CAS Spring Meeting June 2007

Introduction to ERM …The Measurements, Quadrants, Tools, and Solutions

Prof. Mark C. VonnahmeFox Family Clinical

ProfessorUniversity of Illinois at Urbana-Champaign

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Speaker background…. 31 years experience in surety and

property casualty… President and CEO, CNA Surety Industry leader … pro-active on many

fronts Changing environment ….

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Practitioner meets academic life… Teaching

Corporate Finance Property and Casualty ERM 25% students … actuarial science

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Appointed to CAS Board in March , 2007 First non-actuary member of Board… Learning … Adding value …

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The combination of Academia and Practitioner…. Thinking about ERM … perspectives

Teaching RMI and ERM provided a deeper understanding of both…

ERM was always important to me …. even when it wasn’t in vogue …

Knowing what I do now, would do it better… ERM is a long term commitment and

process…

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Consider… ERM is a journey… not a one time event ERM is not just compliance … it needs to be

embedded in the culture to be successful ERM starts at the top … and requires the

commitment of management team… ERM must be customized to industry and

company … one size does not fit all … ERM is multi-disciplinary… ERM takes time to develop… be flexible, be

willing to make adjustments…

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Why the shift to ERM Some trends that have impacted the

processGlobalizationContinued integration of insurance Increased regulationFocus on corporate governance

Sarbanes Oxley

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Definition of ERM….

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Committee of Sponsoring Organizations of the Treadway Commission ( COSO ) Published Enterprise Risk Management-

Integrated Framework in 2004 COSO has defined ERM as …A process, effected by an entity’s board of

directors, management and other personnel,applied in strategy setting and across the enterprise, designed to identify potential events that may affect the entity, and manage risk to be within its appetite, to provide reasonable assurance regarding the achievement of entity objectives.

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Traditional risk management Six step process

Risk identification Risk analysis Development of alternative techniques to

treat risks Selection of best risk-treatment techniques Implementation of selected techniques Evaluation and monitor of effectiveness of

risk management

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So what’s different about ERM It expands the process to more fully

integrate risk management into the organization’s structure It is an interactive(pro-active) process not

a reactive process

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A Broader Framework … depicts the following attributes of the ERM process Effected by people Embedded into strategic goals Applied across the enterprise Designed to identify potential events Encourages risk to be managed within a

determined appetite Provides reasonable assurance to key

stakeholders Supports achievement of key objectives

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Where does ERM reside in an organization…

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ERM and Risk Manager CRO needs to have an expanded view of risk Opportunity for gain and loss Manage to take advantage of knowledge of risk Exploit the value of risk bearing operations Acknowledge that risk is an asset and risk

producing activities can provide upside…value Risk and opportunity A competitive edge

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Chief Risk Officer Functions

Create a risk aware culture Oversight of risk assessment activities and risk

appetite Educating stakeholders about ERM program Implementing an integrated risk management

framework throughout the org Managing the ERM framework with emphasis on

operational risks Developing ways to mitigate and finance risk within

the organization’s larger business strategies

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Risk categories or domains … relationships exist between risks Operational risks Financial risks Human capital risks Strategic risks Legal and regulatory risks Technological risks Others

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Establishing an ERM Program Identify the ERM vision Develop a supporting business case Establish a cross-sectional implementation

team Assess the current operating environment Quantify key risks Create SMART response plans

Specific,measurable,acceptable,realistic,time-limited Implement continuous monitoring and

improvement

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The ERM process Identification of organization’s risks

Internally Surveys, interviews,assessments across

departments and divisions Multi disciplinary

Externally Industry benchmarks, economic and other

data

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ERM Process Assessment of risks for prioritization

Quantitative Qualitative Correlations Interdependencies Risk Mapping

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ERM process Risk appetite

Tolerance for risk Risk treatment and control

Loss prevention techniques for reducing frequency and severity

Risk financing, retention or combination

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ERM process Risk mitigation and measurement

Evaluation of risk mitigation strategies Integration into operating planning and

reporting

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ERM process Monitor , adjust and continually

evaluate progress Be flexible… Do not be afraid to adjust to change… It is a constant process …. a journey

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Benefits of Risk Management Practical Whys from James Lam …

and others Positives of Active Risk Management

Managing risk is everyone’s job Managing risk can reduce earnings volatility Managing risk can maximize shareholder

value Risk management promotes job and financial

security

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Practical Whys from Vonnahme Good companies want to stay that

way… Leading v following

Staying competitive … or a competitive edge..

Dealing with change…

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What would an ERM program accomplish … Increase recognition of the importance of capital to

support risk Improve focus on risks of the organization More refined/better definition of risk appetite Impact/reduce cost of reinsurance or other risk

management techniques Impact the capacity and cost of debt Assist in attaining /retaining higher AM Best and/or

other ratings Improve Corporate Governance … transparency and

disclosure Lead to higher value for all stakeholders

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Final thoughts

Prof. Mark C. VonnahmeFox Family Clinical ProfessorUniversity of IllinoisMvonnahm@cba.uiuc.edu