An insurance company’s overall culture consists of a set of subcultures. Experts within those subcultures make decisions differently. In his Best’s Review article “Culture Compass,” Milliman’s Neil Cantle explains why insurers need to approach modern business governance with less rigidity. He also describes how understanding culture can help a company empower its experts to make local decisions in harmony with established risk appetite and corporate values. This process produces an overall risk culture essential to the company’s governance framework.
We need to recognize that there is more than one valid perspective to be heard when deciding a course of action. Cultural Theory shows that four such views are always present: pragmatists believe that the world is uncertain and unpredictable; conservators believe the world is high risk; maximizers see the world as low risk and fundamentally self-correcting; and, managers know the world is risky, but believe it can be managed.
In conducting our work we want to ensure that each of these views is considered and debated, the surprising outcome being that the result of such a discussion is not a compromise, suboptimal for all, but rather will be a solution that actually works better for all parties. Creating a culture where this type of debate is acceptable is therefore an important, and often overlooked, part of the governance framework.
It turns out that culture is actually a much more important feature of our business than we might have thought—not just a nice-to-have after all, but actually an integral part of our control framework. When the board sets the risk appetite, it is establishing the tone for how business should be done. It must be clear what the objectives are and how you feel about the uncertainties associated with their delivery. By describing the types of risks that are to be actively sought, in return for a reward, those that are to be accepted and those that are to be avoided, the board is providing a set of guiding principles that staff can use when making its daily decisions about which actions to take next. In any situation, someone can ask: “Is this a risk we should be taking, and how much of it can we take?” Testing the likely consequences of the action against the risk appetite provides a way to move forward. The question also requires them to know what is going on more widely. Assuming the company has a finite appetite for risk, the answer to the “how much” part of the question requires you to know how much appetite has already been used elsewhere. This requires a culture that supports and promotes knowledge-sharing across department boundaries.