SaskatchChaptMay14EmergRisks

Chris Mandel

SVP, Strategic Solutions

Sedgwick

RIMS Saskatchewan Chapter

May 15, 2014

Copyright © 2013 by Sedgwick - Confidential – Do not disclose or distribute.

Copyright © 2013 by The Hartford. Confidential. All rights reserved. No part of this document may be reproduced, published or posted without the permission of The Hartford.

2

Speaker Contact Information

Chris Mandel. RF. CPCU, ARM SVP, Strategic Solutions Sedgwick, Inc. [email protected]

210-845-5804

mailto:[email protected]

Sedgwick © 2013 Confidential – Do not disclose or distribute. 3

A Broad and Fuzzy Paradigm

“There are known knowns. These are things that

we know that we know. There are known

unknowns. That is to say, there are things we

know we don’t know, but there are also

unknown unknowns. These are things we don’t

know we don’t know.”

- Donald Rumsfeld, U.S. Sec of Defense (2002)

WHILE THE RISKS LESS UNDERSTOOD ARE DIFFICULT TO ADDRESS, THEY ARE OFTEN SO SUBSTANTIAL IN IMPACT, THEY CAN’T BE IGNORED

Copyright Excellence in Risk Management, LLC ERM, LLC 2013


What is an Emerging Risk?

Those issues hat have not manifested themselves sufficiently to be

managed using the tools commonly applied to more developed

exposures. They are “those risks an organization has not yet

recognized or those which are known to exist, but are not well

understood

RIMS’ “Emerging Risks and ERM

A condition, situation or trend that could significantly impact the

Company’s financial strength, competitive position or reputation within

the next 5 years. Emerging risks involve a high degree of uncertainty.

It is unclear where an emerging risk will land on the loss curve.

Anonymous actuary


Other Definitions

Lloyds: An issue that is perceived to be potentially significant but

which may not be fully understood or allowed for in insurance terms

and conditions, pricing, reserving or capital setting.

PWC: Those large scale events or circumstances beyond one’s direct

capacity to control, that impact in ways difficult to imagine today.

S&P: Risks that do not currently exist.

What about black swans?

Global ERM Survey

Key Findings

• Board level commitment critical to decision making and driving value

• Dedicated senior executive to drive and facilitate

• ERM culture encouraging full engagement and accountability at all

levels

• Stakeholder engagement in RM strategy development and policy

setting

• Transparency in risk communications

• Integration of financial and operational risk data into decision making

• Need for sophisticated quantification to understand risk and

demonstrate value proposition

• ID of new and emerging risks using internal and external data sources

• Move from avoidance and mitigation to leveraging options for value

Source: Aon Corporation 2010 6

The discipline of risk management has

evolved from strictly a value preservation-

based focus to a balanced focus between

protecting assets and creating or enhancing

value.

Operating

Risk

Credit Risk

Model Risk

Entrepreneurial

Risk

Regulatory

Compliance Risk

Future/White

Space

•Target Models (3B); Lifetime Value Models

•Churn Models; Discount Engine Models

•Upsell Models; Sales Territory Models

•Public Relations & Marketing Initiatives

•Industry Coalitions

•Client/CPA Webinars

•EDI Program

•RCX Stale Date Fees

•Taxpay Premium Processing Fee

•Federal Deposit Frequency Program

•Client Penalty Abatement Service

•IRS/Paychex Partnerships

•$100M Revenue Over Past 5 Years

•EGTRRA Restatement

•PBS, HRO, 401(k) Service Fees

Risk Management

A flexible and dynamic risk management

discipline is uniquely positioned to quickly adapt to change and identify opportunistic

risk to create new streams of revenue and

increase value

Value Preservation to Value Creation

A VIEW INTO EMERGING RISKS IS CRITICAL TO THE VALUE FOCUS

RIMS Risk Maturity Model

Root Cause Discipline

Degree of discipline applied to measuring root cause by: 1) determining sources 2) understanding impacts 3) identifying trends, and 4) measuring effectiveness of ontrols .

Risk Appetite Management

Degree of accountability for (1) defining acceptable boundaries 2) calculating and articulating risk tolerance 3) developing a risk portfolio 4) considering scenarios, and 5) attacking gaps between perceived and actual

risks.

ERM Process Management Degree that a repeatable and scalable risk management process is integrated into business and

resource/support units, using a sequential series of steps that support uncertainty reduction and promote opportunity exploitation.

Adopt ERM Approach

Denotes the degree of executive support for an ERM-based approach within the corporate culture. Activities cut across all processes, functions, business lines, roles and geographies.

Copyright © 2010 Risk and Insurance Management Society, Inc. All rights reserved. 8

Business Resiliency and Sustainability

Extent to which an organization integrates business resiliency and sustainability aspects for its operational planning into its ERM process.

Performance Management

Degree to which organizations are able to execute on vision and strategy in tandem with risk management activities.

Uncovering Risks UNCOVERING RISKS

Degree of quality and coverage (penetration) throughout the organization for uncovering uncertainties related to organizational

goals achievement.

RIMS Risk Maturity Model

Copyright © 2010 Risk and Insurance Management Society, Inc. All rights reserved. 9


The Opportunity for Risk Managers

Uncover the unknown or poorly understood

threats to businesses

Bringing resources to bear to address the risks

efficiently

Building resiliency and sustainability

Leveraging risks that lend themselves to

exploitation

Leveraging emerging risk processes for

competitive advantage


High Level Risk Types

Strategic

• Acquisitions • Business Model • Competition • Demographic

Changes • Disruptive

innovation • Market • Etc.

Operational

• Customer service • Infrastructure • Processes • System capabilities • Talent • Etc.

Financial

• Capital • Cash flow • Credit • Debt obligations • Foreign exchange • Liquidity

• Etc.

External

• Economy • Environment • Geopolitical • Regulatory • Tax policies • Weather events

• Etc.

Do Some Risks Matter More?

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Macro-level Categories to Consider

Environmental

Systemic

Cultural

Technological

Societal

Geopolitical

Economic


Emerging Risk Identification Tactics

Surveys/Questionnaires

Financial Statements

Records and Files

Flowcharts

Personal Inspection

Industry Check Lists

Events

Experts/Delphi Type Methods

Environmental Scanning

Scenario Analysis

Trend Analysis

Risk Management Stakeholders

Key Focus

Targeted Outcome

Emerging Risk Management Process

Enterprise Risk Management

Risk Process Effectiveness

Identification and Management of Significant Risks

Process Efficiency

Process Efficiency

Effective & Efficient Process Execution

Internal Audit

Control Testing

Effective

Controls

Compliance

Compliance Risks

Regulatory Compliance

Controller

Financial Reporting

Sox 404 Compliance

Business Units

Business Performance

Controlling Risks to as well as Meeting

Objectives

Unified Strategy

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Best Practices for ID and Assessment

Conduct emerging risk reviews

Integrate or align ER reviews with the planning processs(es)

Drive agreement on key assumptions and test them with rigor

Challenge conventional thought processes and the status quo

Apply the right methods to better understand and predict ERs

Balance an internal vs external environmental view

Manage ERs within the risk appetite and tolerances of your firm Adapted from RIMS’ Emerging Risks and ERM Report (2012)





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Healthcare

Aging workforce

Rising medical costs

• Pharmaceuticals

Affordable Care Act (ACA) aka ObamaCare

Wellness programs

• Discounted health care costs/employee contribution

Changing employee demographics

• Ethnic

• Age/Sex/Skills

• Priorities

• Cultural shift



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Workforce issues - talent attraction and retention

Baby boomers retiring – 10,000 baby boomers a day have been turning 65 since 1/1/11 and will continue until 2030

• Smaller future workforce

Future workforce will be very technology savvy

Future workforce will be more demanding

• Telecommuting

• Flexible hours, etc.

Work/life integration vs. balance



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Emerging claim challenges

Impact of Affordable Care Act

Legalized marijuana

• Drug test issues

Gay marriages and domestic partnerships

Increasing proportion of fraud



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Emerging claim challenges

Use of electronic devices while driving

• Mobile phone use

• Hands-free

• Texting

• GPS

Natural disasters

• High variability of CAT events

• Super Storm Sandy

• CAT modeling Change Impact



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Technology

Legacy systems

IT security

Cyber issues

• Identity theft

• Malware

• Business interruption

• Target >>>>>>>>>>>>>>>


Target as an Emerging Risk Poster-child?

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Emerging Risks in a Strategic Context

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Identifying emerging risks

Rating emerging risks on relevance, importance and uncertainty

Monitoring impact of and reporting on emerging risks

Emerging Risks in a Strategic Context

Copyright © 2010 Risk and Insurance Management Society, Inc. All rights reserved.

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Traits of Emerging Risks

Emerging Risks

High Level of Uncertainty

Lack of Consensus

Uncertain relevance

Difficult to Communicate

Difficult to Assign

Ownership

Systemic or “business practice”

issues

Source: RIMS Executive Report Emerging Risks and Enterprise Risk Management © 2010 RIMS

Scanning the External Environment

Interviews

External Scanning

Importance Relevance Probability Immediacy Impact Level of

Uncertainty

Emerging Risk [Periodic] Report Trend/Event Implications

Strategic Directions Key

Indicators Owner Plan Threshold

Warnings Monitoring

Future Focused Emerging Risk Scanning

MACRO MICRO

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Scoping the External Environment

ORGANIZATION SPECIFIC

Clients Customers Vendors/Supply

Chain Distributors

MICRO/INDUSTRY

Direct Competitors

Indirect Competitors

Markets Sectors Analysts Strategic Alliances

MACRO

Cultural/Social Technological Economic Environmental Political/Legal

Regulatory Strategic Planning

Operations

External Scanning


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Using Scenarios for the Most Uncertain Risks

Scenario 1: Protectionism

Scenario 2: Oil Prices

Scenario 3: “Green”

movement

Objective Example: Global Expansion

Consider potential consequences if scenario plays out

Select leading

indicators and signposts




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3 Keys to Success

Separate the Emerging Risks Processes: Emerging risks are fundamentally different than more internal/short-term/operational risks, and many companies recognize the need for a separate, more qualitative and creative process (often led by dedicated committees or teams) for identifying and managing emerging risks.

Rely on SMEs: ERM teams often bring in individuals with a specialist-level understanding of particular external/macroeconomic trends, using them to help create scenarios, assess the likely direction of trends and measure the potential magnitude of their impact on the enterprise.

Use Robust Scenario Planning: Due to their longer-term nature, major external emerging risks require an effective scenario planning process to build confidence that their impact has been correctly assessed.

Emerging Risk Process Summary

Integrate into ERM Strategy

Identify Emerging Risk Relative to Goals & Objectives

Assess Risk Interconnectedness & Determine Appropriate Responses

Monitor and Report Leveraging KRIs tied to KPIs

Sedgwick © 2012 Confidential – Do not disclose or distribute.

www.sedgwick.com



33

Speaker Contact Information

Chris Mandel. RF. CPCU, ARM SVP, Strategic Solutions Sedgwick, Inc. [email protected]

210-845-5804


Christopher E. Mandel, RF, CPCU, ARM SVP, Strategic Solutions, Sedgwick, Inc.

Christopher E. Mandel is the SVP for Strategic Solutions at Sedgwick, Inc. He is engaged in helping Sedgwick chart its future through the long term planning for products, services and strategic solutions for this claims and productivity management firm. He is also co-founder and EVP, Professional Services for rPM3 Solutions, LLC as well as founder and president of Excellence in Risk Management, LLC. both independent consulting firms specializing in governance, risk and compliance, with a special emphasis on enterprise risk management. rPM3 Solutions holds a patent for a unique risk measurement process known as ARQ™. Prior to electing early retirement and for ten years from 2001-2010, Mr. Mandel was head of enterprise risk management for USAA Group, a $165 billion diversified financial services organization. At USAA, he designed, developed and led the enterprise-wide risk management and corporate insurance centers of excellence. He also served as President and Vice Chairman, Enterprise Indemnity CIC, Inc., an Arizona based alternative risk financing facility.

Mr. Mandel has more than 25 years of experience in risk management and insurance in large, global corporates. He has pioneered the development of cross-enterprise risk management capabilities resulting in S&P rating USAA as “excellent and a leader in ERM” from 2006 through 2010. In 2007, Treasury and Risk Magazine bestowed the Alexander Hamilton Award for “Excellence in ERM” on USAA. Mr. Mandel has been a long term senior leader in the Risk and Insurance Management Society including being elected President and Chief Risk Officer and was named Risk Manager of the Year in 2004.

Mr. Mandel’s deep, wide and diverse experience in all facets of risk management and insurance allows him to offer those interested in managing risk with excellence to engage him to provide everything from a comprehensive strategy and complete ERM framework to targeted guidance, tools, techniques and/or training. Mr. Mandel’s innovative approach to making risk a key strategically placed and results oriented function results from solidly connecting risk management outputs to a company’s key performance metrics and ultimately, mission accomplishment.

Mr. Mandel received his B.S. in Business Management from Virginia Polytechnic Institute and State University and an MBA in finance from George Mason University. He holds the CCSA, CPCU, ARM and AIC designations and is a frequent industry speaker, teacher and writer. He writes the “Risk Innovation” column for Risk and Insurance magazine and in 2008 was elected a member of Risk Who’s Who (RWW). He also wrote the Ask a Risk Manager column for Business Insurance from 1996 through 2008.

CONTACT: [email protected] 210-698-8056 o 210-845-5804 m https://www.sedgwick.com

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Sedgwick, Inc.

The leader in innovative claims and productivity

management solutions

Sedgwick Claims Management Services, Inc. is the leading North American provider of

innovative claims and productivity management solutions. Sedgwick and its affiliated

companies deliver cost-effective claims, productivity, managed care, risk consulting, and

other services to clients through the expertise of more than 10,000 colleagues in 195

offices located in the U.S. and Canada. The company specializes in workers’

compensation; disability, FMLA and other employee absence; managed care; general,

automobile and professional liability; warranty and credit card claims services; fraud and

investigation; structured settlements; and Medicare compliance solutions. Sedgwick and

its affiliates design and implement customized programs based on proven practices and

advanced technology that exceed client expectations. For eight years in a row, Sedgwick

has been awarded the distinguished Employer of Choice® certification, the only third-

party administrator (TPA) to receive this designation. In 2011 and 2012, the company

was named the Best Overall TPA by buyers of risk services through an independent

survey conducted by Business Insurance. For more see www.sedgwick.com.

© 2013, Sedgwick Claims Management Services, Inc. applies to all content except where otherwise noted

http://www.sedgwick.com/

SaskatchChaptMay14EmergRisks

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models discount engine

b lifetime value models

value source

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erm cultureencouraging