Risk Insider: Grace Crickette

ERM and the Art of War

By: | April 27, 2017 • 3 min read
Grace Crickette, a leader in enterprise risk management, is special administrator, Finance and Administration for San Francisco State University. She can be reached at [email protected]

This is the 11th post in a series from Risk Insider Grace Crickette on how to gracefully bring together traditional risk management, change management techniques and enterprise risk management concepts. The series is inspired by strategies devised by Sun Tzu, a Chinese military general and philosopher.

Make ERM, Not War

rainbow peace sign copy

Art of War Key Principle: The way to capitalize on the endless opportunities created by ever-changing conditions, is to become engaged as a part of a well thought out plan and be flexible in adapting tactics to those ever-changing conditions within the context of each pre-determined strategy.

Chapter V focuses us in on moving to the Creative or Energy mode, wherein the greatest amount of preparation and on-going effort takes place in implementing Enterprise Risk Management. From our menu of common elements of an ERM Program, let us move onto Measure, Monitor, and Report.

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In my last post we covered forming multi-disciplinary groups and clearly providing these groups with a vision, communications, training, and forums, as well as leveraging actuarial services to support the vision and the groups.   To maintain the momentum and keep the groups energized you need to establish baselines and measure progress.

My methodology is to meet with various departments and disciplines and ask the questions:

How do you know if you are doing well? What data do you have to let you know how you are doing? 

I am looking to get the organization to clearly articulate objectives and then identify the risks that impact those objectives.  Then I want to know if we have the data for measuring and monitoring and if it is timely, or is it primarily ad hoc, annual and manual.  The information gathered through these meetings is critical for understanding and developing the key indicators (KIs) that become an important component of your Enterprise Risk Management program.

What is a Key Indicator?

 Key Performance Indicators: KPIs are derived from critical success factors and define these critical success factors into more meaningful criteria. For example, the critical success factor of “improve productivity” might have KPIs such as cost, service quality, cycle time, streamlining of processes, and reduced duplication and/or rework. Example: Net Promoter Score (NPS): Finding out your NPS is one of the best ways to indicate long-term company growth.  Send out surveys to your customers to see how likely it is that they’ll recommend your organization to someone they know. Establish a baseline with your first survey and then monitor change.

Key Risk Indicators: KRIs are derived from analyzing what could go wrong or has gone wrong relative to another metric.  For example, reviewing claims information relative to the size of the risk (i.e., number of patients treated) or calculating a recordable rate for employee injuries.

# of Injuries        =    Recordable Rate (retrospective)

Personal hours

Key Leading Indicators: KLIs are derived from analyzing data that is a predictor of what is about to happen.  For example a KLI that provides information on customer satisfaction could be used as a predictor for increased sales.  Another example would be a KLI that provides information on employee satisfaction could be a predictor of turnover.  The number of change orders on a construction project can be a predictor of the project not coming in on budget or on time.

# of Change Orders        =    Cost Overspend (predictor)

Project Budget

How often can Indicators be updated?  

Indicators can be updated as frequently as the data they are drawn from is updated. Some examples:

Claims Information … Daily

Payroll Information … Monthly

Construction Scheduling … Quarterly

How is change measured with an Indicator?

Change is typically measured by looking at ratios between time periods relative to the data

After you develop your portfolio of KIs, you need to establish regular reporting.  Whether you produce reports on KIs manually or with a business intelligence system, you need to provide timely, accurate and actionable information.  A common vocabulary supported by a data dictionary is useful.  Each data field must be defined, the original source identified, and the valuation date.  The data dictionary provides a common information infrastructure required to deliver a single version of truth.

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It is common in the early stages of development that users find that their data source is not accurate, but this is actually a big benefit of implementing a reporting program because you improve your organizations understanding and management of data.  Do not wait for perfection though, rather communicate out that the reports when first reviewed may seem “incorrect” and that part of the benefit of your ERM program is to help the organization obtain and communicate better information. Expect also that a Key Indicator that you thought was going to be brilliant may end up not being that useful and you will need to make modifications or abandon that particular KI.

Key Takeaway: Implementing ERM takes Energy and Creativity; measuring, monitoring and reporting data is a key component of an ERM program.  Develop Key Indicators based on your organizations objectives and the risks that impact those objectives.  Deliver the information in a timely manner with a data dictionary that explains the data.  Be prepared to continuously update and improve your data and reporting.

Remember — It’s not Risk Management, its Change Management!

More from Risk & Insurance

More from Risk & Insurance

Cyber Liability

Fresh Worries for Boards of Directors

New cyber security regulations increase exposure for directors and officers at financial institutions.
By: | June 1, 2017 • 6 min read

Boards of directors could face a fresh wave of directors and officers (D&O) claims following the introduction of tough new cybersecurity rules for financial institutions by The New York State Department of Financial Services (DFS).

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Prompted by recent high profile cyber attacks on JPMorgan Chase, Sony, Target, and others, the state regulations are the first of their kind and went into effect on March 1.

The new rules require banks, insurers and other financial institutions to establish an enterprise-wide cybersecurity program and adopt a written policy that must be reviewed by the board and approved by a senior officer annually.

The regulation also requires the more than 3,000 financial services firms operating in the state to appoint a chief information security officer to oversee the program, to report possible breaches within 72 hours, and to ensure that third-party vendors meet the new standards.

Companies will have until September 1 to comply with most of the new requirements, and beginning February 15, 2018, they will have to submit an annual certification of compliance.

The responsibility for cybersecurity will now fall squarely on the board and senior management actively overseeing the entity’s overall program. Some experts fear that the D&O insurance market is far from prepared to absorb this risk.

“The new rules could raise compliance risks for financial institutions and, in turn, premiums and loss potential for D&O insurance underwriters,” warned Fitch Ratings in a statement. “If management and directors of financial institutions that experience future cyber incidents are subsequently found to be noncompliant with the New York regulations, then they will be more exposed to litigation that would be covered under professional liability policies.”

D&O Challenge

Judy Selby, managing director in BDO Consulting’s technology advisory services practice, said that while many directors and officers rely on a CISO to deal with cybersecurity, under the new rules the buck stops with the board.

“The common refrain I hear from directors and officers is ‘we have a great IT guy or CIO,’ and while it’s important to have them in place, as the board, they are ultimately responsible for cybersecurity oversight,” she said.

William Kelly, senior vice president, underwriting, Argo Pro

William Kelly, senior vice president, underwriting at Argo Pro, said that unknown cyber threats, untested policy language and developing case laws would all make it more difficult for the D&O market to respond accurately to any such new claims.

“Insurers will need to account for the increased exposures presented by these new regulations and charge appropriately for such added exposure,” he said.

Going forward, said Larry Hamilton, partner at Mayer Brown, D&O underwriters also need to scrutinize a company’s compliance with the regulations.

“To the extent that this risk was not adequately taken into account in the first place in the underwriting of in-force D&O policies, there could be unanticipated additional exposure for the D&O insurers,” he said.

Michelle Lopilato, Hub International’s director of cyber and technology solutions, added that some carriers may offer more coverage, while others may pull back.

“How the markets react will evolve as we see how involved the department becomes in investigating and fining financial institutions for noncompliance and its result on the balance sheet and dividends,” she said.

Christopher Keegan, senior managing director at Beecher Carlson, said that by setting a benchmark, the new rules would make it easier for claimants to make a case that the company had been negligent.

“If stock prices drop, then this makes it easier for class action lawyers to make their cases in D&O situations,” he said. “As a result, D&O carriers may see an uptick in cases against their insureds and an easier path for plaintiffs to show that the company did not meet its duty of care.”

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One area that regulators and plaintiffs might seize upon is the certification compliance requirement, according to Rob Yellen, executive vice president, D&O and fiduciary liability product leader, FINEX at Willis Towers Watson.

“A mere inaccuracy in a certification could result in criminal enforcement, in which case it would then become a boardroom issue,” he said.

A big grey area, however, said Shiraz Saeed, national practice leader for cyber risk at Starr Companies, is determining if a violation is a cyber or management liability issue in the first place.

“The complication arises when a company only has D&O coverage, but it doesn’t have a cyber policy and then they have to try and push all the claims down the D&O route, irrespective of their nature,” he said.

“Insurers, on their part, will need to account for the increased exposures presented by these new regulations and charge appropriately for such added exposure.” — William Kelly, senior vice president, underwriting, Argo Pro

Jim McCue, managing director at Aon’s financial services group, said many small and mid-size businesses may struggle to comply with the new rules in time.

“It’s going to be a steep learning curve and a lot of work in terms of preparedness and the implementation of a highly detailed cyber security program, risk assessment and response plan, all by September 2017,” he said.

The new regulation also has the potential to impact third parties including accounting, law, IT and even maintenance and repair firms who have access to a company’s information systems and personal data, said Keegan.

“That can include everyone from IT vendors to the people who maintain the building’s air conditioning,” he said.

New Models

Others have followed New York’s lead, with similar regulations being considered across federal, state and non-governmental regulators.

The National Association of Insurance Commissioners’ Cyber-security Taskforce has proposed an insurance data security model law that establishes exclusive standards for data security and investigation, and notification of a breach of data security for insurance providers.

Once enacted, each state would be free to adopt the new law, however, “our main concern is if regulators in different states start to adopt different standards from each other,” said Alex Hageli, director, personal lines policy at the Property Casualty Insurers Association of America.

“It would only serve to make compliance harder, increase the cost of burden on companies, and at the end of the day it doesn’t really help anybody.”

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Richard Morris, partner at law firm Herrick, Feinstein LLP, said companies need to review their current cybersecurity program with their chief technology officer or IT provider.

“Companies should assess whether their current technology budget is adequate and consider what investments will be required in 2017 to keep up with regulatory and market expectations,” he said. “They should also review and assess the adequacy of insurance policies with respect to coverages, deductibles and other limitations.”

Adam Hamm, former NAIC chair and MD of Protiviti’s risk and compliance practice, added: “With New York’s new cyber regulation, this is a sea change from where we were a couple of years ago and it’s soon going to become the new norm for regulating cyber security.” &

Alex Wright is a U.K.-based business journalist, who previously was deputy business editor at The Royal Gazette in Bermuda. You can reach him at [email protected]