Exploring the Role of Risk Managers: How We’re Built With the Skills to Lead the Charge

I’ve been accused of sounding like that old cellular tagline “there’s an insurance product for that!” But, there is unique value in corporate risk management’s ability and approach in building meaningful insurance products that help our companies better understand and recover from their risks.

Yet, many companies struggle with pivoting their internal risk functions from an insurance buying function to a strategic risk intelligence repository that drives shareholder value.

Connecting discreet risk information throughout the business and making sense of it is a difficult task, but corporate insurance and risk management functions have the innate skill set to lead the charge.

Insurance is an important part of an ERM process due to the mass of useful underwriting information we aggregate and the diverse skill set of the risk manager. One of the key ways to attack this is repositioning existing underwriting skills and work product to inform the enterprise-level decision making process to empower our C-suite.

At its core, the science of risk management is an amalgamation of facts and priorities all aimed to enhance decision-making quality. Making the right call amidst today’s business environment of viral trends, complex supply chains, evolving regulatory environment and ever-changing consumer preferences is difficult.

The companies that win will be those with a clear understanding of their risk environment and that can link it to their business strategy.

Insurance risk management can add a distinct value proposition in today’s business environment: Generally, we can take almost any risk, price it, and build an insurance product around it. But, to be successful, risk managers must “know a little bit about everything,” as Charlie Munger said. The risk manager must be the corporation’s Chief Expert Generalist.

Connecting discreet risk information throughout the business and making sense of it is a difficult task, but corporate insurance and risk management functions have the innate skill set to lead the charge.

The Expert Generalist nomenclature has been used to describe Munger and other business luminaries but was first coined by Bain & Company’s Orit Gadish.

She defined the skill set as “someone who has the ability and curiosity to master and collect expertise in many different disciplines, industries, skills, capabilities, countries and topics. He or she can then, without necessarily even realizing it, but often by design:

1. Draw on that palette of diverse knowledge to recognize patterns and connect the dots across multiple areas.
2. Drill deep to focus and perfect the thinking.”

Munger takes this further with his concept of “mental models,” whereby one develops various frameworks for analysis: “You have to learn all the big ideas in the key disciplines in a way that they’re in a mental latticework in your head and you automatically use them for the rest of your life,” Munger says.

In risk management, we use underwriting models to assess specific risks against which we want to insure. We look at causes of loss, put dollars around them and add an expense load to build a sustainable insurance product. Corporate risk managers have many mental models based upon underwriting frameworks.

Leveraging these models allows for assessing risk and builds the basic infrastructure for the corporation’s risk intelligence pipeline. Using the existing insurance framework allows us to classify by the magnitude of its impact and likelihood.

It also provides greater clarity for our auditors to understand our priorities, establishing the building blocks for effective board-level risk reporting.

To assess a particular risk, risk managers begin with a common starting point that most in the corporation can identify, such as when and where will this risk (if it materializes) appear in the financials.

If the impact of the risk is accounts receivable, leveraging a trade credit underwriting approach could be appropriate. Perhaps looking at the debtor’s financials, debt structure, pending litigation and overall industry posture would be good reference points in assessing the likelihood and impact.

Along those lines, an impact materializing as lost revenue could be evaluated as a business interruption expense. How many inventory turns or months of operation would be impacted? What are our business continuity and crisis management procedures to lessen the impact?

To assess a particular risk, risk managers begin with a common starting point that most in the corporation can identify, such as when and where will this risk (if it materializes) appear in the financials?

Even more obtuse risks like execution risk can be supported and articulated with an insurance approach. Considering the financial impact to the company and underwriting these tasks as a transaction liability product could be useful.

Alternatively, these risks that are harder to quantify could be considered in a parametric manner: what is the dollar amount (or financial trigger point) impact that causes us concern if we are unable to execute X.

Using these underwriting frameworks as mental models allows us to gain a deep understanding of the characteristics, behaviors, impacts of particular risks. It is then up to us to translate this information into a common lexicon, ideally a robust ERM program, that all within the corporation understand.

The perspective of the risk manager as both the expert generalist of the company and its internal underwriter adds tremendous value to a corporate ERM process. It puts tangible metrics around the risk and directly ties the it to industry losses, as well as the corporation’s specific exposure.

The risk manager is uniquely qualified to “connect the dots” between various risks and is positioned to synchronize the risk story to provide strategic advantage. We’ll be ready to tackle the unknown unknowns when they materialize.

Combining an underwriting approach with a financial statement impact and timing analysis translates risks in to a common language so that all departments understand their specific role in addressing the risk.

Evaluating exposure bases that drive different lines of business and using them as a baseline to build a risk model has been the bread and butter of risk management. That combination of an underwriting approach with a financial statement impact analysis provides a baseline for building company specific mental models.

It becomes an integral and reliable reference that drives best in class decision making and creating a path for organizational success.