Category Archives: Enterprise risk management

Enhancing ERM frameworks based on learned lessons from COVID-19 pandemic

COVID-19 has illuminated the wide-ranging impact that emerging risks can have on insurers across the globe. It has focussed attention on a grey area that exists in recognising when an emerging risk has fully “emerged” and how it should be treated. It would seem logical that once an emerging risk is realised, its subsequent monitoring and management should fall under a pre-existing risk management framework.

In this briefing note, Milliman professionals discuss how traditional enterprise risk management (ERM) frameworks may not fully capture the complexity of an emerging risk event, and reflect on some lessons that can be learned from the COVID-19 pandemic.

COVID-19 changing how life insurers approach enterprise risk management

How is the coronavirus pandemic impacting how life insurance companies approach enterprise risk management? It’s apparent that risk managers must consider several emerging issues related to risk analytics, risk strategy, the chief risk officer’s role, and the centralized risk function within life insurance companies. Milliman’s Tony Dardis, Chloe Lau, and Ariel Weis provide perspective in their paper “COVID-19 and enterprise risk management.”

To optimise financial decision-making, human-and-machine iterative process proves most successful

Milliman has announced that an innovative new study examining multi-criteria decision-making using an iterative process of advanced computing and human input has shown superior results in risk management when compared with machine algorithms or humans alone.

Using an illustrative example from the life insurance industry, the study looked at how optimisation techniques can be used to develop insights into drivers of economic capital within an internal model framework, and how to then use these insights for risk management decisions. The findings illustrate that advanced computing, visualisation, and complex systems-mining techniques that include expert input can deliver superior optimisation results when faced with multiple objectives and multiple constraints, which machine algorithms alone find challenging to resolve.

While not obvious at the outset, combining human input with advanced computer modeling allows domain experts to analyse results and elicit insights into features that subsequent iterations of a model should contain, thereby refining the process.

Milliman’s study employed the DACORD platform from DRTS, Ltd. to support its system-mining efforts. ‘Future states are unknown, involve human affairs and are therefore complex,’ says Jeff Allan, CEO of DRTS, Ltd. ‘Augmenting experts with the appropriate tools and processes can aid the reasoning and evaluation of a range of solutions.’

Adds Milliman’s Corey Grigg, ‘Looking toward the future, this sort of optimisation technique can extend to big data, simulations, and enhanced visualisation, ensuring that even as the complexity of our data and problems increases, experts can continue to add value.’

The results suggest a number of practical applications for enterprise risk management (ERM) in the insurance industry, including finding patterns in key risks driving capital losses and understanding diversification in order to enable quick judgements about the similarities and differences in the risk profiles of different portfolio elements.

Milliman’s Optimisation study was conducted in conjunction with Dr. Lucy Allan of University of Sheffield. To read the entire study, click here.

How can insurers enhance risk culture and governance control?

An insurance company’s overall culture consists of a set of subcultures. Experts within those subcultures make decisions differently. In his Best’s Review article “Culture Compass,” Milliman’s Neil Cantle explains why insurers need to approach modern business governance with less rigidity. He also describes how understanding culture can help a company empower its experts to make local decisions in harmony with established risk appetite and corporate values. This process produces an overall risk culture essential to the company’s governance framework.

We need to recognize that there is more than one valid perspective to be heard when deciding a course of action. Cultural Theory shows that four such views are always present: pragmatists believe that the world is uncertain and unpredictable; conservators believe the world is high risk; maximizers see the world as low risk and fundamentally self-correcting; and, managers know the world is risky, but believe it can be managed.

In conducting our work we want to ensure that each of these views is considered and debated, the surprising outcome being that the result of such a discussion is not a compromise, suboptimal for all, but rather will be a solution that actually works better for all parties. Creating a culture where this type of debate is acceptable is therefore an important, and often overlooked, part of the governance framework.

It turns out that culture is actually a much more important feature of our business than we might have thought—not just a nice-to-have after all, but actually an integral part of our control framework. When the board sets the risk appetite, it is establishing the tone for how business should be done. It must be clear what the objectives are and how you feel about the uncertainties associated with their delivery. By describing the types of risks that are to be actively sought, in return for a reward, those that are to be accepted and those that are to be avoided, the board is providing a set of guiding principles that staff can use when making its daily decisions about which actions to take next. In any situation, someone can ask: “Is this a risk we should be taking, and how much of it can we take?” Testing the likely consequences of the action against the risk appetite provides a way to move forward. The question also requires them to know what is going on more widely. Assuming the company has a finite appetite for risk, the answer to the “how much” part of the question requires you to know how much appetite has already been used elsewhere. This requires a culture that supports and promotes knowledge-sharing across department boundaries.

Milliman Risk Talks: Risk Institute Fall 2015 highlights (part I)

The Milliman Risk Institute organizes biannual advisory board meetings where members promote enterprise risk management (ERM) thought leadership by discussing trending topics and research efforts. This Milliman Risk Talks episode highlights key takeaways from the Institute’s Fall 2015 meeting.

To learn more about the Risk Institute, click here.

To watch our Milliman Risk Talks series, click here.