Description of the role of the Chief Risk Officer(CRO) Description du rôle du Chef de la gestion du risque

1. Friday, May 11
8 – 9:30 a.m.
Session 60
Session Sponsor: Joint Risk Management
Emergence of the Chief Risk Officer
Moderator: Sim Segal, FSA, MAAA
Presenters: Robert G. Lautensack, Jr., FSA; Henry M. McMillan, FSA, MAAA; Michel Rochette, FSA
A chief risk officer and an industry expert will explain the function of the CRO and skill sets required to
serve in this capacity. What is the CRO’s responsibility and how does it fit within the organizational and
decision-making structure of the firm? How is CRO performance evaluated? The discussion will include an
examination of the value the actuarial skill set provides to those in, or being considered for, this role
You will learn for yourself what skills need to be acquired to sit in the “C” suite. Or, if you are a company
executive, understand better how this role can serve the needs of your firm.
Targeted Value Ladder Stage: Market
Coordinators: Anthony Dardis, FSA, FIA, MAAA; David T. Henderson, FSA, MAAA

2. Enterprise Risk Advisory, LLC
May 11 2007
Bob Lautensack
Henry McMillan
Michel Rochette
Sim Segal
Role of the CRO

3. Enterprise Risk Advisory, LLC 2
(1)Main Roles of a CRO:
 CRO is NOT the Risk Manager of the Risk Managers!
 Leader, facilitator, integrator, coordinator of risk rather than a
manager of risk.
 Create a culture risk awareness within the organization.
 Formally bring consideration of risk into the strategic decision
making.
 Develop a center of excellence for managing risk using the skills
sets of individual risk managers.
 Communicate to all stakeholders – internal and external – about
risk.
 Bring the BIG PICTURE PERSPECTIVE!

4. Enterprise Risk Advisory, LLC 3
(1)Main Responsibilities of a CRO:
 Develop, maintain, and update risk governance
framework:
 Risk policies, risk appetite and risk limits.
 Risk infrastructure, process and reporting.
 Risk integration and links between risks.
 Coordinate with business line:
 Risk training
 Risk assessment and action plans
 Incorporate risk elements in performance metrics
 Ensure lines of business have risk capacity both in
personnel and risk systems.

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(1)Main Responsibilities of a CRO:
 Senior management:
 Advice on risk issues in strategic decision making
 Provide aggregated and detailed reports on risk in
line with risk appetite and limits
 Keep management appraised of industry standards
 Committees:
 ALM, Credit, Operational, IT, Security
 External Party liaison
 New regulatory risk initiatives: Ex. NAIC Corporate
Governance for Risk Management Act.

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(1)Skills Required:
 Some quantitative skills but not be a polymath: analytical,
understands the models and bright!
 Excellent understanding of the supply value chains of your
organization: See the links between risks that the risk silos don’t
see!
 Strategic and tactical thinker.
 Ability to understand business issues.
 Ability to compare risk and reward.
 Leader/ educator in terms of promoting a risk culture.
 Project manager of risk initiatives.
 Ability to synthesize a lot of data and see trends and potential
impact on company.
 Communication skills are a priority because a
CRO is a C-level Executive: written and oral.

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(1)Differences between Actuaries and CRO
 Actuaries:
 Emphasize high
quantitative skills
 Specialize in a field:
Valuation, pricing, risk…
 Risk field: focus on
measurement of risk
 Communication with peers
 Usually function with other
actuaries in actuarial
departments.
 CROs:
 An analytical background is
sufficient
 Overall view of the
businesses: Integrative
view. Can see the links.
 Some risk can’t be
quantified but doesn’t mean
that they can be managed.
 Communication to a broad
audience, internal/external.
 Build links with business
units where risks are
managed.

8. Enterprise Risk Advisory, LLC 7
(2)Internal: Interaction with the Board
Once a month
Once a quarter
Twice a year
Once every year
Other
Do not formally report 8%
1%
11%
15%
53%
12%
TP 2006 ERM Survey
92% report on risk to their
Board of Directors at least annually

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(2)Internal: Interaction with Senior
Management
Once a month
Once a quarter
Twice a year
Once every year
Other
Do not formally report
7%
5%
6%
8%
35%
39%
More frequent than with the Board, about 40% monthly
TP 2006 ERM Survey

10. Enterprise Risk Advisory, LLC 9
(2)External: Interaction with Shareholders
Once a month
Once a quarter
Twice a year
Once every year
Other
Do not formally report 39%
4%
27%
8%
18%
4%
TP 2006 ERM Survey
The majority (61%) of respondents indicate they
report on risk to shareholders at least annually

11. Enterprise Risk Advisory, LLC 10
(2)External Interaction with Regulators
Once a month
Once a quarter
Twice a year
Once every year
Other
Do not formally report 38%
5%
32%
3%
18%
4%
62% of the participants formally report on risk to regulators
TP 2006 ERM Survey

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(2)External Interaction with Rating Agencies
Once a month
Once a quarter
Twice a year
Once every year
Other
Do not formally report 37%
3%
48%
6%
6%
0%
63% report on risk to the rating agencies at least annually
TP 2006 ERM Survey

13. Enterprise Risk Advisory, LLC 12
(2)Internal Communication of Risk
Regular reports to executive
committee/board of directors
On an ad hoc, as-needed basis
Regular reports to CRO
Risk “dashboards” at the risk
category, business or corporate
level
Regulatory reporting formats
Other 4%
25%
29%
32%
45%
75%
(75%) provide reports on key risk exposures and risk management activities to
the executive committee or Board of Directors
TP 2006 ERM Survey

14. Enterprise Risk Advisory, LLC 13
(2)External Communication
Provide separate information to rating
agencies
Separate section devoted to risk management
in annual report
Provide supplementary information to
regulators
Use regulatory reporting formats
Provide separate information to financial
analysts
Do not externally communicate with
stakeholders
Hold focus groups with key
customers/suppliers/community
Other 4%
3%
14%
18%
31%
32%
45%
59%
More common with European insurers (68%)
North America (26%)
TP 2006 ERM Survey

15. Enterprise Risk Advisory, LLC 14
(3)Decision Making by CROS: Risk/Control
 High Level position => High level involvement
 Oversight role, not a cop!
 Must exist at the same level as CFO.
 Areas of focus:
 Risk identification, particular emerging risks
 Risk approval process of new initiatives making sure that all
risks are taken into account
 Risk exception authorization
 Risk prioritization and escalation.
 Risk mitigation strategies and alternatives
 Risk compliance and business continuity.
 Risk communication

16. Enterprise Risk Advisory, LLC 15
(4) Risks under CRO’s Purview Now
 Financial risks:
 Interest rate (97%)
 Equity(81%)
 Credit (asset default/migration) (80%)
 Liquidity (41%)
 Demographic risks:
 Mortality (92%)
 Lapse ( 84%)
 Longevity (73%)
 Policy holder behavior (58%)
 Operational risks (70%)
TP 2006 ERM Survey

17. Enterprise Risk Advisory, LLC 16
(4)Risks under CRO’s Purview: Emerging
Reputational Risk
(52)
Regulatory Risk
(40)
Human Capital Risk
(40)
IT RISK
(35)
Financial, Market, Credit and Insurance Risk
(30)
Crime, security, political, natural hazard, FX, Terrorism, Country Risk
(20)
Source: Economist Intelligence
Unit, 2005
Max Scale: 100

18. Enterprise Risk Advisory, LLC 17
(5) TOP RISKS
 Economic risks:
 Credit losses are at historical lows: Risk of downturn is
increasing. No spill over yet from SubPrime meltdown.
 Political risks are increasing everywhere.
 Liquidity risk: private equity, structured deals.
 Thus: Scenarios and Stress tests still RELEVANT.
 Compliance with the new regulatory environment:
 NAIC Corporate Governance For Risk Management Act
 Solvency II.
 Principles-based
 Others: AML
 Monitoring and identifying emerging risks:
 Longevity risk. Impact of new lifestyles, drugs on health.
 Extreme events: Avian Flu, terrorism and business continuity
 Concentration of risks and links between risks.

19. Enterprise Risk Advisory, LLC 18
(6)Reporting relation of the CRO
Responsible for Risk Management
To Whom Primarily Reports
The person responsible for risk management most often reports to
the CEO (45%)
Chief Risk Officer
Chief Fin. Officer
Risk Management
Committee
Chief Actuary
Head of Internal
Audit
Other 14%
1%
8%
16%
18%
43%
CEO
CFO or Financial
Director
Board of Directors
COO
Risk Committee
Other 6%
4%
4%
17%
24%
45%
TP 2006 ERM Survey

20. Enterprise Risk Advisory, LLC 19
(7)ERM Culture
 Evolutionary process: Must see a trend in a company from:
 Existing risk identification in silos.
 Start establishing links between risks: Ex. Natural Hedge
between life and annuity operations.
 Start being proactive in risk assessment: Forward looking, not
just reporting on existing situation.
 Embed risk analysis in new initiatives – new product, new IT
system, M & A,
 Communicate internally and externally about your risk
situation.

21. Enterprise Risk Advisory, LLC 20
(7) ERM Culture: Enshrined in organizations
when:
 Business lines takes the initiative on risk issues: Behaviors have
changed.
 Prevention: Scanning for risks, consciously choosing the risks we
want to retain, then managing them proactively.
 Detection: Early identification of risks from internal or external
sources.
 CRO focuses only on emerging risk.
 Recovery after risk occurrence and learn quickly: continuous
improvement.
 Risk analysis becomes as important as revenue generation:
activities are evaluated on a risk-adjusted basis.
 Compensation becomes tied to risk.

22. Enterprise Risk Advisory, LLC 21
(8) Risk Appetite:
 Definition: Risk appetite is defined as the
organization’s willingness to accept risk in pursuit of its
strategic objectives.
 Risk appetite is assessed against the organization’s
key drivers of success: financial and non financial.
 The establishment of the statement on risk appetite is
intended to guide employees in their actions and ability
to accept and manage risks.
 Preferable if determined from top down rather than
bottom up.
 Define metric: Debt rating, earnings volatility.

23. Enterprise Risk Advisory, LLC 22
(8) Risk Appetite:
 Link with overall strategic goal.
 Ex. Insurance financial strength rating or desired debt rating -
which implies a desired capital to keep that rating over a given
time horizon-.
 Translate into day-to-day management:
 Allocate risk appetite to each type of risk by setting up
appropriate limits including the zero tolerance risk.. Ex. Fraud..
 Allocate risk appetite even for the non quantifiable risk: Ex.
Reputation risk. Firm not willing to compromise its reputation.
 Define risk tolerances around that risk appetite.
 Communicate internally and externally: Build expectations
about risk. When risk materializes within limits, markets will not
react as they have already built it into their pricing.

24. Enterprise Risk Advisory, LLC 23
(9) Challenges of the CROs
 Ensuring that the organization is in compliance with
the ever changing regulatory environment.
 Informing the Board about significant risk issues.
 Assuring business continuity and prepare for crisis:
crisis management and fight inertia to do so.
 Monitor emerging risks: Operational, reputation,
environmental.
 Get an integrated picture of risk: Establish links.
 Embed risk management in day-to-day operations.
 Linking risk management in capital management.

25. Enterprise Risk Advisory, LLC 24
(9) Challenges of the CROs
Improving the risk measurement and quantification
processes
Acting to manage the risk profile of your
organization
Improving internal risk reporting processes
Ensuring that risk management considerations are
explicitly factored into decision making
Improving the risk identification and prioritization
processes
Establishing a risk framework and/or risk policy
Improving education and internal communication of
risk management principles and approach
Establishing a risk management organization and
governance structure
Improving external communications
Incorporating risk management considerations into
incentive compensation
Other 1%
8%
14%
42%
46%
53%
54%
59%
63%
64%
77%
TP 2006 ERM Survey

26. Enterprise Risk Advisory, LLC 25
Thanks
 Ellen Bull, Librarian at the SOA for useful references
and help for my two presentations

27. SOCIETY OF ACTUARIES
Life Spring Meeting (May 2007)
Session Topic:
Value Ladder
All Sessions 60
Expected Attendance 2,690 32
Actual Attendance 2,238 17
Number of responses 998 11
Return rate (# of resp./actual att.) 45% 65%
Overall 1
Rating Overall rating of this session 3.78 4.30
Provided you with practical technical information 3.97 3.60
Will enable you to make better business
decisions
3.83 4.10
Prepared you to impact industry-wide changes 3.64 4.00
Knowledge of Subject 4.28 4.36
Effectiveness of Delivery 3.79 4.50
Number of participants indicating presenter included
commercial promotion in presentation
0
Knowledge of Subject 4.28 4.27
Effectiveness of Delivery 3.79 3.90
Number of participants indicating presenter included
commercial promotion in presentation
0
Knowledge of Subject 4.28 4.55
Effectiveness of Delivery 3.79 4.30
Number of participants indicating presenter included
commercial promotion in presentation
0
Sim Segal Moderator Effectiveness 1
: Rate the
moderator's skills in managing this session
3.80 4.64
1
The rating scale used: Excellent (5), Very Good (4), Good (3), Fair (2), Poor (1), and N/A (no value).
2
The rating scale used: Strongly Agree (5), Agree (4), Neither Agree nor Disagree (3), Disagree (2), Strongly Disagree (1), and N/A (no value).
Emergence of the Chief Risk Officer
Robet Lautensack
Market
Learning
Experience 2
Indicate your level of
agreement with the
following. This session:
Evaluation Tips to keep in mind when reviewing the responses:
Numerical evaluations tend to give you a pretty good feeling for how well the attendees responded to the session as a whole. Scores in the
range of 3 to 5 are considered successful programs. Written comments come from people who may have a strong opinion, therefore they tend to
be very good or very bad. Repetitive comments that point to the same theme could be an indication of an area you may want to capitalize on in
the future or work on for future presentations.
Henry McMillan
Michel Rochette
PresenterEffectiveness1
4.30
3.60
4.10
4.00
4.36
4.50
0
4.27
3.90
0
4.55
4.30
0
4.64
3.78
3.97
3.83
3.64
4.28
3.79
4.28
3.79
4.28
3.79
3.80
This Session
All Sessions
Perception Solutions, Inc. www.perceptionsolutions.com 7/17/2007

28. SOCIETY OF ACTUARIES
Life Spring Meeting (May 2007)
Session Evaluation (Participants' Comments)
Session Value Ladder Overall Comments Regarding This Session
60 Market Good discussion - should be repeated so more attend.
60 Market Great format!
Perception Solutions, Inc. www.perceptionsolutions.com 7/18/2007 Comments- 1