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Risk Management

Looking at Risk Three Dimensionally

Risk managers who collaborate throughout their organizations improve awareness, agreement and alignment of tactical plans.
By: | December 1, 2015 • 4 min read
Topics: ERM | Risk Management

There is a direct relationship between strong risk management practices and superior operating performance, according to several reports.

The “2015 Aon Risk Maturity Index Insight Report” released in November analyzes the inverse relationship between a higher “risk maturity rating” and lower stock price volatility, as well as a direct relationship between a higher risk maturity rating and superior operational financial performance.

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Additionally, the report’s findings reinforced the relationship between a higher risk maturity rating and the relative resilience of an organization’s stock price in volatile equity, currency and commodity market scenarios.

Organizations with a high risk maturity rating differ from those with lower ratings in several ways, said Kieran Stack, managing director at Aon Global Risk Consulting in Chicago.

“If organizations try to increase the performance across those dimensions, that helps them also improve building awareness, agreement and alignment of tactical plans to execute.” — Kieran Stack, managing director at Aon Global Risk Consulting

Typically, he said, they communicate their risks across the organization, they collaborate across functions and they form consensus in both determining the key strengths and weaknesses of mitigating the risks and formulating tactical plans to continue to improve their risk management programs.

Indeed, 60 percent of organizations with above average risk maturity ratings consistently and formally share the results of risk assessment activities across the organization, while only 19 percent of organizations with below average risk maturity ratings do so, according to the report.

Organizations with below average risk maturity ratings are more likely to communicate these risk assessment results only on an ad-hoc basis (68 percent of below average respondents versus 40 percent of respondents scoring above average).

Collaboration Counts

As for collaboration, 51 percent of organizations that score above average collaborate across risk functions while only 11 percent of firms scoring below average do. The report found that 72 percent of organizations that score below average only collaborate on an ad-hoc basis during data gathering or analysis activities.

“In the business world there is still a disconnect that risk management is an essential part of the strategic planning process allowing companies more certainty with achieving desired outcomes.” — Albert L. Sica, managing principal, The ALS Group

“If organizations try to increase the performance across those dimensions, that helps them also improve building awareness, agreement and alignment of tactical plans to execute,” Stack said.

High risk maturity organizations also tend to integrate quantitative modeling techniques in their risk management activities, he said.

“These organizations are not just looking at qualitative assessments of their key vulnerabilities, but also assessing these risks from a quantitative perspective,” Stack said. “For instance, they are using probabilistic modeling techniques such as stochastic simulations to better assess and quantify their exposures to these risks.”

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Another report, using data from the RIMS Risk Maturity Model, has similar conclusions: Organizations exhibiting mature risk management practices realize an increased valuation premium of 25 percent, according to “The Valuation Implications of Enterprise Risk Management Maturity.”

The findings by Mark Farrell of Queen’s University Management School and Dr. Ronan Gallagher of University of Edinburgh Business School are based on RIMS research data.

According to the report, organizations with highly mature ERM practices had formal processes for performance management, ERM process management, adoption of ERM-based approach, root cause discipline, uncovering risks, risk appetite management, and business resilience and sustainability.

Carol Fox, director of strategic and enterprise risk practice, RIMS

Carol Fox, director of strategic and enterprise risk practice, RIMS

Carol Fox, RIMS’ director of strategic and enterprise risk practice, said that the study suggests that firms that have successfully integrated these processes into their strategic planning activities and everyday practices have superior ability to understand the risk dependencies across the enterprise.

“The question we often get asked is, is risk maturity worth the investment?” Fox said. “I think the RIMS report and the Aon report tell a very compelling story for organizations that it is worth it to invest in risk management capabilities – not only for for-profit companies, but also for nonprofit organizations.”

Albert L. Sica, managing principal of The ALS Group, an independent insurance and risk management consulting firm in Edison, N.J., said that the concept of risk maturity is very important.

“Risk management in many cases has been synonymous with buying insurance, rather than a more thoughtful overall understanding of risks so companies can avoid surprises,” Sica said.

“In the business world there is still a disconnect that risk management is an essential part of the strategic planning process allowing companies more certainty with achieving desired outcomes.”

One example of this disconnect is not fully understanding the retained risk companies have through simple exclusions in their insurance policies, he said.

Albert L. Sica, managing principal, The ALS Group

Albert L. Sica, managing principal, The ALS Group

Companies should also determine where the pinch points are in their supply chains and how an occurrence could develop into significant financial issues for their product or project – such as a supplier going out of business or a critical part coming from overseas being delayed.

“The whole idea is to think about risk management a little bit more three dimensionally,” Sica said.

“Risk management should be working closely with senior leadership to help the company achieve a better understanding of unexpected events and related financial impact allowing them to eliminate surprises.”

Katie Kuehner-Hebert is a freelance writer based in California. She has more than two decades of journalism experience and expertise in financial writing. She can be reached at [email protected]

More from Risk & Insurance

More from Risk & Insurance

High Net Worth

High Net Worth Clients Live in CAT Zones. Here’s What Their Resiliency Plan Should Include

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]