RIMS Legislative Summit 2017: Focus on Flood

WASHINGTON—The RIMS Legislative Summit kicked off on Wednesday in Washington, D.C. with a panel lead by Congressional office staff.

Panelists included: Democratic Staff in the U.S. House of Representatives; Jason Tuber, Senior Advisor to Senator Menendez (D-NJ); Ed Skala, Deputy Staff Director for the House Financial Services Committee; and Brandon Beall, Professional Staff Member, Office of Senate Committee on Banking, Housing and Urban Affairs; as well as Lisa Peto, chief counsel for the Financial Services Committee.

The focus was the once-again looming expiration of the National Flood Insurance Program (NFIP). The program that was set to expire in September, but was saved with a temporary extension now set to expire again on Dec. 8.

The panelists, each of whom began with the disclaimer that these were their opinions and not the opinions of their office, came to a consensus that a new NFIP was critical, that a gap in coverage is certainly not ideal and they acknowledged that their offices were working on a bi-partisan resolution.

Some of the major concerns discussed were:

  • Funding—who will fund the NFIP? If the NFIP expires or ceases to exist would the burden fall on the taxpayer and then ultimately on government anyway? Should excess flood coverage be privatized? There was also discussion on whether mandating states to offer certain protections for flood exposure would help the situation.
  • Accessibility and Affordability—what measures must be included in the new bill to not only make sure flood insurance is available but that it is available at an affordable price?
  • Residential vs. Commercial—The idea was discussed as to whether there should ultimately be two versions of the NFIP that separate residential and small businesses from large commercial businesses. It was noted that large commercial businesses might have flood coverage elsewhere or are better funded to retain some risk and, as such, should have the opportunity to opt out. This would spur new challenges to determine what qualifies a business as small or large (i.e., an online enterprise that generates considerable revenue but operates out of someone’s basement).
  • Risk Mitigation—Should risk mitigation be a part of the final bill? Incentives for both the insurer and the insured would support organizations that practice good risk management. The argument was made, however, that not all residents and not all businesses have the funds for risk management. For example, not everyone has the money in the bank to raise the height of a house or storefront.

Jim McIntyre, RIMS Washington, D.C. counsel and chair of McIntyre & Lemon stated, “It is probable that we’re looking at another extension come December. Unfortunately for the National Flood Insurance Program, bills regarding trade, healthcare and immigration will take precedent at the moment and [the NFIP] might have to wait a bit longer.”

On Day two of the summit, about 50 RIMS members descended on Capitol Hill for meetings with congressional leaders. The goal was to share RIMS priorities for a long-term National Flood Insurance Program.

Hurricane Debris Removal Costs Climbing

It’s difficult to find a photo of Houston, Miami, or any city hit by Hurricanes Harvey and Irma that doesn’t contain mountains of debris. As cleanup continues, more trash is piling up everywhere. Cities and towns are faced with a number of issues including costs, expediency, manpower and just what to do with all that trash.

Reuters reported that cleanup after Hurricane Katrina in 2005 took about a year. Hugh Kaufman, a retired EPA solid waste and emergency response analyst said the overall bill for Katrina was $2 billion, the largest to date. That cleanup spanned several states and the demolition of the more than 23,000 homes in the New Orleans area alone. He believes the combined cleanup tab for Harvey and Irma will top Katrina‘s.

In Houston, city officials estimate that about 8 million cubic yards of debris will need to be hauled away, enough to fill up the Texans’ NRG Stadium twice. There are about 100,000 piles of trash in the city, with collection farther along in some neighborhoods than in others, according to the New York Times. Moving these mountains of garbage has been left to county and local officials, who hire debris removal companies to help. FEMA reimburses local governments for 90% of their cost. About $136 million in federal funds were released to pay for initial cleanup around Houston, Reuters said.

In Brevard County, Florida, it is estimated there will be 600,000 cubic yards of trash hauled away—compared to 800,000 cubic yards after Hurricane Matthew—which they anticipate will take about a month, Florida Today reported. Because there is no set schedule for pickup, a number of residents decided not to wait, instead hauling their debris to landfills, causing traffic tie-ups.

Where will all this trash go? In Texas, contracted waste haulers and municipal crews are moving trash to dozens of landfills.

Judith Enck, a former regional administrator for the Environmental Protection Agency who dealt with the aftermath of Hurricane Sandy told the New York Times that figuring out what to do with debris is one of the most challenging aspects of any storm. Because decisions are generally made at the local level, she said, “every community has to kind of reinvent the wheel.”

Setting aside appliances like refrigerators for recycling, chipping downed trees for mulch instead of burning them, prevents pollution and extends the life of landfills, Enck said, adding that leaking landfills present a hazard that can pollute groundwater.

A number of municipalities are asking residents and businesses that put their trash out for pickup to separate trees and other plant material from debris such as shingles, fences and roofing materials.

Florida Today offered these guidelines for preparing storm debris for pickup:

  • Debris should be placed on the curbside, but not in the road or on a sidewalk.
  • Debris should be sorted into separate piles—such as piles for vegetation, for wooden construction debris and for metal construction debris—to help speed up the pickup process.
  • Vegetation and other debris should be cut into sections no longer than 4 feet.
  • Do not use bags for yard waste, as it makes it impossible to recycle or mulch.
  • Do not put yard waste on top of storm drains, as it could block receding waters from Hurricane Irma flooding.
  • Neatly stack construction and demolition debris (drywall, roof shingles, siding, carpet, fencing and docks).
  • Never place debris next to utility poles or transformers, under power lines, on top of water meters, by fire hydrants, near vehicles, next to mailboxes or fences.
  • Do not place debris on other people’s property.

RIMS Membership Has a Say in COSO’s New ERM Framework

When Risk & Insurance Management Society (RIMS) members use the new ERM framework published Sept. 6 by the Committee of Sponsoring Organizations of theTreadway Commission (COSO), they may recognize their own ideas prominently displayed. Carol Fox, RIMS vice president of strategic initiatives announced the call for public comment on Risk Management Monitor in June 2016. She said feedback from the industry, and particularly RIMS members, is reflected in COSO’s ERM Framework: Integrating with Strategy and Performance.

“RIMS members took advantage of the unique opportunity to influence one of the industry’s major guidance documents. For several weeks, members collaborated and drafted a response, which was publicly available through the end of last year,” said Fox, who participated on the project’s advisory council. “We were very appreciative that COSO reached out to RIMS and other professional associations, whose input strengthened the content, ideas and approaches featured in Integrating with Strategy and Performance.

A summary of the public comment feedback includes:

  • More than 200 responses–double that of the internal control update
  • Over 70% of responses from individuals
  • Over 50% of participation outside of North America
  • Almost 50% had affiliations beyond COSO memberships
  • Almost 50% of respondents had 10 or more years of risk management experience
  • Positive ratings outnumbered negative ratings by 4.5 to 1

The new publication serves as an update to 2004’s Enterprise Risk Management – Integrated Framework, which is internationally regarded as the standard for applied risk management frameworks. Developed by PwC under the direction of the COSO Board, its simple, five-component structure considers various viewpoints and operating structures while highlighting the importance of enterprise risk management in strategic planning. It also emphasizes embedding ERM throughout an organization, as risk influences strategy and performance throughout the organization.

“The complexity of risk has changed, new risks have emerged, and both boards and executives have enhanced their awareness and oversight of enterprise risk management while asking for improved risk reporting,” said COSO Chair Robert B. Hirth Jr. “Our overall goal is to continue to encourage a risk-conscious culture.”

Enterprise Risk Management: Integrating with Strategy and Performance is available in printed form, e-book, on-line subscription and pdf licensing for large organizations, accounting and consulting firms. Additionally, COSO is planning for the framework to be translated into several languages, including Chinese, Japanese, Spanish and French.

Visit www.coso.org for purchase information and for a link to the framework’s executive summary.

The ERM Value Connection

Research has shown that enterprise risk management (ERM) adds value. One research paper showed that ERM adds to the value metric called Tobin’s Q. Other award-winning research has shown that ERM enables better decision making. The authors of that research state:

“Specifically, as companies implement an ERM process, the new knowledge it provides them about objectives, risks, oversight, information and communication, and the internal environment leads to enhanced management, as evidenced by increased management consensus, better-informed decisions, better communication with management regarding risk taking, and increased management accountability. This enhanced management, in turn, leads to improved performance.”

ERM and Reputation
As an extension, it would make sense that there would be some impact on reputation risk if a company does ERM well, is sophisticated at ERM, and has developed a mature process. While this common sense may prevail, empirical data and testing is lacking. This is primarily because measuring both ERM and reputation risk is not so easy. But the questions remain:

  • Is there a relationship between ERM effectiveness and reputation?
  • Furthermore, does this relationship show up in performance metrics?

While we cannot answer these questions here, we can explore some simple relationships and at least gain a few insights. Admittedly, reputation risk and ERM are still young disciplines and more data is needed to explore these and other questions. Any attempt to answer these questions with current data carries some caveats. First, this is complicated data from nonfinancial firms and all data was before the year 2014. Second, these are simplistic looks at the data as split into the upper and lower percentiles (split at 50%). Third, the information discussed below reveals levels that have not been tested for statistical significance. In spite of these, let’s examine what may be obvious to some business risk experts.

What data reveals about ERM and Reputation Level
The big question might be, “Do we see higher reputation levels associated with better ERM?” The answer is not yet (at least in this data at this point in time). Companies in the sample with lower reputation scores have higher ERM effectiveness scores than companies with higher reputation scores.

Other Explanations
A good researcher knows to develop the theory first and also to consider alternative explanations. It is wise to follow that process. For example, in this sample companies with greater reputation are bigger than the lower tier reputation companies. It might be true that larger companies have more difficulty building a more mature ERM capable company because they are so large and spread around the globe. It could also be true that smaller companies are over confident in the ERM processes. Either theory (and others) could explain why the high ERM and high reputation levels do not match up. This testing is left for future research.

The Volatility Theory
An alternative theory (what academics explore and test) is that the level of reputation is not what’s important because the company already had their long-standing (developed over many years) reputation when they established ERM. Instead, it might be true today that the real reputation value of ERM is that it helps manage the volatility around reputation because the company is better prepared, sees the reputation risk, correlated risks, helps get the companies ahead of the risk events, and helps them understand how these events might play out and impact the organization’s reputation.

Examining the data shows that the answer on volatility is that this could be true. The data show that at set reputation levels (meaning when the data is split on high and low reputation volatility levels), better ERM leads to lower volatility in reputation at both levels and that is probably a very good thing for most organizations. It appears that ERM does have an impact on reputation but the impact is likely on reputation volatility.

Conclusion
Prior research shows ERM adds value and helps improve decision making. With further testing, future research may be able to confirm another obvious truth, that better ERM improves reputation. But it may be doing so in a surprising way via reduced volatility of reputation.