10 ERM Questions from an Investor – The Answer Key (3)

Riskviews was once asked by an insurance sector equity analyst for 10 questions that they could ask company CEOs and CFOs about ERM.  Riskviews gave them 10 but they were trick questions.  Each one would take an hour to answer properly.  Not really what the analyst wanted.

Here they are:

  1. What is the firm’s risk profile?
  2. How much time does the board spend discussing risk with management each quarter?
  3. Who is responsible for risk management for the risk that has shown the largest percentage rise over the past year?
  4. What outside the box risks are of concern to management?
  5. What is driving the results that you are getting in the area with the highest risk adjusted returns?
  6. Describe a recent action taken to trim a risk position?
  7. How does management know that old risk management programs are still being followed?
  8. What were the largest positions held by company in excess of risk the limits in the last year?
  9. Where have your risk experts disagreed with your risk models in the past year?
  10. What are the areas where you see the firm being able to achieve better risk adjusted returns over the near term and long term?

They never come back and asked for the answer key.  Here it is:

3.  The answer to this question requires several parts of risk management to be right.  First of all, the answerer needs to know which risk position grew the most.  Second of all, in a good risk management program, the position that grew the most should have had by far the most scruitny.  High growth does not always spark big blow ups, but big blow ups are always preceded by high growth.  A firm that is not paying lots and lots of attention to its fastest growing risk is not going to end up with good results.  The highest growth positions require a disproportionate large amount of attention, but most often they get a disproportionately smaller share of attention.  Risk management budgets are determined based upon the business at the start of the year.  Finally, to answer the question, the firm needs to have someone who they can immediately identify who is responsible for that risk.  Best practice is to have a senior person responsible for each major risk.  That should be a business person, not the CRO or CFO.  If it is not the same person who is responsible for sales and profits, then management has set up a fight.  On one side is the person responsible for bringing in the business and for achieving profits.  On the other side is the person responsible for preventing losses.  Not a fair fight in most firms.

In the end, the best practice firms recognize that in situations of great change, there needs to be a special ERM process that exceeds the regular ERM process.

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2 Comments on “10 ERM Questions from an Investor – The Answer Key (3)”

  1. riskviews Says:

    I totally agree that it is of utmost importance. I was not sure however, that it belonged on this particular list.

    I have spoken to a number of CEO’s about ERM and never thought to ask that question. Perhaps I should have.

  2. Rolande Mbatchou Says:

    I think you should add a 11th bullet relating to values/ethics: “What is the tone at the top at your corporation in regards to risk and how do you help promote an effective Enterprise Risk Culture ‘ERC’? “. I think it is very important for an entire organization to understand the sets of values or mission driven behind risk management decisions. To add, there should be an enterprise risk culture in order to ensure that ALL stakeholders play a role in managing risks.
    Maybe you wanted to address this point in one of the questions but I just thought this question was relevant as well!


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