Turning enterprise risk management from an art to a science

With risk assessment and management strategies now a regulated requirement of integrated reports, an actuary with a Chartered Enterprise Risk Actuary (CERA) qualification moves the subject beyond process to a more precise science.

There are three clear tenets of the annual integrated report relating to company strategy: it needs to disclose the strategy and the rationale behind it, it must disclose the performance of the company against that strategy to date, and also disclose any risks identified in the strategy, along with the precautions taken to mitigate those risks. So enterprise risk management (ERM) is becoming recognised as a key pillar of sound governance, to the extent that there is now an actuarial qualification – the CERA credential – devoted to assessing and mitigating risk as comprehensively as possible.

“Old-style risk management, essentially, involved round-table brainstorming,” says CERA-certified actuary Arthur Els, Managing Director of ARGEN Actuarial Solutions. “You would get all the heads of department together, and everyone would talk about what they foresaw as potential risks, and you’d all discuss possible solutions. You’d end up running your risk management strategy by consensus – so as a process, it was pretty good; very inclusive, with lots of feedback – but it was still almost entirely intuitive and each division in the company would have its own ERM operation. The CERA brings mathematical modelling and computer simulations to the process of assessing risk scientifically; it takes ERM further by connecting the ERM strategy to the company’s financial statements and strategic vision. We can even show the client what the effects of a ‘black swan’ event (ie, a rare catastrophe) will be on the business. We consult as active members on risk committees and with chief risk officers, using CERA techniques to identify and manage risk critically, creatively and collectively.”

CERA: comprehensive and intensive

ARGEN, formed in March 2014 by the merger of actuarial firms Arthur Els & Associates and Genesis Actuarial Solutions, is exceptionally well placed to offer ERM advice, as it includes on its staff one of the very few CERA-certified actuaries in South Africa as well as other staff close to obtaining this international qualification. The CERA curriculum covers probability, financial mathematics, micro/macro-economics, construction of actuarial models, advanced finance- and enterprise-risk management, financial reporting and operational risk. Training includes the theoretical, practical and professional underpinnings of ERM, with a rigorous and comprehensive grounding in both the qualitative and quantitative skills required.

“It’s not just a question of identifying what the risks are,” says Els. “You also need to be able to assess how big an effect it would have on the company’s balance sheet. If this risk were to become a reality, would it be a minor dip in the year’s profits, or would it take out your business? The CERA has the tools and training to assess that accurately; to tell you when a risk is too big for your company alone, but might be manageable if you share it in partnership with another company, for example – or to show you a computer model of what happens to your business model if the dollar goes to R14.”

In effect, CERA represents a leap forward in ERM; bringing a fresh approach as consultants into the “closed shop” that was traditional ERM. “What we offer clients is a way to take their risk management a step up, to link it to the company’s vision, for the benefit of all stakeholders in the company,” concludes Els. “We bring in the theory and the modelling, and an understanding of finances – it’s a new level of risk assessment.”