Milliman Risk Talks: Model management (Part II)

March 27th, 2015 No comments

In this two-part Milliman Risk Talks episode, Mark Stephens, Vikas Shah, and Olivia Wang from the Risk Advisory Services practice discuss model risks and offer simple, actionable insights on improving model management frameworks. Part two takes a deeper dive into the different components of model management, with an emphasis on improving the validation and documentation process.

To watch our Milliman Risk Talks series, click here.
To learn more about Milliman Risk Advisory Services, click here.

ERM: The science of what’s next

March 24th, 2015 No comments

Robert-HoytFounded in 2011, the Milliman Risk Institute provides scientific-based thought leadership on all facets of enterprise risk management (ERM). Composed of senior risk executives, actuaries, and university professors, the Milliman Risk Institute Advisory Board meets semi-annually in discussing ERM trends, research, and key topics.

In this blog series, members of the Milliman Risk Institute Advisory Board share their views on ERM research and development and how it can support business insights.

Although I serve on a couple of corporate boards, I come from the academic side, so my interest in enterprise risk management (ERM) may be somewhat different from others. What I find fascinating about the Milliman Risk Institute and its work is the opportunity it offers to hear how ERM and risk management practices are developing within the industry at large. I look for any topics within the research that can help give me an industry perspective. Now that ERM and the evolving role of risk management within organizations is actually taking place in practice, it is always fascinating to follow where the research leads us.

Having a sense for the wider landscape is valuable, and surveys can provide real insight into that. But what excites me even more are the increasing opportunities to dig into data. Much of the current research is focused heavily on data and the opportunities for learning from that data. I think that’s actually probably the next step, which is already beginning now with the Risk Institute and other similar efforts. I think a very exciting direction to proceed is in considering how we can really start to dig into all that data. As companies are increasingly challenging and evolving the role of risk management, we can learn a great deal from that data. The Risk Institute is in a key position to actually have access to that data.

Obviously, as an academic, I see that we have our own risks in higher education. There are many lessons to be learned from a lot of different industry data, but I think probably the most important effort for any company is to really press toward the edges of what might occur for the organization. In banking and insurance, that’s often talked about as stress testing or scenario testing. We’re reminded of these issues again and again, whether it’s the recent concerns about Ebola, which made such significant impacts on public health concerns and on the healthcare industry, or whether it’s the rocket that just exploded the other day from a private launch by Orbital Sciences.

We are continually reminded that, regardless of the specific economic sectors an industry occupies, there are always new and emerging issues out there that companies have to grapple with and really try to get a handle on. What are the implications of those unusual tail risks, stressed environment kinds of exposures, or losses? I think that’s an area by which many companies and organizations are still challenged.

Robert Hoyt is a member of the Milliman Risk Institute Advisory Board. He is the Department Head and Dudley L. Moore, Jr., Chair of Insurance, Risk Management and Insurance Program, at the Terry College of Business, University of Georgia. Robert is also the Department Heads of the Legal Studies Program, and the Real Estate Program at the Terry College of Business.

Milliman Risk Talks: Model management (Part I)

March 20th, 2015 No comments

In this two-part Milliman Risk Talks episode, Mark Stephens, Vikas Shah, and Olivia Wang from the Risk Advisory Services practice discuss model risks and offer simple, actionable insights on improving model management frameworks. Part one covers some challenges around managing models and recommends a few steps that companies should take when formalizing model governance and usage policies.

To watch our Milliman Risk Talks series, click here.

To learn more about Milliman Risk Advisory Services, click here.

The three facets of ERM programs

March 17th, 2015 No comments

Christina-KiteFounded in 2011, the Milliman Risk Institute provides scientific-based thought leadership on all facets of enterprise risk management (ERM). Composed of senior risk executives, actuaries, and university professors, the Milliman Risk Institute Advisory Board meets semi-annually in discussing ERM trends, research, and key topics.

In this blog series, members of the Milliman Risk Institute Advisory Board share their views on ERM research and development and how it can support business insights.

Enterprise risk management (ERM) is still a relatively new field, which really started to come into its own only after the global financial crisis in 2008 and 2009. But three basic facets of ERM have remained critical constants since even before that. The first lies in integrating ERM with internal audit business resiliency. How do we really look at the interdependence across those particular functions within an organization? If ERM is pigeonholed into a compliance function, or a protection function, it’s all too easy to lose track of whether enough risk has been taken on—whether an entity actually creates more risk for itself by being too risk-averse. ERM more and more needs to be treated as a distinct discipline.

The second is found in the wider culture itself, how it is changing to become more aware of risk. Evidence of this shift could be seen in Sarbanes-Oxley and was there again in Dodd-Frank. This trend raises questions about what a risk culture looks like in the first place. If you step back from all this regulatory climate that we’ve now imposed, if you look at the financial crisis and the impact it’s had, how has the culture changed? It’s obviously not easy to quantify but it’s an interesting question to take on. How do you know when your ERM program is working? Is it that you have good reporting and compliance? Is it that you have fewer surprises? And how do you measure that impact, quantify it?

The third facet involves big data and predictive analytics. We now have information resources that we’ve never had before, we can slice and dice it a hundred new ways and the information is constantly streaming in to us in real time. Is it really helping us get better at managing risk, or is it diluting our ability to focus and really understand root causes? Can it really be used to improve an overall operation — and how can you know whether or not that is actually happening?

Goldman Sachs, for example, is the best I’ve ever seen at using big data and predictive analytics, whether it’s on the trading floor or in other areas—absorbing the mountains of data, understanding the implications, and using that as the basis for action, with tremendously impressive results. Cisco is another, automated from day one because it didn’t have the legacy. Even the Federal Reserve, with its more traditional, old school approach to information, has begun to consider and work with macro impacts, particularly in areas where it has access to information others don’t, such as about companies and trends in other countries.

The amount of information available now is incredible. Every meeting, I have an opportunity to know a lot more about who I am meeting with. I can start targeting people. It doesn’t have to be marketing groups, it can be personal. I’m going to a particular social gathering, I’m going to a particular event. I can, if I choose to, be much better at working the room than I ever could have before, because people are freely giving up unbelievable amounts of information on social media now. The implications for data mining and profiling are almost staggering.

Christina Kite is a member of the Milliman Risk Institute Advisory Board. She is Senior Vice President of Business Services and Director of Finance at BB&T.

Integrating ERM into a corporate culture

March 11th, 2015 No comments

David-CooperFounded in 2011, the Milliman Risk Institute provides scientific-based thought leadership on all facets of enterprise risk management (ERM). Composed of senior risk executives, actuaries, and university professors, the Milliman Risk Institute Advisory Board meets semi-annually in discussing ERM trends, research, and key topics.

In this blog series, members of the Milliman Risk Institute Advisory Board share their views on ERM research and development and how it can support business insights.

When it comes to enterprise risk management (ERM), a company can have all of the people, processes, resources, and technology in place. But if the company doesn’t have the culture to support ERM—really, the leadership that drives it—then it just might fail, not only in meeting risk management goals, but in meeting any of its goals. The easiest way is to start ERM when the company starts, but of course it’s too late for that now for many companies.

So how can they be brought together? It’s not just top-down solutions we need—it’s also bottom-up. A culture of empowerment enables people at all levels of the company, especially those at the lowest levels, who are in positions to see and know, to effectively say, “Hey, wait a minute. Something is not right here.” General Motors (GM) provides a classic example. At one point it had to recall 29 million cars for faulty ignition switches. But we know now that that problem had actually been a known issue for over a decade. The real problem, the corporate culture problem, was that the technicians at GM—who we can certainly assume are talented and capable people—never felt empowered to speak up about it.

There’s another specific aspect of corporate culture that needs to be addressed in this, one that is still looked at closely only in academic studies. That is the issue of bias. ERM decisions still come down to judgment, and whenever we talk about judgment we also have to talk about bias. And we still don’t see many businesses really getting down into the weeds on how bias affects decision making. It’s a painful thing to confront in many cases because really it involves confronting our own weaknesses, constantly questioning things that we accept as certainties. Again, the complexities involved can be enormous. In the case of GM it’s not as simple as an authority bias, an assumption on the part of the technicians that their superiors had already noted and dealt with the problem. Nor is it purely conformity bias either—the idea that no one else is saying anything about a problem so I won’t either.

When a company starts to look at things in terms of risk, everything starts to look risky. That tends to shut people down. It’s the same way with bias. Companies have to be careful how they approach it. When you start to look at the issues closely it can become overwhelming and it can also shut people down, in terms of making decisions. At that point a company becomes truly risk-averse, which can spiral into its own self-reinforcing problems. Integrating ERM principles into a corporate culture thus has to be approached carefully and deliberately, with a willingness to try things and move on, using iterative strategies. A lot of the biases and risks we don’t necessarily see sitting there in our organizations. That’s why it’s so important to open up lines of communication all across it.

David Cooper is a member of the Milliman Risk Institute Advisory Board. David is a former Navy SEAL and President of the Karakoram Group.

Adult diaper sales shine light on longevity

March 10th, 2015 No comments

According to consumer data in Japan, it appears more adults are girded in diapers than babies. This statistic is analogous of the country’s aging population. Increased life expectancy is putting a financial strain on individuals. There is also evidence that increased longevity can have an economic effect on a country’s finances. In a recent Best’s Review (subscription required) article, Milliman consultant Stephen Conwill talks about the role the life insurance industry can perform to help governments cover the costs of those living longer.

Here is an excerpt:

Living longer has massive financial implications, both for individuals and governments…

Stephen Conwill, chief executive officer of Japan Milliman, said the insurance sector can pick up where governments leave off.

“Governments are usually successful when they provide something very simple, the basic needs, and then let the insurance sectors provide either more complex risks or fill in the gaps the government can’t adequately provide,” he said. “That’s certainly been the philosophy in Japan with respect to both health care and pensions. It’s worked very well to date, but the government plans are under extreme pressure for cost cutting, figuring out how to fund it going forward.

“So funding is really the issue and I think it’s really on the funding side that the insurance and private sector can hopefully get in and encourage people to do a little more for themselves, and can encourage companies to work together and provide solutions.”

Milliman Risk Talks: Monitoring and updating risk data

March 4th, 2015 No comments

Having clean and timely risk data is an essential element of successful enterprise risk management (ERM) programs. In this episode of Milliman Risk Talks, Vikas Shah and Olivia Wang from the Risk Advisory Services discuss the process of monitoring and updating risk data, as well as the technologies that companies can use to support this effort and control against security concerns.

To watch our Milliman Risk Talks series, click here.

To learn more about Milliman Risk Advisory Services, click here.

Milliman infographic: Risk evolution

March 3rd, 2015 No comments

The infographic below illustrates how a risk event can develop over time and how enterprise risk management (ERM) can help prevent an organizational breakdown.

Complexity_Infographic_finalx600

For more perspective on how ERM can map risk and uncertainty within a business management process to avert systemic failures, watch this video.

Milliman infographic: Building a better ERM framework

February 24th, 2015 No comments

Recently, the Milliman Risk Institute partnered with Oxford Economics to survey 125 North American risk executives on the current state of their enterprise risk management (ERM) programs. Insights from the survey report include two differentiators for successful ERM programs and several action items to boost the effectiveness of ERM efforts.

The following infographic captured these highlights from the survey report:

ERM_final

To access the full survey report, click here.

Establishing ORSA processes with Solvency II on the horizon

February 19th, 2015 No comments

Insurers are finalizing Own Risk and Solvency Assessment (ORSA) trials as they prepare for Solvency II to take effect in January 2016. Assessing and documenting the uncertainties that affect business goals can help firms maintain risk profiles that align with their risk appetites. Milliman consultant Neil Cantle’s article entitled “The final countdown” provides insurers perspective on what they need to consider when running an ORSA exercise.

Here is an excerpt:

The focus on risks that produce financial uncertainty, and specifically those which might be absorbed with capital, has arguably led to a rather indirect way of thinking about risk in insurance. Most firms equate ‘risk’ with the capital needed to absorb it and often avoid the issue of understanding the actual risk itself, which can have consequences beyond immediate financial losses. This has led to wide-spread use of statistical approaches based on loss data and expert estimates which, by design, do not provide any rigorous linkage to other (non-capital) outcomes or directly back to risk management efforts. Scenario-based approaches are slightly more helpful but arguably leave firms open to the criticism that they have missed important scenarios, so the process for choosing them needs to be pretty robust. Developments in causal modelling have enabled firms to tackle this problem and show how the underlying dynamics of risks can simultaneously lead to a range of outcomes.

The regulator has expressed some concern that the types of scenarios and stresses being considered are too focused on regulatory capital (rather than the amount of capital you think you need), concentrated too much on the risks covered by the SCR, and have been rather too simple. Scenario and stress testing methodologies have advanced considerably over the past few years, and a key theme is the need to consider multivariate conditions (as real life tends to combine events).

In most cases, the shortcoming in the methodology is in developing the scenarios in the first place – the models are quite capable of producing the results once you know what the scenario is. The draft guidance is clear that the assessment of risk includes deciding the extent to which non-capital mitigation techniques are used and consideration of the effectiveness of the system of governance in different circumstances. While it is useful to have capital model outputs help you decide whether a scenario is extreme or not, take care not to create a circular argument centered on the model – it is better to decide the right scenarios and then explore their dynamics including, but not limited to, capital consequences.

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