An ERM Carol

You awake with a start.  There is an eerie presence in your bedroom.  A voice says “Come with me!”

You see yourself, many years ago, starting out in your career.  With an interest in risk, you feel lucky that you were able to land a position in an insurance company.  You are encouraged when you hear your boss say “its all about risk and reward”.  But it didn’t take you too long to find out that while there were daily, weekly, monthly, quarterly, annual and special reports about the rewards that the company was experiencing, there was not one single report about risk.  You confront your manager about this and he tells you that “risk isn’t something that you measure”, it is in your gut.  You just know when something is risky. “.  He advised that once you were more experienced, you too would be able to tell when something was risky or not.  

You drift back to sleep when a second voice calls you to “Behold!”.  You see yourself a manager in an insurance company:

You are being told that risk is very important. Your company takes risk management very seriously. Several years ago, the company spent millions to build a state of the art Economic Capital Model.  Now, all plans and all performance is viewed in terms of the amount of risk associated with each and every activity.  And you hate the whole thing!

To you, this has become a technocratic nightmare.  Your performance is judged by a computer using an algorithm that seems to be spewing forth somewhat random values.  It seems like your promotions and bonuses are being determined by a slot machine, but a slot machine with no window to see what is happening inside.

The high priests of risk operate the model.  But they are too busy to actually explain what is going on in a manner that could help the business.

So if somehow, you are lucky enough to get to the top, that will be the last day for that complex risk model.

And you pull the covers up over your head.  This is too much like a workday.  You need your sleep.  But before long, a third voice wakes you again.   “This way…”

You are on the hot seat.  The board wants to know how the company was able to get into such a problem.  Didn’t you see that there were such enormous build ups of exposures to that risky indoor snow experience sector?  The frostbite claims were double what they were last year.  Dividends will have to be eliminated.  And we probably need to turn down the corporate air conditioners.  No longer could the offices be kept at a tolerable 31 degrees.  Next summer would be unbearable.  Your only defense is that your gut told you that there was little risk and big rewards in the indoor snow business.  But that is not how it went.  They end the meeting by letting you go.  The inglorious end to your career as a risk manager. 

You wake up shouting that it was not your fault.  And you see the light coming in the window.  You turn on the TV to find that all this happened in one night.  You get dressed and go back into the office.  You are finishing up your staff meeting and you direct your attention to your risk management staff.

Starting today, I want you to spend more of your time making your models more transparant and the findings more actionable.  I am tired of risk being something that comes at us after the fact to tell us that something was wrong.  We need to focus on leading indicators that all of the managers can use in real time to manage the business.  You can still use that fancy model that you all so love, but I only want to hear about the model when it actually explains something about the business that I can use next quarter to do a better job of managing my risk and reward.

And with that, we ended the meeting and all went to our holiday party.  Next year will be interesting…..

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