On-Demand Webinar: Managing Risk for Property and Casualty in a Digital World
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- Manage risk of NIGO documents and incomplete claims
- Increase compliance while decreasing the compliance burden
- Curate the best customer experience
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ERM: Concept to Reality
Ask risk executives about the challenges of implementing an enterprise risk management program and they will tell you it’s no easy task.
“It’s definitely an uphill battle,” said Morgan Keane, general manager, enterprise risk management division, Port Authority of New York and New Jersey.
Michael Liebowitz, senior director of insurance and enterprise risk management at New York University, said it is “extremely” difficult.
“I had a lot more hair when I started,” he joked.
But for all of the difficulties, the rewards are immense. A study commissioned by RIMS found that companies with mature ERM programs boast a 25 percent higher shareholder value than those that do not.
The study by researchers at Queen’s University Management School and the University of Edinburgh Business School looked at the maturity of risk management efforts at companies from 2006 to 2011.
“For those entities that have not yet embraced ERM, the arguments to do so are compelling,” the researchers wrote in “Testing Value Creation Through ERM Maturity.”
Yet, it’s not an easy argument to make.
“How do you show the value of something that is not happening?” asked Keane.
“Mostly, I think of ERM as a cultural change within an organization in that I am trying to win hearts and minds of people, not just produce a great process,” she said.
When she began at the Port Authority, enterprise risk management was mostly an ad hoc process. And even though ERM began as a board-driven initiative, she focused on a bottom-up approach “because the culture of our organization does well with a grass-roots approach.”
She worked with every department to identify risks that “are usually within their ability to manage.” When there were successes, she shared them with other departments to demonstrate the value of ERM, until the word spread and her input was sought.
One of the lessons she learned along the way was the need to build relationships. “You have to talk to people in language they understand,” she said. “Language that resonates with them. One message for everybody does not work.”
Not everyone understands risk management from the perspective of a risk executive, she said.
Creating a risk library, she said, helps give business leaders a standard vocabulary. “When you identify the risk, you identify the root cause. That’s a standard language and everybody uses the same terms to describe the situation.
Making it as easy as possible for employees to discuss the likelihood and impact of a risk is important, Liebowitz said. He likes to use photos and plain language to share the complex ERM and risk management frameworks created by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) and ISO 3100 by the International Organization for Standardization.
Making changes to an organization requires an understanding of the social systems within it, according to the “Harvard Business Review.” That involves letting employees at all levels of the organization propose solutions based upon “their own logic and clear pathways for change execution.” It requires making allies of key influencers and encouraging conversations about execution of the change.
Liebowitz said that “getting buy-in from strategic people [will] … help you advance a particular program or idea. First, you identify who those people might be. You get them to buy into the idea that ERM is something that an organization can find value in.
“Mostly, I think of ERM as a cultural change within an organization in that I am trying to win hearts and minds of people, not just produce a great process.” — Morgan Keane, general manager, enterprise risk management division, Port Authority of New York and New Jersey
“If there is value, then there’s a need and a want for it, and those people are easier to convince that maybe they want to take a chance,” he said. “What I am saying is, start small.”
Instituting ERM is increasingly a board-driven process. Nearly three-quarters of business leaders surveyed by the Enterprise Risk Management Initiative at North Carolina State’s Poole College of Management, said that boards of directors are asking for increased senior executive involvement in risk oversight. For large or public companies, the percentage is 88 percent.
Implementing ERM, however, needs to be a slow process, said Jack Hampton, professor of business at St. Peter’s University in New Jersey and former executive director at RIMS. It’s a common error, he said, to push too hard.
“What you see is, if you try to sell ERM across all departments, eyes really glaze over. … It doesn’t gain any traction,” he said. “The mistake risk managers make in-house is they talk about the big picture of all risks being managed without silos, in one comprehensive viewpoint,” he said. “That’s not how to explain it. You explain it by illustrating a story of how one group of people can do something.”
Hampton added, “The starting point is to find out what operating managers need to know in terms of information to manage what they perceive to be the key risks affecting their areas. If you approach it as a colossal task, it doesn’t work very well. You don’t put the system together by bringing everybody to the table at once.”
That’s what Liebowitz of NYU learned along the way to creating an ERM program that credit rating agencies have called best in class, he said.
After an initial attempt to convince the executive vice president of finance to implement an ERM program — who responded that it was a passing fad — Liebowitz cut back his focus to just one department, with the idea of using his success there as a selling point.
He chose the finance and treasury departments and worked with directors and managers to identify risks and mitigation strategies that “either brought efficiencies or identified potential exposures for the organization. And we fixed them,” he said.
That got the EVP’s attention, but it wasn’t until nearly two years later when the board’s audit committee approached the EVP to ask whether NYU had an ERM program, that the initiative really took off.
“Now, it looked like the greatest thing since sliced bread,” Liebowitz said.
“We put together a plan and began to roll out ERM throughout the operations division of the university,” he said. “It was about building traction to get this running.”
After successfully focusing on operations for about 18 months, the academic side invited him to develop an ERM strategy for a new academic site in China.
“We continue to roll out our program in the operations division and we rolled out ERM to a third of our other international [academic] locations,” he said, as the program reaches the 5-year mark.
Mistakes Will Be Made
John Phelps, director, business risk solutions, Blue Cross and Blue Shield of Florida, began his ERM program 17 years ago “before ERM was a household word. … I have made every mistake you can make with this,” he said.
“That’s the best instructor I have had, the mistakes I have made.”
A few of the lessons he has learned: “If certain levels of management are not ready for the ERM thing, they are just plain not ready. Sometimes it takes an end run or for them to observe successes in another area to bring them around.
“Another is without upper management endorsement of what you are doing, you can go nowhere. You are just having a nice exercise. To be sustainable, it has to be cultural.”
Phelps said he also learned that senior leaders give “much higher deference … to identifying and evaluating risk at a strategic level than at the operational level. That’s also where the greatest value of the ERM program can be exposed.”
He said that he unsuccessfully tried to “integrate risk-taking criteria into annual performance planning and the organization just would not do it. I tried it twice. … Me trying to turn a chicken into a duck isn’t going to get the job done. I backed off.
“It was two steps forward, one step back, in implementing something both conceptual and tactical within the organization in order to move up to the strategic level where the greatest value of ERM can be exploited,” he said.
Phelps said it took four or five years to convince his senior leaders to move to a rudimentary form of ERM 17 years ago. His persistence combined with a market event caused the leaders to endorse the initiative, he said.
Now, the ERM program includes a scorecard for the 10 most critical strategic risks over a one-to-three-year period. Each risk scorecard has key risk indicators on it, and each is owned by a senior vice president. He updates his board three times a year and updates the VP ranks quarterly.
“We are pretty focused at the strategic level trying to find the greatest value for our organization as we continue to work on supporting strategy development and strategy execution at the company. We are doing this in a post-Affordable Care Act environment, and a pretty dicey and dynamic market,” Phelps said.
“There is also the other side: It’s not just preventing something bad from happening. It’s understanding a project or an organization at a strategic level so you can be more successful. … We come along with ideas to help improve chances for success.
“I have made every mistake you can make with this. That’s the best instructor I have had, the mistakes I have made.” — John Phelps, director, business risk solutions, Blue Cross and Blue Shield of Florida
“No one will ignore you when you explain that we are trying to make them more successful,” he said.
Keane said one of the biggest lessons she learned was to “try things out. Fail fast and course correct.”
Liebowitz said the two biggest mistakes he made were “biting off more than I could chew and thinking that more was better. Now, I have a card on my desk that says, less is more.”
Answering the Call
Risk managers know their ERM initiative is built into the organization when their advice is sought, experts said.
“I’m getting calls instead of me calling people,” Keane said. “I’m getting invited to meetings instead of inviting myself.”
Liebowitz agreed: “You know you are successful when people want to come together to discuss risk.”
NYU’s program began as “an island in a vacuum,” he said. “Today, we collaborate at a very high level with internal audit. We exchange ideas back and forth. We do the same with our compliance department.”
He sees ERM as “a three-legged stool,” with ERM as the seat, atop the legs of compliance, internal audit and operational risk.
“That’s when you know the program is working right and you can identify risks and share risks and we’ve come to the point now where we jointly work on risks together,” he said. “This year, for the first time, we are going to provide to our governing body a combined risk map that will have compliance risks and operational risks together, instead of reporting separately,” he said.
Liebowitz noted, however, that some risk manager colleagues prefer not to work as closely with internal audit.
Succeeding at ERM is grounded on the achievements of traditional risk management, Liebowitz said. His risk management team has eight employees, including him. Two are focused on ERM.
The team places all insurance for the university and its medical center, except for some employee benefits. It has self-insured workers’ compensation, a captive, an extensive international program including construction, as well as other coverages.
“None of this [implementing an ERM program] could have happened unless there was trust in what the traditional risk management department was doing,” he said. “The organization needs to trust you and your expertise to identify what are the right risks.”
That means being able to differentiate between challenges at the organization, such as employee retention or recruiting, and issues that present real risks. It also means differentiating between risks that can be mitigated within a set period of months or years, and those continually on the risk register, such as cyber security or geopolitical risk.
“It’s just being one step ahead of the bad guys,” Liebowitz said.
As traditional risk management evolves into an ERM program, some risk managers use the RIMS Risk Maturity Model to measure their progress.
“It’s very helpful,” said Keane of the Port Authority. “It focuses the efforts of the [risk management] team so we don’t get pulled into so many different directions. It shows progress and can increase buy-in.”
The model characterizes the five-step evolution of ERM maturity — from ad hoc, initial, repeatable, managed and leadership — taking into account the degree of formality and effectiveness of the processes.
The RIMS research on linking shareholder value to ERM maturity found that two attributes of ERM maturity create the most value for organizations: performance management and ERM process management. They contribute 23 percent and 20 percent, respectively, to a firm’s valuation, according to the study.
ERM process management addresses both the downside of risk and the potential upside or opportunity, while performance management is the degree to which the organization is able to execute on the ERM vision and strategy.
“The maturity model is a tool,” Phelps said. “It’s not going to develop a program for you. It gives you a way to map out where the enterprise risk management program for a particular company is, and … where it should go.
“It takes ERM from abstract to tangible.”
Phelps, a former president of RIMS, said Blue Cross and Blue Shield of Florida used the RIMS model as a base to create its own framework that adds in some additional factors important to the organization.
Robust ERM Programs
Mature ERM programs are fairly rare. Even though most executives believe risks are becoming more complex, only one-quarter of business leaders say their organization has a “mature” or “robust” ERM program, according to the 2016 NC State study.
“This year we observe that the maturity of enterprise-wide risk oversight processes remains relatively stable at levels consistent with the past few years … ,” the report stated. “Most notably, organizations continue to struggle to integrate their risk oversight efforts with their strategic planning processes.”
It noted that large organizations, public companies and financial services companies were “significantly more mature” than other entities, but even there, only one-third of such companies say their programs are mature.
Nearly half of the companies targeted “insufficient resources allocated to ERM” and “other priorities that compete with ERM” as the main barriers to success.
Organizations have scarce resources, Keane said. That’s why it’s important to present a business case on the need for mitigation activities. “It must have a connection to the budget,” she said. “If you do a good job in the ERM risk register, you can use that to advocate for resources for further risk mitigation.”
Scarce resources and budgetary pressure make it an uphill battle to advocate for the purchase of technology — and that is a crucial element to ERM success, said Hampton.
“You need technology,” he said. “You can’t do ERM without it. … Managers need real-time access to the status of risks that are actively being monitored or managed. A risk management information system (RMIS) is a tool that is both efficient and cost-effective. It is silly to implement ERM without building on the right technology foundation.”
Liebowitz said NYU has a traditional RMIS system as well as an ERM system that houses all the data around the risks and shows historic changes in risk scoring and mitigation efforts. It also allows “risk owners” to self-monitor risks.
“It takes a lot of the human element out of a lot of things,” he said. “Instead of people sending emails or making phone calls, we let the system do it so we can spend more time doing the analysis work than the ‘chasing for information’ work.”
Creating a reporting structure for ERM is also important, he said.
NYU has several risk management and compliance committees at the operating level that funnel information into committees at the risk management, compliance or audit level. Those committees, in turn, report to a senior risk and compliance steering committee that reports to the board of trustees.
“Having the structure keeps everything orderly,” Liebowitz said.
“If someone is just starting out, the best thing I could say to them is, be organized. Be forward-thinking. Show value to your organization and just keep trying.
“There is a need, not only within our profession, but within your company and it will take time for them to realize what you are doing and then they will say, why weren’t you doing this before?” &
Hot Hacks That Leave You Cold
Thousands of dollars lost at the blink of an eye, and systems shut down for weeks. It might sound like something out of a movie, but it’s becoming more and more of a reality thanks to modern hackers. As technology evolves and becomes more sophisticated, so do the occurrence of cyber breaches.
“The more we rely on technology, the more everything becomes interconnected,” said Jackie Lee, associate vice president, Cyber Liability at Nationwide. “We are in an age where our car is a giant computer, and we can turn on our air conditioners with our phones. Everyone holds data. It’s everywhere.”
Phishing Out Fraud
According to Lee, phishing is on the rise as one of the most common forms of cyber attacks. What used to be easy to identify as fraudulent has become harder to distinguish. Gone are the days of the emails from the Nigerian prince, which have been replaced with much more sophisticated—and tricky—techniques that could extort millions.
“A typical phishing email is much more legitimate and plausible,” Lee said. “It could be an email appearing to be from human resources at annual benefits enrollment or it could be a seemingly authentic message from the CFO asking to release an invoice.”
According to Lee, the root of phishing is behavior and analytics. “Hackers can pick out so much from a person’s behavior, whether it’s a key word in an engagement survey or certain times when they are logging onto VPN.”
On the flip side, behavior also helps determine the best course of action to prevent phishing.
“When we send an exercise email to test how associates respond to phishing, we monitor who has clicked the first round, then a second round,” she said. “We look at repeat offenders and also determine if there is one exercise that is more susceptible. Once we understand that, we can take the right steps to make sure employees are trained to be more aware and recognize a potentially fraudulent email.”
Lee stressed that phishing can affect employees at all levels.
“When the exercise is sent out, we find that 20 percent of the opens are from employees at the executive level,” she said. “It’s just as important they are taking the right steps to ensure they are practicing what they are preaching.”
Locking Down Ransomware
Another hot hacking ploy is ransomware, a type of property-related cyber attack that prevents or limits users from accessing their system unless a ransom is paid. The average ransom request for a business is around $10,000. According to the FBI, there were 2,400 ransomware complaints in 2015, resulting in total estimated losses of more than $24 million. These threats are expected to increase by 300% this year alone.
“These events are happening, and businesses aren’t reporting them,” Lee said.
In the last five years, government entities saw the largest amount of ransomware attacks. Lee added that another popular target is hospitals.
After a recent cyber attack, a hospital in Los Angeles was without its crucial computer programs until it paid the hackers $17,000 to restore its systems.
Lee said there is beginning to be more industry-wide awareness around ransomware, and many healthcare organizations are starting to buy cyber insurance and are taking steps to safeguard their electronic files.
“A hospital holds an enormous amount of data, but there is so much more at stake than just the computer systems,” Lee said. “All their medical systems are technology-based. To lose those would be catastrophic.”
And though not all situations are life-or-death, Lee does emphasize that any kind of property loss could be crippling. “On a granular scale, you look at everything from your car to your security system. All data storage points could be controlled and compromised at some point.”
The Future of Cyber Liability
According to Lee, the Cyber product, which is still in its infancy, is poised to affect every line of business. She foresees underwriting offering more expertise in crime and becoming more segmented into areas of engineering, property, and automotive to address ongoing growing concerns.”
“Cyber coverage will become more than a one-dimensional product,” she said. “I see a large gap in coverage. Consistency is evolving, and as technology evolves, we are beginning to touch other lines. It’s no longer about if a breach will happen. It’s when.”
About Nationwide’s Cyber Solutions
Nationwide’s cyber liability coverage includes a service-based solution that helps mitigate losses. Whether it’s loss prevention resources, breach response and remediation expertise, or an experienced claim team, Nationwide’s comprehensive package of services will complement and enhance an organization’s cyber risk profile.
Nationwide currently offers up to $15 million in limits for Network Security, Data Privacy, Technology E&O, and First Party Business Interruption.
Products underwritten by Nationwide Mutual Insurance Company and Affiliated Companies. Not all Nationwide affiliated companies are mutual companies, and not all Nationwide members are insured by a mutual company. Subject to underwriting guidelines, review, and approval. Products and discounts not available to all persons in all states. Home Office: One Nationwide Plaza, Columbus, OH. Nationwide, the Nationwide N and Eagle, and other marks displayed on this page are service marks of Nationwide Mutual Insurance Company, unless otherwise disclosed. © 2016 Nationwide Mutual Insurance Company.
This article was produced by the R&I Brand Studio, a unit of the advertising department of Risk & Insurance, in collaboration with Nationwide. The editorial staff of Risk & Insurance had no role in its preparation.