Author Archives: Emily Holbrook

About Emily Holbrook

Emily Holbrook is a former editor of the Risk Management Monitor and Risk Management magazine. You can read more of her writing at EmilyHolbrook.com.
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Georgia Storms Cause $32 Million in Insured Losses

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Georgia has been through some pretty intense weather this week. Severe storms ripped through Georgia and neighboring states, ushering in high winds, hail, lightning and at least 20 tornadoes.

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It has been reported today that seven people were killed in Georgia alone and hundreds of thousands were left without power.

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Needless to say, communities in the area are left with much to clean up.

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And insurance companies are left with a lot of claims. In fact, insured losses from the storms in Georgia are estimated at $32 million, according to Georgia Insurance Commissioner Ralph T. Hudgens. This number does not include uninsured losses and is likely to grow, he warned.

“We’ve been quite busy the last couple of — actually we’ve been busy this year,” said Richard Tison, a Claim Representative for State Farm. And the damage is not just in one place.

As Georgia residents continue the cleanup process, most can do so knowing that their electricity has been restored. As of this morning, only 300 metro Atlanta residents remained without power.

Bernanke: Clearing House Risk Management Needed

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Fed Chairman Ben Bernanke is calling for stricter risk management of financial clearing houses. During a recent speech in Stone Mountain, Georgia, he stated how important these clearing houses are and how important it is to protect them from systemic risks. And important may be a bit of an understatement.

Basically, when a financial transaction is processed (common stock, futures, options, etc.) either in an exchange or over the counter (OTC), the trade is handed over to a clearing house, which assumes the legal counterparty risk for the trade. Basically, the clearinghouse makes sure both parties involved in the trade make good on their agreement. And if one does not, it absorbs that risk. It goes to say that clearing houses take on A LOT of risk, especially considering the chances of a large firm defaulting or a market crash.

Worrisome to Bernanke, and others I’m sure, is the concentration of such risks among only a few organizations, the most popular being the Depository Trust & Clearing Corporation and Fedwire. Realizing the importance of these firms for day-to-day financial transactions, he called for actions to ensure the safety of these intermediaries.

“Because the failure of, or loss of confidence in, a major clearinghouse would create enormous uncertainty about the status of initiated transactions and, consequently, about the financial positions of clearinghouse participants and their customers, strong risk-management at these organizations, as well as effective prudential oversight is essential,” Bernanke said.

Bernanke does point out, however, that clearing houses have withstood severe crises in the past, to which he attributes to “good planning and sound institutional structures but also some degree of good luck.”

But are clearing houses too big to fail? Will they take on unnecessary risks because that is how they view themselves? We’ve seen how that has played out before so let’s hope Bernanke’s words are put to action.

Read the full transcript of Fed Chairman Ben Bernanke’s speech at the 2011 Financial Markets Conference.

Lloyd’s Provides Million-dollar Coverage for Adventurer

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UK adventurer Sarah Outen is known for her amazing athletic ability and unending endurance. In 2009, she became the first and only woman (and the youngest person) to row solo across the Indian Ocean.

But that wasn’t quite enough for the ambitious 25-year-old. On April 1, she set off on her latest expedition that will take her from London, around the world, and back to London after two-and-a-half years of rowing, cycling and kayaking. A dangerous feat to say the least.

To provide coverage for such an event, Lloyd’s stepped in, issuing a $2 million insurance policy to be placed in the Lloyd’s market.

Jonathan Thomas, the Lloyd’s underwriter at Watkins syndicate who designed the policy, said: “Sarah has presented one of the most challenging underwriting propositions of any person I have quoted for personal accident and medical expenses coverage in the last quarter of a century.

Thomas also mentioned the risks posed by the duration of the trip, including uncertain food rations, muscle fatigue and the fact that she will be entirely alone.

ERM on the Rise

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An uprising in Egypt or a catastrophic natural disaster in Japan can make a company stop and think about how that event impacts their business. And events like these are helping to spur companies to fully embrace enterprise risk management (ERM).

This is a good thing. And, according to some, it’s only going to get better.

James Lam, president of risk-management consulting firm James Lam & Associates, has high expectations for the future of ERM, telling CFO magazine that “We’re going to make more progress in ERM implementations and its standardization in the next couple of years than we did in the last dozen.” According to his research, almost 90% of global organizations with more than $1 billion in revenue are either putting an ERM program in place or, in 25% of those cases, already have a program up and running.

Russ Banham, a contributing editor of CFO magazine, also has some great insight into the present state and future situation of the risk management movement. He penned quite an interesting ERM article that was published today. In it, Banham states that it’s not just black swan events that are to credit for the spike in ERM popularity, three trends have also caused an increase in interest.

  1. Corporate boards are under regulatory pressure to address risk management explicitly.
  2. Proponents of ERM are making progress in having it acknowledged as a best practice for overall risk management.
  3. New technologies are enhancing companies’ ability to evaluate, measure, and prioritize risks, and to test and report on their potential impact.

Banham points to the Dodd-Frank Act, the fact ratings agencies factor in ERM criteria into their ratings process, COSO II (the Committee of Sponsoring Organizations) and the SEC’s sharpened stance on risk management as why some companies, especially larger ones, have no option other than the fully implement an ERM program.

Governance issues aside, ERM would get a major boost if it were widely regarded as an industry standard for best practices. “We are not talking about a one-size-fits-all standard, since risk management is part art and part science, and organizations differ by geographies, markets, business lines, and organizational structure,” Lam says. “It can, however, be an industry-by-industry standard, customized by companies within a given industry.”

Optimism aside, most companies still have a long way to go in terms of developing a comprehensive, efficient and successful ERM strategy. As we see by the second graphic below, more than half of companies still have little or no common risk management processes implemented.

Let’s hope Lam’s predictions come to fruition.