Introducing Enterprise Risk Management Into the University Classroom: A Case Study

• Author: Timothy Higgins,Bronwen Whiting,Chong It Tan,Aaron Bruhn,Bridget Browne
• Date: 01 March 2017
• Published date: 01 March 2017
• DOI: http://doi.org/10.1111/rmir.12071

Risk Management and Insurance Review

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Risk Management and Insurance Review, 2017, Vol.20, No. 1, 99-131

DOI: 10.1111/rmir.12071

EDUCATIONAL INSIGHTS

INTRODUCING ENTERPRISE RISK MANAGEMENT INTO

THE UNIVERSITY CLASSROOM:ACASE STUDY

Aaron Bruhn

Bronwen Whiting

Bridget Browne

Timothy Higgins

Chong It Tan

ABSTRACT

This article reports on the challenges faced when enterprise risk management

courses (commonly studied by practitioners after several years of actuarial

practice) were introduced into a postgraduate coursework degree, and taught

concurrently with Actuarial Control Cycle (Part II) units. A small sample of

students were interviewed, and the information gleaned from these interviews

combined with the reflections provided by teaching staff is used to argue that

although not problem-free, the overall gain to students makes the projectworth-

while. Assessment structure and use of class time in particular are examined as

key features of the class, and potential improvements are suggested.

INTRODUCTION

In this article we report on our experiences of introducing courses in enterprise risk

management (ERM) at the Australian National University (ANU), in 2015. In contrast

to other case studies described in the literature (e.g., Acharyya and Brady, 2014; Okura

and Yanase, 2014), ANU’s ERM courses are set within the framework of postgraduate

study in actuarial studies. Further, for students who achieve very high grades over two

separate but related ERM courses, an exemption is granted from a professional actuarial

examination, which can lead to the professional designation of chartered enterprise risk

actuary/analyst (CERA).

This case study offers a complement to the emerging literature on risk management

education, and provides useful insights into ways to counter some of the shortfalls in risk

Authors are with the Research School of Finance, Actuarial Studies and Statistics, Col-

lege of Business and Economics, Australian National University, Canberra, Australia. Aaron

Bruhn at: phone: +61-2-6125-4904; fax: +61-2-6125-0087; e-mail: aaron.bruhn@anu.edu.au.

Bronwen Whiting at: phone: +61-2-6125-3837; fax: +61-2-6125-0087; e-mail: bronwen.

whiting@anu.edu.au. Bridget Browne at: phone: +61-2-6125-7373; fax: +61-2-6125-0087; e-mail:

bridget.browne@anu.edu.au. TimothyHiggins at: phone: +61-2-6125-4507; fax: +61-2-6125-0087;

e-mail: tim.higgins@anu.edu.au. Chong It Tan at: phone: +61 2 9850 4843; fax: +61-2-9850-9481;

e-mail: chongit.tan@mq.edu.au.

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management education that have been expressed by others. Acharyya and Brady (2014)

highlight various observations about the state of risk management education globally,

pointing out that a variety of academic disciplines and professional bodies have their

own versions, interpretations, and/or emphases in what they consider risk management

to be. Some disciplines focus on quantitative/modeling aspects of risk management, but

give less attention to more subjective, qualitative, or behavioral aspects. Other disciplines

may focus on the latter aspects, but fail to offer precise approaches that address any

immediate problem at hand. In addition, Acharyya and Brady point out the (natural)

tendency of professional bodies to have less interest in theoretical aspects of ERM in

favor of a more practice-based emphasis.

As such, Acharyya and Brady (2014) state that these factors have led to:

1. segmental- or silo-based approaches over holistic approaches to risk management

education, and

2. risk management not yet being a recognized mainstream academic discipline, and

little in the way of best practice being available to guide the design process of a

genuinely holistic course in risk management.

The actuarial profession has a similar understanding of “silo” compared to “holistic”

to the broader risk management professions. A particularly actuarial distinction might

be that it involves relatively sophisticated modeling of dependency structures between

elements of the overall system. As such, a feature of the ERM syllabus, and a focus of the

ANU second-semester course, is to teach advanced statistical techniques for modeling

dependencies between risk factors. Following the global financial crisis, the apparent

reliance on sophisticated mathematics for pricing risk was criticized, due in part to a

lack of understanding of the limitations of some of the methods applied. A good deal

of class time in the second-semester course is spent ensuring that students understand

the limitations of the various modeling techniques. Note that this does not mean under-

emphasizing key details, but rather connecting the detailed models in a reasonable way

to view the complete situation.

We describe the context and features of the courses that have been introduced at ANU

and outline our own approaches to manage the “risks” of delivering a university-based

yet professionally oriented program. These include a high level of interaction with

professional bodies, adherence to professional CERA syllabus standards, ensuring the

appropriate credentials of faculty who teach ERM, and having a feedback mechanism

to ensure lessons are learnt and appropriate modifications are made. This article is one

part of the latter process.

We then describe insights from interviews with a selection of students sitting ERM in

2015. We also reporton the teaching faculty’s own reflections of their experience in 2015

as well as their plans and rationale to modify the ERM courses in 2016 and beyond.

We conclude with a discussion of how elements of ANU’s approach can address some

of the aforementioned shortfalls in risk management education. This offers some en-

couragement that the integration of professional bodies with academia can be a model

that addresses identified shortfalls, as well as enhances the educational and learning

experience for all involved. In this way we add to the growing dialogue in improving

ENTERPRISE RISK MANAGEMENT INTO THE UNIVERSITY CLASSROOM 101

risk management education around the world, and reflect upon and improve our own

delivery to “better” practice over time.

ENTERPRISE RISK MANAGEMENT

Risk is traditionally understood in terms of financial risk—across assets and liabili-

ties. The main drivers are banking (credit and market risk) and insurance (which adds

insurance risk). Operational risk is increasingly considered and incorporated, as are

“higher level” risks such as strategic risks and so on. Risk management has traditionally

been within the domain of the actuary,but has not necessarily expressed as such. It was

traditionally practiced via pricing, valuation, financial condition reports, and embed-

ded value reporting that would include sensitivity and/or scenario testing. As explicit

models for describing and quantifying capital requirements developed, this increas-

ingly became the focus of actuarial risk management. Actuaries have always worked in

conjunction with other risk management professionals such as internal audit.

One of the key benefits of ERM is analogous in some ways to the key benefits of the

actuarial control cycle, which makes up the second part of three parts of the qualifica-

tion system in Australia—this codifies and gives a common language and approach to

something actuaries “have always done.” And given the challenges that many boards

have in expressing a risk appetite and converting that into measurable indicators for

their business, there is clearly still a lot of room for increasing shared understanding of

what risk is and how to think about it.

A layman’s view of risk management might focus on how to avoid or mitigate the

downside impacts of certain events or decisions. A more professional view of ERM

should instead consider both upside and downside impacts of certain events or deci-

sions, and furthermore, this is considered at an organization-wide level so as to capture

dependencies and links between the various functional areas within an organization.

For example, actuarial bodies are seeking to incorporate ERM more meaningfully at a

professional level and in a holistic, rather than piecemeal, manner. Roeschmann (2014,

p. 279) cites the Casualty Actuarial Society, which defines ERM as the process by which

“organizations assess, control, exploit, finance, and monitor risks from all sourcesfor the

purpose of increasing the organization’s short and long-term value to its stakeholders.”

ERM as a discipline also gives particular attention to factors that may have previously

been considered negligible or less important to risk management, such as the risk culture

within an organization (EAC, 2016; Roeschmann, 2014). This differs as to the mechanisms

of corporate governance, which is more concerned with regulatory compliance, policy

compliance, and providing a structure for the interests of shareholders and employees

to be included (Acharyya and Brady, 2014). Indeed, ERM is not about meeting a set of

criteria for the purposes of compliance, but needs to build “a holistic understanding of

risk issues” (Acharyya and Brady, 2014, p. 124).

In highlighting the nature of risk management in many insurers, Roeschmann (2014)

reports surveys that suggest nontrivial differences in how ERM is understood both

within and between companies. This arises from a “subjective silo view” predominating,

including many insurers taking an “overly deterministic, technical view,excluding most

subjective issues” (p. 277), which handicaps at the outset any holistic understanding

of ERM. Instead, effective ERM should incorporate “all quantitative and qualitative