Enterprise Risk Management for Smaller Insurance Companies

Guest Post By Max J. Rudolph, FSA CERA CFA MAAA


In today’s volatile world insurance companies need an ERM framework in place to help manage risk. The path taken can vary, but iterative movements to improve risk culture and risk identification can lead to an optimization of the balance between risk and reward. Better decisions are made and value is added.

Large insurers tend to have specialized staffs, with pricing actuaries separated from reporting actuaries both physically and culturally. Small and mid-sized insurers have actuarial staffs that do it all. This requires a team of detail oriented generalists, a true oxymoron. These actuaries price the products, develop the projections, and complete any regulatory reporting that is necessary. Managements often use senior actuaries as key members of their team, and this often leads to long and fulfilling careers.

The goal of enterprise risk management is to make better decisions regarding the overall risks taken by a firm. This means looking at specific risks holistically, across all business lines, as well as aggregating risks across the enterprise.

What’s in it for me?

Why should small company actuaries, already stressed by regulatory burdens and increasingly complex models, embrace enterprise risk management (ERM)? In many ways the profile at smaller firms I described means that the actuary is already highly involved in ERM without calling it that. Leadership teams at small firms are asked to address all risks and talk through issues as a group. The senior actuary is typically one of the primary go to employees for financial issues, providing peer review capabilities for the CEO. These teams are tackling ERM, but when an external stakeholder like a rating agency asks about the firm’s ERM process the question might be left blank or given an incomplete answer. This is partly due to newness to the subject for the external stakeholders. The way the question is asked does not elicit a full response. There are generally so many things to discuss during an annual visit that developing ERM with small firms rarely makes the cut for the live presentations.

In many ways, suggestions for small insurer ERM parallel that of larger firms. Identifying and prioritizing risks taken, developing strategies to manage them, and most importantly using this information to improve decision making does not vary in concept. It is the implementation that is different. While large firms will involve many people from a variety of units, small firms can accomplish much of the project with a small group sitting together for a much shorter period of time. This is more efficient but other means must be used to instill the risk culture throughout the organization.

ERM Framework

With limited resources, actuaries must plan in advance how to best leverage an ERM framework to help meet the needs of other projects as well. Principles-based approaches to reserves and capital requirements are right around the corner and serve as an excellent example of how ERM and other projects can leverage each other to accomplish multiple   tasks. Model improvements can be made in a base model that is then used for many tasks, including pricing, cash-flow testing, and strategic planning. Using one base model will save time when others ask you to explain the differences between them. The AAA is also developing tools to help practitioners meet the new regulatory requirements of PBA. Know what is available. For example, the AAA interest rate scenario generator provides a safe harbor for regulatory purposes as well as a learning tool for internal decision making as modelers get more comfortable with stochastic analysis. Using it first can provide an opportunity to better understand the nuances of a firm’s business.

This continues in August Newsletter

Explore posts in the same categories: Enterprise Risk Management, ERM, Modeling, Risk, Small Companies


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One Comment on “Enterprise Risk Management for Smaller Insurance Companies”

  1. PSI Says:

    Good article with the information about Enterprise Risk Management. Here they explained what is ERM and the need of the same, and also given the definition of Goal of Enterprise Risk Management. We can get the idea of ERM Framework also.



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