Editors' Cuts

A World of Trouble for Risk Managers

Bill Kenealy
Insurance Experts' Forum, March 16, 2011

While most of us can view the recent paroxysm of current events with detachment, the risk managers that convened this week at the 2011 ERM Symposium here in Chicago do not have that luxury.

The breadth of issues confronting risk managers was evident during a panel discussion titled “ERM: A 360 Degree View of Risks” as the conversation careened from topics including the financial crisis to regulatory reform to the ongoing disaster in Japan. 

Lizabeth Zlatkus EVP and Chief Risk Officer, The Hartford Financial Services, said one positive consequence of this multitude of risks is that risk managers are having an easier time commanding attention and resources, noting that many CROs now report to boards and CEOs. “Risk management has an enhanced prominence,” Zlatkus said. However, she said the question now becomes whether this higher profile is sustainable. “If the economy is booming five years from now, will this still be a board level concern?”

To ensure that ERM endures, Zlatkus said it was necessary to inculcate an appreciation for risk across the enterprise and that mitigating risk cannot rest solely on the shoulders of risk managers. “Risk models are a good tool but an overall risk culture is more important,” she said. “It needs to be embedded in the decision making of the firm.”

Part of this culture is enabling managers and employees to speak up about business they find exceeding a company’s risk appetite, even if that business is highly lucrative or seemingly detached from a company’s core business. Panelist John Wengler, CRO at Blue Star Energy Services, noted that American International Group’s infamous financial products division was able to keep risk managers and auditors at arms length because it was so profitable. “It was a sideline business that took AIG down.”

Zlatkus said that the courage to ask unpopular questions is a necessity for CROs. “People need to speak with conviction,” she said. “If something seems too good to be true, it is.”

Yet, citing the political upheaval in the Mideast and the earthquake and tsunami in Japan, Dan Rodriguez, managing director, Credit Suisse, said that even the most thoughtful of risk mangers will occasionally be caught by surprise. “I wasn’t running nuclear meltdown scenarios for Japan until this week,” he said.  

Accordingly, Rodriguez argued that diversity on a risk management team was essential to spur a wide range of ideas and avoid groupthink. “A lack of imagination is fatal for risk managers,” he said.

Zlatkus agreed that assembling a diverse risk management team with a thorough understanding of the business is essential. “Risk management departments need people with business seasoning and different backgrounds,” she said.

On a separate panel discussion, Susan Cleaver, director, enterprise risk management, State Farm Insurance Co., said she relies on talent from the company’s actuarial, underwriting and finance teams to augment the full time employees on her team. Cleaver said crafting a common language the business can understand is challenging but essential. “Articulating an exact risk appetite is a tall order.”

A fully functioning risk management team seems all the more crucial, given the rapid pace of regulatory reform. “It’s a daunting task to stay up to speed with all the federal government, state governments and NAIC are throwing at us,” said Greg Hayword, AVP and actuary, State Farm Insurance Co. “It’s almost mind boggling how much is being proposed.”

Indeed, one of the more pervasive concerns voiced at the symposium was the fear the Dodd Frank Act (DFA), now in its critical implementation phase, would produce unintended and unforeseen consequences fro risk managers. Rodriguez worried that the law, intended to mitigate risk and create transparency, would instead complicate efforts by banks and insurers to hedge risk and push more money into the unregulated dark pools run by hedge funds.

William Sergeant, director, State Farm Mutual Automobile Insurance Co., enumerated concerns his company harbors about DFA. Foremost among these was the formula the newly established Financial Stability Oversight Council (FSOC) will use to determine “systemically important financial institutions.” Sergeant stressed that the primary constituent of the formula, size of the institution, was an inexact yardstick considering the difference in business models between property/casualty insurers and, say, investment banks. “Insurance is fundamentally different and that should be acknowledged,” he said. “There is little contagion risk in a traditional P&C insurance operation.”

Sergeant said another primary concern was that a head of the incipient Federal Insurance Office has yet be named, depriving the FSOC of insurance expertise as it completes the rulemaking phase. Even fully staffed, he questioned whether the FIO would have sufficient expertise evaluate insurer ERM efforts and whether the new rules cross the line between management and regulator. “ERM is an evolving science, so I’m concerned about embedding overly prescriptive mandates in a model law,” he says.

Another regulatory front for insurance risk managers is the Solvency Modernization Initiative being undertaken by the National Association of Insurance Commissioners (NAIC). Sergeant was generally laudatory of NAIC’s proposal for an Own Risk and Solvency Assessment (OSRA) for insurers but said, if enacted, the annual reports runs the risk of duplicating state solvency efforts. “We support effective solvency regulation, but dumping thousands of pages of documents on regulators may not be the best solution,” he said.

Many speakers expressed a wish for U.S. regulators to adopt a more principles-based regulatory approach akin to those common in Europe. Yet Dr. Colin Lawrence, head of the U.K.’s Financial Services Authority, seemed to dash those hopes with his comments. Lawrence said certain financial services firms had exploited principles-based regulation by concocting deliberately complex and opaque products intended to deceive regulators. He said this had caused regulators to lose trust that firms could be relied upon to comply with principles-based regimes. “Everybody prefers [a principles-based] approach but in an absence of trust you get rules.”

The Hartford’s Zlatkus acknowledged that amount of information that insurance risk managers will need to share with regulators is only going to rise.

Bill Kenealy is a senior editor with Insurance Networking News.

Readers are encouraged to respond to Bill by using the “Add Your Comments” box below. He can also be reached at william.kenealy@sourcemedia.com.

This blog was exclusively written for Insurance Networking News. It may not be reposted or reused without permission from Insurance Networking News.

The opinions of bloggers on www.insurancenetworking.com do not necessarily reflect those of Insurance Networking News.

Comments (0)

Be the first to comment on this post using the section below.

Add Your Comments...

Already Registered?

If you have already registered to Insurance Networking News, please use the form below to login. When completed you will immeditely be directed to post a comment.

Forgot your password?

Not Registered?

You must be registered to post a comment. Click here to register.

Blog Archive

Don’t Wrap Your Organization Too Tight With Metrics

Metrics provide a picture of how business is going, and systems are performing. But do they provide the right picture?

Insurance: The Original Shared Economy

Insurers should look to revisit the roots of the insurance process.

The Seven Flavors of Virtualization

There is no one single form of virtualization rather, different parts of the IT infrastructure require different approaches.

Can New Technology Turn Older Cars into Safer Cars?

Unless you have the means and motivation to buy a new car every year, your newest car is quickly about to become an older car.

What if Someone Kickstarted an Insurance Company

Our industry is evolving and implementing new innovations, particularly focusing on the customer experience, including the web and mobile.

The Transformative CIO

Today's technology leaders are expanding well beyond their traditional role.