Organisations are increasingly able to quantify risks, which were traditionally viewed as unpredictable or infrequent. Other arguments include recognition of the fact that well-diversified investors do not exist (Shimko, 2001) and that risk management enhances firm value by improving the value of expected cash flows (Shapiro and Titman, 1998; Nocco and Stulz, 2006). Strategic Finance, 87(9), p.49.Beasley, M., Pagach, D. & Warr, R., 2008. Stakeholders, in the pursuit of maximising their wealth for a given level of risk, have strong incentives to ensure that the board provides effective risk oversight by practising risk management in a value-additive and transparent manner. et al., 2015. Over the last 70 years, businesses have increasingly taken risk management into consideration as part of operating a successful long-term company. The Characteristics of Firms That Hire Chief Risk Officers. As the world has changed at a rapid rate over the last two decades so has the role that risk management plays within the organisation. Modern Portfolio Theory (MPT), developed by Markowitz (1952), highlights how risk-averse investors can construct investment portfolios that optimise expected investment return (based on a given level of market risk) by considering the correlation levels between the assets included in the investment portfolio. It seems reasonable to assert that an optimal strategy for achieving success is to maximise strengths and minimise weaknesses. The community relies on everyone sharing – .css-1c7uf6v{background:none;border:none;font-size:15px;color:#1861bf;}Add Anonymous Salary, Enterprise Risk Management - Monthly Contractor. If the enterprise does not take on enough risk, they may err on the side of over-cautious risk aversion and may not be fully exploiting potential investment projects. (2011) argue that ERM is â€œa construct that ostensibly overcomes limitations of silo-based traditional risk management”. The greater the risk exposure, the greater the potential reward on offer, or in layman’s terms, “there is no such thing as a free lunch.”  From a corporate perspective, shareholders invest funds in the organisation and expect to receive a return commensurate with the level of risk they perceive they are undertaking. RMA Journal, 93(7), p.51. CAS (2003) has also recognised this by highlighting that â€œthere is a realisation that risk is not completely avoidable and, in fact, informed risk-taking is a means to competitive advantage” (CAS, 2003). Business continuation management has extended the practice of contingency planning by requiring comprehensive internal control systems. 80 Enterprise Risk Management Actuary jobs available on Indeed.com. However, the transfer of risks via insurance only took into consideration hazard type risk exposures, which, although important, only pertain to a sub-section of risks the organisation may face, since insurable hazard risks are typically risks that are independent, measurable and do not allow the organisation to benefit (i.e. From Traditional Risk Management to Enterprise Risk Management. Catastrophe modelling, for example, has been widely utilised by actuaries in the insurance world since the early 1990s. Lam, J., 2011. When pricing the risk of adding a new asset to the portfolio, Sharpe (1964) claimed that only systematic risk should be factored in, as idiosyncratic risk can be diversified away. Filter by location to see Enterprise Risk Management salaries in your area The organisation can control their level of beta and thus manage the potency of market movements similar to the principal behind leverage. Samanta, P., Azarchs, T. & Martinez, J., 2004. Nocco and Stulz (2006) contend that an evaluation of risk and return at the project level does not allow for optimisation at the corporate level, as risk diversification and correlations are ignored, thus leading to sub-optimal decision making. The Journal of Finance, 48(5), pp.1629–1658.Grace, M.F. In summary, it is clear that the practice of risk management is in the midst of a paradigm shift, as the global commercial business landscape continues to rapidly evolve. & Simkins, B.J., 2005. Mackay, P. & Moeller, S.B., 2007. This is an on-demand intensive exam prep course for the SOA's Enterprise Risk Management Exam. An increasingly complex layer of connected risks has called for the adoption of an integrated, holistic approach to risk management. ERM is a discipline and should therefore have support from the top of the organisation to be carried out in an orderly, prescribed manner. But our skills and talents are transferable to any industry that requires risk modeling and management, including: Financial services, such as banking and investment management. This vantage point is very important for the ERM actuary, since from this new perspective, many ERM definitions stress value creation and how the implementation of the ERM discipline can help a business improve decision making, thus increasing the likelihood of achieving business objectives. The theoretical value proposition of corporate risk management may seem intuitively obvious, but is however ambiguous and has historically been contested. Enterprise Risk Management: Strategic Antecedents, Risk Integration, and Performance. Finally, it would be remiss not to mention shareholders, as the owners of public traded companies, who are exerting influence via a desire for more predictable and stable earnings if they are to invest capital. Life and Health Risk Actuary England, City of London, London £70000 - £80000 per annum + competitive package HFG The individual would ideally be a newly qualified life or health actuary will have experience in risk management Organisations are now challenged to view risk as an opportunity by ensuring they only take on risks where they have a competitive advantage and also by actively seeking risk exposures that may lead to valuable upsides. Additionally, researchers (Beasley et al., 2007; Lin et al., 2012) have also found early evidence to suggest that ERM does not in fact create value and may potentially destroy it. The Basel III Capital Framework: A Decisive Breakthrough. The CRO is Here to Stay. CAS (2003) state that: â€œOrganisations have become quite willing to share practises and efficiency gains with others with whom they are not direct competitors” (CAS, 2003). A Senior Manager’s Guide to Integrated Risk Management. For example, the Modigliani and Miller (1958) seminal contribution on the irrelevance of an organisation’s capital structure implies that in perfect capital markets, risk management activities also do not create value. Chartered Enterprise Risk Analyst (CERA) - Salary - Get a free salary comparison based on job title, skills, experience and education. Journal of Applied Corporate Finance, 18(4), pp.8–20.Pagach, D. & Warr, R., 2011. To summarise, in today’s changing business world, TRM practices are no longer viable in terms of ensuring that organisations manage risks in an enterprise-wide fashion. ERM, therefore, parallels MPT by viewing the organisation’s risk exposures in a portfolio context, with inter-dependent and connected risk exposures, which can therefore be optimised by taking advantage of the “portfolio effect”. This progress in risk quantification has provided regulators and organisations a level of confidence to ensure that they operate within both regulatory parameters and corporate risk-tolerance levels. These talks will be about risk and how it relates to business. Different fields may view risk in often seemingly disparate ways. Meulbroek (2002) shares this view and argues, â€œThe goal of risk management is not to minimize the total risk faced by a firm per se, but to choose the optimal level of risk to maximize shareholder value”. Journal of Accounting, Auditing & Finance, 23(3), pp.311–332.Beasley, M.S., Clune, R. & Hermanson, D.R., 2005. Hence a key aspect of ERM (and difference from the TRM approach) relevant to the ERM actuary, is that the firm’s major risks, from all sources, are aggregated together in a ‘portfolio’ of risks. & Pagach, D., 2015. The Journal of Finance, 57(2), pp.815–839.Hannoun, H., 2010. Firms that advance ERM from a value-based perspective and focus on embedding risk culture across the organisation, encourage employees to take a more risk aware approach and align ERM with their strategic goals are realising significant value, particularly in the long-term. Journal of Accounting and Public Policy, 34(3), pp.219–243. Reverting to the basic premise that it is not possible to yield a return without bearing some degree of uncertainty, it is clear that risk is, quite simply, an unavoidable part of doing business. The national average salary for a Enterprise Risk Management is $67,021 in United States. ERM focuses on all risk types, not just those that are insurable or financial in nature. The aggregation of significant hazard, financial, operational and strategic risks marks a shift in focus from a defensive endeavour to a more offensive discipline. Actuaries with a broad knowledge of risk management and how it applies to business can rise to executive positions in their companies, such as chief risk officer or chief financial officer. & Liebenberg, A.P., 2011. Markowitz (1952) recognised that an investor can reduce portfolio risk simply by holding combinations of instruments, which are not perfectly positively correlated. For instance, Beasley et al. Thus, only the remaining risk needs to be addressed, which should be less onerous than mitigating each risk independently. Kit and Caboodle: Understanding The Skepticism about Enterprise Risk Management. I used this data to empirically investigate the relationship between the extent of ERM implementation and firm performance to provide a unique contribution to the relationship between ERM maturity and firm value. In my widely cited 2015 paper, â€œThe Valuation Implications of ERM Maturity” I was able to use a newly available, and previously under-utilised, data-rich source from the Risk and Insurance Society that provides in-depth ERM maturity model survey responses from a sample of public listed organisations. Portfolio Selection. By pooling risks together an insurance company can utilise actuarial science theory and loss distributions to predict with a high degree of accuracy the potential losses (claims) from year to year. Kloman (1976) advocated for a more coordinated, or â€œholistic”, approach to risk management, and other researchers, such as Crockford (1980), Bannister and Bawcutt (1981) and Stulz (1996), all called for a move away from the silo-based practice of TRM, towards a more optimised risk management system that integrated activities under a single framework. Enterprise Risk Management: Theory and Practice. Managing risk in a more comprehensive and integrated manner is referred to as ERM. See how your offer stacks up to other pay packages and negotiate confidently. Median pay: How much do Actuaries make? Furthermore Nocco and Stulz (2006) argue that ERM can lead to a reduction in the probability of large detrimental cash flow shortfalls (which are economically burdensome to the firm in terms of future growth implications), costly capital acquisition and relinquishing of profitable investments. As the world increases in complexity and inter-related systems require greater levels of understanding and clear communication, the ERM actuary is in strong demand. These businesses also consist of a multitude of different departments, potentially operating from separate and often international locations. The Risk Management Revolution. & Rustambekov, E., 2011. Page 5 Enterprise Risk Management A Life Actuary’s Perspective Company X requires capital of $200m to remain solvent over a one year time frame with probability 99.95%. The Enron (2001) and Worldcom (2002) debacles had, at their core, a breakdown in corporate reporting systems that masked underlying risk exposures. The Case Studies 2.1Case Study 1 – the life insurer, TAL Life Limited In their 2005 paper on ERM for insurance companies, Standard and Poor‟s identified the following five components of ERM The Nexus of Enterprise Risk Management and Value Creation: A Systematic Literature Review. Modigliani, F. & Merton H. Miller, 1958. A State-Preference Model of Optimal Financial Leverage. It is clear that the board of AIG did not have a full comprehension of the true AIG risk exposure resulting from their CDO endeavours. Journal of Risk Management of Korea, 12(1), pp.207–228. Floreani, A., 2012. The Journal of Political Economy, 81(3), pp.637–654. 8 Questions You Should Absolutely Ask An Interviewer, State Street Enterprise Risk Management salaries - 2 salaries reported, Visa Inc. 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What is the ERM actuary? (2012) utilise Chief Risk Officer (CRO) appointments as a binary proxy for ERM implementation and base their findings on the supposition that CRO appointment is indicative of ERM implementation. ERM is often viewed as a difficult to define discipline, but most ERM literature seems to agree that it relates to interchangeable concepts, such as â€œintegrated risk management”, “strategic risk management” and â€œholistic risk management”. PWC (2015) surveyed over 1,000 business executives and found that the perspective of risk is changing from operational to strategic. The Role of the Board in Enterprise Risk Management-The Board of Directors has Direct Responsibility for and, 93(7), p The syllabus for this examination covers key topics in enterprise risk management and is a key component of the pathway for earning the Chartered Enterprise Risk Analyst credential. To answer these questions we first need to take a step back and think about what exactly risk is: Defining risk and deciding how to manage it are key considerations for modern corporate management. This has resulted in increased transparency in terms of effective risk practices that create value and are thus worthwhile. Journal of Applied Corporate Finance, 14(4), pp.56–70.Meulbroek, L.K., 2002. (May 12, 2015) Prior to this time period, risk management focused on managing the downside of risk, which was typically resolved through insurance, which simply pooled the risk with other similar risks, thus allowing the insurer to accept the transfer of risk in a profitable and mutually beneficial setting. Fortune Magazine (July). I'm a UK qualified Actuary and currently a Senior Lecturer of Actuarial Science at Queen's University Belfast. Chartered Enterprise Risk Actuaries (CERAs) are the risk professionals best qualified to lead an organisation’s enterprise risk management (ERM) program. ERM is considered to be an advanced framework for risk management, and it first appeared in 1995 in the Joint Australia/New Zealand Standard for Risk Management (AS/NZs, 2004). The Profession's eShop staged a book signing for author Paul Sweeting's warmly received new title Financial Enterprise Risk Management at the … This led to a broader risk management approach to insurable hazard risks. The study report concluded that almost 75% of these major losses occurred due to correlated and interdependent risks. As we collect more salary reports, we will be able to display related salaries for this job title. Rating agencies, and in particular S&P, have also begun to incorporate the presence of an ERM framework into their rating factors, and thus it can be presumed these policies serve as an additional driving factor behind ERM (Aabo et al., 2005). Clearly, the literature has fallen short on using an all-encompassing ERM measure that addresses and explores the actual processes and factors (Kraus, 2012). Reinsurance: Compacts of god. The optimal risk-taking position lies between these extremes and is characterised by exposing the organisation to an acceptable level of risk that also enhances the potential investment return. Black, F. & Scholes, M., 1973. The Value of Corporate Risk Management. The firm-specific (idiosyncratic) risk and the treatment of it, within an appropriate risk management framework, is a widely debated topic. To approach these challenges, organisations are foregoing traditional risk management processes and embracing a more holistic-based approach. In other words, the ERM approach is a result of the maturing, continuing growth and evolution of the risk management division and its application in a more structured and disciplined way (McCarthy and Flynn, 2004). Finally, with organisations now taking a portfolio view of risk, as described above, there is a growing effort to quantify risk correlations and the overall portfolio risk of the organisation. There is an increasing demand for actuaries in non-traditional roles. (2011) emphasised the benefits of ERM, attesting that hedging residual risk (rather than independent risks) maximises value by allowing the organisation to benefit from a risk diversification effect or recognition of natural risk hedges. The evidence is compelling that the implementation of ERM has the potential to create tangible value amongst organisations in general, but particularly amongst those that are more complex in nature or operate in a strong knowledge-based stakeholder focused environment. 2015 Report on the Current State of Enterprise Risk Oversight: Update of Trend and Opportunities. In contrast, the discipline of ERM takes the advanced view that risk management needs to bring together the individual silos of risk management under a more portfolio-based, holistic approach. Hence, the CAPM asserts that well-diversified investors are able to hold portfolios that will have already eliminated the idiosyncratic specific risks of the firm, thus rendering risk management efforts irrelevant in terms of value creation. From a corporate finance perspective, the additional risk can come in the form of systematic risk, which relates to undiversifiable market uncertainties, or from firm-specific idiosyncratic risk. Standard requirements for such an internship include completion of at least one actuarial exam and a GPA of 3.5 or higher. Aabo, T., Fraser, J.R.S. This more offensive approach towards agility, pro-active risk seeking and attempting to optimise risks, rather than simply reducing or mitigating them, enables a more favourable risk profile to be achieved; such that new business opportunities can be effectively developed and executed as the competitive landscape alters (e.g., from technological innovations). CAS (2003) highlights this danger by arguing: â€œeven seemingly insignificant risks on their own have the potential, as they interact with other events and conditions, to cause great damage” (CAS, 2003). These developments have led to a much more fluid and active transfer of risk between parties and have formed much of today’s corporate risk mitigation strategies. Do Firms Hedge in Response to Tax Incentives? Heightened financial sophistication, advancing technology, emerging geo-political risks and accelerating business activity have also contributed to the number and the growing complexity of risks organisations face. Globalisation, for example, has led to more firms facing regulatory obstacles, geo-political exposures, supply chain risk and foreign exchange rate risk. This is the equivalent Whilst the growth of ERM has varied by organisation and industry, the transition away from the more silo-based and less aggregated traditional risk management practices can be attributed to a number of fundamental drivers, many of which are described in detail by the Casualty Actuarial Society (CAS) ERM Committee (2003). Practical Risk Management, Witherby.Beasley, M., Branson, B. ERM is a multifaceted, ambiguous concept that eludes simple interpretation. As well as the possible beneficial diversification effects of correlated risks, it should be noted that there is potential for risks to compound and lead to significant adverse effects that may not have occurred if the risks were isolated. As previously emphasised, risk management is no longer solely concerned with minimising downside risk and the ERM actuary's focus will shift as a result. Increasingly, organisations are moving from an intuitive, ‘gut-feeling’ approach to more data-driven predictive modelling. The integration of risk management into the firm’s culture and corporate decision making processes. The American Economic Review, 48(3), pp.261–297.Modigliani, F. & Miller, M.H., 1963. Transportation, such as shipping and air travel. Journal of Accounting and Public Policy, 24(6), pp.521–531.Bernstein, P.L., 1998. Available at SSRN 301331. An integrated risk organisation that encourages a centralised risk management process. ERM Initiative at North Carolina State University. Hence it is clear that the sharing of common tools, processes and ERM practices across industries and globally has also played a part in helping to drive and embed the ERM discipline. Lin, Y., Wen, M.-M. & Yu, J., 2012. ERM accounts for all stakeholders, not just shareholders. Various studies have also statistically shown that risk management appears to be adding value in the presence of these market imperfections (e.g., Smith and Stulz, 1985; MacKay and Moeller, 2007). A further driving force in ERM adoption has been the increased ability and tendency to measure and analyse risks as a result of advances in risk-modelling expertise and technology. Deloitte, 2013. In support of the argument for a holistic risk management approach, McShane et al. Salary ranges can vary widely depending on many important factors, including education , certifications, additional skills, the number of years you have spent in your profession. Modern businesses have to contend with increasing complexities due to the rapid and dynamic change and ever-growing volume of global interconnections. Against the Gods: The Remarkable Story of Risk. The study, consisting of 1,000 of the world’s largest global public companies, between 2003 and 2012, reported that 38% of companies suffered a one-month share price decline of more than 20% relative to the MSCI Global 1000 index. As such, ERM assumes that risks are not 100% correlated. This is partly in recognition of the fact that the desire for risk avoidance may actually increase the volatility and fragility of financial markets as a whole via certain investment products (Jacobs, 2004). ), 7 of the Best Situational Interview Questions. Corporate Income Taxes and the Cost of Capital: A Correction. John Wiley & Sons Inc, United States of America. The average Actuary II salary in Alexandria, IN is $77,321 as of November 25, 2020, but the range typically falls between $70,219 and $86,980. The 2007–2008 financial crisis and on-going corporate risk management failures, such as those highlighted in Section 1.2, have led to a greater insistence from regulators, institutional investors and corporate governance oversight bodies that board members and senior management of organisations take more responsibility for managing risk on an enterprise-wide scale and, in general, that risk practices become much more stringent. Journal of Applied Corporate Finance, 17(3), pp.62–75. Whilst defensive risk mitigation strategies certainly play an important role in modern risk management strategies, organisations have begun to focus more on the opportunities that risk may present and how value can be created from it, by taking on risks where the organisation has a competitive advantage. Early research by Modigliani and Miller (1958) questions the validity of risk management efforts. 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