Excellence in Risk Management IV

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Excellence in Risk Management IV

  1. 1. Excellence in Risk Management IV May 2007 Turning Risk Into Opportunity
  2. 2. Agenda <ul><ul><li>Introduction </li></ul></ul><ul><ul><li>Are firms moving toward strategic risk management? </li></ul></ul><ul><ul><li>What drives firms to more strategic risk management? </li></ul></ul><ul><ul><li>360-degree view: Are risk managers in alignment with the C-suite? </li></ul></ul><ul><ul><li>Beyond risk management—turning risk into opportunity </li></ul></ul><ul><ul><li>Takeaways </li></ul></ul><ul><ul><li>Panel discussion </li></ul></ul>
  3. 3. Introduction
  4. 4. Excellence in Risk Management Series <ul><li>“ Excellence in Risk Management I” studied the risk management practices of 30 top-performing risk managers in North America (2004). </li></ul><ul><li>“ Excellence II” examined the characteristics and practices of organizations that are implementing an enterprise-wide risk management program (2005). </li></ul><ul><li>“ Excellence III” examined the changes occurring in risk management in response to a wide array of new risks (2006). </li></ul><ul><li>“ Excellence IV ” is the latest in the series. </li></ul>
  5. 5. Excellence III raised interesting questions, which led us to… <ul><li>The objectives of “Excellence IV”: </li></ul><ul><ul><li>Is there a continued trend toward strategic risk management? </li></ul></ul><ul><ul><li>Are the views of risk managers aligned with those of the C-suite when it comes to key risks? </li></ul></ul><ul><ul><li>Who, within an organization, is the leader of the risk management effort? </li></ul></ul><ul><ul><li>Are organizations seizing one of the key benefits of strategic risk management—turning risk into opportunity? </li></ul></ul>
  6. 6. Excellence in Risk Management IV <ul><ul><li>A quantitative study </li></ul></ul><ul><ul><li>Interviews with 391 RIMS members of mid- to large-size organizations </li></ul></ul><ul><ul><li>Interviews with 77 C-suite executives (CEO, CFO, board members, general counsels) of mid- to large-size organizations </li></ul></ul><ul><ul><li>Interviews conducted by TNS from February 14 through March 23, 2007 </li></ul></ul><ul><ul><ul><li>TNS is one of the world's leading market information companies, with $2 billion in revenues, operating in 56 countries. </li></ul></ul></ul><ul><ul><ul><li>TNS Finance Sector Group is a global leader in providing research-based insight to firms in the financial services industries. </li></ul></ul></ul>
  7. 7. Who we interviewed Annual Revenues Industries
  8. 8. Are firms moving toward strategic risk management?
  9. 9. Self-assessed level of risk sophistication Risk Management <ul><li>TRADITIONAL </li></ul><ul><ul><li>Risk Identification </li></ul></ul><ul><ul><li>Loss Control </li></ul></ul><ul><ul><li>Claims Analysis </li></ul></ul><ul><ul><li>Insurance and Risk-Transfer Methods </li></ul></ul><ul><li>PROGRESSIVE </li></ul><ul><ul><li>Alternative Risk Financing </li></ul></ul><ul><ul><li>Business Continuity </li></ul></ul><ul><ul><li>Total Cost of risk </li></ul></ul><ul><ul><li>Education and Communication </li></ul></ul>TRADITIONAL + <ul><li>STRATEGIC </li></ul><ul><ul><li>Enterprise-Wide Risk Management </li></ul></ul><ul><ul><li>Indexing of Risk </li></ul></ul><ul><ul><li>Use of Technology </li></ul></ul>PROGRESSIVE + TRADITIONAL +
  10. 10. Overall, few companies consider their risk approach strategic Q2a. Based on our 2006 risk management study, companies fall into three categories with regard to risk management. How would you categorize your firm's approach to risk management?
  11. 11. Most companies believe they need to take a more strategic approach to risk management Agreement With Statement BASE: Firms that have a traditional or progressive risk management approach Q1b. Please indicate the extent to which you agree or disagree that “My firm should take a more strategic approach to risk.”
  12. 12. Larger firms are more sophisticated in their management of risk <ul><ul><li>In 2006, firms with more than $1 billion revenue were 50% more likely to be strategic than firms under $500 million. In 2007, they were 320% more likely. </li></ul></ul>Q2a. Based on our 2006 risk management study, companies fall into three categories with regard to risk management. How would you categorize your firm's approach to risk management? Company Size
  13. 13. What drives firms to more strategic risk management?
  14. 14. Financial services firms—certainly driven by regulation—are the most likely to characterize themselves as strategic Industry
  15. 15. A broader view of risk is associated with strategic risk management Traditional Strategic Q4a. Please indicate the level of importance this risk area represents relative to your firm's operations and financial performance. % Difference in Perceived Importance of Risk Financial Risk Strategic Risk Operational Risk Hazard Risk Human Capital Political Risk Brand/Reputation Enterprise Risk Credit Risk FX/Commodity Risk Products Liability Intellectual Property Business Continuity/Crisis Management Risks Employment Practices Liability Environmental Risk Absenteeism/Total Absence Management Technology/E-Risk Regulatory/Compliance Risk Workers Compensation Terrorism Auto General Liability Property
  16. 16. While all firms acknowledge the benefits of enterprise-wide risk management (ERM), those with a strategic approach to risk management have a greater understanding of the benefits Traditional Strategic % Difference in Agreement With ERM Benefits Q1b. Please indicate the extent to which you agree or disagree that an ERM program contributes to meeting the following objectives. Enhancing quality/increasing overall productivity Improving earnings per share Increasing ability to be more agile and entrepreneurial (to seize opportunities) Reducing earnings volatility Leveraging risk as a competitive tool Improving responsiveness to natural or other disasters (contingency planning) Improving allocation of capital and resources Minimizing operational disruption Increasing shareholder value Increasing management and business-unit accountability Improving corporate governance practices Increasing ability to meet corporate strategic goals Improving risk-response decision process Improving communications/articulation on risk taking to shareholders/board Improving management of cross-organizational interrelated risks
  17. 17. The use of ERM has nearly doubled in just one year—those saying they were in the planning stage last year went ahead with implementation ERM Implementation Q1a. To what extent has your firm implemented an ERM program?
  18. 18. And ratings agencies are starting to push firms to strategic risk management My firm's senior management knows how much it is willing to lose from all sources of risk over a selected time horizon in order to achieve its overall long-term financial objectives. My firm's senior management knows where the top exposures are, both in terms of measured risks and unmeasurable uncertainties. My firm's senior management understands the company's risk profile and the mitigation strategies being used to manage its major risks.
  19. 19. Just over half know where the top exposures are Agreement With Statement
  20. 20. And half understand their company’s risk profile Agreement With Statement
  21. 21. Only about one-third know how much they are willing to risk Agreement With Statement
  22. 22. Only one-fourth of firms can successfully pass the ratings agencies’ risk challenge Only 25% agree with all three ratings agency statements My firm's senior management knows how much it is willing to lose from all sources of risk over a selected time horizon in order to achieve its overall long-term financial objectives My firm's senior management knows where the top exposures are, both in terms of measured risks and unmeasurable uncertainties My firm's senior management understands the company's risk profile and the mitigation strategies being used to manage its major risks
  23. 23. A strategic approach to risk management helps with ratings agencies Agreement With All Three Ratings Agency Statements Approach to Risk
  24. 24. 360-degree view: Are risk managers in alignment with the C-suite?
  25. 25. Risk managers are slightly ahead of the C-suite in pushing for strategic risk management Agreement With Statement My firm should take a more strategic approach to risk management
  26. 26. The C-suite and risk managers have similar views on the ratings agency challenge statements Q2d. To what extent do you agree or disagree with the following statements? Agreement With Ratings Agency Statements By Job Title
  27. 27. Risk managers place more importance on risk than their C-suite counterparts—especially hazard risks Risk Managers C-Suite Q4A . Please indicate the level of importance this risk area represents relative to your firm's operations and financial performance. % Difference in Importance Financial Risk Strategic Risk Operational Risk Hazard Risk Human Capital Political Risk Brand/Reputation Enterprise Risk Credit Risk FX/Commodity Risk Products Liability Intellectual Property Business Continuity/Crisis Management Risks Employment Practices Liability Environmental Risk Absenteeism/Total Absence Management Technology/E-Risk Regulatory/Compliance Risk Workers Compensation Terrorism Auto General Liability Property
  28. 28. Brand and regulatory compliance are rated top exposures by both the C-suite and risk managers <ul><ul><li>Views diverge for human capital and technology risks. </li></ul></ul>Q4d. What do you feel are the top three exposures in terms of measured risks and unmeasurable uncertainties? Exposure Risks Ranked 7 5 Technology/E-Risk 8 3 Human Capital 5 9 Workers Compensation 4 8 Property 2 4 Business Continuity 3 2 Regulatory Compliance 1 1 Brand Reputation Risk Managers C-Suite Ranked Above 5 (Not Top 5)
  29. 29. Risk managers and the C-suite are in reasonable alignment on what’s important and what’s well-managed Q4a. Please indicate the level of importance this risk area represents relative to your firm’s operations and financial performance. Q4b. Please indicate how comfortable you are that this risk is being managed appropriately in terms of the company's exposure to loss.` Comfort With How Risks Are Handled C-SUITE Discomfort Risk is Being Managed Appropriately Risk Importance HIGH IMPORTANCE/ LOW DISCOMFORT LOW IMPORTANCE / HIGH DISCOMFORT LOW IMPORTANCE/ LOW DISCOMFORT HIGH IMPORTANCE/ HIGH DISCOMFORT Enterprise Risk Technology/E-Risk Human Capital Business Continuity/ Crisis Management Risks Brand/ Reputation Employment Practices Liability Regulatory/ Compliance Risk General Liability Workers Compensation Credit Risk Absenteeism/ Total Absence Management FX/Commodity Risk Terrorism Political Risk Intellectual Property Property Environmental Risk Auto Products Liability
  30. 30. The pattern of importance versus discomfort for risk managers in 2007 was nearly identical to that in 2006 Comfort With How Risks Are Handled RISK MANAGER Discomfort Risk is Being Managed Appropriately Risk Importance HIGH IMPORTANCE/ LOW DISCOMFORT LOW IMPORTANCE / HIGH DISCOMFORT LOW IMPORTANCE/ LOW DISCOMFORT HIGH IMPORTANCE/ HIGH DISCOMFORT Enterprise Risk Technology/E-Risk Human Capital Business Continuity/Crisis Management Risks Brand/ Reputation Employment Practices Liability Regulatory/ Compliance Risk General Liability Workers Compensation Credit Risk Absenteeism/ Total Absence Management FX/Commodity Risk Terrorism Political Risk Intellectual Property Property Environmental Risk Auto Products Liability Q4a. Please indicate the level of importance this risk area represents relative to your firm’s operations and financial performance. Q4b. Please indicate how comfortable you are that this risk is being managed appropriately in terms of the company's exposure to loss.`
  31. 31. While risk managers and the C-suite are generally in alignment, there are differences… <ul><ul><li>Risk managers think workers compensation is more important, but are also more comfortable with it. </li></ul></ul><ul><ul><li>Risk managers are considerably more comfortable with FX/commodity and regulatory/compliance risk. </li></ul></ul><ul><ul><li>Enterprise risk is much more important to the C-suite. </li></ul></ul>
  32. 32. Who’s on first? Everyone sees himself/herself as the risk management leader Q5c. Which two people take the top leadership roles in determining your organization's overall approach to risk? Importance Rank for Risk Leadership by Functional Area 1 3 2 Risk Manager 3 3 Risk Manager 1 2 CFO 2 1 CEO CFO CEO
  33. 33. Beyond risk management—turning risk into opportunity
  34. 34. A third of companies are actively looking to turn risk into opportunity Agreement With Statement
  35. 35. Risk-into-opportunity exploration <ul><ul><li>Preliminary work led to 10 state-of-the-art techniques that can turn risk into opportunity. </li></ul></ul><ul><ul><li>We asked if they were being used, if they worked, and if usage would grow. </li></ul></ul>Minimizing business interruption due to climate change/ catastrophic property loss Managing people risk by developing a corporate responsibility program Leveraging technology Strengthening vendor relationships Leveraging regulatory compliance to create competitive advantage Restructuring via acquisitions and divestitures Creating new risk management products Use of captives to transfer risk and generate revenue Accepting risk to increase profit Altering the company's risk management profile
  36. 36. Emerging use of risk-into-opportunity techniques Using Fully/Extensively Q3a. To what extent are you using this technique at your firm? Use of captives Creating new risk management products Restructuring via acquisitions and divestitures Leveraging technology Altering the company's risk management profile Accepting risk to increase profit Leveraging regulatory compliance Strengthening vendor relationships Minimizing business interruption Managing people risk
  37. 37. Accepting risk to increase profit 56% 43% 39% 38% 33% 28% 25% 17% 15% 14% Using Fully/Extensively “ Redundancy in our warehouse locations was minimized to create a more lean structure. Our risk of not being able to service a given geography due to a catastrophic loss is increased, but we believe our control efforts adequately minimize that particular risk.” Use of captives Creating new risk management products Restructuring via acquisitions and divestitures Leveraging technology Altering the company's risk management profile Accepting risk to increase profit Leveraging regulatory compliance Strengthening vendor relationships Minimizing business interruption Managing people risk
  38. 38. Leveraging technology 56% 43% 39% 38% 33% 28% 25% 17% 15% 14% Using Fully/Extensively “ Our IT department is very cutting edge when it comes to security, innovation, and responsiveness. Several of our electronics vendors have been so impressed that they’ve asked us to consult to their IT departments.” Use of captives Creating new risk management products Restructuring via acquisitions and divestitures Leveraging technology Altering the company's risk management profile Accepting risk to increase profit Leveraging regulatory compliance Strengthening vendor relationships Minimizing business interruption Managing people risk
  39. 39. Creating new risk management products 56% 43% 39% 38% 33% 28% 25% 17% 15% 14% Using Fully/Extensively “ The university…is lined with over 1,500 olive trees. Not only were the fallen olives a constant and costly cleanup, but their greasy, slippery residue was the cause of accidents and a lawsuit. Due to the inspiration of the campus groundskeeper, today the olives are picked and pressed into a product that has won gold medal honors at the Los Angeles County Fair.” Use of captives Creating new risk management products Restructuring via acquisitions and divestitures Leveraging technology Altering the company's risk management profile Accepting risk to increase profit Leveraging regulatory compliance Strengthening vendor relationships Minimizing business interruption Managing people risk
  40. 40. A handful of firms are currently using five or more techniques for turning risk into opportunity Average = 3.1
  41. 41. Large firms and those who consider themselves to be strategic risk managers are most actively trying to turn risks into opportunities Number of Techniques Fully Implemented or Using Extensively Company Size Risk Approach in Companies $1 Billion + Mean Number of Techniques Using Mean Number of Techniques Using
  42. 42. Risk managers and the C-suite agree on turning risk into opportunity Agreement With Statement My firm's senior management looks for opportunities to use risk to the firm's competitive advantage
  43. 43. Two techniques for turning risk into opportunity seem to offer near-term potential Risk-Into-Opportunity Techniques Q3a. To what extent are you using this technique at your firm? Q3c. How likely are you to increase usage of this technique in the future?
  44. 44. Takeaways
  45. 45. Research takeaways <ul><ul><li>The focus on strategic risk management continues </li></ul></ul><ul><ul><ul><li>Use of enterprise-wide risk management up sharply </li></ul></ul></ul><ul><ul><li>Multiple drivers of strategic risk management </li></ul></ul><ul><ul><ul><li>Size and industry matter </li></ul></ul></ul><ul><ul><ul><li>Ratings agencies driving change </li></ul></ul></ul><ul><ul><li>Alignment on risk assessment </li></ul></ul><ul><ul><li>Disconnect on leadership </li></ul></ul>
  46. 46. Putting this survey to practical use <ul><ul><li>Use this survey as a discussion tool with your C-suite to determine alignment in your firm on views of key risks. </li></ul></ul><ul><ul><li>Determine whether your C-suite can/cannot answer “Yes” in response to all three ratings agency questions. </li></ul></ul><ul><ul><ul><li>If not, discuss how you can help your C-suite find the answers. </li></ul></ul></ul><ul><ul><li>Gain clarity about the C-suite view of your role as the company moves toward more strategic risk management. </li></ul></ul><ul><ul><li>Conduct internal discussions to: </li></ul></ul><ul><ul><ul><li>identify ways in which risk is currently being turned into opportunity; and </li></ul></ul></ul><ul><ul><ul><li>get others in your firm to consider new ways of turning risk into opportunity. </li></ul></ul></ul>
  47. 47. Our Panelists <ul><ul><li>Laurie J. Champion Vice President, Risk Management Coca Cola Enterprises, Inc. </li></ul></ul><ul><ul><li>Jackie Hair, ARM Corporate Director, WW Risk Management Ingram Micro Inc. </li></ul></ul><ul><ul><li>Janice Ochenkowski Managing Director Jones Lang LaSalle </li></ul></ul>
  48. 48. Appendix
  49. 49. Opportunities <ul><ul><li>Leveraging regulatory compliance to create competitive advantage. </li></ul></ul><ul><ul><ul><li>Some companies take a strategic approach to compliance by implementing technology to automate internal controls, reporting, and testing and by establishing a centralized repository for this data to lower administrative costs and ensure a higher degree of confidence in the compliance process . </li></ul></ul></ul><ul><ul><li>Minimizing business interruption due to climate change/catastrophic property loss. </li></ul></ul><ul><ul><ul><li>Some companies have enhanced the reliability of power systems, upgraded fire protection, and increased redundancy in coastal and earthquake-prone areas to mitigate the effects of catastrophes by reducing property damage and business interruption risk. Such efforts will slow the pace of rate increases and allow the company to publicize its ability to continue operating in the face of a disaster. </li></ul></ul></ul><ul><ul><li>Strengthening vendor relationships. </li></ul></ul><ul><ul><ul><li>Some companies have brought strategic vendors in as full business partners to assure that they understand the future strategy of the company and are operating to optimize risk taking, sharing, and transfer. This may result in a company's having more loyal vendors that will service the company ahead of its competitors in a widespread crisis situation, such as Hurricane Katrina, providing the company with a competitive advantage. </li></ul></ul></ul><ul><ul><li>Altering the company’s risk management profile. </li></ul></ul><ul><ul><ul><li>Some companies have undertaken efforts to identify areas where risks are over- or under-managed to create a more financially sound organization that will generate confidence with a variety of stakeholders, including employees, investors, and the general public. </li></ul></ul></ul><ul><ul><li>Managing people risk by developing a corporate responsibility program. </li></ul></ul><ul><ul><ul><li>Some companies view people risk and corporate social responsibility holistically. They are addressing both risks together by developing a corporate responsibility program to mitigate unethical or inappropriate behavior, fraud, or other forms of individual malfeasance. Such programs can have a direct positive effect on business results and company image. </li></ul></ul></ul>
  50. 50. Opportunities <ul><ul><li>Restructuring via acquisitions and divestitures. </li></ul></ul><ul><ul><ul><li>Some companies use acquisitions and divestitures to improve risk profile and/or eliminate high-risk areas. For example, a manufacturing company used its corporate aircraft fleet to transport passengers for a fee when the fleet was not in use by the company. The cost of its insurance program was much higher than the profits from the transportation operations. The company divested itself of the aircraft operations and began using commercial jets and charters for its own transportation needs. This improved its risk profile, lowered risk-transfer costs, and freed up funds to use on other projects. </li></ul></ul></ul><ul><ul><li>Creating new risk management products. </li></ul></ul><ul><ul><ul><li>Since a risk is rarely unique to one firm, innovative risk management solutions can result in salable new products. For example, a technology company identified information security as a potential risk, developed a proprietary data protection solution, and then recognized the opportunity to offer data security as a managed service to its clients. </li></ul></ul></ul><ul><ul><li>Leveraging technology. </li></ul></ul><ul><ul><ul><li>Technology can be used for more than compliance and reporting. Using ERM tools and techniques leads to identification of knowledge needs, implementation of analytic and actuarial frameworks, and better decision-making. This improved access to information and faster decision-making allows the company to be more nimble in responding to changing customer needs. </li></ul></ul></ul><ul><ul><li>Use of captives to transfer risk and generate revenue. </li></ul></ul><ul><ul><ul><li>The increased use of captives demonstrates their cost-effectiveness in managing risk. Some firms now take this farther, using their captives to accept third-party risk and underwriting it profitability so that the captive becomes a revenue-generating subsidiary. </li></ul></ul></ul><ul><ul><li>Accepting risk to increase profit. </li></ul></ul><ul><ul><ul><li>With a broader understanding of risk and better tools to evaluate it, some firms are now purposefully increasing risk in order to lower costs or increase revenues. For example, creating a leaner supply chain increases risk, but lowers costs. </li></ul></ul></ul>
  51. 51. RIMS and Marsh thank you for your ongoing support of the Excellence in Risk Management series The Risk and Insurance Management Society, Inc. (RIMS) is a not-for-profit organization dedicated to advancing the practice of risk management, a professional discipline that protects physical, financial, and human resources. Founded in 1950, RIMS represents nearly 4,000 industrial, service, nonprofit, charitable, and governmental entities. The Society serves more than 10,000 risk management professionals around the world. Marsh is part of the family of MMC companies, including Kroll, Guy Carpenter, Putnam Investments, Mercer Human Resource Consulting (including Mercer Health & Benefits, Mercer HR Services, Mercer Investment Consulting, and Mercer Global Investments), and Mercer specialty consulting businesses (including Mercer Management Consulting, Mercer Oliver Wyman, Mercer Delta Organizational Consulting, NERA Economic Consulting, and Lippincott Mercer). Copyright 2007 Marsh Inc. All rights reserved. Compliance # MA7-10168

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