ERM appetite by alicejenny

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									   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
Mvonnahm@cba.uiuc.edu

								
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