Tag Archives: unknowns

Modernization: CRO Faces New ‘Unknowns’

Internal and external demands have resulted in the clarification and expansion of the role of the chief risk officer and the risk management function. Internally, senior management and the board see the merit of using key risk information. Ensuring the company is managed within its risk appetite enables it to best utilize its resources to take advantage of changing competitive needs and strategic opportunities. Externally, U.S. and global regulators are articulating clear expectations for the role of the CRO and governance of the risk function, as well as the role of the board in risk management and the CRO’s and risk function’s relationship with the board. These demands emphasize the need for clear policies and processes with appropriate documentation and governance.

As little as 10 years ago, the risk function was novel at most companies, and there were almost as many models of how to organize and manage the function as there were insurers. This has changed. Leading practice is becoming clearer, and expectations are now more consistent and defined. However, boards and regulators are increasingly inquiring about new “unknowns”: data security, cyber terrorism, reputational risk and competitive obsolescence. All of these also fall under the CRO’s purview and increase demands on risk resources.

The case for change

The risk function is the newest among the direct stakeholders that insurance modernization directly affects, and there are a number of important implications and outcomes.

  • No existing “pipes” – For the majority of North American risk functions, many risk calculations and resulting reports are very recent creations. Very few have a solid network of pipes that transmit data and input through models and calculations onward to result in verifiable and controlled information. Therefore, compared with many other functions that modernization affects, the risk function does not need to dismantle existing pipes. However, it is critically important that, as insurers plan and develop these new pipes, they do so in cooperation with other stakeholders. If they do not, then the risk function may find itself unnecessarily tearing up what should be a common roadway.
  • From build to oversee – While internal and external changes affect all stakeholders, the risk function is unique in that its very nature also is changing. When the risk function originally came into being, it was the CRO’s and his staff’s responsibility to create the models and capability needed to support the function. Now, as risk infrastructure takes shape, management, boards and other stakeholders are asking the CRO and risk function to play a key role in governance and control. This brings into question how best to manage and oversee both the risk and overall corporate infrastructure. Can and should these be responsibilities of the risk function, and, if not, who should be responsible for managing this infrastructure?
  • Process and documentation – Much of the newly built infrastructure was constructed quickly and in a “learn by doing” mode. Much of it is parallel to but not coordinated with activity in other areas, especially actuarial. As companies have mapped processes and documented assumptions, models and output, functional overlaps have become clearer. In many cases, clarification and resolution of the overlaps will be necessary to enable rational enterprise level mapping and non-duplicative documentation.
  • Demonstrated engagement – The CRO and risk management staff (with input from actuarial, investment, finance and others) support the foundation on which risk information is built Increasingly, the board and regulators are asking for holistic engagement in agreeing on assumptions and methodologies, not just siloed input from subject-matter experts. The risk function increasingly is being asked: Are the business managers – the first line of defense –in agreement? And, is their collective engagement substantive and verifiable?
  • Governance – As the board’s role in risk management and risk taking becomes clearer, many boards and regulators recognize the need to include major risk and strategic initiatives under the oversight umbrella. They look to the CRO to be the conduit of information between them and the insurer. This strongly suggests that the CRO should have insight into modernization initiatives that go beyond just the risk function.

In a modernized company, a synergy of efficient processes with clearly defined stakeholder expectations exists among risk, actuarial, finance and technology (RAFT). The modernized risk function will share a common foundation of data, methods and assumptions and tools and technology with the other RAFT functions. (Naturally, the risk function will have certain unique processes that build on this foundation.) Finally, enterprise compatible business management, HR, reporting and governance all channel the process to its apex: intelligent decision making.

  • Data – The organization, with significant risk input, clearly defines its data strategy via integrated information from commonly recognized sources. The goal of this strategy is information that users can extract and manipulate with minimal manual intervention at a sufficient level of detail to allow for on-demand analysis.
  • Methods and analysis – Modern risk organizations emphasize robust methods and analysis, particularly the utilization of different approaches to arrive at insight from more than one perspective. Key to proper utilization of multiple methods is confidence that different outcomes are not the result of inconsistent inputs but rather truly reflect new insight.
  • Tools and technology – Up-to-date tools and technology help the risk function gather, analyze and share information faster, more accurately and more transparently than ad hoc end-user computing analysis. With modern tools and technology, risk personnel can devote the majority of their time to understanding and managing risk rather than programming and running risk models.
  • Stress testing – Stress testing has become a key weapon in the risk management arsenal. Test results convey risk information to senior management, the board and regulators. Resulting impacts on capital under stress scenarios become key to capital planning and calibrating economic capital (EC) models. Moreover, these tests are fully integrated in financial planning and the finance function’s agenda.
  • EC/Capital modeling – Economic capital calculations continue to be an important tool for decisions at all levels, from strategic to micro-level asset trading and product design. A modernized organization fully integrates these models with key actuarial activities, and the process and results help the company more effectively plan for and manage risk. Results are available quickly, and efficiency of the process allows for extensive “what if” testing.
  • Validation – A comprehensive model risk management structure is in place. The company routinely validates new models and model changes. Assumption consistency is transparent across risk, actuarial and finance. The company verifies data integrity and uses a model inventory to weed out duplication and overlap. Savings more than pay for model risk management (MRM) costs.
  • Human capital – Risk functions employ more inquisitive and analytical analysts. The emphasis is on managing risk, not running models. A significant portion of the group devotes its time to understanding emerging trends and investigating potential new threats to the organization. Clear organizational design facilitates working in a collaborative manner with other control functions and business managers.
  • Governance – Risk plays a key role in governance and risk appetite is well established. Decision making throughout the organization incorporates risk in a transparent manner. This is in large part because of confidence in risk output because data and input is consistent with finance and actuarial analytics, models are validated and senior management and the board understand key assumptions and limitations.

The benefits

Realizing ERM’s promise requires more than just complex economic capital and value at risk (VAR) models. It requires confidence in these models and an understanding of their key assumptions and limitations. This confidence and understanding need to be pervasive – from risk, finance and actuarial personnel themselves, through line of business leadership, up to senior management and the board.

With a modernized platform in place, CROs and risk functions can turn their attention to managing risk, not calculating and reconciling numbers, as well as providing management and board with the best tools for intelligent decision making, confidence in capital deployment and competitive strategies consistent with risk appetite and capacity.

Critical success factors

Plan ahead and in concert with other stakeholders. The risk function is in the unique position of not having to dismantle infrastructure, but it definitely does need to build on it. The function’s relative youth and lack of legacy encumbrances mean it is in an ideal position to be a leader in modernization initiatives.

Moreover, the risk function has both an opportunity and an obligation to raise concerns about the risks involved in modernizing in an uncoordinated way or the risk to the insurer’s competitiveness from not modernizing at all.

Call to action – Next steps

Look for quick wins, like faster processing, more transparency, deeper insight, but stay true to the long-term plan. Some of these quick wins can be cost savings opportunities. For example, an inventory of documented models can reduce the number of models (and associated maintenance cost) by weeding out redundancies. In addition, the company can streamline internal reports when all areas use the same foundational data and calculations. Moreover, the company may be able to rationalize multi-jurisdictional, external and regulatory reporting.

Getting to 2020 — Defining the Unknown (Part 2)

Today’s exercise focuses on the best concepts you can dream up so your organization can thrive in the future. You’ll then need to perform a reality test on those ideas, using research you’ve developed.

This article follows up on my first, in which I argue that now is the time to prepare for what I call “Agency 2020.” In other words, you need to prepare your organization for the leap that will be required for future prosperity.

In that first article, I asked dozens of questions to help define the current reality of 2014. We searched for the knowns – and the known unknowns – of today. This time around, almost every question will be about a discovery in the “unknown unknowns.”

Your challenge is about asking the right questions – and then stretching yourself beyond your comfort zone to find good answers for tomorrow. Use a flood light on the dark horizon of tomorrow. It’s premature to focus with laser-like intensity.

Pursue this process with enthusiasm and childlike curiosity. Forget what you know and believe. Ask “what if?” Don’t try to define “what isn’t.” My intent is to broaden your horizon, stimulate imaginative thought, encourage you to focus and help you act as you develop your new organization for 2020.

To keep the process simple and open-ended, we’ll focus on four issues:

  • people
  • technology
  • the global economy
  • innovation

PEOPLE: The overriding challenge and opportunity in 2020 will be people: who they are,  their values, the cultures they will create and their wants and needs in their own world. Do their worlds and your world overlap? Is there some common interest and opportunity? How do you communicate with many … as well as with a niche of one?

Research the generational mix in 2020. What percentage of the population will be Gen C, Millennials, Gen X and Boomers? Will the Greatest Generation be gone? What will be the influence of each group in the decision-making process as consumers, managers, leaders, etc.?

If they are clients or prospects, what products and services can you offer to meet their wants and needs? How do you profitably deliver this at a price they are willing to pay? What message, media, metrics are necessary to ensure you maintain intimacy continually with each person and affinity, as well as with their population (generation) – however they define it?

Where and how can your interests align – whether as employers, employees, collaborators, competitors, decision makers, policy leaders, educators, friends or social media group members, etc.? Who is now – or who will be – in your world tomorrow, in 2020?

Consider the following as you try to put your arms around a new digital universe that will see the LAGgards (Last Analog Generation) leaving the scene and new Gen C – digital natives – begin to assert their influence before they finish high school. (Before you roll your eyes, have you ever had to ask a teenager to show you how to use your device du jour?)

John Naisbitt painted the picture of this phenomenon in his book Megatrends when he talked about “balancing high tech and high touch.”

If you are unwilling or unable to accept the new world, demographics and diversity, enjoy your retirement.

TECHNOLOGY: Decades ago, the scholar and organizational consultant Warren Bennis observed: “The factory of the future will have two employees, a man and a dog. The man is there to feed the dog, and the dog is there to keep the man away from the machinery.” Could he be right?

To provide perspective, remember that in 2003 the BlackBerry was considered state-of–the-art technology. Some believed this device owned the future of social connection. There was no iPhone, iPad, Facebook, Twitter, etc. By 2012, BlackBerry’s parent – then known as Research in Motion – was teetering on the edge of bankruptcy, and “i” technology, smart devices and social media were out-of-control adolescents.

Today, conversations are focusing on the Internet of Things, or IoT, where inanimate objects – smart watches, “intelligent” cars, home appliances, etc. – communicate without the intervention of people.

In 2020, will technology work for us, or will we work for technology? Will we know more and communicate better than Siri, or will artificial intelligence be the trusted advisers for most consumers? Will facial recognition technology allow your iPhone to read the mood of your clients better than you can, when you’re each sitting at the City Club texting each other over lunch?

Is this ridiculous? Can you afford to be wrong?

THE GLOBAL ECONOMY: Time and place are gone. The lights are always on, and the door is never locked in any place of business. That’s the good news: You can live on Main Street and still compete in Dublin, Dubai or Duson, La. The bad news is that your competitor and many hackers are on Main Street, peering into your shop. You can be a David in a world of Goliaths. But if you’re a Goliath, you’re more vulnerable than ever to a world of Davids. If your company is bureaucratic, you’re just a slower Goliath.

My best suggestion is to “capture population” and become the portal of choice for members of that universe. Don’t worry about selling products. Instead, focus on needs and solutions to problems. Facilitate the “buying,” or capture, of each individual in the group. Remember: If you control a large enough population, you can “insure” needs of the group – without the cost of issuing individual policies.

INNOVATION (the new power plays and power players): In a presentation on change in 1993, I declared: “Today GM, Sears and IBM are the kings of their respective jungles. In our lifetime, one of these companies will fail.” The audience shook their heads in disbelief. I was right, and in the long term I may win the trifecta.

From the Affordable Care Act, to Facebook, Amazon, Twitter, apps, artificial intelligence and IoT, the marketplace is being redesigned by the people who shop there. In other words, the deck is being reshuffled. Opportunities have never been greater, the stakes higher or the risks greater.

That the world will be different is a fact. Remember Einstein’s admonition: “Insanity is to continue to do what you’ve always done and expect a different result.” Don’t be insane. Be prepared.  It can work. As I noted in my first article, we’ve already walked on the moon!

With forethought, an organizational purpose, principles, a vision, a commitment and a plan that ropes you to that commitment, you can and will prevail.  Don’t try to conquer the world. Just identify and prevail in your part of that world.

Be bold and wise in your research and positioning for 2020. Today’s world includes unlimited data, much less useable information and less still actionable knowledge. By 2020 – if you’re willing to try – you’ll be able to take the actionable knowledge, shape it to the wants and needs of a specific group, align your offerings (helping them buy) and innovate your processes to ensure you can deliver at a price they are willing to pay. Align your message, media, meaning, etc. to each specific group. Test the concept. And then act – meaning experiment. Remember, wisdom exists at the intersection of knowledge and experimentation. When you fall down, stand back up.

As business management columnist Dale Dauten states: “Different isn’t always better, but better is always different.” Be better in 2020. Differentiate yourself from the sameness of today and tomorrow!  Take the giant leap of discovery for yourself … and all of mankind!