Transcript Understanding The Enterprise Risk Management Process Through The Risk Manager’s Eyes

Understanding The Enterprise Risk
Management Process
Through The Risk Manager’s Eyes
Casualty Actuarial Society
Special Interest Seminar
San Francisco, April 3, 2001
Presenters
Robert Wolf - Principal
William M. Mercer Inc./MMC Enterprise Risk - Chicago
Laurie Champion - Manager, Corporate Insurance
Ford Motor Company - Treasurer’s Office - Dearborn
Ken Zignorski - Managing Director
MMC Enterprise Risk - New York
Agenda
 Introduction
 ERM Trends - What’s Going
On?
 Integrated Risk
Management Programs What Does this Mean?
 Risk Manager Response Industry Examples
 Risk Manager Response Ford Motor
 Q&A
Actuarial Perspective
ERM Evolution Actuarial Evolution
Traditional Roles
Evaluating Hazard/Financial Risk in a silo
Insurance Company
Determine what to charge in order to meet profits targets
(Ratemaking)
What to set aside to meet future obligations of past events
(Reserving)
Insurance Customers
What to budget in order to pay for self-insured obligations
and premiums
What to set aside to meet future obligations of retained risk
Actuarial Perspective
Continuing Evolution
Actuarial Evolution
Evolving Demands for Risk Integration
Insurance Company
Holistic Evaluation of Assets and Liabilities (Dynamic
Financial Analysis (DFA))
• Optimum Capital Structure
• Realization of Business Plan
Insurance Customers
Optimum Risk Financing
• What risks to retain/insure - captives, retros, large
deductibles
..but still only Hazard and Financial Risk
Actuarial Perspective
ERM Evolution
Actuarial Evolution
All sectors of Corporate America
Not merely Insurance Companies and their
Customers
Evolution of Risk Management
As the quantification/approach to
measuring/handling risk evolves, so too does
our job description.
Risk Manager
From Insurance Buyer to Integrated/Consolidated
Risk Strategy
Actuary
Traditional: Evaluate Hazard/Financial Risk
Evolution: DFA (Insurance Companies)/ ERM
Why the Evolution of ERM
New/Larger Risk
E-Commerce, Market/Book Values
New Risk Products
Merger of Insurance and Financial Institutions
Realization that Silo-Based Approaches are
Flawed
Ignores inherent hedges and correlation
Increased Management Accountability
New Regulations requiring corporate governance
Why the Evolution of ERM
In short, because Society Demands it
Computer and Information Age
We couldn’t do what we are doing today if we
needed to use slide-rules or abacus.
Focus
Optimize Shareholder Value
How Does Risk Manifest Itself?
Fortune 1000 Group Analysis
10% of the Fortune 1000 companies suffered a loss of over 25% of shareholder value within one month
% of top 100
25
24
Primary Cause of Stock Drop (# of Companies)
20
15
12
11
10
7
7
6
7
6
4
5
2
3
1
1
2
1
1
0
0
0
Competitive
Pressure
Customer
Demand
Shortfall
MisLoss of
R&D
ManageForeign
Cost
aligned
Key
Delays
ment
MacroOverruns
Products
Customer
ineffectiveEconomic
Customer
Regulatory
Supplier
M&A
Accounting nessSupply Chain
Issues
Pricing
Problems
Problems
Integration
irregularities
Issues
Pressure
Problems
Strategic
Operational
High Interest
Input
Rate
Comm- Fluctodity uation
Price
Financial
Source: Compustat, Mercer Management Consulting analysis - Period Examined was June 1993 to May 1998
Note: There were also 5 stock drops for which the primary cause could not reliably be determined. These 5 stock drops are not depicted.
Law- Natural
suits Disasters
Hazard
Two Ways to Interpret Graph
Hazard and Financial Risk is Not Important
Hazard and Financial Risk has been and
continues to be managed well
Testimonial for risk managers, actuaries, brokers,
and financial analysts.
We need to continue the process
…The opportunity now is to work on the left
side of the graph.
Today’s Risk Manager Is Seeing Many Things
 Emerging ERM Trends
 Enhanced Financial
Management &
Sophisticated Analysis
 Integrated Risk
Management Thinking
 Changing & Competing Risk
Management Roles &
Responsibilities
 Evolving Risk Management
Practices & Needs
Risk Managers and Senior Executives Are
Hearing More and More About Risk Management
What is Enterprise Risk Management? - EIU Survey
Selected views of ERM by Senior Management:
 “ERM assesses and manages all risks while looking for upsides in identifying
risks.”
 “The goal of Enterprise Risk Management is to understand all of the risks on a
quantitative and intuitive level and to manage them through a central risk area to take advantage of the synergies of managing risk in one area.”
 “Enterprise Risk Management is about information and capital management.”
 “Good risk management is reflected in share price indirectly, but the market is
not giving a premium for ERM yet, it’s still too new.”
 “The ultimate goal of Enterprise Risk Management is preservation of shareholder
value.”
 “Managing risk enterprise wide means two things: bringing all the pieces of the
enterprise together to add the exposures, and using the whole enterprise to
manage risk - making sure at the corporate level that all the different oversight
departments are working together.”
 “The job of Enterprise Risk Management is figuring out where the edge of the
cliff is, and making sure the risk takers know where it is.”
Enterprise Risk Management
Enterprise Risk Management is a process for identifying and prioritizing critical risks
facing an organization, quantifying their impact on financial and strategic objectives,
and implementing financial and organizational solutions to address them.
1. Risk management is a systematic,
critical-risk focused activity
2. Risk is quantified to make
informed business decisions
3. Risk management is an integral part of
strategic planning and budgeting
4. Pricing, capital allocation, performance
measures consider potential risk as well as returns
5. Risk is not automatically avoided, but
weighed against opportunity to optimize risk versus return
6. Risk mitigation/financing focuses on events
and volatilities that could compromise financial
and strategic objectives
Economist Intelligence Unit ERM Study
How confident are you that your company's primary systems
and processes identify, evaluate and manage potentially
significant risks?
% responding
TOTAL
STATE-OWNED
PRIVATE
PUBLIC
ASIA /PACIFIC
EUROPE
NORTH AMERICA
0%
20%
40%
5 - HIGHLY CONFIDENT
60%
4
3
2
80%
1 - NOT CONFIDENT
100%
Economist Intelligence Unit ERM Study
Does your company identify risks on a formal ERM
basis?
Plan To
YES
11%
NO
19%
46%
NO, BUT PLAN TO WITHIN
ONE YEAR
24%
NO, BUT PLAN TO WITHIN
TWO TO FIVE YEARS
Does your company manage risks on a formal ERM
basis?
Plan To
YES
13%
41%
19%
NO
NO, BUT PLAN TO WITHIN
ONE YEAR
27%
NO, BUT PLAN TO WITHIN
TWO TO FIVE YEARS
Economist Intelligence Unit ERM Study
If you manage--or plan to manage--risk with a formal ERM approach,
how important were the following objectives in your decision?
% re s ponding "ve ry im portant" or "highly im portant"
COM M ON UNDERSTA NDING OF RISK A CROSS FUNCTIONS
A ND B USINESS UNITS
B ETTER UNDERSTA NDING OF RISK FOR COM P ETITIVE
A DVA NTA GE
SA FEGUA RDS A GA INST EA RNINGS-RELA TED SURP RISES
A B ILITY TO RESP OND EFFECTIVELY TO LOW-P ROB A B ILITY
CRITICA L/ CA TA STROP HIC RISKS
COST SA VINGS THROUGH B ETTER M A NA GEM ENT OF
INTERNA L RESOURCES
M ORE EFFICIENT CA P ITA L A LLOCA TION
A B ILITY TO A VOID LOW-P ROB A B ILITY CRITICA L/
CA TA STROP HIC RISKS
A B ILITY TO IDENTIFY A GGREGA TING A ND/OR OFFSETTING
RISK P A TTERNS
B ETTER REGULA TORY COM P LIA NCE
IM P ROVEM ENT IN COM P A NY'S P /E RA TIO
COST SA VINGS THROUGH REDUCTIONS IN HEDGING A ND
INSURA NCE COSTS
A B ILITY TO COM P ENSA TE M A NA GEM ENT B A SED ON
RISK-A DJUSTED RETURNS
OTHER
0%
10%
20%
30%
40%
50%
60%
70%
Economist Intelligence Unit ERM Study
Most significant risks and respondents' ability to manage them
% responding
CUSTOM ER LOYA LTY/ SA TISFA CTION
COM P ETITIVE THREA TS
OP ERA TIONA L FA ILURE/
INTERRUP TION
M A RKET SHIFTS
M A CROECONOM IC
% ranking among top 5 risks
A TTRA CTION/ RETENTION OF QUA LITY
P EOP LE
% w ho manage "w ell" or "very w ell"
REGULA TORY
EM P LOYEE TURNOVER
P OLITICA L EVENTS
P OTENTIA L LA WSUITS
VOLA TILITY IN COM M ODITY P RICES
0%
10
%
20
%
30
%
40
%
50
%
60
%
70
%
Today’s Risk Manager Is Seeing Many Things
 Emerging ERM Trends
 Enhanced Financial
Management &
Sophisticated Analysis
 Integrated Risk
Management Thinking
 Changing & Competing Risk
Management Roles &
Responsibilities
 Evolving Risk Management
Practices & Needs
Economist Intelligence Unit ERM Study
Use of financial metrics
% of respondents
Do you believe that implementing ERM has the
potential to improve your company's P/E ratio or
decrease your cost of capital?
RAROC
EVA
% responding, public com panies
Earnings at risk
NO
12%
Value at risk
Notional exposure amounts
Industry benchmarks
Expected claims exposure/costs
Internal performance benchmarks
Cashflow volatility
0%
10%
20%
30%
Companies using ERM
40%
50%
60%
Companies not using ERM
70%
YES
88%
Economist Intelligence Unit ERM Study
Do you measure the integrated effects of risk in the following areas?
% responding
60%
50%
40%
30%
20%
10%
Yes
0%
FINANCIAL
HAZARDS
OPERATIONAL
STRATEGIC
ACROSS
ACROSS ALL
CATEGORIES FINANCIAL AND
HAZARD RISKS
No
No, but plan to
w ithin 3 years
Some Candidate Models Random Walk & Mean Reverting
“Drift” may be zero,
positive or negative
Arithmetic Random Walk
St = a0 + St-1 + et
Geometric Random Walk
ln= natural
logarithm
lnSt = a0 + lnSt-1 + et
Coefficient of St1 is 1
Et-1 (St) = a0+ St1
•
Simple model for capturing uncertainty.
•
“Best guess” for price tomorrow is price today (plus any drift).
•
Logarithmic form prevents negative prices (or rates); probability
distribution is lognormal.
•
Widely used for financial time series.
•
Underlying “stochastic process” for derivatives valuation, such as BlackScholes and related methods.
•
The First Order Autoregressive or AR(1) process can be written as
Arithmetic AR(1)
Geometric AR(1)
St = a0 + a1 St-1 + et
lnSt = a0 +a1 lnSt-1 + et
a1 < 1
• The price in this model is “mean-reverting”.
Geometric AR(1) can be re-written as
lnSt = (1-a1) [a0/(1-a1) - lnSt-1] + et or
lnSt =  [ lnM - lnSt-1] + et
• When St-1 is below (above) the long-run mean M, the expected price change is positive
(negative).
• Mean reversion is fairly common for commodities and almost always used for interest
rates.
Comparison of Price Paths
Random Walk vs. Mean Reverting Process
Comparison of Sample Price Paths
Random Walk vs. Mean Reverting Process
250
RW: lnSt - lnSt-1 = et
200
MR: lnSt - lnSt-1 = .10 [ln100 - lnSt-1] + et
Price
150
100
50
Week
Random Walk
Mean Reverting Process
51
49
47
45
43
41
39
37
35
33
31
29
27
25
23
21
19
17
15
13
11
9
7
5
3
1
0
Volatility Around Annual Expected Cost
• Diversification / covariance effect captured through integration of financial risks
• Reduces capital required to manage volatility
All Risks
Integrated
Risks (1 to 8)
Individual Risks
Currency
Separate
Treatment
Effect of
Integrating
$1.6B
D
E
V
I
A
T
I
O
N
F
R
O
M
$764M
$700m
99%
$500m
90%
$100m
$10m
Mean
- $10m
M
E
A
N
$1M
$173M
$132M
$332M
- $100m
$115
M
$433M
$2.4B
$434M
$4B
$(43)M
$4B
Combined
Risks (1 to8)
Currency
Summed
Total
$4B
Mean
10%
values
1%
-$500m
-$700m
Risk 1
Risk 2
Risk 3
Risk 4
Risk 5
Risk 6
Risk 7
Risk 8
Combined
Total
Economist Intelligence Unit ERM Study
Do you quantify the value of the following intangible assets?
% responding "yes"
60%
Yes
40%
No
No, but w ill w /in 3 years
20%
No, but w ould like to
0%
BRAND
COPYRIGHTS/
PATENTS/
TRADEMARKS
GOODWILL
HUMAN CAPITAL
REGULATORY
FRANCHISE
Many New Analytical Models
Value at Risk
Dynamic Financial Analysis
Monte Carlo Simulation
Time Series Analysis
Data Segregation and Analysis
GARCH Analysis
Today’s Risk Manager Is Seeing Many Things
 Emerging ERM Trends
 Enhanced Financial
Management &
Sophisticated Analysis
 Integrated Risk
Management Thinking
 Changing & Competing Risk
Management Roles &
Responsibilities
 Evolving Risk Management
Practices & Needs
Financing Risks Via Silo Management
Risk 1 Risk 2 Risk 3
. . . Risk
N
Enterprise
Total Risk
DECISION
RETAIN
Retained Risk
“unknown”
+
PREMIUM
Premium
“unknown”
Often leads to a sub-optimal enterprise result:
•
•
•
•
Over insurance/hedging of non-correlated and negatively correlated risks
Under insurance/hedging of positively correlated risks
Higher than understood exposure to event risk
Missed opportunities to place risks in different markets
Silo Risk Management as a
Portfolio of Interrelated
Decisions
Risk 1 Risk 2 Risk 3
. . . Risk N
Enterprise
Total Risk
DECISION
RETAIN
Retained Risk
“known”
+
PREMIUM
Premium
“known”
Some risks should stay in silos
Some risks should be split out from silos in which they currently reside
Some risks should be combined in larger portfolios
And,
“Overlay” decisions may be necessary to produce the desired result.
Managing Risk Financing Strategies
on a Portfolio of Risk Basis
Risk 1 Risk 2 Risk 3
...
Risk N
Enterprise
Total Risk
DECISION
RETAIN
Retained Risk
“known”
+
PREMIUM
Premium
“known”
Understanding Current Risk
Management Systems
Who manages what risk
and how do they relate?
Strategic/Tactical
• Take Risk
• Shed Risk
• Avoid Risk
What information and
performance measures are
used to make decisions?
Operating
How are decisions made?
Decisions
&
Responses
• Prevention
• Mitigation
• Recovery
Financial
• Capital Structure
• Capital Budgeting
• Pricing
• Ins./Hedge/Retain
Results
Today’s Risk Manager Is Seeing Many Things
 Emerging ERM Trends
 Enhanced Financial
Management &
Sophisticated Analysis
 Integrated Risk
Management Thinking
 Changing & Competing Risk
Management Roles &
Responsibilities
 Evolving Risk Management
Practices & Needs
Economist Intelligence Unit ERM Study
When the following events occur, how would your company's risk
management change, if at all? (financial interventions)
% responding
70%
60%
50%
40%
30%
20%
10%
0%
WE WOULD BE LESS LIKELY
TO HEDGE/ INSURE
NO CHANGE
MORE LIKELY TO HEDGE/
INSURE
Financial w indfall
Adverse shock
Investment plans
more aggressive
When the following events occur, how would your company's risk
management change, if at all? (organisational interv.)
% responding
LESS LIKELY TO ADJUST
BUSINESS PROCESSES/
ORGANISATIONAL
STRUCTURES
80%
60%
NO CHANGE
40%
20%
0%
Financial w indfall
Adverse shock
Investment plans
more aggressive
MORE LIKELY TO ADJUST
BUSINESS PROCESSES/
ORGANISATIONAL
STRUCTURES
Economist Intelligence Unit ERM Study
In w hich of the follow ing activities do you incorporate a
formal ERM approach?
% re s ponding
CAPITAL ALLOCATION/
EXPENDITURES
CORPORATE STRATEGIC PLANNING
INDIVIDUAL OPERATING UNIT
STRATEGIES
OPERATING BUDGET PREPARATION
TODAY
PRODUCT/ SERVICE PRICING
IN THREE
YEARS
M&A
PRODUCT/ SERVICE DESIGN
HUMAN CAPITAL STRATEGY
COMPENSATION STRUCTURES
0%
20%
40%
60%
80%
100%
Economist Intelligence Unit ERM Study
How centrally coordinated are the following organisational
business practices across your entire company?
% responding "nearly unified" or "com pletely unified"
ACCOUNTING
AUDITING
CAPITAL BUDGETING
STRATEGIC PLANNING
REVENUE FORECASTING
REGULATORY COMPLIANCE
RISK MANAGEMENT
LEGAL
HR PLANNING
0%
10%
20%
30%
40%
50%
60%
70%
80%
Economist Intelligence Unit ERM Study
How significant are the following obstacles to managing risk with a
formal ERM approach?
% re s ponding "ve ry s ignificant" or "highly s ignificant"
DIFFICULTY OF M EA SURING INTA NGIB LE RISKS
LA CK OF A LIGNM ENT B ETWEEN RISK M A NA GEM ENT
A ND CURRENT P LA NNING P ROCESSES
INSUFFICIENT IT SYSTEM S TO A NA LYSE, M ONITOR A ND
CONTROL RISK
LA CK OF CLEA RLY DEFINED ROLES, A CCOUNTA B ILITY
A ND INFORM A TION FLOWS
CULTURA L OP P OSITION
LOW RECOGNITION OF B ENEFITS WITHIN COM P A NY
LA CK OF M A RKET TO TRA NSFER OP ERA TIONA L A ND
STRA TEGIC RISKS
LA CK OF EXTERNA L P ROVIDERS CA P A B LE OF
P ROVIDING A FULL RA NGE OF RISK SERVICES
LOW RECOGNITION OF B ENEFITS WITHIN INVESTOR
COM M UNITY
OTHER
0%
10%
20%
30%
40%
50%
60%
So What is The Result?
Evolving Risk Management Positions
Chief Risk Officer, ERM Councils, Global Director of
Risk Management
Rise of, and Partnership with, Internal Audit
Corporate governance issues and perspectives
Rise of, and Partnership with, Treasury
Financial Management perspectives and insights
 Rise of Board Audit Committees
Evolving Skill Base for Risk Managers
Enterprise Risk Management Can
Mean All These Things
Corporate Governance
Gesetz zur Kontrolle und
Transparenz im
Unternehmensbereich- Bill on The
Control And Transparency of
Companies
KonTraG Bill
Cadbury
Commission on Corporate Governance Rutterman
Greenbury
The Stichting Corporate Governance
Hampel
Turnbull
Code of Best Practice
Business Round Table
King Report
Stock Exchange Commission
Stakeholder Communication
Blue Ribbon Commission
Report on Effective Systems of Internal CalpersCorporateGovernanceProgramme
Control
Vienot Committee
Marini Report
Levy-Long Committee
Draghi Commission
Corporate Governance Forum of Japan
Toronto Stock Exchange Committee
Canadian Securities Committee
Allen Committee Report
Canadian Institute of Chartered
Accountants
KPMG Peat Marwick Survey
Blue Book
Company Law Review
Best Practice Statement of
management discussion and analysis
Stock Exchange Listing
New Accounting Standards
Integrating Hazard and Financial
Risks into a Single Contract
Hazard
Finance
Risk Fusion®
+
Establishing a Chief Risk Officer
Chief Risk Officer
Oil Trading
Natural Gas
Trading
Risk
Management
Electricity
Trading
Crisis Management
“Never in all history have we harnessed
such formidable technology. Every
scientific advancement known to man
has been incorporated into its design.
The operational controls are sound and
foolproof.”
=
E.J. Smith
Captain, H.M.S. Titanic
Today’s Risk Manager Is Seeing Many Things
 Emerging ERM Trends
 Enhanced Financial
Management &
Sophisticated Analysis
 Integrated Risk
Management Thinking
 Changing & Competing Risk
Management Roles &
Responsibilities
 Evolving Risk Management
Practices & Needs
Financial Services Institution
Company / Title
Mutual Fund Company
Chief Risk Officer
ERM Perspectives, Roles & Responsibilities
Reporting Structure
CRO only responsible for financial and operational risks.
CRO reports to CFO.
CRO functions as advisor regarding business risks, with decision
responsibility falling solely on business units.
Risk Group, consisting of risk, audit, compliance, &
security, meets regularly.
Market and credit risks are isolated in specific areas of the business,
whereas operational risks are inherent in all business processes.
Ensures that Company’s financial risks are well integrated.
Metrics used include VaR, cash flow volatility, claims exposures
and notional exposure amounts; earnings-at-risk is not used due to
high day-to-day volatility of amounts of exposure and earnings.
CRO views risks broadly but is weary of trying to reduce them to
too few metrics because “you lose track of the numbers.”
All categories of risk are managed by senior line
executives, supported by control specialists. Market
and credit risk specialists are traditional risk managers
with analytical expertise and industry expertise.
Operational control team includes auditors,
contingency planners, security specialists, compliance
experts and traditional risk managers.
Strategy is to make ERM even more nimble –
company has formed a horizontal, cross functional,
rapid-response team to quickly evaluate risks of ebusiness initiatives across the units.
CRO does not believe that risks should be “run high
up in the company.” Also, past experience with one
CFO resulted in too much focus on controller type
risks.
Source: EIU Study , 2000
CRO has spent a lot of energy trying to defuse issues
of clout, turf, etc. while trying to make risk
management an automatic, not too complicated part of
ongoing business practices.
Power & Energy Industry
Company / Title
Large company that
markets energy services
and products throughout
North America. Business
also includes a Gas and
Electric Company that
delivers natural gas and
electricity service to one
in every 20 Americans.
Chief Financial Officer
Risk Manager
ERM Perspectives, Roles & Responsibilities
Reporting Structure
CFO has enterprise risk management responsibility, and the Risk Manager
reports to him.
CFO is ERM champion with
support from Risk Manager, who
reports directly.
The firm takes a portfolio approach via “profit at risk” and they do analyze
correlations across commodities, but they haven’t found correlations in
other areas such as cash-flow volatility vs. other kinds of risks.
They do much to offset or manage risks across business units (e.g.,
determining how to handle being long power and short gas without
artificially limiting what the power and gas sides can do).
The risks they manage include commodity, foreign exchange, interest rate
and credit risk, and they believe that most of their risks are quantifiable
They are also focused on bringing top management to a fundamental
agreement on “profit at risk.” Then they will consider plans to take
positions at holding company level to balance the risks in the business units.
Risk Manager faces cultural hurdles, spending lots of time teaching
managers who grew up in a regulated environment about risk.
CFO is creating a broad conceptual framework to help traders think about
risk, to evolve the company away from micro-management.
Source: EIU Study, 2000
Chemical/Agricultural Industry
Company / Title
Large global producer &
marketer of agricultural
products, operating in
nearly 70 countries
worldwide
ERM Perspectives, Roles & Responsibilities
Company’s ERM goal is to maximize shareholder value while minimizing capital outlays.
ERM Manager thinks good risk management is indirectly reflected in share price, but
thinks it’s too early for the market to give premiums for ERM.
To determine company risks, ERM group meets – twice a year for major units and once a
year for smaller units -- with the line manager of each unit, along with direct reports, and
identifies the processes having a major effect on shareholder value (major is defined as
accounting for 10% or more of capital earnings for the unit). Then they examine how
sound the decision-making tools are behind each process.
ERM Manager
They do scenario-based planning: identify four events that could affect each unit’s value;
quantify the likely impact on cash flows; and, develop action plans to manage the risk(s).
Senior managers are evaluated on action plan implementation.
They’re not at the point of measuring correlations, domino effects etc.
They would like to begin compensating senior management on risk-adjusted returns. They
tie compensation to EVA for now.
They hope ERM will help reduce volatility in earnings. Other metrics include cash flow
volatility, VAR with their debt profiles due, and interest rate volatility.
ERM group considers whether various risks need to be managed in coordination among
various units or among different levels of the corporation.
Source: EIU Study, 2000
They have an intranet application that lets everyone see the various risks throughout the
company and explains how they’re being managed.
One major challenge in implementing ERM is the lack of other companies that are doing
it well – few examples for comparison.
Reporting Structure
ERM Manager reports to the CEO
and is viewed as the equivalent of a
CRO.
Information Technology Industry
Company / Title
Large Computer
Manufacturer
Risk Manager
ERM Perspectives, Roles & Responsibilities
Reporting Structure
RM claims not to believe in enterprise risk management or in CRO roles. RM’s
opinion is that company is happy managing risks in boxes—they have 12 different
groups having something to do with risk management.
Board responsible for looking at
risks across activities, with CFO
ultimately responsible for risk
management.
But, in practice company is working to integrate too. RM has, for instance, started
something called Riskweb, where every department having anything to do with risk can
post information, contacts, etc; they are even putting some outside consultants on the
site.
Risk Management function reports to CFO
RM emphasizes that company’s Board, with delegated responsibility to the CFO, has
always looked at risk across its activities.
A key challenge in risk management is getting accurate data.
RM states that under the new CEO company is getting much less conservative and
much more interested in taking more risk.
Part of this shift involves stopping attempts to mitigate risk down to a zero tolerance.
Company plans to micro-manage less, particularly as they move more to third party
suppliers (micro-managing them loses the savings of moving to them in the first place).
Company is very concerned about e-commerce risks. Two main facets:
-They are concerned about security risks as they use e-commerce increasingly in their
supply chain.
-They are setting up and investing in new dotcoms.
Consumer Brands Company
Company / Title
ERM Perspectives, Roles & Responsibilities
UK based international
hospitality and leisure
group focusing on
hotels, leisure retail and
branded drinks.
Risk management is implicit in firm’s strategic planning process, financial planning
and budgeting process, and pre- and post-investment appraisal process.
Director of Risk
Management
Reporting Structure
The Director of Risk Management
reports to the Corporate Secretary,
who is a member of the executive
Board.
Company believes that explicitly identifying risk is Enterprise Risk Management.
Firm has a major risk identification process that is similar to ERM.
-They bring together senior management from each branch of the business with the
senior risk manager identifying risk.
-Company officers are interviewed and asked what other areas they can identify as
being vulnerable to risk.
-The expense of a given risk is ranked on a scale of one to five and multiplied by a
similar measure of probability, also ranked on a scale of one through five.
-Risk is then examined on a gross basis and on a net basis (current exposure).
-Twice a year, a summary of significant risks is presented to the audit committee.
-This is extended into an action plan, the progress of which is monitored throughout the
year.
Crisis management skills, continuity planning and business continuity skills are all
managed centrally by the risk management group.
The primary variable monitored is impact on earnings.
Future risk management, within firm, must evolve towards providing management
with greater analysis of how to treat risk on an integrated basis.
Director of risk management is anxious to see risk insurance policies that cover a broad
range of possibilities.
He believes that risk management will “manage down” impact and probability
operationally.
Twice a year, a summary of
significant risks is presented to the
audit committee.
Ford Motor Company
Risk Management At Ford
External Service Providers
What Risk Management Services is Ford
Expecting in the Future
Risk Management at Ford
 Ford’s approach to risk management in general
 Ford’s Approach to Hazard Risk Management
 Ford’s use of external service providers
What external service providers does Ford see now?
What does Ford value?
 Ford’s requirements for the future
Skill sets
Infrastructure
Ford Risk Management - Purpose,
Statement and Vision
 To improve the business’ ability to understand manage
and mitigate global corporate risk in real time,
 In such a way that we make better risk/return decisions
and manage capital more efficiently,
 So that shareholder value materializes and unforeseen
risks do not.
Hazard Risk Management at Ford
Centralized, global, “consistent”
Treasury function
Matrix approach (Legal, Safety, Facilities, HR,
Business Ops, Finance)
Risk retention vs. transfer
Risk management practices
Culture
External Service Providers
What external service providers does Ford see
now?
Actuarial Firms
Insurance and Reinsurance Companies
Risk Management Consulting Firms
Big 5 Accountants
Brokers
Integrated Risk Management
External Service Providers
What does Ford value?
Execution – Speed and Quality of analysis, solution
development and delivery
Business Orientation
Creativity
Focus - Relevance
Value – solutions and information
Value - Measurement
Technical capability
Future Requirements at Ford
Technical capability
Skill Sets
Diagnostics
• Profiling – business focused, timely and relevant
• Modeling
• Benchmarking / databases
Solutions – design and execution
Infrastructure
Tools
Databases
Analytics - span risk factors and functions
Horsepower
Ford’s Future Requirements
Risk profiling
Systems integration
Management risk information
Creative use of Insurance Products
Broader view of integrated risk management
Understanding The Enterprise Risk
Management Process
Through The Risk Manager’s Eyes
Questions & Answers
Casualty Actuarial Society
Special Interest Seminar
San Francisco, April 3, 2001