core deposit on fund loans. This could mean future liquidity problem if

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bank is at or near its borrowing limit in the purchased fund market. Similarly, a high ratio of loan

commitment to assets indicates the need for high degree of liquidity to fund.

Ratios Bank-A Bank-B

Borrowed Fund to total Assets 22% 30%

Core Deposits to Total Assets 55% 40%

Loan to Deposits 54% 90%

Commitment to lend to total assets 36% 60%

In the above example, Bank-A uses core deposits much more than borrowed funds to get its liquid

funds. The Bank-B is subject to greater liquidity than Bank-A. Further Bank-A had loan commitment

to total asset of 36%, while Bank-B had much greater ratio of 60%. If these commitments are taken

down, Bank-B must come up with cash to full fill these commitments more than Bank-A. Thus, Bank-

B is exposed to substantially greater liquidity risk than Bank-A from unexpected takedown of loan

commitment by its customers.

Liquidity Index

Liquidity index is defined as

I = Ʃ (wi)*(P/P*), where wi is the percentage of each assets in the Bank‟s portfolio

This index measures the potential losses the Bank could suffer from a sudden or fire-sale disposal of

assets compared to amount it would receive at a fair market value established under normal market

condition. The greater the difference between immediate fire-sale asset price P and fair market price

P*, the less liquid is the Bank‟s portfolio of assets.

Credit Risk

Credit risk is the risk that the promised cash flows from the loan and securities held by lender may not

be paid. The default can happen to non-payment of principal amount as well as interest amount. The

credit risk can be measured both in a qualitative and quantitative ways. The qualitative ways of

measuring the credit risk are

Rating of the Company- High rated company has more chances of honouring the

commitment

Reputation- Borrower‟s reputation from historic lending history is a guide.

Leverage- The ratio of debt to equity affects the probability of default because large amount

of debt such as bonds and loans, increase in interest charge poses significant claim on the

cash flow.

Volatility of earning- High volatile earning streams increases the probability that the

borrower cannot meet the commitment.

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Some of the quantitative ways of measuring the credit risks are

Credit Scoring model

Linear probability and Logit model

Linear discriminant model

Mortality rate derivation of credit risk

Most of these models have base in the area of Statistics Which is covered under the ERM examination

(ST9) conducted by the actuarial profession.

The pricing model factors the potential credit or counter party risks and actuaries are well equipped as

far as factoring risks and pricing thereof.

Liquidity, Credit and market risks such as volatility in FX, Commodity rates risks, IT risks

involving several applications which may not be interfaced are some areas where the profession

needs to focus more if actuaries are to foray and work in these financial areas.

As far as handling capital adequacy, meeting Basel norms, economic capital etc the actuaries

can contribute significantly using their skills in handling Solvency II or RBC. They can

effectively help business in choosing viable product, modifying the existing product or

withdrawing non-viable ones.

Risk management

Upon measuring the risks, the risks need to be managed to minimize its adverse impact on the

business which can be performed through

Risk Transfer

Risk Reduction

Risk Avoidance

Risk Retaining and

Risk Managing

Life Insurance

Some of the ways of risk management for different risks are summarized in the table below where

actuaries have been involved actively in the past.

Risks Ways of Risk management in Life Insurance Products

Mortality

Underwriting, Reinsurance, Point of Sale

control, Claim Management, product mix,

monitoring

Term

Interest Rate Low guarantees, ALM Non-Par Traditional

Lapse Point of sale control, Sales training, Retention

efforts, monitoring Term

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Expense Management control, monitoring ALL

Equity Active management Unit Linked

Upon the regulator allowing the new financial tools such as derivatives or Longevity bonds for

annuity products, actuaries will need to get trained in those tools.

In the banking area the key risks are financial risks such as market liquidity and credit risk; actuaries

need to increase their knowledge and understanding of the banking business to enable the risk

management in these areas. Some of the areas such as ALM as used in life insurance can be used in

the banking sector by using the duration of assets and liability to address the interest rate risk.

Liquidity and Credit risk management is the area requiring more focus for actuaries to be successful

in this financial area.

Risk monitoring

Risk monitoring is very important step in the risk management framework to feed back into the

control cycle to improve the future long term assumptions. Actuaries in the past have been using this

tool for setting the long term assumption and have been the key strengths of the actuaries. As

actuaries use their judgement after looking at the past experience enables them likely future

differentiates them from other profession.

Actuaries can use their skill and help the banking industry in setting up assumptions either long term

or short term. For example, based on the withdrawal pattern from the savings and current account

similar to lapse rate used in insurance, actuaries can arrive at the withdrawal rate pattern in the banks

to enable bank help in managing the liquidity risk so that they can reduce the cost of raising the short

term liquidity issues.

Similar to the lapse investigation, the methodology used in the expense investigation in life insurance

industry can be explored in the banking sector and allocating the expense loading in different line of

business.

Risk reporting

Irrespective of banking or insurance sector, risk reporting is integral part of the framework to enable

key stakeholders such as Senior Management, Board, Regulator, Rating Agencies and

Policyholder/Bank customer to know the financial position of the Company and take informed risk

based decision.

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Role of actuaries

The goal of ERM is to effectively manage risks facing the organization. Enterprise risk managers

should be focused on the business of effectively managing risk and return. Since the portfolio context

establishes the basis for risk measurement and management, and hence, economic decisions, it is

important to think about portfolio risk and to try to measure and estimate it as best as possible. This

involves measuring individual risks and all their interactions.

Therefore, it would seem that actuaries are in an ideal position to be effective enterprise risk

managers. With their technical backgrounds, actuaries are experts in quantifying insurance risk and,

by way of training, are well positioned to quantify other types of risks and their interactions as well

Opinion

While risk managers increasingly acknowledge the value and need for enterprise, holistic modelling,

to date it appears there are few working models. Again, this is likely due to the current real and

significant barriers to quantitative modelling. But one can assume that advances in technology and

quantitative expertise will continue and, therefore, it makes sense for the actuarial profession to take

steps now to best position itself to be the risk modellers and Enterprise Risk Managers of choice in the

future. Of course, Enterprise Risk Management is more than simply quantifying risks, but this is a key

step and one in which the actuarial profession would do well to consider as a means to be more

effective players in ERM

Opportunities for actuaries to work in banking for risk management

Despite some current gaps in actuary‟s skills to work in banking area‟s risk management, there are

enough reasons why they can still work because:

There are structural commonality between the banks long term of assets (loan) and life

insurance Company‟s long term nature of liabilities. Both the institutions have long term

nature, where both have commonality of default of paying premium (lapse rate) in life

insurance and default of loan re-payment in banks (apart from common risk of change in

interest rate) . Actuaries can help the banks in managing and forecasting the expected default

rate similar to assumption of lapses and build into the price of the loan.

Both the banking and insurance industries‟ capital requirement/management is based on the

risk based capital under the three pillars approach. As actuaries understand the linkages

between risk and capital better due to their prior involvement in managing the solvency of

the company, they can help banks better understand and manage the risk of insolvency based

on risk and how reduction of risk can optimize the capital consumption.

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Both the industries face similar issues on interest rate risk and operational risk. There is an

opportunity to learn from each other‟s experience on the management of these two risks. As

the traditional products are getting popular in the Indian market with embedded guarantees

on maturity, there is a room for actuaries to learn from banking friends on the management

of interest rate risk.

o Operational risk presents a common ground to unite the two streams as this is a

challenging area in quantify this risk. However, actuaries have some exposure to

extreme value theory which is used in modelling operational risk and exposure to

statistical tools which may be used to model operational risk.

Many of the tools used in both the industries are common, such as

o Stress and Scenario testing (SST) to identify the tail risk

o VaR for quantification of market risk

o Economic Capital as a part of pillar-I capital calculation and setting the risk appetite

o Cash flow projection to assess ALM mismatch and to assess the liquidity risk

o Stochastic modelling to price risk and understand the risk distribution

Actuarial profession is quite active in constantly updating the course curriculum- inclusion

of ERM (ST9) in the professional exam, inclusion of specialised qualification of Certified

Actuarial Analyst (CAA)

The risk management framework and risk integration leading to the concept of enterprise

risk management is same across all the industries. During the 2008 economic crisis, common

issues were found responsible for the failure of banking/insurance such as Board room

failure, too much reliance on models, exotic option etc.

Suggestions for profession to take this forward

To have a ERM committee to oversee the development in the ERM in India and recommend

and prepare extra reading material or new letter in a directional basis for interested parties

To discuss the skills of actuaries to wider field in financial market for its marketing.

Increase the emphasis on Financial Risk Management through seminars

Widen scope of the study materials-Add recent India specific case studies .As India has very

different challenges so such case studies will go a long way in understanding what is required

in the Indian context.

Add some of the qualitative aspects of risks management within the curriculum

Capacity building seminars should be held with exhaustive debates on latest tools and

techniques of measuring risks. Experts from the related area can be invited to deliver lectures.

New tools can be established that will provide new or improved information that will lead to

more targeted strategies:

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Global Conference of Actuaries

Economic capital

Optimization routines

Fuzzy logic

Risk mapping and correlation

Risk specialist certification given only after demonstration of specific skills to clearly

establish this as a separate branch-This can be done via a project presentation as is done in

IFA seminars.

Wider fields –Like foraying into disaster management modelling at national level (e.g.

advising national Disaster Management Authority under Govt of India) for more recognition

and developing expertise.

Senior risk specialist to contribute in national level magazines suggesting solution to risk

issues faced by the financial industry (including insurance)

Publication of white papers on risk issues which are hitherto not touched or in a developing

stage e.g modelling operational risks

Leadership programmes to be conducted-These is in place.

Author’s Profile

Rajiv Mukherjee, MSc, AIAI

E-mail: [email protected]

Rajiv started his actuarial career in Life Insurance Corporation of India. He has worked in multiple

capacities with the insurance regulator (IRDA), direct life insurance companies Aviva and ING (now

Exide Life) and has also managed big teams in the outsourcing spaces handling client and project

management.

He has over 18 years of experience spanning across pricing, reinsurance, systems administration,

underwriting reporting. He has also managed large teams in the outsourcing space dealing in client

and project management. Being an Associate member of the Institute, he is active in various activities

of the Institute of Actuaries of India.

Rajiv holds a Master‟s degree in Mathematics from the University of Delhi and is an Associate

member of the Institute of Actuaries of India .

His hobbies and passion include reading voraciously and solving maths puzzles .Currently his field of

interest is ERM.

17th

Global Conference of Actuaries

Sonjai Kumar, SIRM

Sonjai is working as Head-Insurance and Financial Risk in Aviva India Life Insurance since June 2012.

He is responsible for providing oversight risk management of insurance (Mortality risk, persistency

risk and expense risk) and financial risk (Interest rate risk, equity risk, credit risk and liquidity risk) by

independently reviewing and challenging product pricing, Business plan, Solvency assessment,

MCEV, Assets and Liability Management, Stress testing etc.

Sonjai has completed “Certificate in Risk Management in Financial Services” from Institute of Risk

Management, London and qualified for Specialist Member of the Institute (SIRM). This practical

qualification addresses the real issues facing organizations’ in the financial services sector,

particularly banking and insurance. The programme provides a thorough introduction to sources of

risk and describes the tools, techniques, systems, processes and strategies necessary for managing

risks in banks and insurance companies.

Sonjai has worked in actuarial area in Pricing, Experience investigation, Reporting, Risk Management

etc for over a decade in the Private Life Insurance Sector in India. He worked little over five years in

LIC of India when insurance sector was in a process of opening.

Sonjai is a part qualified actuary, he has done Post Graduate Diploma in Actuarial Management

from City University, London besides having Masters Degree in Mathematics from University of

Delhi.

He is passionate about Risk Management and Actuarial subjects; expresses himself through his

thoughts using write-ups in different forums along with communicating his work through his own

website (www.risk-management.in). His areas of interests in risk management are Enterprise Risk

Management (ERM), Financial risks , Insurance Risk, Assets and Liability Management (ALM), Market

Risk, Stress and Scenario testing (SST), Liquidity Risk, Credit Risk, Economic Capital Etc.

He can be reached at [email protected] or [email protected]