9/21/2017. ERM = integrated picture of all key risks ENTERPRISE RISK MANAGEMENT. ERM process cycle

Transcription

1 Integrating ERM into Strategic Planning and Other Decision Making ACHS Annual Meeting Hartford, November 14, 2017 Sim Segal, FSA, CERA President, SimErgy Consulting Academic Director of ERM Programs, Columbia University Author, Corporate Value of Enterprise Management ERM = integrated picture of all key risks ENTERPRISE RISK MANAGEMENT Market Credit Pricing Asset-Liability Technology Human Resources Disaster Strategy Competitor Regulatory Etc. 2 ERM process cycle Identification Messaging Quantification Decision- Making 3 1

2 6 Enterprise Value Traditional approach fails to integrate ERM into decision making Do metrics support decision-making? Do ERM models work? Is there buy-in from business units? Traditional Approach Not for operational or strategic risks Only risk, not return Complex Unreliable quality Slow response time Lack of transparency Corporate-driven, not enough business segment input Compliance-oriented 4 Value-Based ERM Framework All s Strategy Qualitative Assessment Severity Scenario Development Key Scenarios Mostly Objective Mgmt Tactics Correlation Value Impact Enterprise Exposure Appetite ERM Committee X FINANCIAL Market Credit STRATEGIC Strategy Execution OPERATIONAL HR Key s Mostly Subjective 1+ events / sim 1 event / sim ERM Model Baseline Value ΔValue Pain Point ΔValue -10% 15% ΔValue -20% 3% Individual Exposures Process Identification Quantification Decision-Making Quantifying individual risk exposures Modified Case Study Individual Quantification Company Value Impact IT 1 Legislation Loss of Critical EEs M&A Execution International 1 Loss of Key Supplier Loss of Key Distributor IT 2 International 2 Union Negotiations Competitor 1 Consumer Relations 0.0% -5.0% -10.0% -15.0% -20.0% -25.0% 6 2

3 ILLUSTRATIVE EXAMPLE Enterprise risk exposure pain points -10% Company Value Pain Point ΔValue -10% 15% ΔValue -20% 3% -20% Company Value 7 Value-based approach supports integration of ERM into decision making Do metrics support decision-making? Do ERM models work? Is there buy-in from business units? Traditional ERM Not for operational or strategic risks Only risk, not return Complex Unreliable quality Slow response time Lack of transparency Corporate-driven, not enough business segment input Compliance-oriented Value-Based ERM Metrics for all risks ΔValue = rigorous business case Practical Reliable quality Fast response time Transparency Business unit-driven / Corporate for consistency Supports business segment goals (FMEA) 8 Value-based ERM strengthens the strategic planning process Aligns baseline assumptions Aligns scenario assumptions Provides dynamic strategic planning 9 3

4 Aligns baseline assumptions Aggregating projections Identifies model inconsistencies (sales force projection example) Analyzing trends Comparing plan period projection to (a) recent financials; (b) industry sector expectations; and (c) projections beyond plan period Analyzing the valuation Reasonability check versus market capitalization Results by business segment Documenting and disseminating Broadens awareness/understanding of baseline strategic plan (example of identifying/resolving different conception of Plan commitments) Developing stress tests Strengthens understanding of what is, and is not, included in baseline 10 Aligns scenario assumptions Consistent rigor in developing risk scenarios (FMEA) Guided by FMEA expert Consistent presence of corporate ERM team Standardized definitions of risk scenarios Relies on potential quantitative impact on value (and to lesser extent likelihood) rather than rely on subjective labeling, such as pessimistic Uniform assumption about external environment Assumptions shared across enterprise, allowing reconciliation of any differences 11 Provides dynamic strategic planning Ability to perform strategic planning (and evaluate other decisions) on ad hoc basis Reflects changes in internal or internal environment Reflects changes in strategy or tactics Models what if scenarios o On a consistent and integrated basis o At enterprise and business segment level Provides robust risk-return info for any decision strategic planning, strategic, tactical, transactions, mitigation o Δ return = Δ baseline strategic plan projection and key metrics o Δ risk = Δ enterprise risk exposure and sub-enterprise exposures 12 4

5 Contact information Sim Segal, FSA, CERA President SimErgy Consulting Chrysler Building 405 Lexington Ave., 26 th Flr New York, NY (646) Office (917) Mobile (347) Fax