Category Archives: Financial Risk Management

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Excellence in Risk Management

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The Great Recession is not known for inspiring great things, but it did spur the creation of the Dodd-Frank bill, which, among many things, created the Financial Stability Oversight Council and the Federal Insurance Office. And the near-collapse of the U.S. economy did wonders for the discipline of risk management.

As a result, according to a new survey from Marsh and the Risk and Insurance Management Society (RIMS), executives in the C-suite are expecting much more from the risk managers at their company.

Below are a few of the key findings from the report:

  • An overwhelming majority of respondents said that senior management’s expectations of their organizations’ risk management departments have grown over the past three years. Senior management’s list of desired changes from risk managers includes integrating risk management deeper with operations, executing daily risk management activities more efficiently, providing improved analysis and quantification, and leading enterprise risk management (ERM) activities.
  • The most common focus area for 2011 is strengthening strategic risk management, which was cited by more than half of survey respondents. For the second year, this area came out on top, although barriers to doing so remain.
  • The top barrier cited to senior leadership understanding of the risk landscape was silos within the organization. This is the same answer given in prior years, and is something that organizations should begin to confront if they have not already done so. One way to tear down the silos is to create or strengthen cross-functional risk committees.
  • As the role of chief risk officer (CRO) continues to develop, we are beginning to see some differences in how they view and prioritize the issues. For example, CROs were much more likely than other risk managers to categorize senior management’s change in expectations a “very significant.” CROs said strengthening ERM capabilities and integrating ERM into strategic planning were focus areas for 2011.
  • Economic conditions ranked as the number one risk among respondents, and was also the risk that they were least comfortable with their organizations’ ability to manage. In other areas, such as business disruption, risk managers and the C-suite are not as aligned in their views of how prepared their companies are to manage the risk.
  • Nearly 60% of companies said their use of data and analytics has changed over the past three years. This is likely a reflection of leadership’s desire for there to be more transparency and quantification around risk decisions, particularly the economic implications. Despite the stated changes, however, there appears to be a need for companies to better use the available tools and analytics.

And let’s take a look at the areas in which senior management’s expectations of the risk management department have grown:

It seems the financial crisis continues to shine a light on the importance of risk management as a whole and, more specifically, enterprise risk management and strategic risk management.

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.

Risk Management in the News

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Some days there are a plethora of risk management topics in the news, other days, not so much. Today we are in luck as I’ve come across quite a few risk management-related news stories that I hope you find interesting.

As risk management continues to evolve, we will continue to see compelling news articles focusing the various ideologies encompassing the discipline. More discourse regarding risk management means more thought about the topic and, hopefully, more real-world implementation.

The 10 Best Industry Blogs

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Bloggin’ ain’t easy. Doing it well takes commitment, research, accuracy and regular postings. And, of course, a knack for writing. The staff of Risk Management has a few favorite blogs that we visit on a regular basis for their insight, knowledge and timeliness. The following are 10 of our favorite risk management and insurance blogs:

  1. The Call: Foreign Policy magazine’s blog posts are authored by Ian Bremmer, president of the global risk research and consulting firm Eurasia Group. The blog uses political science to analyze the future of politics and the global economy. When it comes to industry blogs, this one is my personal favorite.
  2. Terms + Conditions: The Insurance Information Institute’s blog covers current disasters, risks, laws, regulations and market conditions, among other topics. Claire Wilkinson, vice president for global issues at III, has done a great job of posting timely articles first thing in the morning, and it seems she’s been joined recently by James Lynch, a veteran insurance professional and blogger.
  3. Clear Risk: The company itself works with organizations to help improve their risk management techniques and the blog, managed by Craig Rowe, covers the various aspects of risk management and insurance in a well-organized and easy to read manner.
  4. Schneier on Security: Bruce Schneier, a security technologist and author, manages this blog, which focuses on security and security technology. He has testified on security before the United States Congress and has written articles for some of the worlds biggest publications. Schneier, an opinionated tech man, knows what he’s talking about — and it shows in every post.
  5. Workers’ Comp Kit Blog: This blog covers (you guessed it) everything relating to the world of workers’ comp. It acts as a discussion forum for employers to learn about workers’ comp cost containment, techniques and strategies. The blog is managed by Rebecca Shafer, and attorney and risk consultant, and features posts by more than 30 other professionals. Though the format of the blog can be somewhat distracting (ads galore), the content is useful.
  6. GC Capital Ideas: The website, a part of reinsurance intermediary Guy Carpenter, refers to itself as more of a platform from which it disseminates information that has been published through reports, briefings and bylined articles. I refer to it as a blog and its information is has proved valuable to our team on more than one occasion.
  7. Calculated Risk: This blog offers a sophisticated analysis of economic data, from consumer sentiment to the mortgage and housing industry to the banking industry. Managed by Bill McBride, a full-time blogger with a background in finance and economics, Calculated Risk proves successful at turning complicated technical data into useful information for the masses. McBride publishes several posts per day.
  8. Political Risk Explored: Brian Hasbrouck, a man with a serious interest in the international political economy, manages this blog. PRE’s short and sweet posts pull from other publications or reports that the blog’s readers may have never come across on their own. The blog’s simple format makes it easy to navigate and read and the Twitter feed embedded on the right-hand side is an added bonus.
  9. Product Liability Monitor: This blog was created by attorneys in the Weil product liability practice and discusses key trends, developments and events that have shaped and are shaping the product liability landscape. The blog’s clean format is something to be imitated.
  10. The FCPA Blog: Its simple name leaves no guesses as to what it covers — news and views about the United States Foreign Corrupt Practices Act. Managed by Richard Cassin, the multiple daily posts gives readers a grim reminder of the oft-corrupt corporate world and analysis of the FCPA’s actions.

If you think we have left off an important blog related to the industry, please let us know in the comments section below.