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Risk Manager Focus

ERM: Concept to Reality

Risk managers share hard-learned lessons on implementing enterprise risk management.
By: | October 15, 2016 • 13 min read

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.

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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.

Michael Liebowitz, senior director of insurance and enterprise risk management, New York University

Michael Liebowitz, senior director of insurance and enterprise risk management, New York University

“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.

Gaining Buy-In

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.

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“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.”

John Phelps, director, business risk solutions, Blue Cross and Blue Shield of Florida

John Phelps, director, business risk solutions, Blue Cross and Blue Shield of Florida

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.

Morgan Keane, general manager, enterprise risk management division, Port Authority of New York and New Jersey

Morgan Keane, general manager, enterprise risk management division, Port Authority of New York and New Jersey

“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.

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“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.

Jack Hampton, professor of business, St. Peter’s University

Jack Hampton, professor of business, St. Peter’s University

“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.

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“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?” &

Anne Freedman is managing editor of Risk & Insurance. She can be reached at [email protected]

More from Risk & Insurance

More from Risk & Insurance

High Net Worth

Your High Net Worth Client Wants to Live in the Danger Zone? Here’s What Your Resiliency Plan Should Look Like.

Having a resiliency plan and practicing it can make all the difference in a disaster.
By: | September 14, 2018 • 7 min read

Packed with state-of-the-art electronics, priceless collections and high-end furnishings, and situated in scenic, often remote locations, the dwellings of high net worth individuals and families pose particular challenges when it comes to disaster resiliency. But help is on the way.

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Armed with loss data, innovative new programs, technological advances, and a growing army of niche service-providers aimed at addressing an astonishingly diverse set of risks, insurers are increasingly determined to not just insure against their high net worth clients’ losses, but to prevent them.

Insurers have long been proactive in risk mitigation, but increasingly, after the recent surge in wildfire and storm losses, insureds are now, too.

“Before, insurance was considered the only step in risk management. Now, our client families realize it is one of the many imperative steps in an effective risk management strategy,” said Laura Sherman, founding partner at Baldwin Krystyn Sherman Partners.

And especially in the high net worth space, preventing that loss is vastly preferable to a payout, for insurers and insureds alike.

“If insurers can preserve even one house that’s 10 or 20 or 40 million dollars … whatever they have spent in a year is money well spent. Plus they’ve saved this important asset for the client,” said Bruce Gendelman, chairman and founder Bruce Gendelman Insurance Services.

High Net Worth Vulnerabilities

Laura Sherman, founding partner, Baldwin Krystyn Sherman Partners

As the number and size of luxury homes built in vulnerable areas has increased, so has the frequency and magnitude of extreme weather events, including hurricanes, harsh cold and winter storms, and wildfires.

“There is a growing desire to inhabit this riskier terrain,” said Jason Metzger, SVP Risk Management, PURE group of insurance companies. “In the western states alone, a little over a million homes are highly vulnerable to wildfires because of their proximity to forests that are fuller of fuel than they have been in years past.”

Such homes are often filled with expensive artwork and collections, from fine wine to rare books to couture to automobiles, each presenting unique challenges. The homes themselves present other vulnerabilities.

“Larger, more sophisticated homes are bristling with more technology than ever,” said Stephen Poux, SVP and head of Risk Management Services and Loss Prevention for AIG’s Private Client Group.

“A lightning strike can trash every electronic in the home.”

Niche Service Providers

A variety of niche service providers are stepping forward to help.

Secure facilities provide hurricane-proof, wildfire-proof off-site storage for artwork, antiques, and all manner of collectibles for seasonal or rotating storage, as well as ahead of impending disasters.

Other companies help manage such collections — a substantial challenge anytime, but especially during a crisis.

“Knowing where it is, is a huge part of mitigating the risk,” said Eric Kahan, founder of Collector Systems, a cloud-based collection management company that allows collectors to monitor their collections during loans to museums, transit between homes, or evacuation to secure storage.

“Before, insurance was considered the only step in risk management. Now, our client families realize it is one of the many imperative steps in an effective risk management strategy.” — Laura Sherman, founding partner, Baldwin Krystyn Sherman Partners

Insurers also employ specialists in-house. AIG employs four art curators who advise clients on how to protect and preserve their art collections.

Perhaps the best known and most striking example of this kind of direct insurer involvement are the fire teams insurers retain or employ to monitor fires and even spray retardant or water on threatened properties.

High-Level Service for High Net Worth

All high net worth carriers have programs that leverage expertise, loss data, and relationships with vendors to help clients avoid and recover from losses, employing the highest levels of customer service to accomplish this as unobtrusively as possible.

“What allows you to do your job best is when you develop that relationship with a client, where it’s the same people that are interacting with them on every front for their risk management,” said Steve Bitterman, chief risk services officer for Vault Insurance.

Site visits are an essential first step, allowing insurers to assess risks, make recommendations to reduce them, and establish plans in the event of a disaster.

“When you’re in a catastrophic situation, it’s high stress, time is of the essence, and people forget things,” said Sherman. “Having a written plan in place is paramount to success.”

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Another important component is knowing who will execute that plan in homes that are often unoccupied.

Domestic staff may lack the knowledge or authority to protect the homeowner’s assets, and during a disaster may be distracted dealing with threats to their own homes and families. Adequate planning includes ensuring that whoever is responsible has the training and authority to execute the plan.

Evaluating New Technology

Insurers use technologies like GPS and satellite imagery to determine which homes are directly threatened by storms or wildfires. They also assess and vet technologies that can be implemented by homeowners, from impact glass to alarm and monitoring systems, to more obscure but potentially more important options.

AIG’s Poux recommends two types of vents that mitigate important, and unexpected risks.

“There’s a fantastic technology called Smart Vent, which allows water to flow in and out of the foundation,” Poux said. “… The weight of water outside a foundation can push a foundation wall in. If you equalize that water inside and out at the same level, you negate that.”

Another wildfire risk — embers getting sucked into the attic — is, according to Poux, “typically the greatest cause of the destruction of homes.” But, he said, “Special ember-resisting venting, like Brandguard Vents, can remove that exposure altogether.”

Building Smart

Many disaster resiliency technologies can be applied at any time, but often the cost is fractional if implemented during initial construction. AIG’s Smart Build is a free program for new or remodeled homes that evolved out of AIG’s construction insurance programs.

Previously available only to homes valued at $5 million and up, Smart Build recently expanded to include homes of $1 million and up. Roughly 100 homes are enrolled, with an average value of $13 million.

“In the high net worth space, sometimes it takes longer potentially to recover, simply because there are limited contractors available to do specialty work.” — Curt Goetsch, head of underwriting, Private Client Group, Ironshore

“We know what goes wrong in high net worth homes,” said Poux, citing AIG’s decades of loss data.

“We’re incenting our client and by proxy their builder, their architects and their broker, to give us a seat at the design table. … That enables us to help tweak the architectural plans in ways that are very easy to do with a pencil, as opposed to after a home is built.”

Poux cites a remote ranch property in Texas.

Curt Goetsch, head of underwriting, Private Client Group, Ironshore

“The client was rebuilding a home but also installing new roads and grading and driveways. … The property was very far from the fire department and there wasn’t any available water on the property.”

Poux’s team was able to recommend underground water storage tanks, something that would have been prohibitively expensive after construction.

“But if the ground is open and you’ve got heavy equipment, it’s a relatively minor additional expense.”

Homes that graduate from the Smart Build program may be eligible for preferred pricing due to their added resilience, Poux said.

Recovery from Loss

A major component of disaster resiliency is still recovery from loss, and preparation is key to the prompt service expected by homeowners paying six- or seven-figure premiums.

Before Irma, PURE sent contact information for pre-assigned claim adjusters to insureds in the storm’s direct path.

“In the high net worth space, sometimes it takes longer potentially to recover, simply because there are limited contractors available to do specialty work,” said Curt Goetsch, head of underwriting for Ironshore’s Private Client Group.

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“If you’ve got custom construction or imported materials in your house, you’re not going to go down the street and just find somebody that can do that kind of work, or has those materials in stock.”

In the wake of disaster, even basic services can be scarce.

“Our claims and risk management departments have to work together in advance of the storm,” said Bitterman, “to have contractors and restoration companies and tarp and board services that are going to respond to our company’s clients, that will commit resources to us.”

And while local agents’ connections can be invaluable, Goetsch sees insurers taking more of that responsibility from the agent, to at least get the claim started.

“When there is a disaster, the agency’s staff may have to deal with personal losses,” Goetsch said. &

Jon McGoran is a novelist and magazine editor based outside of Philadelphia. He can be reached at [email protected]