Advantages and Challenges of Risk Committees
Ever since the 2008 financial crisis, organizations across the country have been rethinking risk and how to manage it.
While many factors contributed to the crisis, not the least of them was a failure of the financial institutions at the center of the crisis to properly manage risk, which was aggravated by the growing complexity and velocity of the risks they were facing.
The Dodd-Frank Act, written and passed to prevent a repeat of the conditions that led to the financial crisis, addressed this issue head on. Recognizing the role inadequate risk management played in precipitating the crisis, Dodd-Frank included new regulations that require publicly traded financial institutions (other than banks) to establish risk committees.
While these requirements only apply to certain national and international financial institutions, the wisdom of the risk committee provisions has been accepted more broadly, and risk committees have come to be accepted as a best practice across other industries, as well.
A new report by the Risk and Insurance Management Society (RIMS), “Exploring the Risk Committee Advantage,” examines the benefits and challenges of the risk committee concept, and describes different types of risk committees and important considerations regarding implementation.
“The mistake a lot of enterprise risk managers make is designing their risk committee and then using it to design their program. It should be the other way around,” says John Phelps, a contributor to the report.
Before determining the appropriate type of risk committee, it is important to determine an organization’s risk management needs, said Phelps, who is director of business risk solutions for Blue Cross and Blue Shield of Florida Inc., and was 2013 RIMS president.
“Once you have decided on the program … then you should think about forming a risk committee as a way to facilitate it,” he said.
Risk committees offer a number of tangible benefits, such as helping organizations identify risk, gather information and implement risk management programs. But according to the report, one of the biggest benefits is creating “a more risk-aware culture throughout the organization.”
Report contributor and RIMS board member Gloria Brosius, director of risk management and insurance programs, Farm Credit Council Services Inc., said risk committees “make everyone in the organization a little more aware that risk management is everyone’s job.”
Risk committees can take a variety of forms, from board level, focusing on long-term strategic risk; to C-suite; to operational risk committees that focus on identifying exposures and developing and implementing risk control programs.
Brosius said that many organizations could incorporate some combination of the three. The best type for a given organization depends on that organization’s size and needs.
Considerations like the number of the members and frequency of meetings are also dependent on the size and nature of the organization, but the report includes specific recommendations. Risk committees should ideally have eight to 12 members.
“If you have too few people you’re not going to be able to accomplish your goals,” said Brosius, “but if you have too many, it’s going to be counter productive.”
And while there is no consensus on the ideal frequency of risk committee meetings, the report recommended meeting more frequently at first. It also emphasized the importance of meetings being held in person.
Once the goals and configuration of the risk committee have been determined, it is important to define them, typically through a board-approved charter that spells out the committee’s purpose, focus and responsibilities, as well as specifics like meeting structure, schedule, and reporting requirements.
It is important to include enough flexibility that the committee isn’t unduly constrained, but Phelps added, “Having narrow expectations about reporting can add some teeth to what you are trying to do.”
The report is clear about the benefits of risk committees, but it also acknowledges the challenges.
Time constraints are always a concern. There is the potential for bias or skewed perceptions due to committee members’ individual backgrounds or the committee’s reporting structure. Junior members may feel inhibited from speaking freely in the presence of their superiors.
Perhaps the biggest challenge is getting adequate buy-in across the organization.
“Making something formal means you have to report on it, and it may require more administrative work as well as more work for those who are chosen to be on the risk committee,” said Brosius.
“They may be doing it informally now, but making it formal creates the illusion, if nothing else, of additional work.”
And it is crucial that the members understand the importance of the risk committee to the rest of their work.
“If they don’t see enterprise risk management and their role in it as integral to them achieving their area’s goals, then there is going to be a lot of apathy in the committee,” said Phelps.
As companies increasingly move toward an enterprisewide approach to risk management, risk committees will become an increasingly important tool, but Phelps said it is important to remember that it is just that — a tool.
“An enterprise risk management committee is no good without a solid enterprise risk management program,” he said.
To download a copy of the report, visit www.rims.org.
TRIA Inaction is ‘Disconcerting’
As a member of the Risk and Insurance Management Society’s (RIMS) External Affairs Committee, chair of RIMS Political Action Committee Risk Pac, and a former president of RIMS, I was very saddened to see that Congress left Washington without providing an extension to the Terrorism Risk and Insurance Act (TRIA).
It is even more disconcerting because there appeared to be a compromise in the works between the House of Representatives version and the Senate version, which would have extended the Federal backstop for six years.
RIMS has worked diligently with key members of Congress and other support organizations to clearly articulate the challenges that employers and their risk managers would face if a Congressional extension of TRIA did not occur prior to the deadline of December 31, 2014.
As the nation’s economy is gaining some momentum after the significant challenges of the worst recession since the 1929 Depression, subjecting the business community to the potential significant impact of policy cancellations for terrorism coverage for property coverage as well as workers’ compensation coverage is absolutely unnecessary and a dereliction of duty on the part of Congress not to have taken action on TRIA.
Businessweek has now written that there is a potential cancellation of Super Bowl XLIX as a result of the backstop not being extended.
Speaker Boehner has gone on record that Congress will fix this as soon as Congress gets back to work in the new year, potentially with a retroactive date.
All that is fine but the bottom line is that this should not have happened and it is unfortunate that politics trumps rational decision-making, thus putting businesses in the cross hairs of potentially having lapses in coverage, which is essential to good business operations.
A Modern Claims Philosophy: Proactive and Integrated
According to some experts, “The best claim is the one that never happens.”
But is that even remotely realistic?
Experienced risk professionals know that in the real world, claims and losses are inevitable. After all, it’s called Risk Management, not Risk Avoidance.
And while no one likes losses, there are rich lessons to be gleaned from the claims management process. Through careful tracking and analysis of losses, risk professionals spot gaps in their risk control programs and identify new or emerging risks.
Aspen Insurance embraces this philosophy by viewing the data and expertise of their claims operation as a valuable asset. Unlike more traditional carriers, Aspen Insurance integrates their claims professionals into all of their client work – from the initial risk assessment and underwriting process through ongoing risk management consulting and loss control.
This proactive and integrated approach results in meaningful reductions to the frequency and severity of client losses. But when the inevitable does happen, Aspen Insurance claims professionals utilize their established understanding of client risks and operations to produce some truly amazing solutions.
“I worked at several of the most well known and respected insurance companies in my many years as a claims executive. But few of them utilize an approach that is as innovative as Aspen Insurance,” said Stephen Perrella, senior vice president, casualty claims, at Aspen Insurance.
“We do a lot of trending and data analysis to provide as much information as possible to our clients. Our analytics can help clients improve upon their own risk management procedures.”
— Stephen Perrella, Senior Vice President, Casualty Claims, Aspen Insurance
Utilizing claims expertise to improve underwriting
Acting as adviser and advocate, Aspen integrates the entire process under a coverage coordinator who ensures that the underwriters, claims and insureds agree on consistent, clear definitions and protocols. With claims professionals involved in the initial account review and the development of form language, Aspen’s underwriters have a full sense of risks so they can provide more specific and meaningful coverage, and identify risks and exclusions that the underwriter might not consider during a routine underwriting process.
“Most insurers don’t ever want to talk about claims and underwriting in the same sentence,” said Perrella. “That archaic view can potentially hurt the insurance company as well as their business partners.”
Aspen Insurance considered a company working on a large bridge refurbishment project on the West Coast as a potential insured, posing the array of generally anticipated construction-related risks. During underwriting, its claims managers discovered there was a large oil storage facility underneath the bridge. If a worker didn’t properly tether his or her tools, or a piece of steel fell onto a tank and fractured it, the consequences would be severe. Shutting down a widely used waterway channel for an oil cleanup would be devastating. The business interruption claims alone would be astronomical.
“We narrowed the opportunity for possible claims that the underwriter was unaware existed at the outset,” said Perrella.
Risk management improved
Claims professionals help Aspen Insurance’s clients with their risk management programs. When data analysis reveals high numbers of claims in a particular area, Aspen readily shares that information with the client. The Aspen team then works with the client to determine if there are better ways to handle certain processes.
“We do a lot of trending and data analysis to provide as much information as possible to our clients,” said Perrella. “Our analytics can help clients improve upon their own risk management procedures.”
For a large restaurant-and-entertainment group with locations in New York and Las Vegas, Aspen’s consultative approach has been critical. After meeting with risk managers and using analytics to study trends in the client’s portfolio, Aspen learned that the sheer size and volume of customers at each location led to disparate profiles of patron injuries.
Specifically, the organization had a high number of glass-related incidents across its multiple venues. So Aspen’s claims and underwriting professionals helped the organization implement new reporting protocols and risk-prevention strategies that led to a significant drop in glass-related claims over the following two years. Where one location would experience a disproportionate level of security assault or slip & fall claims, the possible genesis for those claims was discussed with the insured and corrective steps explored in response. Aspen’s proactive management of the account and working relationship with its principals led the organization to make changes that not only lowered the company’s exposures, but also kept patrons safer.
World-class claims management
Despite expert planning and careful prevention, losses and claims are inevitable. With Aspen’s claims department involved from the earliest stages of risk assessment, the department has developed world-class claims-processing capability.
“When a claim does arrive, everyone knows exactly how to operate,” said Perrella. “By understanding the perspectives of both the underwriters and the actuaries, our claims folks have grown to be better business people.
“We have dramatically reduced the potential for any problematic communication breakdown between our claims team, broker and the client,” said Perrella.
A fire ripped through an office building rendering it unusable by its seven tenants. An investigation revealed that an employee of the client intentionally set the fire. The client had not purchased business interruption insurance, and instead only had coverage for the physical damage to the building.
The Aspen claims team researched a way to assist the client in filing a third-party claim through secondary insurance that covered the business interruption portion of the loss. The attention, knowledge and creativity of the claims team saved the client from possible insurmountable losses.
Modernize your carrier relationship
Aspen Insurance’s claims philosophy is a great example of how this carrier’s innovative perspective is redefining the underwriter-client relationship. Learn more about how Aspen Insurance can benefit your risk management program at http://www.aspen.co/insurance/.
Stephen Perrella, Senior Vice President, Casualty, can be reached at Stephen.firstname.lastname@example.org.
This article is provided for news and information purposes only and does not necessarily represent Aspen’s views and does constitute legal advice. This article reflects the opinion of the author at the time it was written taking into account market, regulatory and other conditions at the time of writing which may change over time. Aspen does not undertake a duty to update the article.
This article was produced by the R&I Brand Studio, a unit of the advertising department of Risk & Insurance, in collaboration with Aspen Insurance. The editorial staff of Risk & Insurance had no role in its preparation.