CAS Spring Meeting June 2007 Introduction to ERM …The Measurements, Quadrants, Tools, and...
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Transcript of CAS Spring Meeting June 2007 Introduction to ERM …The Measurements, Quadrants, Tools, and...
CAS Spring Meeting June 2007
Introduction to ERM …The Measurements, Quadrants, Tools, and Solutions
Prof. Mark C. VonnahmeFox Family Clinical
ProfessorUniversity 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
processGlobalizationContinued integration of insurance Increased regulationFocus 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. VonnahmeFox Family Clinical ProfessorUniversity of [email protected]