Keys to ERM – Discipline

Posted January 11, 2017 by riskviews
Categories: Enterprise Risk Management

keys

There are four keys to ERM – The second is Discipline

Discipline is tightly linked with Transparency, another Key to ERM.  Transparency helps to encourage and enforce Discipline.

There are three ways that Discipline is Key to ERM.

Enterprise risk management brings discipline to the mitigation of individual risks, to aggregate risk management and ERM also promotes a disciplined commitment to a comprehensive approach to risk management.

Enterprise risk management brings the discipline to risk management by making explicit plans for managing risk and then following up, checking on the execution of those plans, and reporting the results of those checks. To some, this seems like lots and lots of needless redundancy, but they miss the point. Discipline makes risk management reliable instead of being another wild card in an uncertain world.

ERM encourages insurers to clearly state their approach to risk as well as the amount and types of risks that they will accept. Clear and coherent communication is an often-underappreciated discipline that is much more difficult than it appears. ERM provides a script and outline that makes it easier to speak clearly about risk and risk management.

ERM always starts with a risk identification and prioritization step, so that while all risks are considered, time and resources are used wisely by focusing only on the most significant risks.

Discipline is unlikely to be maintained in secret. Because of Transparency, is is easily and widely known when Discipline falters.   Insurers that want to have an effective and Disciplined ERM program will have both Discipline AND Transparency.

This is an excerpt from Discipline is key to ERM on the WTW Wire Blog.

Keys to ERM – Transparency

Posted November 16, 2016 by riskviews
Categories: Enterprise Risk Management

keys

There are four keys to ERM.  The first is Transparency.

In traditional risk management situations, the degree to which risk is tightly controlled or loosely allowed is often a personal decision made by the middle manager who “inherited” the responsibility for a particular risk. That person may make the best decision based on full knowledge of the nature of the risk and the availability and cost of mitigation of the risk, or they might just choose an approach based on poor or even inaccurate information because that is the best that they can find with the time they can spare.

Enterprise risk management (ERM) is a commitment to executive and board attention to the important risks of the firm. In a fully realized ERM, the risk profile of the firm and the plans to change or maintain that profile from one year to the next—while exploiting, managing, limiting or avoiding various risks in ways that are tied to the firm’s  strategy—are shared among the management team and with the board.

In the best programs, the risk profile and risk plans are not only shared, they are a topic of debate and challenge. These firms realize that a dollar of profit usually has the exact same value as a dollar of loss, so they conclude that risk management, well-chosen and executed, can be as important to success as marketing.

A clever math student may be able to just write down the answer, but teachers often insist that students show their work to get credit.

Take-Away:
“Show your work” is the idea of ERM
Show steps of and thinking behind risk management process.
Helps others understand intent and determine whether objectives are being met.

More about Transparency about risk and risk management and how it is important to executive management, to the board and to middle managers on Willis Towers Watson Wire.

Who is interested in ERM?

Posted October 20, 2016 by riskviews
Categories: Enterprise Risk Management

enterprise-rm-map

The map above is from Google Trends.  It shows the frequency of Google searches for the term ERM over the past year.  Darker blue means more searches.  No blue means no searches.

 

You can interpret the 12 states with no seaches two ways:

  • Folks in these states already know enough about ERM and have no need to search for more.
  • Folks in these states have no interest in ERM.

Either way, an interesting map.

Risk Trajectory – Do you know which way your risk is headed?

Posted July 25, 2016 by riskviews
Categories: Enterprise Risk Management, Risk Appetite, Risk Environment, Risk Management System

Tags: ,

Arrows

Which direction are you planning on taking?

  • Are you expecting your risk to grow faster than your capacity to bare risk?
  • Are you expecting your risk capacity to grow faster than your risk?
  • Or are you planning to keep growth of your risk and your capacity in balance?

If risk is your business, then the answer to this question is one of just a few statements that make up a basic risk strategy.

RISKVIEWS calls this the Risk Trajectory.  Risk Trajectory is not a permanent aspect of a businesses risk strategy.  Trajectory will change unpredictably and usually not each year.

There are four factors that have the most influence on Risk Trajectory:

  1. Your Risk Profile – often stated in terms of the potential losses from all risks at a particular likelihood (i.e. 1 in 200 years)
  2. Your capacity to bare risk – often stated in terms of capital
  3. Your preferred level of security (may be factored directly into the return period used for Risk Profile or stated as a buffer above Risk Profile)
  4. The likely rewards for accepting the risks in your Risk Profile

If you have a comfortable margin between your Risk Profile and your preferred level of security, then you might accept a risk trajectory of Risk Growing Faster than Capacity.

Or if the Likely Rewards seem very good, you might be willing to accept a little less security for the higher reward.

All four of the factors that influence Risk Trajectory are constantly moving.  Over time, anything other than carefully coordinated movements will result in occasional need to change trajectory.  In some cases, the need to change trajectory comes from an unexpected large loss that results in an abrupt change in your capacity.

For the balanced risk and capacity trajectory, you would need to maintain a level of profit as a percentage of the Risk Profile that is on the average over time equal to the growth in Risk Profile.

For Capacity to grow faster than Risk, the profit as a percentage of the Risk Profile would be greater than the growth in Risk Profile.

For Risk to grow faster than Capacity, Risk profile growth rate would be greater than the profit as a percentage of the Risk Profile.

RISKVIEWS would guess that all this is just as easy to do as juggling four balls that are a different and somewhat unpredictably different size, shape and weight when they come down compared to when you tossed them up.

 

Linking Strategy and ERM – The Final Frontier

Posted July 19, 2016 by riskviews
Categories: Enterprise Risk Management

4 steps to linking strategy and ERM

Many organizations have use the concepts and practices of Enterprise Risk Management to improve the control of their major risks. If applied properly, ERM will improve the transparency and discipline of risk management.  With a risk management regime that is transparent and disciplined, management should begin to notice whether it is aligned with company objectives…whether it is linked with strategy.  When linked with strategy, ERM can act like the crew on a catamaran who lean against the tilt of the boat in heavy wind.  Or to use another nautical analogy, can be the keel of the boat that helps to keep it upright.  The aligned ERM program will not be heavy cargo stacked on the deck, nor will it act like the passengers who run to the low side of the boat.

And better still, ERM can help the boat to get where it is going by helping to choose a path between or around the rocks.  But insurer strategies vary widely, so it seems logical that the linkage of ERM with strategy will vary.  And that may be the reason that there is so much difficulty with the process of aligning strategy and ERM.  Too much advice that focuses on just one way to accomplish that – one way that will work best with just one of the dozens of existing insurer strategies.

4 steps to linking strategy and ERM continues this discussion on the Willis Towers Watson blog.

You have to show up

Posted June 20, 2016 by riskviews
Categories: Chief Risk Officer, Enterprise Risk Management, ERM, Insurance Risk

Woody Allen’s adage that 80% of success is showing up is particularly difficult for some managers to take to heart regarding risk management.

When risk management is successful, there is no bell that rings.  There are no fireworks.  Usually, a successful risk management moment is evidenced by a lack of big surprises.

But most days, big surprises do not happen anyway.

So if risk managers want to be appreciated for their work, they have to do much more than just show up.  They need to build up the story around what a very good day looks like.

  • One such story would be that a very good day might happen when the world experiences a major catastrophe.  A catastrophe that is in the wheel house of the firm.  And because of a good risk management process, the firm finds that its losses are manageable within its capacity to handle losses.
  • In 2011, there were major earthquakes in New Zealand, Japan and Chile.  One reinsurer reported that they had exposures in all three zones but that they were still able to show a (very small) profit for the year.  They credited that result to a risk management process that had them limiting their exposure to any one zone.  A risk manager could work up a story of events like that happening (multi event stress scenarios) and preview the benefits of ERM.

With such stories in mind, when that big day comes when “Nothing Happens”, the risk managers can be ready to take credit!

But to do that, they need to be sure to show up.

 

Management by Onside Kick

Posted June 6, 2016 by riskviews
Categories: Credit Risk, Data, Decision Makng, Enterprise Risk Management, Hedging, Uncategorized

Tags:

Many American football fans can recall a game when their team drove the ball 80 or more yards in the waning moments of the game to pull within a touchdown of the team that had been dominating them. Then they call for the on side kick – recover the ball and charge to a win within a few more plays.

But according to NFL stats, that onside kick succeeds only 20% of the time in the waning minutes of the game.

Mid game onside kicks – that are surprises – work 60% of the time.

But mostly it is the successful onside kicks that make the highlights reel. RISKVIEWS guesses that on the highlights those kicks are 80% or more successful.

And if you look back on the games of the teams that make it to the Super Bowl, they probably were successful the few times that they called that play.

What does that mean for risk managers?

Be careful where you get your statistics. Big data is now very popular. Winners use Big Data. So many conclude that it will give better indications. But make sure that your data inputs are not from highlight reels or from the records of the best year for a company.

Many firms use default data collected by rating agencies for example to parameterize their credit models. But the rating agencies would point out that the data is from rated companies only. This makes little difference for rated Bonds. There the bonds are rated from issue to maturity or default. But if you want to build a default model of insurers or reinsurers then you need to know that many insurers and some reinsurers will drop their rating if it falls below a level where it hurts their business. So ratings transition statistics for insurers are more like the highlight reels below a certain level.

Some models of dynamic hedging strategies were in effect taking the mid game success rates and assuming that they would apply in bad times. But like the onside kick, things worked very different.

So realize that a business strategy and especially a risk mitigation strategy may work differently when things have gone all a mess.

And an onside kick is nothing more than putting the ball in play and praying that something good will happen.


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