DW Simpson
10-04-2005, 08:44 AM
findarticles.com/p/articles/mi_m0BJK/is_12_15/ai_n6239813
Actuaries eye risk roles
Lawrence Richter Quinn
Actuaries are ready to shed their "green eyeshades" image for a shot at the brass ring--moving up the corporate ladder to become enterprise risk managers and chief risk officers, both inside the insurance industry and outside in the wider world. To do that, they'll have to move beyond their old comfort zone.
Here's an idea that will make your head spin: Actuaries ascending to the top spot of enterprise risk management and taking on the role of chief risk officer. For those managers now holding the risk leader's seat, whether they're corporate insurance risk managers, auditors, accountants, treasury executives or running risk trading operations at energy companies, banks, manufacturers and service companies, actuaries stepping into their shoes may sound incredible, perhaps downright blasphemous.
But make no mistake: The actuarial profession wants its members to be top risk dog. They're far more passionate about it, they say, than those who were schooled in corporate insurance buying or in trading derivatives at consumer and investment banks.
And the Risk and Insurance Management Society had better take note. Unlike other professions and their associations that traditionally have claimed the risk mantle, the two major actuarial associations are investing serious money in a multiyear campaign to change the "green eyeshades" reputation of actuaries.
The Schaumburg, Ill.-based Society of Actuaries (SOA) and the American Academy of Actuaries (AAA), based in Washington, want to change what they see as the miscast image of actuaries as boring executives immersed in numbers as turgid as they are incomprehensible.
Instead, they want to highlight the dynamic role actuaries play in modeling insurance and non-insurance risks and the mathematical precision and discipline they bring to anticipating and managing future risks.
Their mantra? Look to the future as much as to the past. As a result, they compare their risk management skills favorably to those of other executives, such as accountants, who they say focus solely on risk avoidance and deal only with past and current risks. In the end, they say, actuaries will capture the attention and imagination of senior executives at companies, whatever their primary business may be.
What of their chances of success? Slim to none in the near future--and many actuaries acknowledge that. But they promise to give other risk professionals a run for their money, perhaps improving overall corporate governance and shareholder value in the process. Longer term, they argue, there's nothing to hold them back.
ACTUARIES' LEG UP
There's no question that actuaries are passionate about heading up enterprise risk management efforts and becoming chief risk officers, either inside or outside the insurance industry.
"At the end of the day we actuaries have a leg up," says Francis P. "Frank" Sabatini, a partner in the assurance and advisory business services practice at Ernst & Young LLP in Hartford, Conn.
"And I think it's very realistic that you'll see actuaries going to work for non-insurance companies, working on and heading up enterprise risk management programs. It will be natural for us to gravitate first toward investment banking and then natural for us to be assimilated into other management areas and disciplines."
Actuaries already are playing a role in enterprise risk management, but the discipline is in its early stages, particularly in the United States, says John Kollar, vice president of the Insurance Services Office (ISO) in Jersey City, N.J. But Kollar says that actuaries can make a major contribution.
"If you go to an insurance broker of course they have clients who are not insurers or reinsurers. Let's say one of its clients is a pharmaceutical company. What's the likelihood that it can deliver a drug that will generate profits?" Kollar said. "You're dealing with a lot of uncertainty there and you have to make decisions. People have been doing it for years but actuaries can bring more discipline and science to that."
MORE TALK THAN ACTION
So far, however, there has been more talk than action when it comes to actuaries moving into enterprise risk management.
"Actuaries' desire to be involved in ERM has not translated into action," says Prakash Shimpi, an actuary who's president of consulting firm Fraime LLC in Florham Park, N.J., and until recently a senior risk management executive at Swiss Re New Markets in New York. "I hear actuaries talk about getting involved, but they seem to focus only on insurers. And the major actuarial consulting firms have few if any dedicated resources."
Unless the profession and the leading practitioners make a stronger push, the involvement in ERM may be limited to the insurance industry and not extend to non-financial corporations, which is where the broader opportunity lies, says Shimpi.
To make it happen, actuaries will have to be willing to sell themselves in new areas.
"It does take some willingness to sell yourself outside the comfort zone. I have to say I find a lot of actuaries who work within their area rather than extending those principles to other areas," says Doug Brooks, vice president and CRO at Sun
Life in Toronto. "A particularly important sales-related issue is being able to take the result of the technical work and put it into business terms. This hasn't been a traditional area of strength for actuaries," Brooks says.
Some risk executives scoff at the idea of actuaries heading up ERM programs and eventually becoming CROs. They argue that actuaries specialize in historical data, the backbone of actuarial tables, and have far less experience dealing with risks that are hard to measure and quantify, such as operational and reputational risk.
They also argue that because actuaries have spent little time rotating between "silos" they don't understand the underlying businesses; that they are steeped in mathematics and lack the diplomatic skills a CRO needs to work with everyone from board members to head-strong managers of line businesses.
"Actuaries have part of the technical background. At the same time they lack other parts, the broader perspective from corporate finance and the management experience," says Dr. Shaun Wang, actuary and research director at reinsurer SCOR Group in Schaumberg, Ill.
"Most of them do the technical work, the numbers crunching day in and day out, but it's hard for them to see the management perspective, the big picture. We should encourage actuaries to be more open-minded, encourage them to learn other people's perspective, so they can really have good conversations with the business managers. If we can speak their language and have the technical skills, we can do a lot for our companies," says Wang, who has guided SCOR Group's ERM program since its inception.
FORGING AHEAD
Despite these and other concerns, the actuarial community is forging ahead, with many in the profession saying they want a piece of the action. The best example so far is the risk management task force put together by the Society of Actuaries to find ways to educate actuaries on the topic. Early last year, the group's board of governors decided to establish a risk management section.
"The task force's job was to get the topic high up on the radar screen and to serve as a launch pad for what now has become the risk management section," says Hubert Mueller, an actuary with Towers Perrin. "It now has more than 1,000 members and the section was started only last fall [there are only about 25,000 qualified actuaries throughout the Americas]. We're expecting between 1,200 and 1,300 members."
Separately, the SOA is launching a long-term media campaign that will be shaping up in the next 12 to 18 months to change that "green eyeshades" stereotype, with the explicit goal of positioning them as current and potential risk managers for all industries.
"The campaign is first about helping educate other constituents. The perception will take a long time to change; it's a long-term initiative that will take 10 to 15 years to address," says Valentina Isakina, the SOA'S staff actuary.
MODELING A FORTE
Where specifically do actuaries add value that other professions' risk managers do not? Invariably, actuaries point to their skill in developing models for exposures that are difficult to hedge.
"What an actuary generally can do is take the expertise of other people, their opinions and data, and deal with the financial consequences of it," says Frederick W. Kilbourne, president of independent actuarial consulting firm The Kilbourne Co. in San Diego.
"That happened with earthquakes. EQECAT put together a very sophisticated system that developed the anticipated workers' comp cost in future years resulting from earthquakes. It's zero in most years but every 20 or 30 years it might total in the billions of dollars. That's exactly the sort of thing where actuaries can excel," Kilbourne says.
Actuaries argue that their ability to model risks where there's little historical data and where they have to dig for information--whether from other professions, such as geology, in the case of hurricane and weather risks, or internally, across corporate "silos"--gives them a distinct advantage as potential risk managers.
That risk modeling experience that actuaries bring to the table can be used in a wider variety of fields.
"Typically actuaries are involved in applying statistical methods to historical situations and applying them forward; that's what risk modeling is all about," says Samir Shaw, a principal with Tillinghast Towers Perrin. "Those same tools can be applied to a broader array of risks--for instance, weather risk where there's tons of historic data. There are other mathematical disciplines that have to be brought to bear, but assessing risk is what actuaries think they are trained for," Shaw says.
Beyond hurricanes and options, models developed by actuaries are helping a wide variety of companies deal with 'what if' scenarios regarding new product introductions and other unexpected scenarios that could quickly jeopardize shareholder value.
Barry Franklin, a consulting actuary and managing principal at Aon Risk Services (ARS) in Chicago, helped a major biotech company model such scenarios regarding, among other issues, the possible late introduction or cancellation of a new drug. "We're not trained in analyzing pharmaceutical or biotech operational risks, but we're trained in analyzing risks generally and translating those into financial consequences," Franklin says. In promoting their own risk credentials, some actuaries criticize the skills of non-actuarial risk managers, such as those with property/casualty or accounting backgrounds, saying that they are too focused on managing past and existing risks--for example, protecting existing factories--rather than risks in the future. "Actuaries are a different kind of risk manager," says Max J. Rudolph, vice president and actuary in financial risk management at Mutual of Omaha.
"Most companies view it as buying insurance. But if interest rates go up by 2 percent, it can have a billion-dollar impact on a lot of companies. And the time horizon I'm looking at is 30 years. Banks say, 'We're doing all this great stuff with hedging,' but it's useless to me because I've got to be able to be here 30 or 60 years from now," Rudolph says.
Nevertheless, some actuaries note that to make their mark in corporate ERM, they will have no choice but to forge ties with those from other risk disciplines. "There's a need to bring accountants, internal auditors together to create a new competency that needs to emerge right now," says Don Mango, CRO at GE ERC, formerly Employers RE. "There should be a single 'plot' between accountants and actuaries."
However skeptical some may be of the actuaries' efforts to become heads of ERM or CROs, actuaries themselves say they have no choice to move forward. To fail to do so will perpetuate the 'green eyeshades' image as the ERM process evolves.
"I think actuaries are in danger of having a major missed opportunity if we don't pursue this now," says Mutual of Omaha's Rudolph. While actuaries already hold CFO positions at many insurance companies, they won't be satisfied until they make that move in non-financial companies. For them, that is the brass ring.
"Having actuaries in non-insurance companies isn't something we're used to, of course," says Mango. "Nevertheless, non-insurance companies represent the most exciting possibilities and opportunities for our profession.
Risk Modeling Beyond Just Insurance
An actuary's modeling skills has more application than just predicting major catastrophes. Barry Franklin, a consulting actuary and managing principal at Aon Risk Services (ARS) in Chicago, had an assignment to help a major biotech company prepare a new product for launch.
"In this case there was a delay in the planned launch of the product. The company was concerned about the potential impact on its cash position that might result from several different risk situations, some traditionally insurable, some not.
"If something would delay the product and push the revenue out to the future we were able to estimate discounted cash flow. Investors place a value on future profits. To the extent that there's a delay in the launch of a pipeline drug it reduces future profits, the stock price goes down."
How did ARS help? "We worked with the company to identify that product's process and critical path," Franklin says. "There's a production life cycle from inception to product launch; we identified the critical factors that could impact it, based on our understanding of the process that one of the drugs would go through in bringing the product to market," says Franklin.
"We built a model that had assumptions about the different risks affecting the product introduction at any given point in time," he also says. "The way we measured the financial impact was in relation to the company's own financial plan. We looked at estimates of revenues and the cost of the product in the pipeline using their models."
Actuaries eye risk roles
Lawrence Richter Quinn
Actuaries are ready to shed their "green eyeshades" image for a shot at the brass ring--moving up the corporate ladder to become enterprise risk managers and chief risk officers, both inside the insurance industry and outside in the wider world. To do that, they'll have to move beyond their old comfort zone.
Here's an idea that will make your head spin: Actuaries ascending to the top spot of enterprise risk management and taking on the role of chief risk officer. For those managers now holding the risk leader's seat, whether they're corporate insurance risk managers, auditors, accountants, treasury executives or running risk trading operations at energy companies, banks, manufacturers and service companies, actuaries stepping into their shoes may sound incredible, perhaps downright blasphemous.
But make no mistake: The actuarial profession wants its members to be top risk dog. They're far more passionate about it, they say, than those who were schooled in corporate insurance buying or in trading derivatives at consumer and investment banks.
And the Risk and Insurance Management Society had better take note. Unlike other professions and their associations that traditionally have claimed the risk mantle, the two major actuarial associations are investing serious money in a multiyear campaign to change the "green eyeshades" reputation of actuaries.
The Schaumburg, Ill.-based Society of Actuaries (SOA) and the American Academy of Actuaries (AAA), based in Washington, want to change what they see as the miscast image of actuaries as boring executives immersed in numbers as turgid as they are incomprehensible.
Instead, they want to highlight the dynamic role actuaries play in modeling insurance and non-insurance risks and the mathematical precision and discipline they bring to anticipating and managing future risks.
Their mantra? Look to the future as much as to the past. As a result, they compare their risk management skills favorably to those of other executives, such as accountants, who they say focus solely on risk avoidance and deal only with past and current risks. In the end, they say, actuaries will capture the attention and imagination of senior executives at companies, whatever their primary business may be.
What of their chances of success? Slim to none in the near future--and many actuaries acknowledge that. But they promise to give other risk professionals a run for their money, perhaps improving overall corporate governance and shareholder value in the process. Longer term, they argue, there's nothing to hold them back.
ACTUARIES' LEG UP
There's no question that actuaries are passionate about heading up enterprise risk management efforts and becoming chief risk officers, either inside or outside the insurance industry.
"At the end of the day we actuaries have a leg up," says Francis P. "Frank" Sabatini, a partner in the assurance and advisory business services practice at Ernst & Young LLP in Hartford, Conn.
"And I think it's very realistic that you'll see actuaries going to work for non-insurance companies, working on and heading up enterprise risk management programs. It will be natural for us to gravitate first toward investment banking and then natural for us to be assimilated into other management areas and disciplines."
Actuaries already are playing a role in enterprise risk management, but the discipline is in its early stages, particularly in the United States, says John Kollar, vice president of the Insurance Services Office (ISO) in Jersey City, N.J. But Kollar says that actuaries can make a major contribution.
"If you go to an insurance broker of course they have clients who are not insurers or reinsurers. Let's say one of its clients is a pharmaceutical company. What's the likelihood that it can deliver a drug that will generate profits?" Kollar said. "You're dealing with a lot of uncertainty there and you have to make decisions. People have been doing it for years but actuaries can bring more discipline and science to that."
MORE TALK THAN ACTION
So far, however, there has been more talk than action when it comes to actuaries moving into enterprise risk management.
"Actuaries' desire to be involved in ERM has not translated into action," says Prakash Shimpi, an actuary who's president of consulting firm Fraime LLC in Florham Park, N.J., and until recently a senior risk management executive at Swiss Re New Markets in New York. "I hear actuaries talk about getting involved, but they seem to focus only on insurers. And the major actuarial consulting firms have few if any dedicated resources."
Unless the profession and the leading practitioners make a stronger push, the involvement in ERM may be limited to the insurance industry and not extend to non-financial corporations, which is where the broader opportunity lies, says Shimpi.
To make it happen, actuaries will have to be willing to sell themselves in new areas.
"It does take some willingness to sell yourself outside the comfort zone. I have to say I find a lot of actuaries who work within their area rather than extending those principles to other areas," says Doug Brooks, vice president and CRO at Sun
Life in Toronto. "A particularly important sales-related issue is being able to take the result of the technical work and put it into business terms. This hasn't been a traditional area of strength for actuaries," Brooks says.
Some risk executives scoff at the idea of actuaries heading up ERM programs and eventually becoming CROs. They argue that actuaries specialize in historical data, the backbone of actuarial tables, and have far less experience dealing with risks that are hard to measure and quantify, such as operational and reputational risk.
They also argue that because actuaries have spent little time rotating between "silos" they don't understand the underlying businesses; that they are steeped in mathematics and lack the diplomatic skills a CRO needs to work with everyone from board members to head-strong managers of line businesses.
"Actuaries have part of the technical background. At the same time they lack other parts, the broader perspective from corporate finance and the management experience," says Dr. Shaun Wang, actuary and research director at reinsurer SCOR Group in Schaumberg, Ill.
"Most of them do the technical work, the numbers crunching day in and day out, but it's hard for them to see the management perspective, the big picture. We should encourage actuaries to be more open-minded, encourage them to learn other people's perspective, so they can really have good conversations with the business managers. If we can speak their language and have the technical skills, we can do a lot for our companies," says Wang, who has guided SCOR Group's ERM program since its inception.
FORGING AHEAD
Despite these and other concerns, the actuarial community is forging ahead, with many in the profession saying they want a piece of the action. The best example so far is the risk management task force put together by the Society of Actuaries to find ways to educate actuaries on the topic. Early last year, the group's board of governors decided to establish a risk management section.
"The task force's job was to get the topic high up on the radar screen and to serve as a launch pad for what now has become the risk management section," says Hubert Mueller, an actuary with Towers Perrin. "It now has more than 1,000 members and the section was started only last fall [there are only about 25,000 qualified actuaries throughout the Americas]. We're expecting between 1,200 and 1,300 members."
Separately, the SOA is launching a long-term media campaign that will be shaping up in the next 12 to 18 months to change that "green eyeshades" stereotype, with the explicit goal of positioning them as current and potential risk managers for all industries.
"The campaign is first about helping educate other constituents. The perception will take a long time to change; it's a long-term initiative that will take 10 to 15 years to address," says Valentina Isakina, the SOA'S staff actuary.
MODELING A FORTE
Where specifically do actuaries add value that other professions' risk managers do not? Invariably, actuaries point to their skill in developing models for exposures that are difficult to hedge.
"What an actuary generally can do is take the expertise of other people, their opinions and data, and deal with the financial consequences of it," says Frederick W. Kilbourne, president of independent actuarial consulting firm The Kilbourne Co. in San Diego.
"That happened with earthquakes. EQECAT put together a very sophisticated system that developed the anticipated workers' comp cost in future years resulting from earthquakes. It's zero in most years but every 20 or 30 years it might total in the billions of dollars. That's exactly the sort of thing where actuaries can excel," Kilbourne says.
Actuaries argue that their ability to model risks where there's little historical data and where they have to dig for information--whether from other professions, such as geology, in the case of hurricane and weather risks, or internally, across corporate "silos"--gives them a distinct advantage as potential risk managers.
That risk modeling experience that actuaries bring to the table can be used in a wider variety of fields.
"Typically actuaries are involved in applying statistical methods to historical situations and applying them forward; that's what risk modeling is all about," says Samir Shaw, a principal with Tillinghast Towers Perrin. "Those same tools can be applied to a broader array of risks--for instance, weather risk where there's tons of historic data. There are other mathematical disciplines that have to be brought to bear, but assessing risk is what actuaries think they are trained for," Shaw says.
Beyond hurricanes and options, models developed by actuaries are helping a wide variety of companies deal with 'what if' scenarios regarding new product introductions and other unexpected scenarios that could quickly jeopardize shareholder value.
Barry Franklin, a consulting actuary and managing principal at Aon Risk Services (ARS) in Chicago, helped a major biotech company model such scenarios regarding, among other issues, the possible late introduction or cancellation of a new drug. "We're not trained in analyzing pharmaceutical or biotech operational risks, but we're trained in analyzing risks generally and translating those into financial consequences," Franklin says. In promoting their own risk credentials, some actuaries criticize the skills of non-actuarial risk managers, such as those with property/casualty or accounting backgrounds, saying that they are too focused on managing past and existing risks--for example, protecting existing factories--rather than risks in the future. "Actuaries are a different kind of risk manager," says Max J. Rudolph, vice president and actuary in financial risk management at Mutual of Omaha.
"Most companies view it as buying insurance. But if interest rates go up by 2 percent, it can have a billion-dollar impact on a lot of companies. And the time horizon I'm looking at is 30 years. Banks say, 'We're doing all this great stuff with hedging,' but it's useless to me because I've got to be able to be here 30 or 60 years from now," Rudolph says.
Nevertheless, some actuaries note that to make their mark in corporate ERM, they will have no choice but to forge ties with those from other risk disciplines. "There's a need to bring accountants, internal auditors together to create a new competency that needs to emerge right now," says Don Mango, CRO at GE ERC, formerly Employers RE. "There should be a single 'plot' between accountants and actuaries."
However skeptical some may be of the actuaries' efforts to become heads of ERM or CROs, actuaries themselves say they have no choice to move forward. To fail to do so will perpetuate the 'green eyeshades' image as the ERM process evolves.
"I think actuaries are in danger of having a major missed opportunity if we don't pursue this now," says Mutual of Omaha's Rudolph. While actuaries already hold CFO positions at many insurance companies, they won't be satisfied until they make that move in non-financial companies. For them, that is the brass ring.
"Having actuaries in non-insurance companies isn't something we're used to, of course," says Mango. "Nevertheless, non-insurance companies represent the most exciting possibilities and opportunities for our profession.
Risk Modeling Beyond Just Insurance
An actuary's modeling skills has more application than just predicting major catastrophes. Barry Franklin, a consulting actuary and managing principal at Aon Risk Services (ARS) in Chicago, had an assignment to help a major biotech company prepare a new product for launch.
"In this case there was a delay in the planned launch of the product. The company was concerned about the potential impact on its cash position that might result from several different risk situations, some traditionally insurable, some not.
"If something would delay the product and push the revenue out to the future we were able to estimate discounted cash flow. Investors place a value on future profits. To the extent that there's a delay in the launch of a pipeline drug it reduces future profits, the stock price goes down."
How did ARS help? "We worked with the company to identify that product's process and critical path," Franklin says. "There's a production life cycle from inception to product launch; we identified the critical factors that could impact it, based on our understanding of the process that one of the drugs would go through in bringing the product to market," says Franklin.
"We built a model that had assumptions about the different risks affecting the product introduction at any given point in time," he also says. "The way we measured the financial impact was in relation to the company's own financial plan. We looked at estimates of revenues and the cost of the product in the pipeline using their models."