Tag Archives: enterprise risk management

To optimise financial decision-making, human-and-machine iterative process proves most successful

Milliman has announced that an innovative new study examining multi-criteria decision-making using an iterative process of advanced computing and human input has shown superior results in risk management when compared with machine algorithms or humans alone.

Using an illustrative example from the life insurance industry, the study looked at how optimisation techniques can be used to develop insights into drivers of economic capital within an internal model framework, and how to then use these insights for risk management decisions. The findings illustrate that advanced computing, visualisation, and complex systems-mining techniques that include expert input can deliver superior optimisation results when faced with multiple objectives and multiple constraints, which machine algorithms alone find challenging to resolve.

While not obvious at the outset, combining human input with advanced computer modeling allows domain experts to analyse results and elicit insights into features that subsequent iterations of a model should contain, thereby refining the process.

Milliman’s study employed the DACORD platform from DRTS, Ltd. to support its system-mining efforts. ‘Future states are unknown, involve human affairs and are therefore complex,’ says Jeff Allan, CEO of DRTS, Ltd. ‘Augmenting experts with the appropriate tools and processes can aid the reasoning and evaluation of a range of solutions.’

Adds Milliman’s Corey Grigg, ‘Looking toward the future, this sort of optimisation technique can extend to big data, simulations, and enhanced visualisation, ensuring that even as the complexity of our data and problems increases, experts can continue to add value.’

The results suggest a number of practical applications for enterprise risk management (ERM) in the insurance industry, including finding patterns in key risks driving capital losses and understanding diversification in order to enable quick judgements about the similarities and differences in the risk profiles of different portfolio elements.

Milliman’s Optimisation study was conducted in conjunction with Dr. Lucy Allan of University of Sheffield. To read the entire study, click here.

Board oversight of emerging and long-distance risks—and how ERM can help

holly-gregoryFounded 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 semiannually to discuss ERM trends, research, and key topics.

Risk-taking lies at the heart of all entrepreneurial activity, and monitoring management’s efforts to identify, monitor, and manage risk is a key responsibility of the board of directors that is closely linked to the board’s role in overseeing corporate strategy and performance. The board has a vital role to play in assisting management to:

• Focus on the risks associated with corporate strategies and the ever-changing business and geopolitical environment,
• Determine the company’s risk appetite
• Devote appropriate resources to risk identification and management activities.

Prudent risk-taking requires reliable information about the trade-offs in risk and reward and a fundamental understanding of risks associated with the drivers of corporate performance. Management is responsible for capturing this information with the assistance of the enterprise risk management (ERM) system it puts in place to help identify risks and their possible impacts.

Identifying and understanding both emerging and long-term risks can be difficult, and boards should press management to continually scan the environment and think about both the immediate future and the longer-term outlook. The challenge is to escape overreliance on data that by its nature is focused on the past.

The good news is that both boards and managements have become more savvy over recent years with respect to risk oversight, particularly since the global financial crisis. Many boards are currently focused on geopolitical risks relating to Brexit and the recent U.S. presidential election, and are grappling with what uncertainties may lie ahead and what the company can do to prepare. Boards are also beginning to pay more attention to risks relating to the Internet of Things—in addition to cybersecurity, which has been top of mind for many companies for some time now. Some boards have also added directors with specialized competencies to help navigate risks of particular concern to individual companies. For example, technology and/or cybersecurity expertise are on the “wish list” of new director backgrounds for many companies (per the Spencer Stuart Board Index 2016).

ERM professionals can help boards “look around corners” with respect to emerging risks and provide support to boards that are determining what to do next. They can also help boards understand the time horizons involved with respect to risks such as those relating to climate change and water rights that require longer-term thinking, and they can assist the boards in prioritizing discussions on longer-term issues. Boards should ensure that there is sufficient time on the agenda to discuss emerging and long-distance risks, in addition to more typical risks, and pay attention even when something might not seem mission-critical. The world is constantly changing at an ever-increasing pace and risk managers help boards stay in front.

Holly Gregory is a member of the Milliman Risk Institute Advisory Board. She is co-leader of Sidley Austin LLP’s Corporate Governance and Executive Compensation practice. As part of this blog series, we asked Holly to share her views on trending topics in ERM.

Top 15 U.S. articles and reports for 2016

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In 2016, Milliman consultants wrote articles and worked on studies covering a range of practices and areas. Healthcare was a hot topic again this year, and topics included value-based payments, risk adjustment, and the Medicaid managed care rule. Other articles—about student loan debt and daily fantasy sports—were also popular. Here’s a preview of the top 15 U.S. articles and reports for the year.

15. Financial analysis of ACA health plan issuers, By Daniel J. Perlman and David M. Liner

14. Are you ready for the new world of value-based reimbursement?, By Marla Pantano

13. Encounter data standards: Implications for state Medicaid agencies and managed care entities from final Medicaid managed care rule, By Jeremy Cunningham, Maureen Tressel Lewis, and Paul R. Houchens

12. The elusive nature of private exchanges, By Mike Gaal

11. Money market update for 2016: The rule that you should be aware of, By Jeffrey T. Marzinsky

For a summary and link to all of the articles, click here.

Top 15 global articles and reports for 2016

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Milliman’s most viewed articles worldwide in 2016 covered topics including pensions, student loans, value-based payments—and Pokemon Go. There were also pieces on Solvency II, encounter data standards, and managed care regulations. Here is a preview of the top 15 global articles and reports for the year.

15. Financial analysis of ACA health plan issuers, By Daniel J. Perlman and David M. Liner

14. Telemedicine and the long-tail problem in healthcare, By Jeremy Kush and Susan Philip

13. Public Pension Funding Study, By Rebecca A. Sielman

12. Life insurance risks: Observations on Solvency II and the modeling of capital needs, By Stephen H. Conwill

11. Encounter data standards: Implications for state Medicaid agencies and managed care entities from final Medicaid managed care rule, By Jeremy Cunningham, Maureen Tressel Lewis, and Paul R. Houchens

For a summary and link to all of the articles, click here.

Does ERM add value?

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 semiannually to discuss ERM trends, research, and key topics.

In this ongoing 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.

Over time I have focused on assessing whether or not there’s a value proposition to enterprise risk management (ERM), examining it at a corporate level. My research as well as the work of others documents that there are ERM efforts that do create value. However, how can companies use ERM to create value for their organization?

I think companies should use ERM to look at opportunities that positively add value to the company. In terms of adding such value, some trends have shown intriguing potential. For example, the notion of identifying and steering away from compensation that directly incentivizes employees or management to undertake behaviors that ultimately are value-destroying—the kinds of perverse incentives we saw leading up to the global financial crisis of 2008 in the major banks.

At present, the breakdown in these efforts appears to be regarding a willingness to acknowledge that a harmful environment was created and existed in the first place. There are some very interesting questions that need to be addressed around why that is, but it’s clear, going back to the global financial crisis, that many of the issues came down to people undertaking the behaviors they were incentivized to take. If you compensate them for taking on mortgages and all you care about is the number of mortgages and not the quality of them, then they’re going to put as many mortgages on the books as they possibly can.

For most organizations, my sense is they’re very open to moving ERM from something mandatory for regulatory compliance and are more taking a view that ERM can actually help them gain competitive advantages. Companies need to be alert to identifying opportunities to integrate ERM more tightly with strategic missions. The changes may be process-related or they may address issues of compensation, incentives, and corporate culture. ERM is more and more moving away from playing a defensive role, and increasingly becoming a proactive element with the potential to add value.

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.

Levels of ERM: A sports analogy

wayne-winstonFounded 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 semiannually to discuss 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 insight.

The requirements of enterprise risk management (ERM) can vary widely by industry. Different companies within an industry may have different levels of ERM development, but stepping back, it’s clear that a lot of ERM development depends on the specific industry, and it’s key to stay competitive. We know the pharmaceutical industry is well advanced in ERM. Those companies make a practice of hiring analytics experts who can run projections continually. Eli Lilly and Company has been doing it for 30 years, and most pharmaceutical companies are not far behind, considering it an essential resource.

At that high level, you see oil companies, for example, making sophisticated efforts in simulation and predictive analytics. But modeling future oil prices is very difficult. Likely few people thought, just two or three years ago, that prices would fall to $40 a barrel when $100 seemed to be the stabilizing point. At the lowest levels of ERM competence, in some of the service industries, individual companies may hire consultants to provide periodic analyses, but they probably don’t have the internal resources to do it themselves.

Every type of industry deals with different problems identifying the best inputs for simulations. That includes sports, too, where baseball is now a widely agreed gold standard in predictive analytics. Thanks in part to Theo Epstein’s success using these powerful tools first with the Boston Red Sox and then, more recently, with the Chicago Cubs, every major league baseball team (and many in the levels below that) now invests in analytics. Five years ago, that wasn’t true of even a majority of teams. Basketball, similarly, has also begun to look more seriously at the uses of predictive analytics.

But football is another issue, partly because of the complexity of the data required and partly because not all of that data is publicly available. A critically important part of simulation and analytics—always—is identifying the data necessary to solve the problem (and excluding the data that is not useful). Say that we wanted to determine the value of an individual left tackle. We need to know how good other left tackles are and have been and also how well each player and team performs overall—on each play. Conventional wisdom, under the influence of the book The Blind Side, argues that the left tackle is the second-most valuable position in football after the quarterback. Is that true? Honestly, nobody really knows the answer, but left tackles are paid that way.

Companies can gain an advantage over competitors by monitoring the industry-wide level of ERM and using it as a benchmark as they commit to matching that level or raising it, with investments in new analytics positions moving forward.

Wayne Winston, PhD, is a Professor at the Bauer College of Business at the University of Houston and Professor Emeritus of Decision Sciences at the Kelley School of Business at Indiana University. Wayne is a member of the Milliman Risk Institute advisory board. As part of this blog series, we asked Wayne to share his views on trending topics in ERM.