ENTERPRISE RISK MANAGEMENT
Agents see ERM as playing an increasing
by important role in the future
By Len Strazewski
September 11 didn't initiate a movement toward ERM, but it certainly contributed to a new awareness of business exposures and management approaches to managing those risk exposures.
The September 11 assault on the World Trade Center changed everything in America, says Debbie Hudgins, vice president and risk management consultant at Palmer & Cay, Inc., a Savannah, Georgia-based insurance agency and brokerage.
Confidence turned to loss. Security turned to insecurity. Risk took on a more powerful meaning for businesses all around the United States, and suddenly business insurance customers were re-examining all of the things that could go wrong with their business, she says.
The disaster didn't initiate a movement toward enterprise risk management (ERM), the holistic reconception of corporate risk and loss management, Hudgins says. But it certainly contributed to a new awareness of business exposures and management approaches to managing those risk exposures.
And then came the Enron Corp. collapse, a corporate management and securities fiasco that raised everyone's consciousness about financial management, corporate leadership, directors and officers liability and fiduciary responsibility.
"ERM isn't a totally new concept, but it is relatively new to the United States," explains Hudgins, a former corporate risk manager and now a leading ERM proponent among agents and brokers. "ERM has been a popular approach to management in Europe where corporations and their boards seem to have a greater involvement in governance issues and total management of risks." But in the past year, ERM has become a hot topic in the United States, led by large corporations, enlightened chief executive officers, chief financial officers and sophisticated risk managers. Palmer & Cay, which has more than 800 employees in 28 offices in the United States, has been introducing ERM to its largest clients as a way of addressing the brave and deadly new world of risk.
"We define ERM as a method to mitigate any risk that would keep a corporation from achieving its goals," Hudgins says. "ERM encompasses strategic risk, operations risk and leadership risk as well as the traditional insurable risks. It's a holistic approach that acknowledges that risk extends beyond financial transactions to every aspect of your business, including brand management, human resources and corporate decision-making."
ERM also takes into consideration what Hudgins calls "the upside of risk."
"Corporations take business risks all the time. They must, if they expect to develop new markets and introduce new products. ERM acknowledges that risk is an essential part of business operations and managing risk is critical to growing a business, not just avoiding loss,"
she says.
"ERM is a balancing act. It involves people and corporate leadership as much or more than it involves insurance and finance," she says. "If a risk can be transferred with insurance, it is not really a risk after all."
Agents and brokers have been involved in the evolution toward ERM since the 1970s when alternative risk financing vehicles such as captive insurance companies and layered risk management programs became available to a new breed of corporate risk managers.
Contemporary ERM may involve captives and other alternative risk financing tools, Hudgins says, but not purely as the capstone of a risk financing program. Alternative risk financing is more likely to be one tool among many, including risk control, business process reengineering and new corporate governance.
To achieve this new process, corporations must begin at their highest levels, Hudgins says. Palmer & Cay usually engages chief executive officers or chief financial officers as their client contacts for ERM consulting. However, as more corporations acknowledge the broadest sense of risk, chief risk officers may also become critical starting points for the ERM process, she says.
The endpoints for ERM could be manifold, she says, involving new management activities as well as insurance and alternative risk financing products. However, Hudgins insists that ERM is not and should not be limited to a single, integrated insurance company product.
In May 2001, Palmer & Cay announced a strategic alliance with Zurich IC2 ("IC Squared"), a Boston-based consulting subsidiary of Zurich Financial Services Group. Zurich IC2 provides risk management analysis and risk modeling services to Palmer & Cay clients interested in developing ERM, Hudgins says.
Zurich Financial Services Group, based in Switzerland, is a global leader in the financial services industry that specializes in financial protection and asset accumulation. The group concentrates in non-life and life insurance, reinsurance, farmers management services and asset management.
The Zurich IC2 division provides ERM consulting services and helps companies assess a wide range of risks, including physical hazards, financial, operational and strategic exposures. The company models risks in a particular business environment and optimizes risk and reward decisions for the client.
The consulting company then advises clients on how to identify and quantify risk quickly, comply with corporate governance requirements, streamline decision making and measure the financial impact of risk, both in terms of value creation and impairment.
"Through our unique focus on managing potential rewards as well as downside risk, we will help Palmer & Cay clients harness their own expert knowledge and develop risk management solutions that protect their business interests and allow them to capitalize on opportunities," says Wolfgang Fiedel, president and chief executive officer of Zurich IC2, on the occasion of the announcement.
"Palmer & Cay uses enterprise risk management as a tool for helping clients develop strategic planning and leadership capabilities," Palmer & Cay's Hudgins says. "We looked very carefully at the ERM marketplace and found that while many companies referred to enterprise risk management as a tool for selling integrated insurance products, Zurich IC2's philosophy matched ours completely."
Zurich IC2 helps the agency execute the European ERM model for the United States, capitalizing on the experience of client companies worldwide, she says. Palmer & Cay can provide insurance marketplace and alternative risk management expertise and design products to secure quantifiable risks. The agency also can provide loss control services to reduce risk and referrals to other kinds of consulting that can help client companies address various business or strategic risks.
McGriff, Seibels & Williams in Birmingham, Alabama, also promotes ERM, but in a more limited way, says Paul E. Sparks, senior vice president in the agency's financial services division. The agency has more than 500 employees in 10 cities. The ERM practice is based in its Atlanta office.
Sparks says the agency began to explore ERM in mid-2001, to assist an energy trading company client that already was re-examining its business risk positions and was seeking ways to reduce or secure a wide range of exposures to loss.
"Our initial ERM client was already pretty far down the enterprise risk management road when they came to us looking for help with concepts and products that could relate to managing their risks. We discovered that while very few companies were actually doing ERM, the concept was spreading rapidly and several energy industry companies were beginning a comprehensive risk analysis process."
Tray Tasker, vice president in the financial services division, joined the agency from the Marsh Enterprise Risk Management practice to provide large corporate client expertise. Tasker says the agency perceived an opportunity to provide insurance and alternative risk financing expertise to these companies.
"ERM activity falls into two categories: ERM consulting and ERM solutions," Tasker explains. "ERM consulting involves talking to a client and getting them to define their philosophy of risks in connection with their business operations," he says. "Operation ERM consulting is similar to business process consulting that became popular in the 1990s as a tool for improving management and overall productivity.
"A true ERM consultant will help a client assess risk across all of the business activities and establish the links between risk management and capital management that can be integrated into corporate strategic management."
Tasker says ERM consulting of this sort is best left to the global consulting companies that combine business process reengineering with auditing and actuarial services. These ERM consultants can then assist client companies in quantifying risk and establishing the financial schemes that can be used to manage the exposures.
McGriff, Seibels & Williams specializes in ERM risk solutions, the execution of an ERM strategy with insurance and alternative risk financing products, he says.
"We come in at the risk quantification stage and jump directly into the solutions stage, providing risk management and insurance products that meet the strategic requirements of the ERM program. We can combine a variety of risk management tools, including residual value, credit enhancement and integrated insurance products to finance key aspects of ERM,"
he says.
Sparks says the agency can also provide an introduction to the ERM concepts to companies that are grappling with more sophisticated visions of risk. Interest in ERM is growing as part of a natural evolution of risk management at Fortune 500 companies, he notes.
"Risk management philosophy evolves slowly," he says. "But it does evolve. Loss portfolio transfer was a big deal five years ago; now it is commonplace. ERM is rare now, but it will increase in popularity, particularly at companies that have come to understand the importance of risk across a corporation.
"We can expect to see it develop more quickly at companies in the financial services and energy industries that have already appointed chief risk officers. They have taken the first steps toward ERM," Sparks says.
The author
Len Strazewski is a Chicago-based freelance writer specializing in marketing, management and technology topics. In addition to contributing to Rough Notes, he has written on insurance for Business Insurance, the Chicago Tribune and Human Resource Executive, among other publications.