Moving ahead with ERM, Part 5: Best practices among Trendsetters

September 25th, 2014 No comments

Stephens-Mark (2)The effect of a fuller adoption of enterprise risk management (ERM) on value creation has been borne out in several prominent studies in recent years. A 2011 study by Robert E. Hoyt and Andre P. Liebenberg of 275 insurance companies found that those implementing ERM programs over an 11-year period enjoyed a 20% premium in firm value over those that didn’t. Standard & Poor’s five-year-old “ERM opinion” rating program for North American and Bermudian insurance companies likewise has reported a stronger positive change in equity prices and lower stock volatility in most years for insurers that it rates as being “excellent” or “strong” ERM programs.

The recent survey conducted by the Milliman Risk Institute of 125 North American risk executives on the state of their companies’ ERM efforts showed that Trendsetters are far more willing to get value out of ERM in the following ways (see part 3 for information about the Beginners, Transitionals, and Trendsetters levels):

Enhanced board oversight: 81% of Trendsetters create value in this area versus 57%, collectively, of Beginners and Transitionals. This ensures that the board is not only more closely attuned to the company’s risk profile, but also better prepared to act on suggested improvements to the ERM framework and processes.
Higher-quality strategic planning: 75% of Trendsetters versus 50% of Beginners and Transitionals. An efficient economic capital model makes for better strategic planning, improving the company’s ability to evaluate strategic initiatives such as mergers and acquisitions.
Better capital efficiency: 81% of Trendsetters versus 55% of Beginners and Transitionals. Better risk-based decisions lead to improved capital efficiency, yielding better return on assets.
Improved performance management: 100% of Trendsetters versus 53% of Beginners and Transitionals. A clearly defined risk appetite statement sharpens performance management, both at the company and business-unit levels.
Stronger brand reputation: 63% of Trendsetters versus 48% of Beginners and Transitionals. A robust ERM system is more likely to prevent negative incidents that could damage a company in the eyes of investors and other stakeholders. Further, it enhances the company’s reputation for grasping the risks and rewards in new opportunities.

In Part 6 of this blog series, we will look at an illustrative case study of a Trendsetter company.

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

For more information, please contact Mark Stephens.

Policy language affects pollution liability claims

September 23rd, 2014 No comments

The terms and conditions of pollution liability policies have often created disputes between insureds and insurers, resulting in litigation. In a recent Best’s Review article authored by Milliman’s Christine Fleming, she explores three oft-disputed areas of these policies: “the definition of a ‘claim;’ the timely notice requirement; and the ‘known loss’ condition.”

The following excerpt offers perspective concerning the meaning of a claim:

Most pollution liability policies are claims-made, meaning that the claim has to be made against the insured during the policy period. Although this requirement seems clear, the question of what constitutes a claim has been the basis of coverage disputes.

For example, in Hatco Corp. v. W.R. Grace & Co., the insured was a prior owner of a contaminated site. The insured received a letter from the current owner of the site that included an administrative order directed to the current owner, and a warning that the current owner would hold the prior owner liable for any costs it incurred in connection with the administrative order.

The insured had a pollution liability policy in which “claim” was defined as a “demand for money.” The court held that the letter was not a demand for money, but rather a threat. Thus, the court reasoned that it was notification of a potential future claim and not a claim as defined under the policy.

In another case, Alan Corporation v. International Surplus Lines Insurance Co., the insured purchased a pollution liability policy. The government contacted a third party, not the insured, during the policy period regarding contamination at the insured’s site. That third party spoke to the insured about the contamination, also during the policy period. After expiration of the policy period, the government initiated action against the insured related to the site.

The insurer’s position was that no claim had been made against the insured during the policy period. The insured argued that the communication with the other party discussing the contamination constituted a claim because it set off a chain of events that eventually led to the government action. The court held for the insurer, and rejected the insured’s position that a claim had been made during the policy period.

The Takeaway: Don’t assume that a “claims made” policy resolves the issues raised by occurrence policies, or that the report date will now be clear. Questions will continue to be raised and litigation will continue to revolve around when a claim was brought against the insured and, indeed, even what it means to have a claim.

Google+ Hangout: Discover value through ERM

September 19th, 2014 No comments

The Milliman Risk Institute has collaborated with Oxford Economics to publish an enterprise risk management survey documenting the journey many companies face on the path to more mature and valuable ERM. In this Milliman Hangout, the Institute’s Executive Director Mark Stephens discusses how the survey established three ERM proficiency levels and the major takeaways that emerged from the report.

To download the survey, click here.

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.