Strategic risk management
Transcription
Strategic risk management
LINKING ENTERPRISE RISK MANAGEMENT TO STRATEGY November 27, 2014 Presented by: Carolyn M. Snow RIMS President Director, Risk Management, Humana Inc. Mary Roth RIMS Executive Director 87% Companies surveyed with revenue above $1 billion say expectations of the risk management department have increased. 2 Enterprise Risk Wheel Source: Zurich INVESTING IN STRATEGIC & ENTERPRISE RISK MANAGEMENT 63% HAVE FULLY OR PARTIALLY IMPLEMENTED ERM Increases risk awareness Contributes significantly to risk avoidance and mitigation strategies Assurance that the organization will reach strategic & operational objectives 4 A RIMS ERM COMMITTEE REPORT: COMPARING TRADITIONAL RM WITH ERM 1. Traditional RM focuses on hazard risk. 1. ERM encompasses both hazard risk and business risk. 2. Traditional RM seeks to restore an organization to former preloss condition. 3. Traditional RM focuses on the value of the accidental loss. 4. Therefore traditional RM is both its own discipline & part of the broader ERM discipline. 2. ERM seeks to enable an organization to fulfill its greatest productive potential. 3. ERM focuses on the value of the organization. 4. ERM focuses on the organization as a whole. Excerpt from ARM textbook: Risk Financing by Berthelsen, Elliot and Harrison page 1.14. THE VALUE OF ERM The Valuation Implications of Enterprise Risk Management Maturity Study Organizations exhibiting mature risk management practices realize a value growth potential of up to 25% Federation of European Risk Management Associations Survey Firms with a more mature approach to Risk Management have better financial results. 75% more firms with advanced risk management practices had Earning Before Interest Taxes Depreciation and Amortization (EBITDA) growth of over 10% 62% more firms with advanced risk management practices attained annual revenue growth of 10%. Source: 2012 study by Federation of European Risk Management Associations 5 STEPS TO TRANSITION TO ENTERPRISE RISK MANAGEMENT FIVE STEPS FOR TRANSITIONING TO ERM Determine what value your organization will gain 5 STEPS TO TRANSITION TO ERM from ERM. Scan the internal environment for what is already being done. Find a champion. Adapt processes to the organization’s needs. Strive for continuous improvement. Source: RIMS Executive Report Transitioning to Enterprise Risk Management. All Rights Reserved. MANAGEMENT’S EXPECTATIONS Source: 2013 RIMS ERM Survey. All rights reserved. HOW EFFECTIVE ARE WE? Source: 2013 RIMS ERM Survey. All rights reserved. RISK TOLERANCE DEFINITION Source: RIMS Strategic Risk Management Implementation Guide 2012. All rights reserved. • Risk Tolerance is the amount of uncertainty an organization is willing to accept in the aggregate (or occasionally within a certain business unit or for a specific risk category), expressed in quantitative terms that can be monitored and may be expressed in acceptable/unacceptable outcomes or as limited levels of risk. RISK APPETITE DEFINITION Source: RIMS Strategic Risk Management Implementation Guide 2012. All rights reserved. • Risk Appetite is the amount of total risk exposure that an organization wishes to undertake on the basis of risk-return trade-offs. Reflective of the company’s business strategy, risk strategies and stakeholder expectations, risk appetite is generally set and/or endorsed by the board of directors through discussions with management. WHAT IS STRATEGIC RISK MANAGEMENT? Strategic risk management (“SRM”) is a business discipline that drives deliberation and action regarding uncertainties and untapped opportunities that affect an organization’s strategy and strategy execution. Source: RIMS Strategic Risk Management Implementation Guide. All rights reserved. Not just another framework – another way to think Strategic risks Risks arising from the strategic plan Source: RIMS Strategic Risk Management Implementation Guide. All rights reserved. Strategic Risk Management in Action… HOW DOES STRATEGIC RISK MANAGEMENT WORK AT HUMANA? Fortune 100 Company 52,000 Employees $13 Billion Market Cap $40 Billion in Revenue Humana’s Journey Where are we along the journey? Ad-hoc Initial Build the Base Mature the Process Link to Performance Set risk strategy, policy and framework Consistent enterprise risk identification and assessment Embedded in strategic planning and other business processes Set optimal risk management structure Business unit risk profiles Management has risk and control performance objectives Build resource pool Aggregate risks across the enterprise Systematic risk reporting Defined appetite / tolerances Risk owners defined and accountable Detection of emerging risks Defined materiality Provide risk reports to Executive Committee Audit Committee Identify and monitor key risk indicators Technology solution in place Risk linked to business performance measurement Enterprise-wide risk awareness and education Initiate technology solution Optimize resource pool Copyright 2009-2014 Risk and Insurance Management Society, Inc. Humana’s Program Identify Strategic Operational Financial Compliance Analyze Planning Risks Execution Risks How Well Managed Report By Business Area and Initiative Copyright Humana Inc., 2014 Input Sources Consider Potential “Black Swans” 10-K Identified Risks Internal Audit / Oversight Groups Identified Risks Deconstruct Risks from Corporate Strategy Process Leader Risk Workshops / Executive Leader Input Deconstruct Risks from Cash Flow and Earnings Assess Surprise Risk Events and Near Misses Copyright Humana Inc., 2014 Engagement at Humana What’s the purpose? Who is involved? Workshop Methodology Stage 1 Process discussion with business area leader Interview session with leader Survey of leadership team Stage 2 Workshop session with leadership team for collaboration and key risk prioritization Stage 3 Optional second workshop regarding mitigation plans Link to detailed information in Journal of Accountancy 2013 article Copyright Humana Inc., 2014 Stage 4 Key risk list, business area consideration, and Internal Audit planning Interview (structured and unstructured) Stages 1 & 2 Identify Questionnaire Business Area Leader (face-to-face, e-quiz) Individual (observation, storytelling) Facilitator Analyze Collective (round table, brainstorming) IT Troubleshooter Challenger Evaluate Copyright Humana Inc., 2014 Scenarios, war games Potential risks placed in appropriate quadrants, after assessing potential impact to business objectives and current mitigation activities. Aids the business in prioritization, mitigation and strategic planning. How Well Managed? Stage 3 Workshop Consider Improvement Urgently Assess Confirm Adequacy Avoid Further Exposure How Impactful? Copyright Humana Inc., 2014 Illustrative Purposes Only Stage 4 Reporting Prioritized Risks High Impact Well Managed Moderate Impact Moderately Managed Not Managed Well Low Impact Risk 2 Risk 7 Risk 9 Risk 4 Risk 3 Risk 1 Risk 5 Risk 8 Risk 6 How Impactful? Copyright Humana Inc., 2014 How Well Managed? THANK YOU!!!! Our Website: WWW.RIMS.ORG RIMS Risk Knowledge Library WWW.RIMS.ORG/RISKKNOWLEDGE Thank You