Description: Enterprise risk management ERM is for the measurement and the management of all significant risks of the business holistically irrespective of types and sources. The study offers significant advances in the current debate on the performance of enterprise risk management, in particular, minimizing the existing gap between the academic understanding and practitioners’ experience on the topic.

Description: Management's goal is to continuously optimize the economic value of the firm, subject to regulatory constraints, with the use of financial valuation of the firm’s balance sheet. Both the assets and liabilities can be perceived as derivative securities. This chapter discusses a variety of financial economics issues with this common theme. From Asset-Liability Integration, M-FI02-1.

Description: Exploration of sources of volatility in retiree health valuations, noting how volatility arises and might be mitigated, with discussion of valuation parameters more problematic for retiree health benefits than for pensions. Three significant influences on retiree health valuation volatility are covered-- changes in benefit level, fluctuations in cost level, and alterations in eligibility for, or duration of, benefit – and attention focused on the last two. Specific conclusions result in recommendations, which are supported by practical examples contrasting volatile measurement results with those likely from the recommended practices. Theoretical discussion includes health claim variation, health trend usage, financial economics, option pricing, discount rates, and deterministic vs. stochastic modeling.

Description: Increasing uncertainties and volatility in financial as well as real goods markets increasingly reveal that controlling systems based on deterministic and pseudo-exact values are insufficiently eligible to manage the business activities. This raises the question how management systems can be modified to generate the adequate management impulses in volatile periods. Risk management deals from identifying, evaluating and aggregating chances and risks, which again determine the potential fluctuation range of relevant performance indicators. Everyday corporate life shows that risk management is considered important; but the corresponding processes to identify, evaluate and report chances and risks are seldom part of established decision criteria. This “paradox” lets assume that risks are managed in various differing and unsystematic ways. The combination of traditional controlling methods and risk management is not primarily a methodological challenge. The behavior of the whole organization, practiced over a long-year period, has to be transferred into a new corporate culture of transparent dealing with chances and risks. This paper describes the necessary change management process, which has to come along with necessary methodological modifications.

Description: The amount of 1 [i.e., the amount that $ 1 is worth after 1 year] for an account earning a nominal interest r compounded n times annually is Pn[r,t], where t = [t1, . . . ,tn]. Note that Pn[r,t] is a polynomial in r of degree n. Now suppose that the n compounding periods have lengths T1, . . . ,Tn chosen at random. What can we say about Pn[r , T] , where T=[T1, . . . , Tn]? This depends of course on what is meant by choosing random lengths and we will consider two different natural possibilities that give rise to different answers to this question.

Description: Actuaries have traditionally recognized the links between risk and value, and in recent years have begun to incorporate aspects of modern financial economic theory into their traditional valuation and risk management approaches. As a result, there has been an increasing trend in the incorporation of explicit market-based risk adjustments into valuations, whether for internal or external purposes. The use of market-based metrics to reflect risk in valuations is becoming increasingly widespread—in fact, major external standard setters, including FASB, IASB, CFO Forum and the various parties setting standards for Solvency II, have prescribed varying levels of use of market-based metrics to measure risk in valuations. Presented at 2010 Enterprise Risk Management Symposium, Society of Actuaries, April 12-15, 2010.

Description: Obsolescence of physical assets and processes is a major component of operational risk for some companies. A simulation experiment shows that managers, who consider the retirement and replacement of individual assets in isolation, have rational incentives, due to risk aversion and uncertainty, to defer the replacement of assets past a time that is optimal from the perspective of the shareholder who owns the entire portfolio of such assets. This results in measurable wealth destruction, —and a demonstrable opportunity to significantly enhance a company’s value. A practical decision model for the replacement timing of fixed, physical assets, which creates wealth by minimizing the long-term consumption of scarce resources, is provided.

Description: This article looks at EVA calculation, its various issues and how it can be used to better manage a company. From Society of Actuaries Financial Reporting Monograph, M-AS99-1.