Principles of enterprise risk management of crucial importance to financial service providers

This is the message of a timely report, ERM for insurance companies - adding the investor's point of view, which will be presented to a sessional meeting of the Institute of Actuaries on Monday 25 January.

The paper will examine how the fundamentals of ERM can be applied to insurance companies and will examine 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, explained 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.”

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Enquiries: Tel. Michael Scanlan on 020 7632 1453 / 07798 804 871 or email michael.scanlan@actuaries.org.uk

Notes to Editors

1. Members of the press are welcome to attend the meeting which takes place at the Royal College of Surgeons, 35-43 Lincoln's Inn Fields, London, WC2A 3PE, Monday 25 January commencing at 17.00 sharp. Please contact Michael Scanlan to arrange an invitation.
2. Actuaries provide commercial, financial and prudential advice on the management of a business assets and liabilities, especially where long term management and planning are critical to the success of any business's venture. They also advise individuals, and advise on social and public interest issues.
3. Members of the Profession have a statutory role in the supervision of pension funds and life insurance companies. They also have a statutory role to provide actuarial opinions for managing agents at Lloyds.
4. The Profession is governed jointly by the Faculty of Actuaries in Edinburgh and the Institute of Actuaries in London. A rigorous examination system is supported by a programme of continuing professional development and a professional code of conduct supports high standards reflecting the significant role of the Profession in society.
5. The Profession is available to provide expert comment to the media on a range of actuarial-related issues, including enterprise risk management, finance and investment, general insurance, health and care, life assurance, mortality, and pensions.