14 3C 2014 Can Strategic Risk Management Work for You

Copyright Risk and Insurance Management Society, Inc., 2014 Our speakers Carol Fox Director of Strategic and Enterprise Risk Practice RIMS, the Risk Management Society™ cfox@rims.org

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Copyright Risk and Insurance Management Society, Inc., 2014

Can Strategic Risk Management

Work for You?

Tuesday, September 16

Proudly presents…

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Our speakers

Carol Fox

Director of Strategic and Enterprise Risk Practice

RIMS, the Risk Management Society™

cfox@rims.org | www.rims.org

Prior to joining RIMS in 2010, Carol held a number of progressively responsible risk management positions in the customer care, communications, manufacturing, defense, and insurance industries A Miami University graduate, she serves on its Center for Business Excellence advisory board and is vice chair of the U.S Technical Advisory Group for ISO 31000 standards In 2009, she received RIMS’ prestigious Harry & Dorothy Goodell

Award In 2011, Treasury & Risk acknowledged her as one of its 100 Most Influential People in Finance

Underwriting and Marketing management positions with Fireman’s Fund and Cigna P&C Currently RIMS

president, she served in a number of board roles, while volunteering as Risk Manager in Residence at

Appalachian State, Ball State University, Temple University and University of Central Arkansas Carolyn is a

member of the Advisory Board for the Business Insurance Risk Management Summit, was named to BI’s Women

to Watch list in 2009, and is a member of Eastern Kentucky University Risk and Insurance Advisory Council

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Emerging and Dynamic Risks in a Swan Environment What You Need to Know

Closing Remarks

Agenda Overview

Disclaimer: The examples used herein and exercise factors are based on publicly available information for educational purposes

only RIMS and the facilitator disclaim any specialized knowledge or specific information about the noted organization, other

than what is presented

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Insurance Government Other

Many missions – same goal: SUCCESS

RIMS’ Mission: To advance risk management for your organization’s success

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WHAT IS STRATEGIC RISK MANAGEMENT?

What we have here is a failure to communicate …

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Risk = an uncertain future

outcome that can either improve or worsen our position

RIMS

Risk = the potential that a

chosen action or activity (including the choice of inaction) will lead to a loss (an undesirable outcome)

Wikipedia

What Does Risk Mean to You?

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What Does Risk Management Mean to You?

Source: RIMS Workshop: Risk Management Techniques: Gaining the Risk Advantage

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Strategic risk management (“SRM”)

is a business discipline

that drives deliberation and action regarding

uncertainties and untapped

opportunities that

affect an organization’s strategy and strategy execution

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Not just another framework – another way to think

Risks arising from the strategic plan Strategic risks

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HOW DOES STRATEGIC RISK MANAGEMENT WORK AT HUMANA?

Strategic Risk Management in Action…

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 Fortune 100 Company

 52,000 Employees

 $13 Billion Market Cap

 $40 Billion in Revenue

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Mature the Process

 Consistent enterprise risk identification and assessment

 Business unit risk profiles

 Aggregate risks across the enterprise

 Defined appetite / tolerances

 Detection of emerging risks

 Identify and monitor key risk indicators

 Initiate technology solution

 Optimize resource pool

Build the Base

 Set risk strategy, policy and

framework

 Set optimal risk management

structure

 Build resource pool

 Systematic risk reporting

 Risk owners defined and

accountable

 Defined materiality

 Provide risk reports to Executive

Committee Audit Committee

Initial Ad-hoc

 Technology solution in place

 Risk linked to business performance measurement

 Enterprise-wide risk awareness and education

Humana’s Journey

Where are

we along the journey?

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Humana’s

Program

Identify

Strategic Operational Financial Compliance

Analyze

Planning Risks Execution Risks How Well Managed

Report By Business Area and

Initiative

Copyright Humana Inc., 2014

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10-K Identified Risks

Deconstruct Risks from Corporate Strategy

Deconstruct Risks from Cash Flow and Earnings

Assess Surprise Risk Events and Near Misses

Process Leader Risk Workshops / Executive Leader Input

Internal Audit / Oversight Groups Identified Risks

Consider Potential

“Black Swans”

Input

Sources

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Engagement at Humana

What’s the purpose? Who is involved?

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Stage 3

Optional second workshop

regarding mitigation plans

Stage 4

Key risk list, business area consideration, and Internal Audit planning

Link to detailed information in Journal of Accountancy 2013 article

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Facilitator

Identify

Interview (structured and unstructured)

Questionnaire (face-to-face, e-quiz)

Analyze

Individual (observation, storytelling)

Collective (round table, brainstorming)

Stages 1 & 2

Challenger

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Consider Improvement

Urgently Assess

Confirm Adequacy

Avoid Further Exposure

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Copyright Risk and Insurance Management Society, Inc., 2014 Copyright Humana Inc., 2014

Moderately Managed

Not Managed Well Illustrative Purposes Only

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WHY SHOULD YOU CARE ABOUT

STRATEGIC RISK MANAGEMENT?

Strategic Lessons for Risk Professionals

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Known knowns

“Things *that+ we know

we know”

Known unknowns

“Some things we *know

that+ we do not know”

Unknown unknowns

“The ones we don’t

know we don’t know”

Understanding the Swans

Source: Managing the Multiple Dimensions of Risk: Part I of a Two-Part Series 2012

Note: Robert Knight, Risk, Uncertainty and Profit, (Dover

Publications) 1921 defined risk as “measurable uncertainty”, and the term “uncertainty” as un-measurable future event

White Swans

Black Swans Grey Swans

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White, Grey, or Black?

 Stakeholders generally will forgive black

swans

 Stakeholders may not forgive the white

and grey swans because…

• it signals lack of management / risk competence and poor board risk oversight

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What Kills Most Companies

“But that’s not the risk that kills most companies The risk that

kills most companies and why they only last 20 years (40%)… is business risk You need to understand your market and your

competitive dynamics and you didn’t have the right talent

There’s only a few things that go wrong, right? You were asleep and the market changed You didn’t have the right people You weren’t challenging the people to anticipate around the corner You weren’t bringing in objective info that was contrary to

managements’ viewpoints so that you had a check and balance

on how they see the world It’s very simple It’s just hard to do.”

Board member Quoted by Dr Paul Walker of St John’s University at RIMS Risk Summit 2013 NYC

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Why Focus on Strategic Risks?

• Accounting irregularities / fraud

• Poor financial hedging

resulting in share price declines

greater than 30%

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Copyright Risk and Insurance Management Society, Inc., 2014 Graphics source: valariehurstandcompany.com

So are these the strategic risks?

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EXPLORING RISK APPETITE AND RISK

TOLERANCE

Integrating into the Strategic Planning Process

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• Defining

acceptable boundaries

Boundaries

• Developing risk portfolio views

Portfolio

• Calculating and

articulating tolerance

Tolerance

• Attacking gaps between

perceived and actual risks

Gaps

• Risk and reward tradeoffs in daily

management

Tradeoffs

What are the five factors for maturing your risk

appetite and risk tolerance capabilities?

Source: RIMS Risk Maturity Model, 2006-2014

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corporate and board

level, given the same

level of expected

reward

Reconciling Your Organization’s Risk Appetite

Source: RIMS Executive Report: Exploring Risk Appetite and Risk Tolerance 2012

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What is your organization’s capacity for risk?

Risk Appetite

Risk Tolerance

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Integration into Strategic Planning Process

Risk Control Strategic

Plan

Capital

Assessment Articulation Action

Source: Constellation Energy Presentation at RIMS 2012 Annual Conference by Brenda Boultwood, Former CRO

Strategic risks

Risks arising from the strategic plan

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EMERGING AND DYNAMIC RISKS IN A SWAN ENVIRONMENT

Integrating into the Strategic Planning Process

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Random, seemingly unpredictable, and unconnected

issues, trends, signals

Emerging and dynamic risks

Potential Impact on

Strategy

Threats, Opportunities

or Both?

Emerging risk is a novel manifestation of risk or type which has not been experienced

previously Dynamic risks are those risks that are known to exist, but may change over time

Defining “Emerging” and “Dynamic” Risk

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What is the primary pathway for aggregating emerging and dynamic risk information and analysis within your organization for strategic

purposes?

How Are Emerging Risks Uncovered?

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What are key processes for managing emerging risks?

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WHAT YOU NEED TO KNOW

Do You Want to Build a Strategic Risk Management Capability?

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Do the Pre-work on Your Organization

• What creates value in your organization?

• How is value captured?

• How is strategy set, communicated and executed?

• What is the actual attitude towards risk management?

• Does the organization’s culture support a strategic

risk management approach?

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Network and Operations

(Behind the Scenes)

Market and Customers

(Perception)

PARTNER NETWORK

Producers, Suppliers, Distributors

CUSTOMER RELATIONS NETWORK

Interactions, Customer Service, PR, Marketing

Operations, Strategy, etc

WHAT IS YOUR BUSINESS MODEL?

VALUE PROPOSITION

Why Customers Buy

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The RIMS SRM Framework

SRM can help accelerate organizational performance in support of strategic goals and objectives

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Do the Pre-work on Drivers

• What value will SRM add that existing processes

do not provide?

• Who are the key players required to succeed?

• Do they already support this approach? Will they

support it later?

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Unlocking Enterprise Value with SRM

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Unlocking Enterprise Value with SRM

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Bringing It All Together

• Once you have identified the why, who, what and how

much of your SRM program, you will need to spend some time and effort to integrate that process into the organizational culture and its practices

• Exploit existing risk and management systems as much

as possible – be an “add-in” rather than “add-on”

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Source: RIMS Workshop: ERM Accelerating Theory Into Practice

Risk Control Network

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Revisiting RIMS

Strategic Risk Management Framework

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Thank You

Closing Remarks

Final Questions

Key Takeaways

Please visit RIMS Strategic and

Enterprise Risk Center

www.rims.org

RIMS Can Help Make Strategic Risk

Management Work for You

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Enjoy the rest of the 2014 RIMS Canada Conference!

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