Various items arising from one of the main events in the risk management year.
A call for greater consistency in the application of the concept of risk appetite and recognition of its value to organizations, are among the findings of a report commissioned by AIRMIC. The research, carried out by Marsh and the University of Nottingham, concluded that the concept of risk appetite was increasingly important to company boards but that there was inconsistency in how it is defined and applied.
It also found a strong desire among practitioners to share best practice and agree consistency of terminology and methodology.
According to the report, risk appetite is a well established and useful concept in the context of insurance buying. However, how to apply it as a strategic tool in a wider business context is still a developing area.
It said the main benefits of understanding risk appetite include: to support the better allocation of resources; improve decision-making and make it more consistent; encourage more effective risk taking, thereby ultimately supporting the organization’s reputation.
It concluded that application of the concept will always vary depending on industry, culture, data availability, degrees of centralisation and existing Enterprise Risk Management maturity. Nonetheless, it is important and beneficial to develop an agreed language and understanding of good practice.
One common theme among practitioners, the report states, is the need to agree a risk appetite statement at the highest level in order to improve oversight of risk management, achieve board understanding of the concept and buy-in from colleagues.
Eddie McLaughlin, a managing director in Marsh’s Risk Consulting Practice for Europe, Middle East and Africa, said: “Just as there is no one size fits all solution to the application of risk management, the same is true of risk appetite. Increasingly, we are seeing organizations integrating risk appetite within their overall enterprise risk management maturity framework and their annual performance appraisal process.”
The current economic conditions give risk managers a great opportunity to become ERM (enterprise risk management) evangelists, but they need to think again about how they approach their jobs.
Joe Restoule, president of the US-based Risk and Insurance Management Society (RIMS), and leader, Risk Management, NOVA Chemicals Corporation, told delegates that traditional risk management skills were no longer enough on their own.
“We should become master communicators and learn how to articulate the company’s risks as we see them in a way that resonates with both internal and external stakeholders,” he said.
Risk managers need to take a broad view of their jobs, he added, one that takes into account the wider context, including issues such as the global economy, geopolitical developments and emerging risks. “Traditional skills are still important, but need to be more clearly demonstrated in a way that relates to the culture and objectives of the organization,” he said.
Restoule described the current crisis as “a wake-up call” that meant business people can no longer do things the same as before – a fact that applies equally to risk managers and the organizations for which they work. “Prepare to leave your comfort zones if you want to wield the influence that your skills deserve,” he said.
This meant that risk professionals should acquire new skills, such as becoming masters of data. “We should see ourselves as strategic partners in the organization – more than just risk managers. Therein lies influence,” he said.
Risk managers would have to develop strategies to engage CFOs and CEOs and influence the C-suite, a task he described as “the most difficult challenge facing risk managers.”
“Don’t get left in the dark. Learn how to put a spotlight on your success and make risk management a bright and shining star in your organization,” he concluded.
With the economic climate taking its toll across industry at large, a significant number of risk management positions have either been made redundant, or not been replaced as incumbents have left, the AIRMIC conference heard.
Garry Taylor, head of global risk property at Lockton International and Ian Canham of IC Advisory discussed why and how risk managers could demonstrate the real value that they deliver to their management and boards, so that organizations going through a tough period do not see risk management as a luxury they can do without.
They cited five key things that risk managers can do to clearly demonstrate the value of the role:
• Understanding the strategy – of the business for which they work and the stakeholders’ objectives.
• Quantifying the financial value – so that there is cost certainty around the programme and the amount spent is the same as, or less than, that spent by your peer group.
• Knowing your insurers – at all layers and in detail. Also knowledge of who might offer alternative cover if an insurer comes off your programme.
• Explaining the total cost of risk – from the essentials such as premiums and brokerage to the more complex issues such as ART and enterprise risk.
• Professional interaction – risk managers have dealings with a wide group of stakeholders and need to ensure that colleagues buy in to the process.
“Insurers clearly understand the value of the risk management function” Taylor told a workshop. “We undertook a sample of opinion in the London market and 83 percent of the underwriters said that if a company has a risk management function it favourably influences the pricing, and all of them said that a professional risk manager adds demonstrable value to insurance placement.
“However, the recession is taking its toll and assuming that management know and understand the value of the role would be complacent. Our job is help the risks managers survive the recession.”
The AIRMIC conference heard a call for more 'joined up thinking' across the insurance Industry.
Neil Campbell who leads Jardine Lloyd Thompson Limted's Risk Consulting Practice, says "Joined up thinking is a term often bandied around in the risk management and insurance world. Unfortunately in many aspects of our industry, we continue to work in isolated silos. Most insurance companies and brokers are still divided into and managed by the most basic insurance coverage lines.
For JLT, working in a joined up way is a fundamental part of our culture. Linking advanced enterprise risk management (ERM) thinking and outputs to the most effective design and execution of insurance-based financing programmes is indeed a happy marriage and a modern and logical development of how these two, up until now separate processes can be integrated and managed dynamically.
During the workshop Neil Campbell highlighted that "with the increasing recognition of enterprise risk management as one of today's most important corporate governance and management tools, bespoke structured insurance programmes are again seen as valuable risk financing tools - insurance capital - to manage significant but sometimes non-core risks within a corporation".
Risk managers should strive to be 'best in class' in their own areas before seeking to expand their roles. Adrian Smith of Cable and Wireless and Nigel Godwin of Heath Lambert said that risk was a board-level issue and that no single type of professional had a monopoly of it. Risk managers have a vital part to play, but ‘risk’ is so broad by definition that not everyone would currently have the broad set of skills required to encompass all aspects of a wider role, Smith said.
"The message we want to get across is that insurance risk managers should focus on the important issues where they can genuinely add value. In this way they will build their credibility and add to their knowledge base so that they can expand their influence within the organization," Godwin said. "Communication with the board needs to be concise, jargon-free and conclusive to ensure all board members, including non execs, understand your subject matter"
Their workshop, ‘Promoting the Risk Manager’, featured a video interview with Tony Rice, ceo of CWI Group, in which he underlined the strategic importance of risk management to the organization. Rice went on to say, however, that risk was managed by the board. The risk manager had an essential role to play, but not necessarily the lead in most organizations.
"AIRMIC members should play to their strengths and support the risk management process in the areas where they're best qualified to do," concluded Smith. "The message we're getting is that the role and profile of the risk manager are increasing all the time and playing to our strengths to add real value to the organization is of utmost importance"
•Date:18th June 2009• Region:UK/World •Type: Article •Topic: Operational risk
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