The COSO ERM Update – Megrow Continues the Dissection

The COSO ERM Update – So What?

The dust on COSO’s updated ERM framework is slowly settling. It is time to dig a little deeper and ponder about the actual impact of the update. Part one of my scribbling is here and part two is here.

for the non-converted

The executive summary of the update release is a hefty 16 pages long; some stakeholders have released YouTube videos to explain the updates, some are publishing podcasts and others release valuable comments on their websites. All these sources offer great content and explanation how risk management, strategy culture and execution fit together.

I have been asking myself: if I were the CEO of a company and (for what ever reason) unconvinced of the comprehensive benefits of ERM, would this update make me change my mind?

Probably not.

Why?

Because the link to measurable performance improvement is not that obvious. Or in more colloquial terms: “where is the beef”? I know this is a hard call, but after all business is about making investments in the aspiration of generating returns.

where are the $$?

It would be great if tangible, real-life examples show how the updated framework is making a quantifiable difference to companies. Ideally, the impact needs to be as closely related to revenue generation and profit of the core business. Invoking the argument of “reduced compliance” cost is tangible, but this is likely NOT what a CEO is looking for. A good argument would be a showcase in which ERM led to a significant change in strategy, which in turn positively impacted sales and/or profits.

Hopefully, over time the pundits will share case studies with a wider group of stakeholders. And until then, let’s keep up the good work, focus on the business opportunities when doing ERM work and stay tuned for more!

PS: this is a really comprehensive drawing…
summary
control freak or risk taker

the pic is posted under creative common’s license



The COSO ERM Update – Megrow Starts the Dissection

The COSO ERM Update – So What?

COSO, together with a number of partners, published the much anticipated ERM-framework update a few months back. I blogged about it the moment it was hot off the press.

The dust has settled, it’s time to dig a little deeper and ponder about the actual impact of the update. The executive summary of the press release already spans 16 pages, giving us an indication about the complexity of the task the authors have tried to tackle.

I decided to look at the new framework from two angles. First: what does it mean to the “converted”, i.e. the ERM practitioners who are familiar with the matter and second, how does an ERM-skeptic (yes, they exist in large numbers… ) look at the new framework and more importantly would it convince him or her to become an ERM-believer?

for the converted

For the “converted” it seems to makes sense. The world has moved on, risks have become more complex, Cyber, IoT and other hot topics were not on the agenda 14 years ago when the original framework was published.

Furthermore, linking ERM to strategy and ultimately to performance also is the right thing to do. After all, elaborately conceived risk heat maps that end up in drawers don’t contribute much to a company’s performance. Boards have become bored with just looking at risk maps, showing numbers in red, amber and green.

And lastly, to counter the ever-increasing complexity of risk with a set of principles is probably the only way to go about it. It is impossible to define universal, detailed standards for today’s and tomorrow’s rapidly evolving risk landscape. Taking the “principles” route is an easy way around being tangible – this criticism of the new framework is heard often.

for the non-converted

stay tuned, update coming soon.



 

Natural hazards cause ‘un-natural’ disasters that man made!

Dr. Dennis Bessant, senior advisor to Megrow, has written a very interesting article about risk management. Asia Insurance Review  published the articles during the 14th Singapore International Reinsurance Conference.

 

page 1

page 2

Access the full article in pdf-format here.

And before you ask: yes, we have the publisher’s OK to go ahead with this blogpost.



 

Happy Birthday – Megrow Enters the Third Year of Operation

Megrow Enters the Third Year of Operation

Thanks to all customers and business partners, the past year has been a  great journey! Some existing clients decided to continue the work with Megrow and some new customers engaged my services. This is good testimony to my value proposition.  I continue to focus on “outcomes matter” and the made-to-measure business approach. Ultimately, every client is different and so is my work with and for the customer.

We are megrow

Megrow is transforming from an “I” into a “we”: Dennis Bessant is senior advisor to Megrow since Q3 2017. He brings extensive experience in the single risk field and decades of leadership track record with him. His knowledge will enhance our value proposition and ultimately work to the benefit of our clients. Read more about Dennis.

Social Media

Find us on Twitter, Google+ and LinkedIn



 

ERM and THE NEW NORMAL

another new normal?

“The New Normal” is a popular theme in the insurance industry. What does it actually mean? And how do ERM and the New Normal go together?

The word “new” implies that matters have changed – so far so good. What about the term “normal”? One meaning of the word “normal” is “as expected”. Here it gets difficult when e.g. looking at data that indicates an ever-increasing frequency of hurricane landfall (cf ref below). In other words, the “new normal” is probably closer to the “new abnormal”.

I therefore coined the phrase “the ever-increasing volatility” to describe the challenge and opportunity of the re-/insurance industry.

How can businesses deal with increasing volatility? Portfolio planning and steering is one approach; in layperson’s terms it’s all about “take more different bites and take smaller bites”. A second solution is to harvest from good Enterprise Risk Management practice and a third approach leverages partnership between reinsurers and insurers that go beyond the provision of capacity.

Good Enterprise Risk Management creates a number of tangible benefits. Firstly, companies that practice good ERM are more robust to withstand shocks. Secondly, companies with strong ERM are more profitable than their peers with average or poor ERM-practice. And last but not least, companies with good ERM demand a higher valuation. Most recent data point at a 20% uplift in company valuation through good ERM!

Keen to know more about the benefits of ERM? Read my blog posts here.

AM Best was kind enough to interview me during the 14th Singapore Reinsurance Conference (“SIRC“) early November 2017.

the interview

Watch the 3+ minutes interview HERE. Thanks to AM Best for having me.


Diana Dorahy and Reto Brosi @ SIRC
with Diana Dorahy of AM Best

 

 

 

 


  • http://www.air-worldwide.com/Blog/How-Often-Are-There-2-U-S–Major-Hurricanes-in-2-Weeks-/


 

ERM and CREDIT RATING

ERM links to Credit Rating

Have you ever wondered how ERM links to Credit Rating? One is about financial stability (or debt repayment capabilities to be precise) and the other one deals with potential upside and downside of the business. So where is the link?

ERM as a key component

AM Best’s rating methodology outlines the connection very well . The picture below depicts the importance of good ERM as one of the rating adjustment factors. For example, if your ERM efforts are very good, the rating can increase by one notch  (the +1 in the ERM box). However, if your ERM efforts falls short of expectation, there is a potential of 4 notches downward adjustment (the “-4” in the box).

At first glance, it appears a daunting task to embed ERM into a rating process. The crux of the matter is to set-up a robust process and then use it, learn from the outcomes and amend as you go along. I have described the steps in setting up a ERM framework in several blog posts. Credit rating agencies look for the robustness of the ERM-approach. Furthermore, they seek evidence  that ERM is an integral part of strategy setting.

As an experienced ERM-practicioner and business executive who has dealt with rating agencies for several years, I’m well positioned to support you in making the ERM-Credit Rating link effective.

Keen to know more? Contact me via the social media buttons or directly reto.brosi@megrow.asia

btw: Picture is taken from publicly available material. 



 

COSO ERM Framework Update

COSO ERM Framework

The COSO ERM Framework is one of the best established and most widely used ERM frameworks. Whilst becoming the quasi-standard after its publication in 2004, the framework started getting a little long in the tooth. COSO and PWC just published the “COSO ERM Framework Update”, 2017 version with some fanfare.

COSO ERM 2017 update
Updated COSO ERM Framework
Why update?

Since the original publication in 2004, the risk landscape has evolved dramatically. Back then, big data and cyber were not yet buzz words and the global financial crisis (which wasn’t “global” after all….) was far away. Secondly, practitioners realised that the true value of ERM becomes evident only if companies link ERM to their strategic considerations. Finally, the notion that risk also means opportunity, i.e. ERM is about capturing upside and mitigating downside, gained more traction.

SO WHAT?

The executive summary released by COSO is a hefty 16 pages long. At first glance, this violates every possible rule of “how to write an executive summary”. Maybe it is a symptom of how complex the overall risk and opportunity landscape has become?

I will publish a series of blog posts going a little deeper into the changes that the new framework brought. Stay tuned for more blog posts on Megrow Consulting’s website.

note:

Copyright of the picture is with COSO.



 

Hong Kong – ERM on the Move

RBC on the horizon

In the run-up to the introduction of the RBC regime, Hong Kong’s recently established independent insurance regulator (“IA”), has issued this circular. Specifically, the regulator encourages all authorized insurers to participate in a first, quantitative impact study (“QIS 1”). The IA has given a challenging deadline for submission: the report is due by 01 December 2017.

ERM on the Move

Amongst many other things, HK-based insurers need to provide their “top 10” operational risk events by loss amount.

If they have these data at a simple push of a button, that’s great, but what if they don’t? Enterprise Risk Management enters the stage here. Risk reporting is a key feature of any good ERM framework. Furthermore, risk reporting will become a standard feature under Hong Kong’s evolving insurance regulation. Hence, it is the right time to set-up a risk register now and profit from easy reporting in the future.

In addition, a good risk register is as good as “half way there” to set up an ERM-framework. Do you know that companies with good ERM practice are valued approximately 20% higher compared to peers with sub-standard ERM? That sounds like a good investment to me.

SO WHATs NEXT?

Setting-up a risk register can be a daunting task. How broad and detailed should a good risk register be? What is the right balance between high level views and the necessary attention to details? How do I balance management views with the risk perceptions of the board of directors? And last, but not least: how do rating agencies and regulators look at risk?

My blog posts describe the journey of risk mapping.

My Contribution

How do you get ERM on the Move? Wouldn’t it be nice to have a pre-populated risk list? Or some industry benchmarks to start with? No need to reinvent the wheel, right?

That’s exactly where I, as an experienced industry and risk professional, come in to make your journey to a good risk list, efficient, smooth and effective. I’d be happy to tell you more how I will accelerate your ERM-journey. Contact me at reto.brosi@megrow.asia or via any of the social media buttons at the bottom of the page.



 

The Connection between Compliance and ERM

Same Same or Different?

A recent article in the South China Morning Post caught my interest. A company apparently failed to comply with certain disclosure requirements. This made me think about the perennial question what is the relation between Compliance and ERM (“Enterprise Risk Management”)?

Wikipedia defines compliance as conforming with stated requirements. These requirements can be external, such as codes and legislation, or internal, such as guidelines and rules.

I take the view that good ERM ensures, amongst other things, that all the necessary internal rules are in place. Furthermore, the rules must be robust and  management looks at “risk” from a strategic perspective. The focus is on “necessary”, i.e. it matters to have the appropriate quantity of rules. A flood of rules  is not a good idea, and having too few rules isn’t a smart choice, either.

Compliance is one aspect of risk management, since it focuses on avoiding breaches and trespassing of rules. So how does ERM come into play?

Test it!

A thorough ERM-process will ensure that the major risks of a company are appropriately defined and mitigated. If non-compliance with certain rules is defined as a significant risk of a company, then a sound ERM framework will check the corresponding set of rules at great length and detail. Often, the risk management team will use discrete scenario analysis to estimate the impact. For example, non-compliance with a certain external rule/code might result in a fine. ERM will quantify a range of possible fines and ensure that mitigation measures are in place. Risk Management will also need to stress test the mitigation measures to ensure that they work as desired.

So?

Let’s abstract the said case a little and run it through an ERM process. During the risk identification process, the compliance function would have come up with a risk category called something like “failure to comply with external rules”. If the compliance function didn’t come up with this risk category then the Risk team should guide the colleagues accordingly. In a second step, this “failure to comply” needs to be quantified. How to quantify such a scenario? Since no probabilistic models might be available for “fines”, it may suffice to define a few discrete scenarios and put a monetary estimate to each one. Subsequently, the compliance team comes up with mitigating factors, such as defined escalation and notification procedures. Then the ERM-function will stress test these mitigation efforts to ensure that they actually work in practise.

Megrow’s Service

An experienced outside party, like Megrow, will contribute very significantly in making the ERM-process cost efficient and effective. Keen to know more? Contact me under reto.brosi@megrow.asia or via any of the social media links at the bottom of the page



 

Keep It Simple

I am a fan of simple smart communication. I’ve expressed my admiration for Lucy Kellaway from the financial times in a previous blog.

Another great source of inspiration is the blog written by two communication professionals from Switzerland. They started out a while ago. Now they have taken it a step further – see what they in their most recent publication has to say.

Always remember: keep it simple!