Wednesday, 8 June 2011

The Actuary magazine - QIS5, ERM, Risk Language and Land Grabbing

Busy day today, so apologies if you are not a fan of volume!

I went through a few articles in June edition of The Actuary magazine - as I had blogged earlier, there seems to be a Solvency II land grab exercise anticipated in which the Risk Management profession would lose out to their Actuarial counterparts, so it is good so see where the common ground is.

There are four articles this month which I strongly advise you give a once-over; my take on these was;

Risk Management - Defining Risk Language -  From premise to execution, there is almost nothing I can fault about this article, and I implore you to read it. I hasten to add that I had seen this (or an extract from it) on InsuranceERM, but this is gratis"! My highlights were;
  • Ease at which the drill-down from key risks to sub-categories causes confusion in existing categories (project risk held up as a prime example)
  • Their tie-in of "risk occurrence" impacting on "economic value", and using that to tie their premise in to impact on Embedded Value or prospective management actions.
  • Illustrating the exact damage each of their categories could do to the different elements of the Embedded Value
  • Their busting out of Liquidity, Strategy and Frictional risk, and the reasoning for it
  • Their explicit inclusion of Diversification and Aggregation risk - I had blogged on how this area may get the 5 star treatment in Ireland, and seemingly, the actuaries behind this paper also acknowledge how the suite of assumptions made in a correlation matrix hold a risk in themselves
  • Acknowledgement of the weaknesses in the scope - just for the benefit of actuaries, and only used 4 bodies to show differences in terminology.
A great effort, and worth 10 minutes of anyone's time.

ERM Strategy - Plan of Action - Stake in the ground for how the Actuarial profession can be properly harnessed for ERM, with the following of note;
  • Call to arms for actuaries to make a name for themselves in ERM's "exciting and growing area"
  • "Analytical skills, judgement and clear communication" attributes of actuaries positively highlighted
  • Nice section on modelling Operational risks, including using the Delphi process ("incorporating expert judgement within risk modelling")
You can see why the Risk Profession may be feeling increasingly uncomfortable!

Solvency II QIS 5: The end of the beginning - Direct from the FSA QIS5 lead, he draws attention to a number of aspects which overstate the change in UK plc's capital under Solvency II (£62bn surplus down to £35bn);
  • Change is measured against Solvency I, not the ICAS regime
  • Surplus is based on Standard Formula, and UK is largest Internal Model market
  • QIS5 takes no account of management actions which can easily and fairly be applied
  • Transitionals (not that they are guaranteed) could have a massive impact on UK, with the prevalence of annuity providers - A nice example is included
He also notes 600 questions were fielded by the FSA resource - at £15m p.a for the model-specific industry levy, that is a pricey call centre! 

ERM - The Evolution of ERM - Cross references some Towers Watson Global ERM Surveys for 2008 and 2010, and good for general trends and benchmarking on Risk Appetite and ERM satisfaction.

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