Enterprise Risk Management: Applications in the Private & Public Sectors

Transcription

1

2 Enterprise Risk Management: Applications in the Private & Public Sectors

3 Agenda 1. Presentation goals and panelists 2. ERM definition 3. Origins of enterprise risk management 4. Examples of creating value with ERM 5. Harnessing ERM in your role 6. ERM and The Institutes 7. Wrap-up

4 Presentation Goals, Panelists and Contributors Panelists: Leo Costantino, CPCU, ARM Bickmore Risk Consulting Services Michael Elliott, CPCU, AIAF The Institutes Lisa Kremer Marsh Contributors: Carrie Frandsen University of California Office of the President Lisanne Sisson Bickmore Risk Consulting Services Linda Conrad Zurich

5 What Is ERM? A strategic business discipline that supports the achievement of an organization s objectives by addressing the full spectrum of its risks and managing the combined impact of those risks as an interrelated risk portfolio. RIMS

6 Comparing Traditional RM With ERM 1. Traditional RM focuses on hazard risk. 2. Traditional RM seeks to restore an organization to former preloss condition. 3. Traditional RM focuses on the value of the accidental loss. 4. Therefore, traditional RM is both its own discipline and part of the broader ERM discipline. 1. ERM encompasses both hazard risk and business risk. 2. ERM seeks to enable an organization to fulfill its greatest productive potential. 3. ERM focuses on the value of the organization. 4. ERM focuses on the organization as a whole. Excerpt from ARM textbook: Risk Financing by Berthelsen, Elliott and Harrison, page 1.14.

7 Origins of Enterprise Risk Management ERM Past and Present How Did We Get Here? Frameworks ERM s relationship with regulatory and compliance functions ERM from the carrier and financial institution perspective

8 Evolution of ERM Embryonic development of enterprise risk management S&P expands review of ERM in its ratings of nonfinancial institutions Development of disciplined approach to market risk and energy risk Collapse of companies (Enron, Andersen, WorldCom,...) 1970s 1980s 1990s 2000s 2010s Development of robust approaches to credit and operational risk Increased regulator pressure to demonstrate sound risk management practices (e.g., Basel II, SOX) SEC expanded disclosure of risk oversight Rating agency review of ERM in financial institutions 8

9 Emergence of ERM Standards COSO ERM framework Developed by a private-sector organization; sponsored by five professional associations in the U.S. Accepted by U.S. SEC Embeds internal control framework Mainly adopted in U.S. or by companies listed in U.S. stock exchanges BS British National Standard Officially published summer Australian Standard 4360 The first ERM standard Most-adopted internationally Major adopted markets: Australia, New Zealand, Europe, Japan China SASAC* ERM guidelines Mandatory for central SOEs (state-owned enterprises) in China Required pilot enterprises to submit annual report starting 2008 ISO Mainly based on AS

10 COSO ERM Framework and ISO ERM is a process to help achieve entity objectives across these categories Eight interrelated components Source: Enterprise Risk Management Integrated Framework. Committee of Sponsoring Organizations of the Treadway Commission, 2004, and ISO Applies to activities at all levels of the organization 10

11 Development of Risk Assessment U.S. Property-Casualty Insurers ORSA Future Competing when the game changes RBC BCAR AM Best s capital adequacy ratio S&P ERM Ratings assessment of ERM practices Best SRQ ERM section supplemental ratings questionnaire NAIC s Solvency Modernization Initiative (SMI) NAIC riskbased capital formula Formulaic risk assessment Increasing focus on qualitative assessment Efficient capitalization for business objectives 11

12 Enterprise Risk Wheel Source: Zurich

13 Risks That Matter Market Capitalization Loss of 50% or More at Top 20% of Fortune 1000 Source: CEB Audit Leadership Council Research. n = 128

14 Value of ERM A survey by Federation of European Risk Management Associations found firms with a more mature approach to risk management have better financial results. 75% more firms with advanced risk management practices had earning before interest taxes depreciation and amortization (EBITDA) growth of over 10%. 62% more firms with advanced risk management practices attained annual revenue growth of 10%. Creating an active risk culture is correlated with higher growth, as the company becomes more aware and accountable for risk. Source: 2012 study by Federation of European Risk Management Associations

15 Value of ERM An Underwriter s Perspective Since underwriters have to assess and price the overall exposure, an underwriter typically finds the details on an ERM program very valuable. Companies must communicate to insurance markets the strength and effectiveness of their ERM programs in order to maximize shareholder value.

16 Value of ERM Private and Public Sector Examples Examples of Enterprise Risk Management Value Creation in Private and Public Sectors Private sector Zurich Public sector University of California County of Los Angeles

17 Value of ERM UC s Reduction in WC Costs

18 Operational Risk and ERM County of Los Angeles Operational risk is defined as the risk of loss resulting from inadequate or failed processes, people and systems or from external events. 18

19 Operational Risk and ERM County of Los Angeles Treating Operational Risk Challenges Scope 37 units; 100,000 employees Organizational culture Processes performed in silos Data Aggregate view of losses and risks lacking 19

20 Operational Risk and ERM County of Los Angeles Treating Operational Risk Current Solutions Root cause analysis and corrective actions Data dashboard Loss exposure reduction committee (governance) 20

21 Operational Risk and ERM County of Los Angeles Treating Operational Risk How Is This ERM? Data Dashboard Root Cause Analysis Governance Committee ERM 21

22 ERM Leadership Roles in the Insurance Industry Applying ERM Principles Within Insurance Industry, Leadership and Management Roles Insurance industry Actuarial Underwriting Claims Leadership and management Risk management Leadership roles (CEO, COO, CFO)

23 Organizational Support Benefits at Every Level Driver Board AC Chair Reduce Reputation Damage and Operational Surprises and Losses Audit Director CEO Exec Mgmt Operating Unit Leaders Managers Employees Portfolio View of Risk Increased Comfort and Confidence for the BOD Achievement of Organization s Strategic Objectives Risk Informed Strategic Decisions Achievement of Organization s Operating Unit Goals Risk Informed Business Decisions Risk Management Functional Synergies and Efficiencies Cost Savings Improved Risk-based Capital Allocation September 3,

24 Risk Management Competencies Author Caroline McDonald writes: Risk managers, often seen mostly as insurance buyers, have work to do in expanding their view of risk to match those of senior executives and board members.today, senior executives and boards think of risk in much broader terms, and risk managers need to see themselves as more than insurance buyers. Source: RIMS Risk Management Professional Growth Model

25 The Institutes Evolution of Risk Management Curriculum Evolution from ARM to ERM Our approach to ERM education Risk classifications Organizational functions Emphasizes frameworks and processes 2014 Business Insurance Innovation Award

26 Wrap-Up Concluding Remarks from Our Panel Questions

27

28 The Anatomy of Enterprise Risk Hazard Cause Even t 1st ORDER RISKS Physical Damage, Personal injuries/deaths 2nd ORDER RISKS Consequential Losses (Production, profits) 3rd ORDER RISKS Indirect Economic Losses (Market share, image, managing upset, personnel, lost investments) 4th ORDER RISKS A consequence of the preceding risks and unacceptable to society Visible Can be evaluated Poorly Visible Difficult to evaluate MORE INSURABLE LESS INSURABLE

29 ERM Framework and Process ARM/ERM Courses

30 ERM Risk Classifications ARM/ERM Courses

31 Risk Management Competencies Research by The Institutes How important is knowledge of risk governance and strategy development for: Insurance and risk management directors Enterprise risk management directors Very Important Somewhat Important Neutral Not Too Important Not Important at All Source: RIMS Risk Management Professional Growth Model

32 Risk Management Competencies Research by The Institutes How important is knowledge of business process and controls for: Insurance and risk management directors Enterprise risk management directors Very Important Somewhat Important Neutral Not Too Important Not Important at All Source: RIMS Risk Management Professional Growth Model