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.


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.


“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.


“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.


“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

Risk Focus: Cyber

Expanding Cyber BI

Cyber business interruption insurance is a thriving market, but growth carries the threat of a mega-loss. 
By: | March 5, 2018 • 7 min read

Lingering hopes that large-scale cyber attack might be a once-in-a-lifetime event were dashed last year. The four-day WannaCry ransomware strike in May across 150 countries targeted more than 300,000 computers running Microsoft Windows. A month later, NotPetya hit multinationals ranging from Danish shipping firm Maersk to pharmaceutical giant Merck.


Maersk’s chairman, Jim Hagemann Snabe, revealed at this year’s Davos summit that NotPetya shut down most of the group’s network. While it was replacing 45,000 PCs and 4,000 servers, freight transactions had to be completed manually. The combined cost of business interruption and rebuilding the system was up to $300 million.

Merck’s CFO Robert Davis told investors that its NotPetya bill included $135 million in lost sales plus $175 million in additional costs. Fellow victims FedEx and French construction group Saint Gobain reported similar financial hits from lost business and clean-up costs.

The fast-expanding world of cryptocurrencies is also increasingly targeted. Echoes of the 2014 hack that triggered the collapse of Bitcoin exchange Mt. Gox emerged this January when Japanese cryptocurrency exchange Coincheck pledged to repay customers $500 million stolen by hackers in a cyber heist.

The size and scope of last summer’s attacks accelerated discussions on both sides of the Atlantic, between risk managers and brokers seeking more comprehensive cyber business interruption insurance products.

It also recently persuaded Pool Re, the UK’s terrorism reinsurance pool set up 25 years ago after bomb attacks in London’s financial quarter, to announce that from April its cover will extend to include material damage and direct BI resulting from acts of terrorism using a cyber trigger.

“The threat from a cyber attack is evident, and businesses have become increasingly concerned about the extensive repercussions these types of attacks could have on them,” said Pool Re’s chief, Julian Enoizi. “This was a clear gap in our coverage which left businesses potentially exposed.”

Shifting Focus

Development of cyber BI insurance to date reveals something of a transatlantic divide, said Hans Allnutt, head of cyber and data risk at international law firm DAC Beachcroft. The first U.S. mainstream cyber insurance products were a response to California’s data security and breach notification legislation in 2003.

Jimaan Sané, technology underwriter, Beazley

Of more recent vintage, Europe’s first cyber policies’ wordings initially reflected U.S. wordings, with the focus on data breaches. “So underwriters had to innovate and push hard on other areas of cyber cover, particularly BI and cyber crimes such as ransomware demands and distributed denial of service attacks,” said Allnut.

“Europe now has regulation coming up this May in the form of the General Data Protection Regulation across the EU, so the focus has essentially come full circle.”

Cyber insurance policies also provide a degree of cover for BI resulting from one of three main triggers, said Jimaan Sané, technology underwriter for specialist insurer Beazley. “First is the malicious-type trigger, where the system goes down or an outage results directly from a hack.

“Second is any incident involving negligence — the so-called ‘fat finger’ — where human or operational error causes a loss or there has been failure to upgrade or maintain the system. Third is any broader unplanned outage that hits either the company or anyone on which it relies, such as a service provider.”

The importance of cyber BI covering negligent acts in addition to phishing and social engineering attacks was underlined by last May’s IT meltdown suffered by airline BA.

This was triggered by a technician who switched off and then reconnected the power supply to BA’s data center, physically damaging servers and distribution panels.

Compensating delayed passengers cost the company around $80 million, although the bill fell short of the $461 million operational error loss suffered by Knight Capital in 2012, which pushed it close to bankruptcy and decimated its share price.

Mistaken Assumption

Awareness of potentially huge BI losses resulting from cyber attack was heightened by well-publicized hacks suffered by retailers such as Target and Home Depot in late 2013 and 2014, said Matt Kletzli, SVP and head of management liability at Victor O. Schinnerer & Company.


However, the incidents didn’t initially alarm smaller, less high-profile businesses, which assumed they wouldn’t be similarly targeted.

“But perpetrators employing bots and ransomware set out to expose any firms with weaknesses in their system,” he added.

“Suddenly, smaller firms found that even when they weren’t themselves targeted, many of those around them had fallen victim to attacks. Awareness started to lift, as the focus moved from large, headline-grabbing attacks to more everyday incidents.”

Publications such as the Director’s Handbook of Cyber-Risk Oversight, issued by the National Association of Corporate Directors and the Internet Security Alliance fixed the issue firmly on boardroom agendas.

“What’s possibly of greater concern is the sheer number of different businesses that can be affected by a single cyber attack and the cost of getting them up and running again quickly.” — Jimaan Sané, technology underwriter, Beazley

Reformed ex-hackers were recruited to offer board members their insights into the most vulnerable points across the company’s systems — in much the same way as forger-turned-security-expert Frank Abagnale Jr., subject of the Spielberg biopic “Catch Me If You Can.”

There also has been an increasing focus on systemic risk related to cyber attacks. Allnutt cites “Business Blackout,” a July 2015 study by Lloyd’s of London and the Cambridge University’s Centre for Risk Studies.

This detailed analysis of what could result from a major cyber attack on America’s power grid predicted a cost to the U.S. economy of hundreds of billions and claims to the insurance industry totalling upwards of $21.4 billion.

Lloyd’s described the scenario as both “technologically possible” and “improbable.” Three years on, however, it appears less fanciful.

In January, the head of the UK’s National Cyber Security Centre, Ciaran Martin, said the UK had been fortunate in so far averting a ‘category one’ attack. A C1 would shut down the financial services sector on which the country relies heavily and other vital infrastructure. It was a case of “when, not if” such an assault would be launched, he warned.

AI: Friend or Foe?

Despite daunting potential financial losses, pioneers of cyber BI insurance such as Beazley, Zurich, AIG and Chubb now see new competitors in the market. Capacity is growing steadily, said Allnutt.

“Not only is cyber insurance a new product, it also offers a new source of premium revenue so there is considerable appetite for taking it on,” he added. “However, whilst most insurers are comfortable with the liability aspects of cyber risk; not all insurers are covering loss of income.”

Matt Kletzli, SVP and head of management liability, Victor O. Schinnerer & Company

Kletzli added that available products include several well-written, broad cyber coverages that take into account all types of potential cyber attack and don’t attempt to limit cover by applying a narrow definition of BI loss.

“It’s a rapidly-evolving coverage — and needs to be — in order to keep up with changing circumstances,” he said.

The good news, according to a Fitch report, is that the cyber loss ratio has been reduced to 45 percent as more companies buy cover and the market continues to expand, bringing down the size of the average loss.

“The bad news is that at cyber events, talk is regularly turning to ‘what will be the Hurricane Katrina-type event’ for the cyber market?” said Kletzli.

“What’s worse is that with hurricane losses, underwriters know which regions are most at risk, whereas cyber is a global risk and insurers potentially face huge aggregation.”


Nor is the advent of robotics and artificial intelligence (AI) necessarily cause for optimism. As Allnutt noted, while AI can potentially be used to decode malware, by the same token sophisticated criminals can employ it to develop new malware and escalate the ‘computer versus computer’ battle.

“The trend towards greater automation of business means that we can expect more incidents involving loss of income,” said Sané. “What’s possibly of greater concern is the sheer number of different businesses that can be affected by a single cyber attack and the cost of getting them up and running again quickly.

“We’re likely to see a growing number of attacks where the aim is to cause disruption, rather than demand a ransom.

“The paradox of cyber BI is that the more sophisticated your organization and the more it embraces automation, the bigger the potential impact when an outage does occur. Those old-fashioned businesses still reliant on traditional processes generally aren’t affected as much and incur smaller losses.” &

Graham Buck is editor of gtnews.com. He can be reached at riskletters.com.