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.
Healthcare: The Hardest Job in Risk Management
Radically changing cost and reimbursement models.
Rapidly evolving service delivery approaches.
It is difficult to imagine an industry more complex and uncertain than healthcare. Providers are being forced to lower costs and improve efficiencies on a scale that is almost beyond imagination. At the same time, quality of care must remain high.
After all, this is more than just a business.
The pressure on risk managers, brokers and CFOs is intense. If navigating these challenges wasn’t stress inducing enough, these professionals also need to ensure continued profitability.
“Healthcare companies don’t hide the fact that they’re looking to reduce costs and improve efficiencies in practically every facet of their business. Insurance purchasing and financing are high on that list,” said Leo Carroll, who heads the healthcare professional liability underwriting unit for Berkshire Hathaway Specialty Insurance.
But it’s about a lot more than just price. The complexity of the healthcare system and unique footprint of each provider requires customized solutions that can reduce risk, minimize losses and improve efficiencies.
“Each provider is faced with a different set of challenges. Therefore, our approach is to carefully listen to the needs of each client and respond with a creative proposal that often requires great flexibility on the part of our team,” explained Carroll.
Creativity? Flexibility? Those are not terms often used to describe an insurance carrier. But BHSI Healthcare is a new type of insurer.
The Foundation: Financial Strength
Berkshire Hathaway is synonymous with financial strength. Leveraging the company’s well-capitalized balance sheet provides BHSI with unmatched capabilities to take on substantial risks in a sustainable way.
For one, BHSI is the highest rated paper available to healthcare providers. Given the severity of risks faced by the industry, this is a very important attribute.
But BHSI operationalizes its balance sheet in many ways beyond just strong financial ratings.
For example, BHSI has never relied on reinsurance. Without the need to manage those relationships, BHSI is able to eliminate a significant amount of overhead. The result is an industry leading expense ratio and the ability to pass on savings to clients.
“The impact of operationalizing our balance sheet is remarkable. We don’t impose our business needs on our clients. Our financial strength provides us the freedom to genuinely listen to our clients and propose unique, creative solutions,” Carroll said.
Keeping Things Simple
Healthcare professional liability policy language is often bloated and difficult to decipher. Insurers are attempting to tackle complex, evolving issues and account for a broad range of scenarios and contingencies. The result often confuses and contradicts.
Carroll said BHSI strives to be as simple and straightforward as possible with policy language across all lines of business. It comes down to making it easy and transparent to do business with BHSI.
“Our goal is to be as straightforward as we can and at the same time provide coverage that’s meaningful and addresses the exposures our customers need addressed,” Carroll said.
Claims: More Than an After Thought
Complex litigation is an unfortunate fact of life for large healthcare customers. Carroll, who began his insurance career in medical claims management, understands how important complex claims management is to the BHSI value proposition.
In fact, “claims management is so critical to customers, that BHSI Claims contributes to all aspects of its operations – from product development through risk analysis, servicing and claims resolution,” said Robert Romeo, head of Healthcare and Casualty Claims.
And as part of the focus on building long-term relationships, BHSI has made it a priority to introduce customers to the claims team as early as possible and before a claim is made on a policy.
“Being so closely aligned automatically delivers efficiency and simplicity in the way we work,” explained Carroll. “We have a common understanding of our forms, endorsements and coverage, so there is less opportunity for disagreement or misunderstanding between what our underwriters wrote and how our claims professionals interpret it.”
Responding To Ebola: Creativity + Flexibility
The recent Ebola outbreak provided a prime example of BHSI Healthcare’s customer-centric approach in action.
Almost immediately, many healthcare systems recognized the need to improve their infectious disease management protocols. The urgency intensified after several nurses who treated Ebola patients were themselves infected.
BHSI Healthcare was uniquely positioned to rapidly respond. Carroll and his team approached several of their clients who were widely recognized as the leading infectious disease management institutions. With the help of these institutions, BHSI was able to compile tools, checklists, libraries and other materials.
These best practices were immediately made available to all BHSI Healthcare clients who leveraged the information to improve their operations.
At the same time, healthcare providers were at risk of multiple exposures associated with the evolving Ebola situation. Carroll and his Healthcare team worked with clients from a professional liability and general liability perspective. Concurrently, other BHSI groups worked with the same clients on offerings for business interruption, disinfection and cleaning costs.
Ever vigilant, the BHSI chief underwriting officer, David Fields, created a point of central command to monitor the situation, field client requests and execute the company’s response. The results were highly customized packages designed specifically for several clients. On some programs, net limits exceeded $100 million and covered many exposures underwritten by multiple BHSI groups.
“At the height of the outbreak, there was a lot of fear and panic in the healthcare industry. Our team responded not by pulling back but by leaning in. We demonstrated that we are risk seekers and as an organization we can deploy our substantial resources in times of crisis. The results were creative solutions and very substantial coverage options for our clients,” said Carroll.
It turns out that creativity and flexibly requires both significant financial resources and passionate professionals. That is why no other insurer can match Berkshire Hathaway Specialty Insurance.
To learn more about BHSI Healthcare, please visit www.bhspecialty.com.
Berkshire Hathaway Specialty Insurance (www.bhspecialty.com) provides commercial property, casualty, healthcare professional liability, executive and professional lines, surety, travel, programs, and homeowners insurance. It underwrites on the paper of Berkshire Hathaway’s National Indemnity group of insurance companies, which hold financial strength ratings of A++ from AM Best and AA+ from Standard & Poor’s. Based in Boston, Berkshire Hathaway Specialty Insurance has regional underwriting offices in Atlanta, Boston, Chicago, Los Angeles, New York, San Francisco, Toronto, Hong Kong, Singapore and New Zealand. For more information, contact firstname.lastname@example.org.
The information contained herein is for general informational purposes only and does not constitute an offer to sell or a solicitation of an offer to buy any product or service. Any description set forth herein does not include all policy terms, conditions and exclusions. Please refer to the actual policy for complete details of coverage and exclusions.
This article was produced by the R&I Brand Studio, a unit of the advertising department of Risk & Insurance, in collaboration with Berkshire Hathaway Specialty Insurance. The editorial staff of Risk & Insurance had no role in its preparation.