Excellence in Risk Management

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Excellence in Risk Management II A Qualitative Survey of Enterprise RiskManagement Programs

April 18, 2005


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What Is ERM?

Assessing and addressing risk from all sources.

A process to manage all risks of the enterprise.

Managing your !usiness "ith a more deli!erate and systematic focuson risk.

#mplementing the infrastructure and culture "ithin the organi$ation tomake good decisions on risk.

Respondents shared these definitions with us:


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Excellence in Risk Management Studies

E&cellence in Risk Management # studied the risk management practices of%' top(performing risk managers in )orth America. *indings presented at the2''+ R#MS conference included the follo"ing,

- he events of the past /' years have resulted in a dramatic shift in the theimportance of risk management and its practices.

- here is an opportunity for risk managers to play a more strategic role intheir organi$ations.

- 0ompanies can recogni$e a significant financial impact !y controlling riskand recogni$ing profit from risk(related strategies.

- Successful risk management relies on a ro!ust hierarchy of information

and integrated information systems.1sing E&cellence # as a foundation of understanding E&cellence ##e&amines the characteristics and practices of organi$ations that areimplementing an enterprise("ide risk management program.


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Excellence in Risk Management II Research Parameters and Methodology

Methodology,Qualitative versus 3uantitative approach

#n(depth intervie"s "ithin five large organi$ations that are implementing an ERMprogram

#ndustries represented,

#nformation services 425*inancial services 4250ommodity services 4/5

#ntervie"s "ith 26 individuals at these organi$ations including risk management at eachcompany

#ntervie"s "ere administered !y phone to o!tain insights on practices perceptionsorgani$ational dynamics and relationships

#ntervie"s "ere supplemented !y a short closed(end 3uestionnaire covering !asic topics

#ntervie"s "ere conducted !y 7reen"ich Associates


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Who We Intervie ed

Risk Management 485

9perations 4:5

Audit 465

0ompliance and ;egal 4%5


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!ey "akea ays

Recogni$e the fundamental !enefits of ERM

1nderstand ho" to implement ERM

1nderstand ho" to sustain ERM in your company


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Enter#rise Risk Management$##lying RiskManagement %isci#line More &roadly

ObjectiveSetting

RiskIdentification

RiskAssessment

RiskMitigationControl

Activities

Monitoring

? All Types of Risk ?Broad Focus?Continuous

Communication

Source: The Committee of Sponsoring Organizations of the Treadway Commission


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Survey Results 'vervie

@hy ERM

7etting Senior(Management Support

0reating a Process to Support ERM


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Why ERM?


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ERM &ene(its

Im liberating people in our company about risk and uncertainty so thatthey can better achieve the ob ectives that they made to the board!"

#$isk %anager


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$s 'rgani)ations $do#t ERM* the Role o( RiskManager &ecomes More Strategic

Strategic RiskManagement

Progressive RiskManagement

Traditional RiskManagement

Impact OnImpact OnOrganizations BottomOrganizations BottomLine and CultureLine and Culture

Organizational Buy InOrganizational Buy In

TechnicalTechnical!anagement !anagement


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$s +om#anies %evelo# an ERM $##roach*Potential &ene(its Multi#ly

" Support O#$ecti%es" Support O#$ecti%es

" Impro%e &arnings" Impro%e &arningsand Cash 'low and Cash 'low " !anage (rowth" !anage (rowth" Capture" Capture

OpportunitiesOpportunities

" Reduce Losses" Lower Insurance

Costs

ManagingRisk

Transferring Risk

OptimizingRisk

Advanced RiskManagement

efensive RiskManagement

!RM Approac"

" )urchase Insuranceand Co%er Ris*s


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73%

80%

80%

80%

Risk Manager

Other

Agree#Strongl$ Agree

"he Role o( Risk Management in the ,irm

T"e firm vie%s risk

management as a ke$strategic function

T"e role of t"e riskmanager "as becomemuc" more strategic%it" implementation

of !RM

Risk Manager

Other

&Risk Manager' n()* Ot"er' n(+),


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31%

81%

20%

100%

60%

88%

75%

80%Strategic

'#erational

-ig"l$ Significant .enefits &/ 0 ),

,inancial

-a)ard

Q2/. @ith the implementation of an integrated approach to risk management across the firm in all of the risk areas 4ERM5 ho" "ould you rate the !enefitsaccruingCor e&pected to accrueCin each of the maDor types of risk Please rate on a scale of / to 6 "here / is )one and 6 is =ighly Significant.

&ene(its o( ERM Im#lementation inMa.or Risk $reas

Risk Manag er

Oth er

Risk Manag er

Oth er

Risk Manag er

Oth er

Risk Manage r

Othe r

&Risk Manager' n()* Ot"er' n(+1,


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40%

80%

80%

100%

2

Risk Manage r

Othe r

Present and ,uture &ene(its o( ERM


T"ere are tremendousfuture potential benefitsin !RM t"at "ave not $etbeen realized

T"e firm is recognizingsubstantial benefits from!RM toda$

Risk Manag er

Othe r



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94%

88%

80%

100%

100%

94%

100%

100%

-ig"l$ Significant .enefits &/ 0 ),

Risk Manag er

Oth er

Risk Manag er

Oth er

Risk Manag er

Oth er

Risk Manag er

Oth er

Improvedcommunicationson risk taking tos"are"olders#board

.etter3informeddecisions

.etter allocation ofcapital and resourcesto address risk

Improved corporategovernance practices

&Risk Manager' n()* Ot"er' n(+1,

Perceived &ene(its o( ERM


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Exam#les o( ERM &ene(its

Multimillion(dollar proDect undertaken once risk profile understood

9ffshore outsourcing program cancelled once high risk "as assessed

)atural hedge discovered

*acilitated M A process

Reduced insurance rates

Fecided not to discontinue product once risk "as understood


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ERM%riving ,orces

Company RiskCompany RiskManagementManagement

FocusFocus

1nderstanding Risk1nderstanding Risk

0ontrolling Risk0ontrolling Risk

9ptimi$ing Risk9ptimi$ing Risk

ExternalForces Sarbanes3O4le$

Si4 Sigma Corporate Scandals Regulator$ Initiatives September ++ 5atural isasters

Internal Forces

Managing !arnings and

Cas" 6lo%s Stake"older Accountabilit$ Meeting Objectives Regulator$ Compliance


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/etting Senior0Management Su##ort


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+onsensus "hat &oard and Senior0Management&uy0In o( ERM Is Essential to $cce#tance 1y the'rgani)ation

Board

Senior Management

F n!tiona" Management

B siness #nits and O$erations

& Alignment 'ith board ob ectives& (enior#level champion

& )ontinued involvement

& (ets the tone

& *ink to investors


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+ontinued Su##ort ,rom Senior ManagementRe2uires %irect +ommunication &y ERM "eam

& Risk committees

? Senior(management risk committee

?


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+reating a Process to Su##ort ERM


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$ccounta1ility and Re#orting at $ll 3evels Is Re2uired to Su##ort theERM Process

+oard

(enior%anagement

) - ).- %RO )-- )/-

-perations+usinessnits

.unctional%anagement

)ross#.unctional $% /eamRisk Management& ' dit& %om$"ian!e()ega"

$isk )ommittee

$isk )ommittee


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'rgani)ation to Su##ort ERM!ey "akea ays

? Separate risk committees to !oard and senior management

? Risk management representation in senior management

? 0ross(functional ERM teamCrisk management internalaudit legal and compliance form core team

? Representation from operationsG!usiness units and

functional management

? =uman resources conspicuous in its a!sence

k d


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Objectives

Policies andProcedures

ecisions

Plans and.udgets

6inancial Strateg$

Enterprise RiskManagement

Corporate Strateg$

3ink to Strategic '1.ectives and Integrate ERM"hinking Into Regular &usiness $ctivities

R i ( h ERM P Wi h


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Rein(orce the ERM Process With a +ommon3anguage and "raining

& Esta!lish a common language a!out risk

? Simple

? #n conformity "ith culture

? ake a consultative approach to training !y using "orkshops

? 1se availa!le technology

? Beep it simple


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&uilding ERM Into the +or#orate +ulture


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Em1edding ERM in +or#orate +ulture


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93%

100%Risk Manage r

Other


Em1edding ERM in +or#orate +ulture

Implementation of!RM re7uires andresults in a culturalc"ange in t"eorganization


o to In(luence "hinking to Include ERM


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-o to In(luence hinking to Include ERM

)ommunications

)ompensation

4er ormance %easurement

*earning 6evelopment

7rooming"Internally

'"" %om$an*

+m$"o*ees

*i etime" %entality to $%


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!ey "akea ays


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or 3o 0 re2uency Risks* ERM +an Reveal


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,or 3o 0,re2uency Risks ERM +an Reveal-idden Risks Re2uiring $ction and -el# inPrioriti)ing Resources

;igh Impact;igh Impact*o' *ikelihood

*o' Impact

*o' *ikelihood

;igh Impact;igh *ikelihood

*o' Impact

;igh *ikelihood*o' Impact

*o' *ikelihood ;igh *ikelihood


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Recommendations


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eco e dat o s

Just do itK 7et started

#dentify a champion

7et senior(management !uy(in

Start prioriti$ing risks using op/'approachPerform !usiness practice revie"s

=old risk "orkshops

;everage e&isting initiatives - Sar!anes(9&ley - Si& Sigma - Audit and compliance initiatives - Strategic planning

Maintain sensitivity to seismic eventsin the company

Employ team approach to the task ofimplementing ERM

*ormali$e it, - Structured approach to

organi$ing processes G lines ofreporting

Beep ERM technology simple andunderstanda!le

Em!ed ERM in e&isting !usinessprocesses

reat ERM as a process not aproDect

inal "hought


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,inal hought

/he key to high#per ormance risk management is aligning riskstrategy among key risk stakeholders, obtaining and sustainingsenior management engagement, and achieving e ective integration

'ith strategic planning!" #$isk %anager


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"hank 4ou

RIMS and Marsh are #roud to have s#onsored theExcellence in Risk Management II survey

!arsh is part of the family of !!C companies+ including ,roll+(uy Carpenter+ )utnam In%estments+ !ercer -umanResource Consulting .including !ercer -ealth / Benefits+!ercer -R Ser%ices+ !ercer In%estment Consulting+ and!ercer (lo#al In%estments0+ and !ercer specialty consulting#usinesses .including !ercer !anagement Consulting+

!ercer Oli%er 1yman+ !ercer 2elta OrganizationalConsulting+ 3&R4 &conomic Consulting+ and Lippincott!ercer0"

The Ris* and Insurance !anagement Society+ Inc" .RI!S0 isa not for profit organization dedicated to ad%ancing the

practice of ris* management+ a professional discipline that protects physical+ financial and human resources" 'ounded in5678+ RI!S represents nearly 9+888 industrial+ ser%ice+nonprofit+ charita#le+ and go%ernmental entities" The Society

ser%es o%er 6+ 88 ris* management professionals around theworld"

Copyright 2005 Marsh nc! All rights reser"ed! 0ompliance L MA>(/'+:'

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Excellence in Risk Management