PROCEEDINGS May 15, 16, 17, 18, 2005 - Casualty Actuarial Society

748 PRESIDENTIAL ADDRESSstrategies. When organizations began to use ERM approachesfor capital allocation and tied compensation to the resulting riskadjusted returns, it became serious for many managers. Cases arenow told of dueling modelers, each with their own capital allocationprocess favoring their sponsoring area, who vie to have theirmodel adopted by the organization. ERM is now evolving intorisk optimization and the efficient deployment of capital. Whenan organization accepts risks where it has a comparative advantage,and transfers or avoids risks where it does not, the systemis adding value by efficient risk treatment. ERM deals with theentire range of potential outcomes, not just downside risk.So, how to become an ERM actuary? Step one in ERM, asin traditional risk management, is risk identification–to identifyall significant risks an organization faces. Although actuaries aregood at quantifying risks, other specialties, such as traditionalrisk managers, have greater expertise in the identification of risk,particularly hazard risks. Traditional risk managers, just as mostactuaries, also tended to ignore financial risks. A first step inbecoming an actuary of the fourth kind is to master the skills ofthe risk managers in the identification of risk and then to expandthis identification process to financial, operational, and strategicrisks, as well as hazard risks. The risks an organization faces,though, are myriad. The advice of one ERM pioneer, James Lam,is instructive. His admonition is, “Don’t boil the ocean.” Insteadfocus on the most significant risks an organization faces. Dealwith those first, then in future iterations expand the focus to thenext level of risk elements.Step two in ERM, as in traditional risk management, is toquantify the risks. Actuaries are well skilled in this area, at leastfor hazard risks, but ERM also requires the quantification of thecorrelations among different risks. ERM is concerned with riskin aggregate and to the extent that one risk offsets other risks,then the organization benefits. To the extent that different riskscombine to increase the negative impact, the organization is atrisk. Measuring the correlations is also more complicated than