In an earlier blogpost I wrote about setting risk appetite for insurance companies under the evolving Hong Kong ERM framework. My focus is on firms that develop their own ERM-framework.
In this blogpost, I “continue” the journey to building an ERM-framework and ponder about risk mapping. Whilst occasionally making reference to Hong Kong, most of the scribble is applicable to every insurer who wants to take its nascent ERM-framework to a next level.
I will share my thoughts about some key steps, write about challenges and, of course, how Megrow Consulting can support your ERM-journey. And most importantly, I keep advertising ERM as a strategic tool to support your business and not to paralyze it.
I like doing risk mapping! However, there is a significant risk (hahaha pun intended…) of getting lost along the journey when engaging an entire company in a comprehensive risk mapping exercise.
Plenty of competent bodies, such as COSO, describe risk mapping at great length and detail, hence I will not dwell on the methodology here. Instead, I share a number of practical aspects, pitfalls, successes and other considerations here.
When I lead or coach risk mapping work, I prefer to do it in small groups and over several iterations. Depending on the circumstances, some initial “ice breaking” might be needed. Generally speaking though, insurance practitioners LOVE to talk about risk, so there is little to worry about. That is good news! Having said that, there are a few points to bear in mind.
Firstly, we need to ensure that the involved teams cover risks across ALL major business activities. In my experience, operational risk often tends to rank highest in terms of risk “count”. Your risk officer or an experienced third party will need to moderate the mapping efforts to bring balance to the risk universe of your company. Secondly, we also need to ensure that the thinking is current and prospective, looking into the back mirror is important, but only looking backward will not get us very far. Thirdly, quantification efforts need to consistent across the entire risk catalogue, otherwise we compare the proverbial apples with oranges.
Last but not least, probably the hardest step on the mapping journey is prioritization of risks. One “must have item” is a list containing the few, all important strategic and key operational risks. Senior management and the directors will give all their TLC to that all-important set of risks. Yes, every risk is important, but depending on expected frequency and impact, it is handled at the appropriate level of the company! No CEO or board risk committee member wants to look at a risk register with 5000 entries, trust me on this one!
local and global perspective
Good risk mapping focuses on what matter most for the current and prospective market environment. Hence, a focus on Hong Kong (in our example) certainly makes sense. However, other risks, such as “Cyber” are prime examples where good risk mapping must take a bigger picture, global view. Quantification and mitigation of risks that are outside well-known “home turf” are a challenge. The good news is: there are ways and means to deal with that.
Senior management and the directors will sign off the risk map. Subsequently, the register enters its next phase. The risk officer will need to maintain it! After all, good risk management is all about mitigation of existing risks and detecting new risks (and opportunities). An important caveat, enlarging the risk register four times a year by adding new considerations isn’t best practice. Ideally, some risks should disappear from the list over time, otherwise the list will get bloated to an extend that nobody can distinguish the chaff from the wheat any longer.
Stay tuned for more blogposts about ERM in Hong Kong here @megrow.asia !