By B.G. YOVOVICH, who has written for national trade publications for more than 20 years
The recent economic turmoil is transforming enterprise risk management practices and is opening unprecedented career opportunities for risk professionals.
Because of the economic crisis, "there is a greater recognition regarding how risk makes itself present in the operation of the company," said Anurag Saksena, senior vice president and chief enterprise risk officer at Freddie Mac, who spoke at the 2010 ERM Symposium, hosted jointly in Chicago in April by the Society of Actuaries (SOA), Casualty Actuarial Society (CAS), Canadian Institute of Actuaries (CIA) and the Professional Risk Managers' International Association (PRMIA).
"My hope is that, when we are sitting here two years from now, people will be thinking of risk management as a basic infrastructure for the running of any company, just as technology is basic infrastructure of any firm--whether the firm is in insurance, or banking or manufacturing," said Saksena.
"The financial crisis has given us this opportunity, and it is incumbent on the risk-management profession to act on it."
One such opportunity that could present itself could revolve around compensation-related initiatives.
"Boards are expected to become much more engaged in the linkage between the risk framework and the compensation system, and the whole area of risk alignment," said another ERM Symposium panel member, Michael P. Stramaglia, executive vice president and chief risk officer of Sun Life Financial.
To take advantage of this opportunity and others, risk professionals will need to expand their portfolios of skills beyond the traditional quantitative capabilities.
"Actuarial training dominates a lot of the thinking around risk," said Stramaglia. "While that has held us in good stead and still adds a lot of value, we need to look beyond that."
The management of enterprise risk "is not just about math, financial theory and economics. It is also cultural theory and human behavior," said Robert F. Wolf, staff fellow in risk management at the SOA and a member of the ERM Symposium's program committee.
"Most of the risk is dependent on the decisions and incentives of people--that is what we need to manage. At the end of the day, if we cannot reflect human behavior and biases into our models, the ERM process is not done," Wolf said.
This expansion of risk managers' roles and responsibilities can be seen even in the range of topics and speakers at an event such as the ERM Symposium. This year, for example, the ERM Symposium included a presentation by social anthropologist Michael Thomson, who--together with David Ingram, senior vice president at Willis Re--discussed differing cultural views of risk, and the implications that these differences can have on the effectiveness of risk identification and ERM initiatives.
"If you look back to the first symposium, you will see more mathematical modeling, which is the bread and butter of actuaries," explained Wolf. "What we have migrated to is inclusion and collaboration with other disciplines."
THE TOOLS OF THE TRADE
But even at the cutting edge of their field, chief risk officers also return to face many familiar topics.
The unsatisfactory performance of many financial models has gotten a great deal of attention, for example, during the financial crisis and recession. Risk managers have a tendency to "fall in love" with their models, said Stramaglia.
"They are complicated. We spend a lot of money on them. We have smart people developing them, so they must be right," he said.
As he warned, the real world is always more complex than a model. Risk managers must remember that models are but one tool in their belt and "that we need to combine it with other perspectives and just plain old-fashioned common sense," he said.
But what should risk managers replace models with?
"My experience is that boards and the industry and management are asking for greater transparency of data analysis, not necessarily more sophisticated models," said Saksena.
Other traditional tools for monitoring risks have also been called into question.
"Everyone has a red, yellow, green report," said Saksena, "and I believe that companies do not run into trouble because of the reds. You get into trouble when greens turn to red without you knowing it."
Saksena recalled a report he used to put together that said "Mind Your Greens." The report was meant to encourage conversation within the organization about things believed to be going well.
"It gave me an opportunity to ask: 'Tell me, under what circumstances would you fall off the cliff. It has been green for two years. What will make it break?' " he said.
However, as valuable as a Mind Your Greens report can be, Saksena warned, "I caution you, it will not make you popular."
In light of issues that arose during the crisis, risk managers might also consider "turning the traditional stress testing approach on its head," suggested Stramaglia.
"Instead of starting with the scenario and determining its impact," he said, "take the approach of starting with an end result that, by definition, puts the organization under a lot of stress, then back into the types of scenarios that can give rise to that. It opens up the range of possibilities. It is an approach that some stakeholders--the board in particular--really connected with, more than some of the more traditional approaches to stress testing."
May 1, 2010
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