By DAVID A. JONES, vice president at Lockton Cos. who has also served as a risk and finance manager for various Fortune 500 companies before joining the brokerage
The 1980s hard insurance market impressed upon boards and executive management the need to control risks encroaching on their organization's bottom line. Since then, corporate America's risk management departments have expanded, contracted and transformed along the way.
More recently, the uncharacteristic coupling of a soft market with an economic recession delivered a tremendous shakeup to risk management departments' organizational structures. Companies were under enormous pressure to find ways of operating more resourcefully. Along with capital expense deferral, some corporations viewed their risk management departments as "low hanging fruit" during budget cuts.
"Given the variables surrounding the financial crisis and the continuance of a soft market, companies always seem to squeeze the resources out of risk management thus disabling their ability to be proactive and effective under any economic conditions," said Richard Meyers, CEO of Richard Meyers & Associates Inc., a Warren, N.J.-based executive search firm specializing in risk management recruiting.
The cuts resulted in dramatic changes to risk management departments. They have been downsized, stripped of their budget control and, in many cases, folded into other departments such as treasury, accounting or human resources.
As companies begin to emerge from the recession, corporate America is seeing a renewed value in risk management controls. In addition, there is a new DNA for risk management departments expecting to succeed in the forthcoming hard market: one that is leaner, more conditioned. How should an ideal risk management department sketch out post recession?
An efficient risk management department operates similarly to the human organism. In a healthy human network, the brain, heart, limbs, and sensorial parts are each equally important but function as a collective body to survive. When overcoming intense physical challenges, the whole body can become conditioned, grow stronger, and reach an optimal performance.
Similarly, a healthy risk management department works as a cooperative network collecting and sharing data to influence strategic decisions for the benefit of the overall enterprise. Each professional in the department serves a critical role to the organization. One role depends upon the other and ultimately forms an integrated, cross-functional approach to protecting the organization's bottom line.
Just like the human organism, a risk management department, too, can adapt through endurance, grow stronger, and ultimately improve the organization's operations when faced with intense financial challenges.
One way risk management departments have coped with recessionary pressures is by consolidating or, in most cases, outsourcing various positions including auto and general liability adjusters, enterprise risk managers, workers' compensation compliance administrators, risk consultants and data analysts.
Outsourcing to experienced vendors and brokers further improves a risk management department's efficiencies resulting in a leaner, more conditioned department. So, what is the anatomy of a lean risk management department and the function of each role? Here's a look at an efficient structure for a typical Fortune 1000 company today.
The brain is the chief risk officer (CRO). The brain is the center for cognitive processes and responsible for executive thinking, planning, organizing, and problem solving. In a similar manner, the CRO sets goals and coordinates activities to meet those goals, makes important decisions impacting fellow executives, income statements, and balance sheets, reports developments and interpretations of risk to the board, and enables the risk management team to perform optimally.
The CRO often collaborates with internal and external audit committees to ensure compliance with various regulatory authorities. The CRO relies heavily on his heart, hands and legs to carry out the company's strategic initiatives and financial responsibility. One of the biggest challenges for CROs is maintaining operational patience to ensure these initiatives remain intact, particularly since risk management initiatives often don't show results until 36 months down the line. In many organizations, the CRO assumes another role such as treasurer, chief financial officer, chief compliance officer, or controller.
The heart is the risk manager. The heart plays an important part as it pumps blood and nutrients throughout the body, adjusting the rate of blood flow responding to internal and external conditions. The risk manager develops and maintains relationships, whereby governing the pace of information-sharing across the entire organization and to outside stakeholders. These stakeholders may include the company's insurance broker, carriers, third-party administrators, adjusters, and state agencies.
Furthermore, the risk manager oversees a company's employee safety, contract negotiation, insurance placements, outside actuary, and Occupational Safety & Health Administration compliance.
Finally, the risk manager has a thorough understanding of the cost-of-risk formula since much of the information shared is of a financial nature impacting profit and loss statements.
"It's all about being a professional business manager rather than just the traditional transactional risk manager," Meyers said. "Since 68 percent of risk management professionals typically report to the financial arm of an organization, it is important risk managers improve their financial skills and ability to be more strategic."
The hands are the manager of insurance. A director of insurance is the right hand of the risk management department who dexterously manages the policies, renewal processes, and insurance records. This professional works hand-in-hand with personnel across the organization's functions and with strategic partners outside the organizations' walls facilitating technical information about operations, exposures, and losses. The manager of insurance oversees audits, and typically coordinates property claims as well.
Equally important, this role continuously improves coverage terms and forms ensuring a best-in-class insurance portfolio for the company. In some companies, the positions of risk manager and manager of insurance are one in the same.
The eyes and ears are the data consultants. The eyes and ears are the most important receptors that, through the nervous system, generate appropriate reactions by sending impulses to the body's systems. The data consultant, in this sensory role, aggregates and interprets loss runs and claims information, then produces various optics based on the specific need.
Familiar with the company's legacy operations and acquisitions, the consultant conducts feasibility studies and produces data summaries while serving as the organization's canary in the coal mine for catastrophes. Without a data consultant, the organization is blind to potential liability trends and vulnerable to uncontrolled, escalating costs.
The legs are the claims manager. Like a runner in a marathon, this role requires energy to manage the changing landscape or unexpected obstacles, and endurance to cross the finish line. Claims managers are the cost containment experts who reduce frequency and lesson severity of first- party and third-party casualty costs.
The ultimate goal of claims managers is to limit the company's overall exposure and mitigate claims as soon as possible. Often the claims manager utilizes injury counselors to facilitate the company's return-to-work program, and interface with the locations and the third-party administrators to ensure all claims are reported properly. Since this person plays an enormous role in the outcome and cost of a claim, stamina and agility are critical to keeping up with a claim wherever it leads.
Finally, in conjunction with this new anatomy is a new state of mind. The efficient risk management department adopts a lean philosophy to reduce or eliminate wasteful processes that obstruct the value it delivers. As Peter Drucker said, "There is nothing so useless as doing efficiently that which should not be done at all."
The risk management department must think lean by eliminating activities that fail to add value, integrating processes and teams, and focusing on continuous improvement. A lean philosophy of avoiding complex processes, aligning agendas across departments, and engaging executive buy-in can return extraordinary results.
Ultimately, a lean department is only as effective as the executive team's subscription to the risk management department's goals and initiatives. They must support and champion risk management initiatives in order to manage varying levels of uncertainty affecting the company's bottom line. Risk management departments, learned by design or as a byproduct of economic conditions, must absolutely focus their responsibility, accountability, and authority on protecting their organization's bottom line to be successful in the forthcoming hard market.
May 1, 2011
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