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Asia: Roles of actuaries and ERM growing beyond insurance

Source: Asia Insurance Review | Nov 2016

The roles of actuaries and ERM are growing in fields beyond insurance, including being increasingly involved in areas such as government projects. This was one of the key points highlighted at the Singapore Actuarial Society’s (SAS) recent 3rd ERM Conference. 
Actuaries and ERM in government
It was noted that actuaries in the UK are engaged in analytical modelling for challenges across government boards – especially long term issues which are their “natural territory” – examples are big data, privacy and climate change, said Mr Colin Wilson, the UK’s Deputy Government Actuary. 
   Financially, actuaries already help with projections in the future so government can understand impact of policy changes in areas such as pensions and demographics. Additionally, actuaries also help with strategic risks. 
   “Actuarial skills are very relevant, even in issues which are not typically actuarial. Thought leadership – making sure we are applying actuarial mindset to issues and disseminating these ideas beyond the actuarial profession will help others see the value of what we do,” added Mr Wilson, who is also President of the Institute and Faculty of Actuaries (IFoA). 
   He noted that the IFoA is working to develop the profession more, such as encouraging the growth of the Chartered Enterprise Risk Actuary (CERA) certification – a demanding qualification introduced in 2007 for actuaries who demonstrate a high understanding of ERM. “If we can help, we should, and seek to apply our expertise beyond the insurance and traditional fields that we are involved in.”
Paradigm shift
Outside of the work in governments, actuaries’ role in the insurance industry is also changing. The insurance industry itself is undergoing a “paradigm shift” in organisational structure and the way businesses will be judged in the future, said Mr Michel Dacorogna, head of DEAR Consulting. 
   With financial markets and new regulations moving towards risk-based solvency regimes, the industry has evolved from management based on accounting and cash-flow metrics to management based on risk/return and on capital allocation. 
   He said that this implies complete reorganisation of a firm’s structure. Actuaries have moved from estimating reserves and pricing insurance policies to estimating capital and risk. 
Modelling useful, but validate!
Mr Dacorogna also noted that companies are increasingly using internal models and complex IT systems to process large amounts of data and determine how much capital is needed. 
   When it comes to modelling, the development of risk models helps to improve risk awareness and anchor risk management and governance deeper in industry practices, providing valuable assessments and guidance in business decisions, noted Professor Marie Kratz of ESSEC Business School.
   As much as models are a simplified version of reality, one still cannot “oversimplify” them. The use of validation techniques is important as it will give a good picture of reality and help people to gain confidence in the model, she said.
Cyber risk modelling – Unique traits
One interesting model is one for cyber risks. Cyber risks have some unique qualities compared to traditional risks – it is not random like a car accident; defensive actions taken can in fact help to prevent losses; and historical data is less useful as what happens in the past has little implication on what will happen in future.
   All these make cyber modelling particularly challenging, said Dr Jade Nie, a lecturer at Nanyang Business School, Nanyang Technological University Singapore (NTU), which is collaborating with MAS on research to make cyber risks more insurable.
   Dr Nie briefed the audience on how NTU used the traditional ruin theory approach on a new topic like cyber risk to derive useful insights. In this pioneering approach to model cyber risk, the team quantified cybersecurity levels in order to project financial losses from cyber attacks. 
   One can assume attacks are constant and a drop in security levels upon each attack will result in more investments from a firm, which will help boost levels. If loss from a breach is high, one is likely to invest more. 
   Another trend is that one is likely to be more afraid of high-severity, less frequent attacks than frequent but less severe ones as it is likely to result in higher total losses. Despite the progress made in cyber modelling and general assumptions which can be made, she acknowledged that the fast evolving nature of cyber technology poses challenges to the development of solutions for cyber insurance.
   The SAS ERM Conference also discussed a number of regulatory and industry guidelines, including RBC2, IFRS and ORSA. It was held from 27-28 September 2016 in conjunction with its 40th anniversary.
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