ISO ERM Forum Brings Together Enterprise Risk Experts from Top Insurers

Enterprise risk management (ERM) has received increased attention in recent years. Motivated by past events as diverse as Hurricane Katrina and the crisis that swept through the financial system, insurers are focusing on ERM as a means of preparing for emerging risks and unforeseen events. In response to the wide range of exposures to loss faced by today’s insurers, ERM offers a holistic view of risk management, looking across traditional business units to develop an overarching enterprisewide perspective on risk management. Yet, ERM encompasses much more than the measurement, mitigation, and transfer of risk. ERM also focuses on optimizing the use of capital, maximizing risk-adjusted returns, and identifying opportunities to generate additional profit by taking on appropriate levels of additional risk.

ISO has been working to assist our customers in the analysis, development, and implementation of their ERM programs. A keystone of ISO’s efforts is the ERM Forum. The forum, which was instituted in 2008, offers a venue for presentations and discussions on ERM-related topics and opportunities for networking with fellow ERM practitioners. The agendas for the forum meetings are driven by the needs of our customers — focusing on topics suggested in surveys of the participants. Many of the sessions are facilitated discussions, where a participant volunteers to lead the group through an examination of key topics.

Participation in the forum has increased to 25 insurers, who have the opportunity to send representatives to forum meetings. The ISO ERM Forum first convened in June 2008 and has met three times since its inception. Highlights of prior meetings include presentations by two rating agencies: A.M. Best at the June 2008 meeting and Standard & Poor’s at the December 2008 meeting. Those presentations provided forum participants with the rating agency perspective on effective ERM programs.

Experts from various property/casualty insurance companies met at ISO headquarters in June 2009 at the most recent meeting of the ERM Forum. The meeting included presentations on emerging issues, correlations and dependencies, ERM best practices, and challenges to quantifying and communicating risk.

The emerging issues presentation cited various hot topics that risk managers are tracking, such as artificially generated electrical/magnetic energy, climate change, genetically modified organisms, green buildings, hazardous products and chemicals, identity theft, Internet exposures, pandemics, and nanotechnology.

Identifying and tracking developments in emerging issues can be a significant task. Each topic offers unique challenges and considerations. For example, although the developing field of nanotechnology offers astounding new products in a number of areas, there may be potential hazards concerning matter developed using nanotechnology, such as carbon nanotubes, which can penetrate the skin, enter the digestive tract, or be inhaled. (ISO has an Emerging Issues Panel that meets via teleconference to share and discuss the latest developments on a wide range of issues.)

The presentation on correlations and dependencies offered interesting insights into what is meant by correlation. When two variables are mathematically correlated, it does not necessarily mean that one causes the other. This concept is often misunderstood. The presentation focused on the need to have a solid understanding of models that ERM practitioners use. While modeling is an extremely useful tool that can offer valuable information, it is important to understand the assumptions that underlie the model.

The meeting also featured a report on the activities of the forum’s operational-risk working group, which was formed in 2008. The group has been exploring and developing an approach to data collection for operational-risk loss events.

Operational risk — broadly defined as the failure of people, processes, or systems to function properly, as well as exposure to loss from external events — is widely regarded as an important but very difficult type of risk to quantify. At the meeting, it was noted there is no upside to operational risk. It is important for an organization to think about operational risk and work to mitigate it. Yet, there is a general lack of specific data available on operational risk.

To address the need, the working group has been evaluating and planning a data-collection effort for operational-risk losses. As a starting point, the group used the existing operational-risk data-collection framework developed for the banking industry, then made modifications to tailor the framework to the insurance industry in the United States. The working group is continuing its efforts in 2009.

The ISO ERM Forum provides insurers with a valuable venue for sharing different perspectives on ERM and for networking with other ERM practitioners. ISO will continue to sponsor the ERM Forum, with at least one additional meeting planned for later this year.

Joe Palmer, FCAS, MAAA, CPCU, is assistant vice president and actuary of ISO’s Increased Limits and Rating Plans Division.

John Kollar Leads the CAS toward Centennial with a Focus on ERM

For John Kollar, the roles of president of the Casualty Actuarial Society (CAS) and vice president at ISO have become increasingly similar.

At ISO, Kollar’s department develops ISO’s insurance programs for personal lines, rating plans for commercial lines, and increased limits factor tables for all lines of insurance. Kollar is also involved in ISO’s initiatives on emerging issues and enterprise risk management (ERM).

Since he assumed the role of president of the CAS in November 2008, Kollar has been focusing on many activities designed to move the CAS forward as it approaches its 100th anniversary in 2014.

“The centennial goal of the CAS is to be recognized globally as a leading resource in educating casualty actuaries and conducting research in casualty actuarial science,” says Kollar. “CAS members will advance their expertise in pricing, reserving, and capital modeling and leverage their skills in risk analysis to become recognized as experts in the evaluation of enterprise risks, particularly for the property/casualty insurance industry.”

ERM
Kollar reports that ERM is one of the major themes the CAS is focusing on to achieve its centennial goal.

“Because ERM is far-reaching and encompasses all types of organizations around the globe, ERM is truly everyone’s business,” says Kollar. “I like to say that I’m personally, corporately, and professionally committed to ERM.”

“In the CAS, our goal is to provide members with ERM learning opportunities to acquire the skills and techniques necessary to serve as chief risk officers and in other leading ERM roles,” he explains. “We are working with various areas of the CAS, the Joint Risk Management Section, and the ERM Institute-International to educate our members on their potential roles in the field of enterprise risk management.”

One of Kollar’s primary focuses within CAS is the development of a global ERM designation. “It’s a multinational initiative in which a number of actuarial organizations are working together, and it’s close to fruition,” he says. “We’ve been working with the U.S.-based Society of Actuaries — which handles life, health, and pension — and actuarial organizations in Australia, Canada, France, Germany, Israel, Mexico, the Netherlands, Catalonia, Sweden, the Republic of South Africa, and the U.K. on the global ERM designation. It’s an exciting opportunity, and ERM is something we’ve been exploring at ISO.”

At ISO, Kollar is also involved with the ERM Forum, composed of more than 25 property/casualty companies. “The purpose of ISO’s ERM Forum is to discuss the various aspects of ERM and share ERM ideas among the participating companies — ultimately for ISO to learn what the companies need so we can develop products and provide services,” he explains.

“In the CAS, we produce research including studies on climate change and its implications on insurance, which can also affect the way ISO operates,” adds Kollar. “When you bring together and share ideas with experts from various companies, you can improve results.”

Future Challenges
“Right now, a lot of actuaries based in the United States are concerned with Solvency II, the more risk-based regulatory requirements for insurers operating in the European Union,” says Kollar. “With the continued evolution to a global economy, many aspects of Solvency II are likely to wash up on U.S. shores.”

“Many companies in Europe have operations in the U.S. and are ISO customers,” he explains. “Actuaries are good at dealing with uncertainties, so when there’s discussion of systemic risk in the U.S. or global economy, the actuarial profession is the logical choice to address it. I also think ISO is the company to address it. So, as with ERM, I see ISO and CAS converging on the regulatory issues arising from Solvency II. ISO focuses on risk and analytics, so who better to deal with this challenge?”