RISK SENSING: THE FUTURE IS NOW
Agents and brokers can play a key role in encouraging clients to adopt this promising new approach
Over the past decade or so, risk management has grown and matured. Perhaps most significant has been the move toward a more comprehensive view of risk management known as enterprise risk management (ERM). ERM has developed around the concept that risks can provide corporations rewards. To gain the most from their ERM programs, corporations are using a variety of tools. A recent addition to the risk manager’s tool chest is risk sensing.
According to a Deloitte report, risk sensing uses human insights and advanced analytics capabilities to identify, analyze, and monitor emerging risks to an organization’s business model, long-term viability, and ability to create value. The twofold goal of sensing emerging strategic risks, the report states, is to “position an organization not only to avoid and mitigate risks, but also to generate risk-powered performance.” The latter, Deloitte notes, actually “creates value from risk …” because a company can “move early to address nascent market movements and customer needs, harness benefits from emerging technologies, and block competitors’ efforts to gain first-mover advantage.”
Deloitte identifies six key characteristics of a robust risk sensing capability:
Strategic focus. Most major organizations monitor financial, operational, regulatory, reputational, and other risks specific to the business. Risk sensing should incorporate these risks to the extent that they help inform strategic decision making.
Listening posts. Listening posts and observable indicators enable tracking of trends and emerging disruptors. Examples include “monitoring emerging tech trends that could disrupt the industry” or “changes in customer sentiment.”
C-suite engagement. Senior executives possess the influence, resources, and organization-wide view to ensure that risk sensing does not become siloed, narrowly focused, or overly tactical.
Metrics and tracking. Objective baseline risk measures—strategic risk indicators and parameters—should be developed so risks can be tracked against them going forward. Ideally, risk sensing includes triggers for evaluating, communicating, and mitigating risks.
Outside-in points of view. Views of external analysts who understand the organization, its goals, and the risks it faces provide “another set of eyes” and can correct the inevitable cognitive biases that can distort the views of management and other internal parties.
Combined technological and human resources. Analyzing and predicting rare and emerging events is facilitated by the use of data analytics and technology advances. Yet human analysis completes the job, enriching these views and providing valuable and otherwise unavailable information and insights.
In its report, the consulting firm suggests that “a starting point for monitoring strategic risks would be to identify the primary building blocks and strategic objectives of the organization that, if negatively impacted, would alter the key forces that drive your sector.” Those forces, Deloitte adds, can be organized into domains, including—but not limited to—economic, regulatory, customer, technological, operational, funding, and research and development.
In 2015, Deloitte conducted a survey, in conjunction with Forbes, of about 150 C-level professionals around the world who worked at companies with revenue of at least $1 billion. Overall, survey results showed that about 80% of respondents said they had started using risk sensing tools. But more were using it to address non-strategic risk, such as financial, compliance, and operational risk. “Yet strategic risks tend to be most important to senior executives,” the Deloitte report notes.
Among the corporate pioneers of risk sensing is General Motors (GM). Kristie Bidlake, who leads GM’s risk sensing function, and Krysta MacDonald, senior manager in the company’s strategic risk management group, have been working on risk sensing methodology at GM for the past couple of years. They recently recounted their journey in a RIMS (Risk & Insurance Management Society) webinar. The presentation provided valuable insights into their risk sensing work, as well as a look at the various steps involved.
GM has a well-established enterprise risk management program that has been accepted by its management and senior operations officials. Bidlake and MacDonald noted that, although the company had a variety of risk management tools to assist in working with known risks, it lacked tools for appropriately identifying unknown risk. This led to the use of risk sensing.
Early steps of risk sensing deployment at GM involved focus groups, management familiarization, education about data and its uses, staff engagement, regular meetings, and more. At first, focus group participants identified topics to address; later the risk management team selected topics that included branding, competitive intelligence, customer experience, social media, and more.
The presenters pointed out that it took considerable time to develop their risk sensing program and that it is experiencing broad acceptance. In retrospect, they say that acceptance was slower by operational personnel. To resolve this situation, the company engaged more people in its sensing network—the element of the program where human insight occurs.
According to Bidlake and MacDonald, several fact-finding meetings were required for the company to involve the right personnel. They found that some groups were already identifying various kinds of risks, and that risk sensing varied from division to division. Today the risk sensing program is incorporated into the company’s overall risk management program, and that has worked well. The work of Bidlake and MacDonald’s team addresses a wide variety of risks that can provide support for corporation decision making.
Despite its relative newness, Bidlake and MacDonald are confident that risk sensing is enhancing GM’s overall risk assessment program. Although the program is directed at a broad range of risks, the major focus is on emerging risks. At the time of implementation, a primary concern for GM was the effect of various geopolitical events that were occurring worldwide.
In the webinar, presenters identified several important aspects of risk sensing and pointed out that human insight is a key element that drives the ability to identify, analyze, and monitor risks. They said that, to be of value, the program needed to incorporate a targeted approach to overall risk analysis. They emphasized the importance of the risk sensing program being integrated or woven into the fabric of their primary enterprise risk management program.
According to Bidlake and MacDonald, the risk sensing network has become a valuable resource and an important tool. Meetings that take place as part of the endeavor have enabled faster and more accurate identification of emerging risks. The initiative also has helped the risk management department create valuable relationships within the company.
One of the most valuable advantages of risk sensing is that it assists corporations in creating enhanced value. The value as described by Deloitte arises from moving early to address market movement and customer needs. Additionally, organizations can harness benefits associated with emerging technologies and can block competitors’ efforts to gain first-mover advantage.
The concept of risk sensing seems to have arrived on the market at just the right time. Several components have come together to provide a more comprehensive approach to risk assessment. The Deloitte report notes that several important elements are needed to develop and deploy needed resources, as is the appropriate use of critical data.
According to Deloitte, as forward-thinking organizations embark on and refine risk sensing programs, they should do so with eyes open. They need a clear understanding of the negative impact that risk sensing can impose and also need to recognize the positive value it delivers.
Deloitte identifies four specific steps companies should take as they develop a useful and sustainable risk sensing program:
- Identify the strategic risks to be monitored and the scope of such effort.
- Define the elements required to enable strategic risk monitoring.
- Configure the platform to enable scanning, analyzing, and tracking of strategic risk.
- Continue monitoring the data sources and generating ongoing.
From an industry standpoint, one can easily see the benefits to commercial lines underwriters of a risk sensing approach. In a hyper-competitive pricing cycle, for example, underwriters may not be able to adjust rates or premiums. Alternatively, they could require more sophisticated approaches to risk analysis.
A role for agents
Agents and brokers are always looking for ways to serve their clients better and to gather more data regarding their accounts. As the risk sensing concept expands and becomes more established, it also can benefit from the use of big data and will become an important part of comprehensive ERM programs.
As risk sensing becomes ingrained in companies’ risk management programs, agents and brokers who understand the concept and its relevance will be at a distinct competitive advantage. Applying this information to an insured’s program is a good reason for agents and brokers to encourage their risk management clients to become involved with risk sensing.
By Michael J. Moody, MBA, ARM