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Excellence in Risk Management IV
May 2007
Turning Risk Into Opportunity
Marsh 2
Agenda
Introduction
Are firms moving toward strategic risk management?
What drives firms to more strategic risk management?
360-degree view: Are risk managers in alignment with the C-suite?
Beyond risk management—turning risk into opportunity
Takeaways
Panel discussion
Marsh 3
Introduction
Marsh 4
Excellence in Risk Management Series
“Excellence in Risk Management I” studied the risk managementpractices of 30 top-performing risk managers in North America (2004).
“Excellence II” examined the characteristics and practices of organizations that are implementing an enterprise-wide risk management program (2005).
“Excellence III” examined the changes occurring in risk management in response to a wide array of new risks (2006).
“Excellence IV” is the latest in the series.
Marsh 5
Excellence III raised interesting questions, which led us to…
The objectives of “Excellence IV”:
Is there a continued trend toward strategic risk management?
Are the views of risk managers aligned with those of the C-suite when it comes to key risks?
Who, within an organization, is the leader of the risk management effort?
Are organizations seizing one of the key benefits of strategic risk management—turning risk into opportunity?
Marsh 6
Excellence in Risk Management IV
A quantitative study
Interviews with 391 RIMS members of mid- to large-size organizations
Interviews with 77 C-suite executives (CEO, CFO, board members, general counsels) of mid- to large-size organizations
Interviews conducted by TNS from February 14 through March 23, 2007
– TNS is one of the world's leading market information companies, with $2 billion in revenues, operating in 56 countries.
– TNS Finance Sector Group is a global leader in providing research-based insight to firms in the financial services industries.
Marsh 7
Who we interviewed
47%53%
Under $1 Billion $1 Billion andOver
Annual Revenues
55%
35%
10%
Service Manufacturing Retail
Industries
Marsh 8
Are firms moving toward strategic risk management?
Marsh 9
Risk Management
Self-assessed level of risk sophistication
TRADITIONAL
• Risk Identification
• Loss Control
• Claims Analysis
• Insurance and Risk-Transfer Methods
TRADITIONAL
• Risk Identification
• Loss Control
• Claims Analysis
• Insurance and Risk-Transfer Methods
PROGRESSIVE
• Alternative Risk Financing
• Business Continuity
• Total Cost of risk
• Education and Communication
PROGRESSIVE
• Alternative Risk Financing
• Business Continuity
• Total Cost of risk
• Education and Communication
TRADITIONAL +
STRATEGIC
• Enterprise-Wide Risk Management
• Indexing of Risk
• Use of Technology
STRATEGIC
• Enterprise-Wide Risk Management
• Indexing of Risk
• Use of Technology
PROGRESSIVE +
TRADITIONAL +
Marsh 10
Overall, few companies consider their risk approach strategic
Q2a. Based on our 2006 risk management study, companies fall into three categories with regard to risk management. How would you categorize your firm's approach to risk management?
51%
34%
15%Strategic
Progressive
Traditional
Marsh 11
Most companies believe they need to take a more strategic approach to risk management
25%
75%
My firm should take a morestrategic approach to risk
management
Agree
Do Not Agree
Agreement With Statement
BASE: Firms that have a traditional or progressive risk management approach Q1b. Please indicate the extent to which you agree or disagree that “My firm should take a more strategic approach to risk.”
Marsh 12
Larger firms are more sophisticated in their management of risk
Q2a. Based on our 2006 risk management study, companies fall into three categories with regard to risk management. How would you categorize your firm's approach to risk management?
In 2006, firms with more than $1 billion revenue were 50% more likely to be strategic than firms under $500 million. In 2007, they were 320% more likely.
50%35% 32%
15%
43%55%
51%
56%
7% 10% 17%29%
Under $500 Million $500 Million to $1 Billion $1 Billion to Under $5 Billion $5 Billion and Over
Traditional Progressive Strategic
Company Size
Marsh 13
What drives firms to more strategic risk management?
Marsh 14
Financial services firms—certainly driven by regulation—are the most likely to characterize themselves as strategic
Industry
21%38% 36% 33% 33% 40% 32%
47%
59% 55% 57% 55% 49%52%
32%
3% 9% 10% 12% 11% 16%
FinancialServices
Construction Health Care Manufacturing Technology Retail Chemicals
Traditional Progressive Strategic
Marsh 15
Traditional Strategic
Hazard Risk
Property
General Liability
Auto
Terrorism
Workers Compensation
Operational Risk
Regulatory/Compliance Risk
Technology/E-Risk
Absenteeism/Total Absence Management
Environmental Risk
Employment Practices Liability
Business Continuity/Crisis Management Risks
Intellectual Property
Products Liability
Strategic Risk
Human Capital
Political Risk
Brand/Reputation
Enterprise Risk
Financial Risk
Credit Risk
FX/Commodity Risk
0%
23%
16%
20%
14%
19%
2%
33%
27%
10%
19%
30%
30%
45%
9%
16%
6%
1%
14%
A broader view of risk is associated with strategic risk management
Q4a. Please indicate the level of importance this risk area represents relative to your firm's operations and financial performance.
% Difference in PerceivedImportance of Risk
Marsh 16
Traditional Strategic
Improving management of cross-organizational interrelated risks
Improving communications/articulation on risk taking to shareholders/board
Improving risk-response decision process
Increasing ability to meet corporate strategic goals
Improving corporate governance practices
Increasing management and business-unit accountability
Increasing shareholder value
Minimizing operational disruption
Improving allocation of capital and resources
Improving responsiveness to natural or other disasters (contingency planning)
Leveraging risk as a competitive tool
Reducing earnings volatility
Increasing ability to be more agile and entrepreneurial (to seize opportunities)
Improving earnings per share
Enhancing quality/increasing overall productivity
While all firms acknowledge the benefits of enterprise-wide risk management (ERM), those with a strategic approach to risk management have a greater understanding of the benefits
38%
35%
33%
29%
27%
25%
24%
22%
20%
18%
16%
15%
13%
12%
11%
% Difference in Agreement With ERM Benefits
Q1b. Please indicate the extent to which you agree or disagree that an ERM program contributes to meeting the following objectives.
Marsh 17
The use of ERM has nearly doubled in just one year—those saying they were in the planning stage last year went ahead with implementation
27%
47%
22%
4%
31%24%
35%
10%
No Plans Planning Partially Fully
2006
2007
ERM Implementation
Q1a. To what extent has your firm implemented an ERM program?
Marsh 18
And ratings agencies are starting to push firms to strategic risk management
My firm's senior management knows how much it is willing to lose from all sources of risk over a selected time horizon in order to
achieve its overall long-term financial objectives.
My firm's senior management knows how much it is willing to lose from all sources of risk over a selected time horizon in order to
achieve its overall long-term financial objectives.
My firm's senior management knows where the top exposures are, both in terms of measured risks and unmeasurable uncertainties.
My firm's senior management knows where the top exposures are, both in terms of measured risks and unmeasurable uncertainties.
My firm's senior management understands the company's risk profile and the mitigation strategies being used to manage its major risks.
My firm's senior management understands the company's risk profile and the mitigation strategies being used to manage its major risks.
Marsh 19
Just over half know where the top exposures are
Agreement With Statement
44%
56%
My firm's senior managementknows where the top exposures are,both in terms of measured risks and
unmeasurable uncertainties
Agree
Can't Agree
Marsh 20
And half understand their company’s risk profile
Agreement With Statement
50%
50%
My firm's senior managementunderstands the company's risk
profile and the mitigation strategiesbeing used to manage its major
risks
Agree
Can't Agree
Marsh 21
Only about one-third know how much they are willing to risk
Agreement With Statement
65%
35%
My firm's senior managementknows how much it is willing to lose
from all sources of risk over aselected time horizon in order to
achieve its overall long-termfinancial objectives
Agree
Can't Agree
Marsh 22
Only one-fourth of firms can successfully pass the ratings agencies’ risk challenge
Only 25% agree with all three ratings agency statements
My firm's senior management knows how much it is willing to lose from all sources of risk
over a selected time horizon in order to
achieve its overall long-term financial objectives
My firm's senior management knows
where the top exposures are, both in terms of measured risks and
unmeasurable uncertainties
My firm's senior management
understands the company's risk profile
and the mitigation strategies being used to manage its major risks
Marsh 23
Agreement With All Three Ratings Agency Statements
A strategic approach to risk management helps with ratings agencies
Approach to Risk
11%
25%
57%
Traditional Progressive Strategic
Marsh 24
360-degree view: Are risk managers in alignmentwith the C-suite?
Marsh 25
Risk managers are slightly ahead of the C-suite in pushing for strategic risk management
Agreement With Statement
58%66%
C-Suite Risk Managers
My firm should take a more strategic approach to risk management
Marsh 26
The C-suite and risk managers have similar views on the ratings agency challenge statements
Q2d. To what extent do you agree or disagree with the following statements?
58% 55%
39%
56%49%
36%
My firm's seniormanagement knows where
the top exposures are
My firm's seniormanagement understandsthe company's risk profile
My firm's seniormanagement knows how
much it is willing to lose fromall sources of risk
C-Suite
Risk Managers
Agreement With Ratings Agency Statements By Job Title
Marsh 27
Risk ManagersC-Suite
Risk managers place more importance on risk than their C-suite counterparts—especially hazard risks
Q4A. Please indicate the level of importance this risk area represents relative to your firm's operations and financial performance.
% Difference in Importance
Hazard Risk
Property
General Liability
Auto
Terrorism
Workers Compensation
Operational Risk
Regulatory/Compliance Risk
Technology/E-Risk
Absenteeism/Total Absence Management
Environmental Risk
Employment Practices Liability
Business Continuity/Crisis Management Risks
Intellectual Property
Products Liability
Strategic Risk
Human Capital
Political Risk
Brand/Reputation
Enterprise Risk
Financial Risk
Credit Risk
FX/Commodity Risk
25%
10%
22%
10%
22%
16%
4%
16%
4%
3%
3%
2%
4%
1%
6%
14%
5%
7%
1%
Marsh 28
Brand and regulatory compliance are rated top exposures by both the C-suite and risk managers
Views diverge for human capital and technology risks.
Q4d. What do you feel are the top three exposures in terms of measured risks and unmeasurable uncertainties?
C-Suite Risk Managers
Brand Reputation 1 1
Regulatory Compliance 2 3
Human Capital 3 8
Business Continuity 4 2
Technology/E-Risk 5 7
Property 8 4
Workers Compensation 9 5
Exposure Risks Ranked
Ranked Above 5 (Not Top 5)
Marsh 29
Risk managers and the C-suite are in reasonable alignment on what’s important and what’s well-managed
Q4a. Please indicate the level of importance this risk area represents relative to your firm’s operations and financial performance.Q4b. Please indicate how comfortable you are that this risk is being managed appropriately in terms of the company's exposure to loss.`
Comfort With How Risks Are Handled
C-SUITEC-SUITE
Dis
co
mfo
rt R
isk
is
Be
ing
Ma
na
ge
d
Ap
pro
pri
ate
ly
Risk Importance HIGH IMPORTANCE/LOW DISCOMFORT
LOW IMPORTANCE/HIGH DISCOMFORT
LOW IMPORTANCE/LOW DISCOMFORT
HIGH IMPORTANCE/HIGH DISCOMFORT
0%
25%
50%
25% 35% 45% 55% 65% 75% 85%
Enterprise Risk
Technology/E-Risk
Human Capital
Business Continuity/ Crisis Management
Risks
Brand/ Reputation
Employment Practices Liability
Regulatory/ Compliance
Risk
General Liability
Workers Compensation
Credit Risk
Absenteeism/ Total
Absence Management
FX/Commodity Risk
Terrorism
Political Risk
Intellectual Property
Property
EnvironmentalRisk
AutoProducts Liability
Marsh 30
The pattern of importance versus discomfort for risk managers in 2007 was nearly identical to that in 2006
Comfort With How Risks Are Handled
RISK MANAGERRISK MANAGER
Dis
co
mfo
rt R
isk
is
Be
ing
Ma
na
ge
d
Ap
pro
pri
ate
ly
Risk Importance HIGH IMPORTANCE/LOW DISCOMFORT
LOW IMPORTANCE/HIGH DISCOMFORT
LOW IMPORTANCE/LOW DISCOMFORT
HIGH IMPORTANCE/HIGH DISCOMFORT
0%
25%
50%
25% 35% 45% 55% 65% 75% 85%
EnterpriseRisk
Technology/E-Risk
Human Capital
Business Continuity/Crisis
Management Risks
Brand/ Reputation
Employment Practices Liability
Regulatory/ Compliance Risk
General Liability
Workers CompensationCredit
Risk
Absenteeism/ Total Absence Management
FX/Commodity Risk
Terrorism
Political Risk Intellectual Property
Property
Environmental Risk
AutoProducts Liability
Q4a. Please indicate the level of importance this risk area represents relative to your firm’s operations and financial performance.Q4b. Please indicate how comfortable you are that this risk is being managed appropriately in terms of the company's exposure to loss.`
Marsh 31
While risk managers and the C-suite are generally in alignment, there are differences…
Risk managers think workers compensation is more important, but are also more comfortable with it.
Risk managers are considerably more comfortable with FX/commodity and regulatory/compliance risk.
Enterprise risk is much more important to the C-suite.
Marsh 32
Who’s on first? Everyone sees himself/herself as the risk management leader
Q5c. Which two people take the top leadership roles in determining your organization's overall approach to risk?
CEO CFORisk
Manager
CEO 1 2 2
CFO 2 1 3
Risk Manager 3 3 1
Importance Rank for Risk Leadership by Functional Area
Marsh 33
Beyond risk management—turning risk into opportunity
Marsh 34
A third of companies are actively looking to turn risk into opportunity
66%
34%
My firm's senior management looksfor opportunities to use risk to the
firm's competitive advantage
Agree
Do Not Agree
Agreement With Statement
Marsh 35
Risk-into-opportunity exploration Preliminary work led to 10 state-of-the-art techniques that can turn risk into
opportunity.
We asked if they were being used, if they worked, and if usage would grow.
Minimizing business interruption due to climate change/
catastrophic property loss
Managing people risk by developing a corporate responsibility program
Leveraging technology
Strengthening vendor relationships
Leveraging regulatory compliance to create competitive advantage
Restructuring via acquisitions and divestitures
Creating new risk management products
Use of captives to transfer risk and generate revenue
Accepting risk to increase profit
Altering the company's risk management profile
Marsh 36
Managing people risk
Minimizing business interruption
Strengthening vendor relationships
Leveraging regulatory compliance
Accepting risk to increase profit
Altering the company's risk management profile
Leveraging technology
Restructuring via acquisitions and divestitures
Creating new risk management products
Use of captives
Emerging use of risk-into-opportunity techniques
56%
43%
39%
38%
33%
28%
25%
17%
15%
14%
Using Fully/Extensively
Q3a. To what extent are you using this technique at your firm?
Marsh 37
Managing people risk
Minimizing business interruption
Strengthening vendor relationships
Leveraging regulatory compliance
Accepting risk to increase profit
Altering the company's risk management profile
Leveraging technology
Restructuring via acquisitions and divestitures
Creating new risk management products
Use of captives
Accepting risk to increase profit
56%
43%
39%
38%
33%
28%
25%
17%
15%
14%
Using Fully/Extensively
“Redundancy in our warehouse locations was minimized to create a more lean structure. Our risk of not being able to service a given geography due to a catastrophic loss is increased, but we believe our control efforts adequately minimize that particular risk.”
Marsh 38
Managing people risk
Minimizing business interruption
Strengthening vendor relationships
Leveraging regulatory compliance
Accepting risk to increase profit
Altering the company's risk management profile
Leveraging technology
Restructuring via acquisitions and divestitures
Creating new risk management products
Use of captives
Leveraging technology
56%
43%
39%
38%
33%
28%
25%
17%
15%
14%
Using Fully/Extensively
“Our IT department is very cutting edge when it comes to security, innovation, and responsiveness. Several of our electronics vendors have been so impressed that they’ve asked us to consult to their IT departments.”
Marsh 39
Managing people risk
Minimizing business interruption
Strengthening vendor relationships
Leveraging regulatory compliance
Accepting risk to increase profit
Altering the company's risk management profile
Leveraging technology
Restructuring via acquisitions and divestitures
Creating new risk management products
Use of captives
Creating new risk management products
56%
43%
39%
38%
33%
28%
25%
17%
15%
14%
Using Fully/Extensively“The university…is lined with over 1,500 olive trees. Not only were the fallen olives a constant and costly cleanup, but their greasy, slippery residue was the cause of accidents and a lawsuit. Due to the inspiration of the campus groundskeeper, today the olives are picked and pressed into a product that has won gold medal honors at the Los Angeles County Fair.”
Marsh 40
A handful of firms are currently using five or more techniques for turning risk into opportunity
15%
31%
37%
17%
Number of Risk-Into-Opportunity Techniques
Used
More than 5
3-5
1-2
None
Average = 3.1
Marsh 41
Large firms and those who consider themselves to be strategic risk managers are most actively trying to turn risks into opportunities
2.13.0 3.3
4.4
Under $500Million
$500 Millionto $1 Billion
$1 Billion toUnder $5
Billion
$5 Billionand Over
Number of Techniques Fully Implemented or Using Extensively
Company Size
2.3
3.8
5.2
Traditional Progressive Strategic
Risk Approach in Companies $1 Billion +
Me
an
Nu
mb
er
of
Te
chn
iqu
es
Usi
ng
Me
an
Nu
mb
er
of
Te
chn
iqu
es
Usi
ng
Marsh 42
35% 34%
C-Suite Risk Manager
Risk managers and the C-suite agree on turning risk into opportunity
Agreement With Statement
My firm's senior management looks for opportunities to use risk to the firm's
competitive advantage
Marsh 43
Two techniques for turning risk into opportunity seem to offer near-term potential
Risk-Into-Opportunity Techniques
25% 28%
62%58%
Leveraging technology Altering the company's risk managementprofile
Using Fully/Extensively Likelihood of Future Use
Q3a. To what extent are you using this technique at your firm?Q3c. How likely are you to increase usage of this technique in the future?
Marsh 44
Takeaways
Marsh 45
Research takeaways
The focus on strategic risk management continues
– Use of enterprise-wide risk management up sharply
Multiple drivers of strategic risk management
– Size and industry matter
– Ratings agencies driving change
Alignment on risk assessment
Disconnect on leadership
Marsh 46
Putting this survey to practical use
Use this survey as a discussion tool with your C-suite to determine alignment in your firm on views of key risks.
Determine whether your C-suite can/cannot answer “Yes” in response to all three ratings agency questions.
– If not, discuss how you can help your C-suite find the answers.
Gain clarity about the C-suite view of your role as the company moves toward more strategic risk management.
Conduct internal discussions to:
– identify ways in which risk is currently being turned into opportunity; and
– get others in your firm to consider new ways of turning risk into opportunity.
Marsh 47
Our Panelists
Laurie J. ChampionVice President, Risk ManagementCoca Cola Enterprises, Inc.
Jackie Hair, ARMCorporate Director, WW Risk ManagementIngram Micro Inc.
Janice OchenkowskiManaging DirectorJones Lang LaSalle
Marsh 48
Appendix
Marsh 49
Opportunities
1. Leveraging regulatory compliance to create competitive advantage.
– Some companies take a strategic approach to compliance by implementing technology to automate internal controls, reporting, and testing and by establishing a centralized repository for this data to lower administrative costs and ensure a higher degree of confidence in the compliance process.
2. Minimizing business interruption due to climate change/catastrophic property loss.
– Some companies have enhanced the reliability of power systems, upgraded fire protection, and increased redundancy in coastal and earthquake-prone areas to mitigate the effects of catastrophes by reducing property damage and business interruption risk. Such efforts will slow the pace of rate increases and allow the company to publicize its ability to continue operating in the face of a disaster.
3. Strengthening vendor relationships.
– Some companies have brought strategic vendors in as full business partners to assure that they understand the future strategy of the company and are operating to optimize risk taking, sharing, and transfer. This may result in a company's having more loyal vendors that will service the company ahead of its competitors in a widespread crisis situation, such as Hurricane Katrina, providing the company with a competitive advantage.
4. Altering the company’s risk management profile.
– Some companies have undertaken efforts to identify areas where risks are over- or under-managed to create a more financially sound organization that will generate confidence with a variety of stakeholders, including employees, investors, and the general public.
5. Managing people risk by developing a corporate responsibility program.
– Some companies view people risk and corporate social responsibility holistically. They are addressing both risks together by developing a corporate responsibility program to mitigate unethical or inappropriate behavior, fraud, or other forms of individual malfeasance. Such programs can have a direct positive effect on business results and company image.
Marsh 50
Opportunities
6. Restructuring via acquisitions and divestitures.
– Some companies use acquisitions and divestitures to improve risk profile and/or eliminate high-risk areas. For example, a manufacturing company used its corporate aircraft fleet to transport passengers for a fee when the fleet was not in use by the company. The cost of its insurance program was much higher than the profits from the transportation operations. The company divested itself of the aircraft operations and began using commercial jets and charters for its own transportation needs. This improved its risk profile, lowered risk-transfer costs, and freed up funds to use on other projects.
7. Creating new risk management products.
– Since a risk is rarely unique to one firm, innovative risk management solutions can result in salable new products. For example, a technology company identified information security as a potential risk, developed a proprietary data protection solution, and then recognized the opportunity to offer data security as a managed service to its clients.
8. Leveraging technology.
– Technology can be used for more than compliance and reporting. Using ERM tools and techniques leads to identification of knowledge needs, implementation of analytic and actuarial frameworks, and better decision-making. This improved access to information and faster decision-making allows the company to be more nimble in responding to changing customer needs.
9. Use of captives to transfer risk and generate revenue.
– The increased use of captives demonstrates their cost-effectiveness in managing risk. Some firms now take this farther, using their captives to accept third-party risk and underwriting it profitability so that the captive becomes a revenue-generating subsidiary.
10. Accepting risk to increase profit.
– With a broader understanding of risk and better tools to evaluate it, some firms are now purposefully increasing risk in order to lower costs or increase revenues. For example, creating a leaner supply chain increases risk, but lowers costs.
Marsh 51
RIMS and Marsh thank you for your ongoing support of the Excellence in Risk Management series
The Risk and Insurance Management Society, Inc. (RIMS) is anot-for-profit organization dedicated to advancing the practice of riskmanagement, a professional discipline that protects physical, financial,and human resources. Founded in 1950, RIMS represents nearly 4,000industrial, service, nonprofit, charitable, and governmental entities.The Society serves more than 10,000 risk management professionals around the world.
Marsh is part of the family of MMC companies, including Kroll, Guy Carpenter, Putnam Investments, Mercer Human Resource Consulting (including Mercer Health & Benefits, Mercer HR Services, Mercer Investment Consulting, and Mercer Global Investments), and Mercer specialty consulting businesses (including Mercer Management Consulting, Mercer Oliver Wyman, Mercer Delta Organizational Consulting, NERA Economic Consulting, and Lippincott Mercer).
Copyright 2007 Marsh Inc. All rights reserved. Compliance # MA7-10168