CAS Spring Meeting June 2007 Introduction to ERM …The Measurements, Quadrants, Tools, and Solutions Prof.
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Transcript CAS Spring Meeting June 2007 Introduction to ERM …The Measurements, Quadrants, Tools, and Solutions Prof.
CAS Spring Meeting
June 2007
Introduction to ERM …The
Measurements, Quadrants, Tools,
and Solutions
Prof. Mark C. Vonnahme
Fox Family Clinical Professor
University of Illinois at
Urbana-Champaign
ERM…
Speaker background….
31 years experience in surety and property
casualty…
President and CEO, CNA Surety
Industry leader … pro-active on many
fronts
Changing environment ….
ERM…
Practitioner meets academic life…
Teaching
Corporate Finance
Property and Casualty
ERM
25% students … actuarial science
ERM…
Appointed to CAS Board in March , 2007
First non-actuary member of Board…
Learning …
Adding value …
ERM…
The combination of Academia and
Practitioner….
Thinking about ERM … perspectives
Teaching RMI and ERM provided a deeper
understanding of both…
ERM was always important to me …. even
when it wasn’t in vogue …
Knowing what I do now, would do it better…
ERM is a long term commitment and process…
ERM
Consider…
ERM is a journey… not a one time event
ERM is not just compliance … it needs to be
embedded in the culture to be successful
ERM starts at the top … and requires the
commitment of management team…
ERM must be customized to industry and company
… one size does not fit all …
ERM is multi-disciplinary…
ERM takes time to develop… be flexible, be willing
to make adjustments…
ERM…
Why the shift to ERM
Some trends that have impacted the
process
Globalization
Continued integration of insurance
Increased regulation
Focus on corporate governance
Sarbanes Oxley
ERM…
Definition of ERM….
ERM…
Committee of Sponsoring Organizations of
the Treadway Commission ( COSO )
Published Enterprise Risk Management-Integrated
Framework in 2004
COSO has defined ERM as …
A process, effected by an entity’s board of directors,
management and other personnel,applied in strategy
setting and across the enterprise, designed to identify
potential events that may affect the entity, and manage
risk to be within its appetite, to provide reasonable
assurance regarding the achievement of entity
objectives.
ERM…
Traditional risk management
Six step process
Risk identification
Risk analysis
Development of alternative techniques to treat
risks
Selection of best risk-treatment techniques
Implementation of selected techniques
Evaluation and monitor of effectiveness of risk
management
ERM…
So what’s different about ERM
It expands the process to more fully
integrate risk management into the
organization’s structure
It is an interactive(pro-active) process not a
reactive process
ERM…
A Broader Framework … depicts the following
attributes of the ERM process
Effected by people
Embedded into strategic goals
Applied across the enterprise
Designed to identify potential events
Encourages risk to be managed within a
determined appetite
Provides reasonable assurance to key stakeholders
Supports achievement of key objectives
ERM…
Where does ERM reside in an
organization…
ERM…
ERM and Risk Manager
CRO needs to have an expanded view of risk
Opportunity for gain and loss
Manage to take advantage of knowledge of risk
Exploit the value of risk bearing operations
Acknowledge that risk is an asset and risk
producing activities can provide upside…value
Risk and opportunity
A competitive edge
ERM…
Chief Risk Officer
Functions
Create a risk aware culture
Oversight of risk assessment activities and risk appetite
Educating stakeholders about ERM program
Implementing an integrated risk management framework
throughout the org
Managing the ERM framework with emphasis on
operational risks
Developing ways to mitigate and finance risk within the
organization’s larger business strategies
ERM…
Risk categories or domains … relationships
exist between risks
Operational risks
Financial risks
Human capital risks
Strategic risks
Legal and regulatory risks
Technological risks
Others
ERM…
Establishing an ERM Program
Identify the ERM vision
Develop a supporting business case
Establish a cross-sectional implementation team
Assess the current operating environment
Quantify key risks
Create SMART response plans
Specific,measurable,acceptable,realistic,time-limited
Implement continuous monitoring and
improvement
ERM…
The ERM process
Identification of organization’s risks
Internally
Surveys, interviews,assessments across departments
and divisions
Multi disciplinary
Externally
Industry benchmarks, economic and other data
ERM…
ERM Process
Assessment of risks for prioritization
Quantitative
Qualitative
Correlations
Interdependencies
Risk Mapping
ERM…
ERM process
Risk appetite
Tolerance for risk
Risk treatment and control
Loss prevention techniques for reducing
frequency and severity
Risk financing, retention or combination
ERM…
ERM process
Risk mitigation and measurement
Evaluation of risk mitigation strategies
Integration into operating planning and
reporting
ERM…
ERM process
Monitor , adjust and continually evaluate
progress
Be flexible…
Do not be afraid to adjust to change…
It is a constant process …. a journey
ERM…
Benefits of Risk Management
Practical Whys from James Lam … and
others
Positives of Active Risk Management
Managing risk is everyone’s job
Managing risk can reduce earnings volatility
Managing risk can maximize shareholder value
Risk management promotes job and financial
security
ERM…
Practical Whys from Vonnahme
Good companies want to stay that way…
Leading v following
Staying competitive … or a competitive
edge..
Dealing with change…
ERM…
What would an ERM program accomplish …
Increase recognition of the importance of capital
to support risk
Improve focus on risks of the organization
More refined/better definition of risk appetite
Impact/reduce cost of reinsurance or other risk
management techniques
Impact the capacity and cost of debt
Assist in attaining /retaining higher AM Best
and/or other ratings
Improve Corporate Governance … transparency
and disclosure
Lead to higher value for all stakeholders
ERM…
Final thoughts
Prof. Mark C. Vonnahme
Fox Family Clinical Professor
University of Illinois
[email protected]