What the New Standards Are
The new standards of practice apply to professional services in risk evaluation and risk treatment for ERM purposes. Broadly, the new standards require actuaries doing ERM work related to risk evaluation or risk treatment (as they are defined in the standards) to consider information such as the organization’s:
- financial strength
- risk profile
- risk management system, and
- risk environment
- or to document their reliance on others who have considered this information
The standards further specify considerations related to economic capital modeling, stress testing, risk mitigation, evaluation of emerging risks, and risk appetites, tolerances and limits. Taken together, risk evaluation (measuring the potential impacts of risk events on an organization’s key performance metrics) and risk treatment (selecting actions and making decisions to transfer, retain, limit, and/or avoid risk) cover the most common actuarial services performed in the context of ERM. So these two new standards offer guidance on the ERM-related services actuaries are most likely to provide.
Many ERM programs are still under development, so it’s important to recognize that the risk management program need not be complete for the standards to apply.
How They Came Into Existence
The new standards are the result of more than three years’ work by the Actuarial Standards Board’s ERM Task Force, chaired by our own Dave Ingram. They now take their place alongside the previously existing actuarial standards of practice, which apply to “traditional” areas of practice such as the calculations required for determining appropriate insurance premiums and reserves.
With their recent adoption by the U.S. actuarial profession, these standards will no doubt become a reference point for actuaries working in other jurisdictions – and other ERM professionals worldwide.
ERM is still very new compared to the other actuarial areas of practice. There is no doubt that the details of ERM practice will further develop over time. But the establishment of strong professional standards means that every company with an ERM program – which, given new rating agency and regulatory requirements, may soon mean almost every insurance company – can count on their actuaries to bring solid expertise to bear.
Dave’s efforts earned him recognition by the American Academy of Actuaries as one of five recipients of the 2013 Academy Award for Outstanding Volunteerism.