Moving ahead with ERM, Part 4: Becoming a Trendsetter

September 16th, 2014 No comments

Stephens-Mark (2)Perhaps the most fundamental way that enterprise risk management (ERM) creates value is by improving the decision-making process, infusing it with a keener understanding of the risks involved in, say, a decision to enter a new product market or shift manufacturing to a new geographical region. But ERM also enhances the company’s brand and its standing with stakeholders by raising its reputation for strategic adeptness and ability to respond successfully to new opportunities in the market.

Risk Institute survey - Figure 6

In the recent survey conducted by the Milliman Risk Institute of 125 North American risk executives on the state of their companies’ ERM efforts, we identified three levels of proficiency: Beginners, Transitionals, and Trendsetters (see part three for more information about these levels). How do companies join the ranks of the Trendsetters, the most proficient level? The profile of Transitional companies that emerged from our survey suggests a top-down pattern that starts with incorporating the risk management function into strategic planning (58% of Transitionals say they have done so) and the budgeting process (59%). Transitionals cite increased competition as the most important trend they face (42%), suggesting this is often what spurs them to make risk management a part of their decision-making.

Almost two-thirds (65%) use ERM to facilitate alignment between people, processes, and infrastructure—more than either Trendsetters or Beginners—but far fewer are implementing it consistently across units or monitoring and updating the function frequently. Quantitative and qualitative risk assessments, which can play a role in strategic and budgetary decisions, are the analytic tools that Transitionals are most likely to use—33% and 36%, respectively—but they use other, more cutting-edge tools, such as horizon scanning and predictive methodologies such as scenario planning, much more rarely. Collectively, these attributes suggest that closer attention to implementation and adoption of a fuller spectrum of the tools and techniques ERM makes available are a key difference between Trendsetters and Transitionals.

In Part 5 of this blog series, we will look at ERM best practices commonly used by Trendsetters.

To download a copy of the full report, click here.

For more information, please contact Mark Stephens.

Moving ahead with ERM, Part 3: Beginners, Transitionals, and Trendsetters

September 12th, 2014 No comments

Stephens-Mark (2)In part 2 of this blog series, we identified the specific key points that enabled us to assess the levels of proficiency for each company in creating value via enterprise risk management (ERM). The information is part of the results from the survey the Milliman Risk Institute recently conducted of 125 North American risk executives on the state of their companies’ ERM efforts.

We identified three levels of proficiency:

Beginners make up 20% of companies in our survey. For these companies, risk is managed in silos. In none of the eight attributes (discussed in Part 2 [link]) do any more than 40% of these companies show strong capabilities, although they report some progress at making risk management more proactive and creating a unified set of risk tolerances. Two out of five of these companies say risk management is proactive and forward-looking, while more than one-third (36%) say it links corporate- and business-unit-level risk tolerances. However, no more than 20% of Beginner companies say the risk function collaborates closely with internal audit and compliance, or is integrated across the organization. This suggests that these companies have a long way to go in making ERM a process that creates value.

Transitionals compose 67% of survey respondents. These companies have formalized ERM programs, but still lag in integration and collaboration. Half or more say they are creating value by improving the timeliness and quality of their data, and by making ERM a bigger part of the strategic planning and budgeting processes, for example. Far fewer, however, are integrating data more deeply into their risk-management decision making, integrating risk management itself across the organization, or building greater collaboration with internal audit and compliance.

Trendsetters — 13% of survey respondents — are most successful at creating value through ERM. Overwhelmingly, these companies say their risk management practices are considered in strategic planning processes. Trendsetters are also becoming more data-driven (100%), and these companies say they maintain timely, high-quality risk-related data (100%). The risk management function is more collaborative at these companies, particularly with internal audit and compliance (88%), and is integrated across the organization (81%). Trendsetters are also far more likely to have a chief risk officer, or CRO (75% versus 44% of the others). This suggests ERM has been more formalized and is being embedded deeply into these companies in ways that make value creation sustainable.

In Part 4 of this blog series we will begin to examine closely the actions that companies can take to successfully move along the spectrum from Beginners to Trendsetters.

To download a copy of the full report, click here.

For more information, please contact Mark Stephens.

Moving ahead with ERM, Part 2: Defining ERM value creation

September 8th, 2014 No comments

Stephens-Mark (2)Quantifying the value contribution of enterprise risk management (ERM) has become increasingly important, but companies face numerous difficulties in this area. In the present challenging and competitive environment companies must justify any capital allocation that does not go directly to high-return activities. Most use some measure to assess the cost-effectiveness of ERM to evaluate the deployment of capital for other business activities, yet no single method emerged as a best practice. The most widely used are:

• Benchmarking performance against peers (27%)
• Return on productivity (26%)
• Return on investment (21%)

To better understand the value creation that may be credited to ERM, the recent survey by the Milliman Risk Institute of 125 North American risk executives measured respondents across eight key attributes of risk management proficiency:

• Embedding ERM in the strategic planning process
• Implementing a proactive and forward-looking risk strategy
• Maintaining timely, high-quality data related to risk
• Linking corporate- and business-unit-level risk tolerances
• Giving ERM a strong role in the budgeting process
• Creating more data-driven ERM processes
• Collaborating closely with internal audit
• Integrating compliance across the organization

In part three of this blog series we will show how the degree to which survey respondents have addressed these issues helped us categorize companies as ERM “Beginners,” “Transitionals,” and “Trendsetters,” and we will begin to discuss specific strategic keys for companies to move along this spectrum from Beginners to Trendsetters. Read part one of this series here.

To download a copy of the full report, click here.

For more information, please contact Mark Stephens.

Moving ahead with ERM, Part 1: ERM survey

September 3rd, 2014 No comments

Stephens-MarkFor a growing number of forward-thinking companies, enterprise risk management (ERM) is not only about protecting their companies from harm, but also about proactively creating measurable value that can strengthen their positions in the market. Studies have found that companies implementing robust ERM programs enjoy advantages in the overall value of their companies, in share price, and in stock price volatility.

Recently the Milliman Risk Institute conducted a survey of 125 North American risk executives on the current state of their ERM efforts. More than one-third of the companies responding (37%) represented manufacturing and commodities companies, and more than one in four (27%) represented financial services. Companies with annual revenues between $1 billion and $5 billion amounted to 60% of the sample, followed by a 25% share of companies with revenues of $5 billion or more.

Risk Institute Survey_Fig1

The results of the survey showed that large majorities see the benefits of ERM fundamentals: improved risk-adjusted decision-making (72%), enhanced board risk oversight (60%), and improved performance management (59%). For half or more of respondents, ERM also creates value across a broader range of areas, including improved capital efficiency (58%), organizational and process optimization (55%), higher-quality strategic planning (54%), improved regulatory compliance (53%), and improved brand reputation (50%). (While ERM and the compliance function are often closely linked, our survey focused entirely on ERM except as it works directly with compensation.)

In this blog series, we will explore the progress of ERM programs in the companies surveyed, dividing them into “Beginners,” “Transitionals,” and “Trendsetters,” and examining closely the actions companies have taken to move themselves along that spectrum from Beginner to Trendsetter.

To download a copy of the full report, click here.

For more information, please contact Mark Stephens.

Localizing a microinsurance program

August 28th, 2014 No comments

Traditional insurance models may not be directly applicable to developing regions. Lalit Baveja explains how Milliman brings its global experience to bear in creating microinsurance services for areas that have unique needs but little collected data.

To read a transcript of this video, click here.

Driving for profit: A view of the UK private and commercial motor insurance markets 2013

August 26th, 2014 No comments

In this year’s edition of Driving for Profit Milliman consultants Derek Newton, Gary Wells, and Vincent Roberts present the results of our analyses of the performance of the private and commercial motor market in the UK.

Starting with UK Private Motor, the overall performance of the market in 2013 has resulted in a pre-tax net insurance ratio of 3.4%. This ratio has been highly distorted by the large prior years’ reserve release made by the Direct Line Group. Overall performance (including reserve releases from prior years) of the UK Commercial Motor market has deteriorated in 2013 to a pre-tax net insurance ratio of -6.9% (from -5.7% in 2012), following an improvement in performance from its trough in 2009. The causes of the deterioration in 2013 were twofold: deterioration in the operating loss for current year business; and strengthening of prior years’ reserves.

This Milliman Market View reviews some of the statistics behind the recent performance of the UK Private and Commercial Motor insurance markets. In particular, we consider market profitability, premium rates, claim frequency and average size, and comparative performance of major players in the markets.

How can Milliman Arius™ enhance loss reserve analyses?

August 22nd, 2014 No comments

Milliman’s Arius™ solution combines traditional deterministic reserving methods with numerous stochastic models, providing not just data summaries but real, actionable information. In this A.M. BestRadio interview, David Kennerud discusses how Arius helps property and casualty actuaries streamline their loss reserving analyses.

Milliman ERM 3.0

August 19th, 2014 No comments

The next phase of enterprise risk management (ERM) involves embedding risk management throughout a company to inform its critical decision-making processes. In this short film, Josh Corrigan explains how Milliman’s holistic approach to helping organizations prepare for “ERM 3.0” draws on a unique understanding of complex systems and behavioral science.

To learn more about Milliman’s ERM services, click here.

Milliman Solvency II Readiness Assessment Tool first industry survey: Ireland, life assurance

August 12th, 2014 No comments

Milliman developed the Solvency II Readiness Assessment Tool to help companies prepare and plan for Solvency II. The tool is designed for life and nonlife direct writing and reinsurance companies. It enables companies to rate themselves using a range of detailed questions covering the full scope of Solvency II. A score of 5 identifies areas that are 100% ready, whereas a score of 1 identifies areas where no progress has been made.

Thirteen life companies based in Ireland shared their current levels of preparedness. In this briefing, Milliman’s Andrew Kay and Mike Claffey have consolidated the results to give an overall idea of the issues facing companies.

High-performance cloud computing enhancing actuarial modeling

August 8th, 2014 No comments

Emerging technologies in cloud computing are transforming the actuarial profession. High-performance computing tools such as Milliman’s MG-ALFA offer clients the speed and scalability needed to process advanced analyses in real time.

In a new Contingencies article entitled “Fast forward: Emerging technology and actuarial practice,” principal Pat Renzi discusses the advantages of conducting complex calculations using a cloud-based actuarial modeling solution. Here is an excerpt from the article:

The actuarial firm Milliman began offering cloud computing in its life insurance computational software in 2010, said Pat Renzi, a Milliman principal with more than 30 years’ involvement in actuarial software. The firm developed its offering in a pilot project with Phoenix Life, an insurer based in the United Kingdom. The resultant savings in labor, operational, and capital costs were compelling. Some of the results, published last year in InsuranceERM, an online media service about risk and capital investment in the insurance industry, show that by operating in the cloud:

  • The production of quarterly numbers took 97.5 percent less time and required 95 percent fewer staff hours;
  • Manual processes were reduced from 900 to 44;
  • Individual modeling and processing systems decreased from hundreds to one unified platform;
  • Opportunities to grow business expanded;
  • The firm was better prepared for Solvency II and ICAS+ (a two-phased approach by the U.K.’s Financial Services Authority that enables insurers to use internal models developed in preparation for Solvency II in meeting financial capital adequacy standards);
  • Operational risk was lowered.

Since starting with Phoenix, Milliman has expanded its cloud-based option to 22 other clients. “We have two paths that companies are taking,” Renzi said, with use of the cloud for calculations finding quicker acceptance. Three clients are in the early stages of using [Integrate], Milliman’s [complete production modeling solution] in the cloud. The others have taken the [first] step by [utilizing the cloud for compute power only]. Using the cloud has been “incredibly powerful for actuaries,” said Renzi, who believes it’s just a matter of time before cloud computing is a common tool.

Because it supports complex calculations, Renzi said, the cloud will play a strong role in the development of new products. Calculations are made in the cloud via desktop or a mobile device using the Windows 8 operating system. “If you put your application in the cloud,” Renzi said, “it is accessible from anywhere and becomes collaborative.”

There are also cost savings. It’s less expensive to rent out cloud time than to invest in mega processors to run stochastic and other complex calculations. This makes the cloud a competitive leveler between life insurers. “The cloud allows everyone to have access, and you pay for it only when you need it,” Renzi said.

Finally, the cloud is almost infinitely scalable. By renting cloud time, Renzi said, clients have gained access to as much as 50,000 [compute] cores or processors—the equivalent of 50,000 single-processor personal computers or laptops.

Milliman’s cloud-based financial solution, Integrate, provides life insurance companies a holistic modeling environment that enables actuarial departments to manage risk and maximize productivity. To learn more, click here.