Call for research in ERM for the UK Actuarial Profession

Members of the Profession also highlighted ERM as one of the two main areas where they wanted the Profession to focus their research efforts in the membership survey in 2009. Consequentially the Management Board has allocated up to £100,000 to support research projects in ERM in 2010-2011 and has worked with the ERM Practice Area Committee to identify the topics that they feel most suited to external research where the outputs will have a broad strategic value to the financial services sector. Proposals for research are now invited from external parties. 

Background

ERM has many definitions.  The generally agreed concept is that ERM is wider than traditional risk management and covers all the risks within an enterprise (or company).  Traditional risk management focuses on identifying risks, measuring and monitoring risks and designing strategies to limit losses to agreed limits.  ERM recognises that businesses take risks in order to make a profit for their owners and therefore considers the upside of taking risks, and attempts to strike a balance between too much risk and not enough risk compared to the enterprise’s strategic direction. Risk is managed holistically in a fully integrated framework, across all different risk types and the different functions/companies within the organisation.

The call for research

The Profession would welcome proposals in the following areas:

(1) How should firms define and use “risk appetite”, but with the emphasis on the need that outputs should be practically grounded and expressed.

(2) How should firms identify and assess the hard to define risks – what techniques are available and how do they work in practice? This topic could possibly be linked with practical techniques for reporting on emerging risk and strategic risks, to mirror text from the recent Walker Report (see separate Appendix at the end of this paper).

(3) How should firms report and communicate tail dependencies and correlations to stakeholders including senior management, the Board and regulators. This includes mechanisms for reporting, and the need for effective communication. Note that the credit for diversification benefit can often be the largest single item in a firm’s assessment of its capital requirements, and hence it can be “worth millions (if not billions)” to get this right.

The research proposed should concentrate on enterprises whose main business is the acceptance or transformation of risk, where the focus would not be limited to the negative aspects of exposure to risk but also the potential of managing risk successfully to enhance the enterprise’s potential. A preference will be shown to proposals that can be applied across traditional actuarial practice areas and more widely.

The successful proposal will be one where practical solutions are proposed to the questions set out above, including specimen output for a variety of notional case studies, and where the proposer can demonstrate how the research will benefit the users of actuarial services in the ERM arena. The Profession are encouraging proposals that concentrate on the development of future practice in this area that is innovative, but also practical and attainable, and which will make a significant contribution to the development of thought.  Whilst the limited use of surveys is not ruled out, we are not anticipating surveys of current practice and opinions but a focus on future thought leadership in ERM.

An indicative cost of between £50,000 - £100,000 is envisaged for the successful grants. The Profession would be sympathetic to proposals where our grant would form part of a jointly funded project working with another funding body, or where sponsorship is involved. Although we anticipate awarding only one or two grants in 2010, the areas identified above will continue to be our focus over the immediate short term of 2-3 years.

Application process

Applicants should submit a detailed proposal by 17.00 BST on 30 June 2010. It is expected that the successful applicants will be announced by 31 July 2010.

The proposal should include:

• An outline of the proposed research and how it fits into one or more of the areas  identified in the call above. An institution may make a proposal in more than one of the areas but we would encourage institutions to focus their efforts where they can demonstrate their expertise.
• A detailed research plan including milestones and outputs . The Profession encourages projects that will be able to report back in the first half of 2011, but could be interested in projects that may be the first stage of a longer term programme as long as the interim conclusions stand alone.
• The names and CVs of those involved in the project and their time commitment
• A cost summary and a schedule of proposed funding payments (these should be linked to outputs or significant events)
• Demonstration of experience in the field covering both the academic and practical expertise required (this may take the form of a joint submission from practitioners and academics)
• Any joint funding or sponsorship that is part of the proposal
• How the research will link back to the ERM Research and Thought Leadership Committee, which will act as a scientific steering committee for the successful projects
• An outline of how the results will be fed back to the ERM Research and Thought Leadership Committee. Dissemination of the results to a wider audience, both inside and outside the Profession, will be dealt with in partnership with that committee at the reporting stage.

Preference will be given to proposals:

• That can show a clear practical focus
• That can report back in the first half of 2011
• That cut across traditional silos in the financial sector
• That are of broad strategic value.

Please submit your proposal to:

Ruth Loseby, Research Manager, The Actuarial Profession, 4 Worcester Street, Oxford OX1 2AW

Tel: 01865 268871

Email: ruth.loseby@actuaries.org.uk (email applications are preferred).

For further information or an informal chat please contact Ruth.

Appendix – Extract from the Walker Report.

A review of corporate governance in UK banks and other financial industry entities - Final recommendations - 26 November 2009.

Paragraph 6.8:

This distinction between the management and control of known financial risks and the identification and monitoring of current risks, including new risks, in a potentially fast-changing market environment has major relevance for how the board of a major bank (and, proportionately, any other BOFI) organises its risk oversight activity.

Paragraph 6.9:

Thus in parallel with, but separately from, compliance and audit the board has responsibilities for the determination of risk tolerance and risk appetite through the cycle and in the context of future strategy and, of critical importance, the oversight of risk in real-time in the sense of approving and monitoring appropriate limits on exposures and concentrations. This is largely a forward-looking focus.

Recommendation 27:

The board risk committee (or board) risk report should be included as a separate report within the annual report and accounts. The report should describe thematically the strategy of the entity in a risk management context, including information on the key risk exposures inherent in the strategy, the associated risk appetite and tolerance and how the actual risk appetite is assessed over time covering both banking and trading book exposures and the effectiveness of the risk management process over such exposures.