Can ORSA Work For All Businesses?

In addition to impacting the way countless organizations conduct business, the 2008 financial crisis was an awakening for regulators charged with reviewing and setting the rules that shape the way organizations assume risk. Insurance, perhaps the riskiest business of them all, did not go unscathed.

Not only are insurers responsible for managing their own internal risks, but careful calculations and guidelines are built into their business models to ensure that the risks fall within set parameters. Regulators will argue, however, that this wasn’t always the case.

Own Risk Solvency Assessment (ORSA) was adopted and now serves as an internal process for insurers to assess their risk management processes and make sure that, under severe scenarios, they remains solvent.

U.S. insurers required to perform an ORSA must file a confidential summary report with their lead state’s department of insurance.  The assessment aims to demonstrate and document the insurer’s ability to:

  • Withstand financial and economic stress with a quantitative and qualitative assessment of exposures
  • Effectively apply enterprise risk management (ERM) to support decisions
  • Provide insights and assurance to external stakeholders

While ORSA is requirement for insurers, a new study by RIMS and the Property Casualty Insurers Association, Communicating the Value of Enterprise Risk Management: The Benefits of Developing an Own Risk and Solvency Assessment Report, maintains that ORSA can be used for all organizations looking to strengthen their ERM function.

According to the report:

Whether or not required by regulation or standard-setting bodies, documenting the following internal practices is a worthwhile endeavor for any company in any sector to utilize in their goal to preserve and create value:

  • Enterprise risk management capabilities

  • A solid understanding of the risks that can occur at catastrophic levels related to the chosen strategy

  • Validation that the entity has adequately considered such risks and has plans in place to address those risks and remain viable.

The connection between the ORSA regulation imposed on insurers and the development of an ERM program within an organization outside of the insurance industry is apparent.

ORSA and ERM both require the organization to strengthen communication between business functions. Breaking down those silos are key to uncovering business risk, but perhaps more importantly, is the interconnectedness of those risks.

Secondly, similar to ERM in non-insurance companies, ORSA requires risk management to document its findings, processes and strategies. Such documentation allows for the process of managing risks to be effectively communicated to operations, senior leadership, regulators and stakeholders. Additionally, documentation enhances monitoring efforts, the ability to make changes to the program and is a benefit that allows ERM to reach a “repeatable” maturity level as defined by the RIMS Risk Maturity Model.

Developing an ERM program has become a priority for many organizations as senior leaders recognize the value of having their entire organization thinking, talking and incorporating risk management into their work. Examining and implementing ORSA strategies can be an effective way for risk professionals to get their ERM program off the ground and operational.

Key Steps to a Robust Risk Management Program

rm-monitoring
Our business environment is constantly changing—technologies improve, regulations are modified, competition increases, and demand evolves. Effective risk management grants an ability to adapt to these changes.

Recent headline events, including the Volkswagen emissions deception, the Wells Fargo scandal, and the penalty paid by Dwolla to the Consumer Financial Protection Bureau (CFPB), illuminate powerful motivators for strong risk management programs. Key to a robust program is preventing stressful, and possibly catastrophic, surprises.

When Plains All American Pipeline failed to detect corrosion in its pipeline, for example, the result was a 3,000-barrel oil spill and millions of dollars in fines. The corrosion had run under the radar because the company did not delegate sufficient inspection resources and did not maintain proper procedures and systems for preventing problems from escalating into emergencies. Risk management best practices, however, could have standardized these procedures throughout the organization and prevented the disaster from occurring.

Complying with regulators like the SEC and CFPB
Dwolla, a small, private e-commerce and online payment company, was found by the CFPB to be guilty of risk management negligence for inadequate data security practices. The catch is that Dwolla did not suffer a data breach and none of its customers were compromised. The CFPB fined Dwolla $100,000 as part of its increased focus on companies’ existing prevention strategies. Regulators are no longer simply pursuing organizations that have suffered risk management incidents; organizations need to take proactive approaches rather than simply hope to get by.

Improving productivity and encouraging innovation
An independent, peer-reviewed report, “The Valuation Implications of Enterprise Risk Management Maturity,” published in The Journal of Risk and Insurance, proved that organizations with mature ERM programs (as defined by the RIMS Risk Maturity Model) can achieve a 25% firm valuation premium over those without. Risk management does not have to be a burdensome addition to daily responsibilities—and if it is executed properly, it won’t. It simplifies daily operations by increasing transparency and allowing more resources to be devoted to value-add activities, like product development and customer services.

Checklist for evaluating your risk management efforts

A better question than “does my organization perform risk management?” is “how effectively does my organization identify and mitigate risks?” The following checklist outlines characteristics common to effective risk management programs. Your organization should prioritize development in these areas.

  1. Effective risk management governance

Boards, through their risk oversight role, are accountable for a risk’s material impact, whether the cause is at the executive level or on the front lines. The SEC considers “not knowing about a material risk” negligence, which carries the same penalties as fraud.

  • The board must monitor the effectiveness of the organization’s risk management process, ensuring it reaches all levels and business areas.
  • Internal auditors must independently confirm the board is informed on all material risks.
  • All material risks must be disclosed to shareholders, along with evidence that they are effectively mitigated.
  1. Performance management and goal management
  • Divide corporate objectives into business-unit contributions.
  • Identify business processes contributing to a goal within each business unit.
  • Cascade goals to all front-line managers within contributing processes.
  • Aggregate goal assessments and determine links between contributing business processes.
  1. Consistent risk identification and prioritization

Risk assessments must address more than high-level concerns. Effective assessments drill into risk events, uncovering the root cause, or problem “driving” the risk. Repeatable risk assessments are based on common numerical scales and scoring criteria across departments.

  1. Actionable risk tolerances

Risk appetite is a high-level statement that serves as a guide for strategic decisions. In order to be actionable, it should be accompanied by its quantitative cousin, risk tolerance. Risk tolerance is an effective monitoring technique for key performance goals and risk metrics.

  1. Centralized risk monitoring and control activities

Risk managers need to do more than design processes to identify risks and appropriate responses. A critical third component—monitoring—is the verification of a control’s effectiveness over the risk. A few key things to keep in mind to make monitoring effective:

  • Adjust risk assessments over time (spend less time on risks with decreasing indexes).
  • Reduce testing by identifying areas that can share controls (increase organizational efficiency).
  • Link risks and activities to determine which processes need to be monitored (prioritize activities/initiatives).
  • Monitor business metrics (discover concerning trends before they affect the organization).
  1. Forward-looking risk and goal reporting and communication

In order to continue funding their organizations’ risk management programs, boards need evidence that those programs are working. Risk managers should ask two basic questions before reporting to the board:

  • How might identified risks affect the board’s strategic objectives and key concerns?
  • Which metrics or trends most validate the program’s effectiveness?

These items are just a starting point for an analysis of your organization’s program. For a more in-depth blueprint and “state of ERM” report, take the RIMS Risk Maturity Model (RMM), a free best-practice assessment tool that scores risk management programs and generates an immediate report of your organization’s risk maturity.

RIMS Risk Maturity Model: Root Cause Discipline

After the last article, which discussed the first two attributes of the RIMS Risk Maturity Model (RMM), ERM Based Approach and ERM Process Management; our focus here is on the third attribute, Root Cause Discipline.

Root Cause Approach

In Washington, D.C., officials tried, but were nearly helpless in stopping the deterioration of the Lincoln Memorial. Rather than address the damage with costly repairs, they instead traced the concern back to a root cause. Deterioration was caused by the high powered hoses needed to clean the building—which were necessary because the building was an attractive home for birds. Birds were drawn to a very dense population of insects, which were attracted to the bright lights of the memorial.

So how do you stop the Lincoln Memorial from deteriorating? You dim the lights.

The root cause methodology provides clarity by identifying and evaluating the origin of the risk rather than the symptoms. Unveiling the triggers behind high level risk and loss events point to the foundation of where an organization is vulnerable.

Uncovering, identifying and linking risk back to the root causes from which they stem allows organizations to gather meaningful feedback, and move forward with accurate, targeted mitigation plans.

To illustrate an example in a business environment, consider the risk of inadequate training. Within an organization, there may be multiple departments experiencing risk regarding their training policies, procedures and documentation, yet each area is likely to be recording and recognizing this risk in its own way. The result is an extensive amount of information recorded in spreadsheets that requires time and energy to sort and sift through. By identifying the root cause, a risk manager can expose the underlying commonality between departments and their concerns, allowing more effective identification and mitigation of systemic risk.

Applying root cause to your current approach

To integrate this type of approach to an enterprise risk management (ERM) program, you must first identify the root cause foundation of your organization. The RMM is built on five root cause categories which cover all enterprise risks:

  • External – risk caused by third-party, outside entities or people that cannot be controlled by the organization
  • People – risks involving employees, executives, board members and all those who work for the organization
  • Process – risks that stem from the organizations business operations including transactions, policies and procedures
  • Relationships – risks caused by the organization’s connections and interactions with customers, vendors, stakeholders, regulators  or third parties
  • Systems – risks due to theft, piracy, failure, breakdown, or other disruption in technology, plant, equipment, facility, data or information assets

Understanding which core area of the organization a risk stems from provides the ability to effectively understand and mitigate the risk. For instance, theft from an external third party is very different than theft from an internal employee, and will thus have a very different response and mitigation strategy. One strategy would require an investment in IT or infrastructure, while the latter would need an HR policy change or new ethics program.

Looking for an example of root cause? Download our complimentary Risk Assessment Template.

How the RIMS Risk Maturity Model Works

Hack Wilson was an MLB star in the 1920’s, but he had a drinking problem. Realizing his potential, Hack’s manager pulled him into the dugout and said, “If I drop a worm into a glass of water, it swims around fine. If I drop it into a glass of whiskey, it immediately dies. What does this prove?”

Hack responded, “If you drink whiskey, you’ll never get worms.”

Hack’s observation, while misguided, provides a lesson in the difficulty of training and educating employees. Over the next several weeks, I hope to provide a step by step walk through of the RIMS Risk Maturity Model (RMM) for enterprise risk management (ERM), and while doing so provide a framework that can be used to educate, implement, and enhance the ERM program at your own organization.

Recently the target of a third party study of ERM programs, enterprise risk management maturity as measured by the RIMS Risk Maturity Model, is proven to add 25% to a corporation’s bottom line value, but how is that value achieved? What is it about ERM that makes these organizations more efficient, better operating, and ultimately more successful?

The answer is that the RIMS RMM is a step-by-step guide on how to implement, improve and measure the adoption of the best practices of ERM defined by ISO, COSO and other ERM standards. The RMM is broken down into seven attributes, and the resulting culture, processes, tools, and structure that allow organizations to realize potential opportunities while managing adverse events and surprises. As outlined by the RMM, enterprise risk management is particularly effective in addressing cross functional or silo specific challenges and gaps by providing a common framework.

That’s a loaded response, and as shown above, educating process owners, risk managers and even executives about the value of ERM can be tricky. That’s the value of the RMM—it breaks down ERM into practical requirements, allowing organizations to assess their current capabilities, while providing concrete guidance for a pathway forward.

The seven core attributes are:

ORM-based approach—Executive support within the corporate culture

Risk appetite management—Accountability within leadership and policy to guide decision-making.

Root cause discipline—Binding events with their process sources.

Uncovering risks—Risk assessments to document risks and opportunities.

Performance management—Executing vision and strategy utilizing balanced scorecard.

Business resiliency and sustainability—Integration into operational planning.

In a few upcoming posts, we’ll cover more fully what a mature ERM program looks like from the perspective of one of our seven attributes. The goal is to improve your organization’s ability to manage risk, while exploring the correlation between business value and ERM maturity.

For an introduction to the RIMS approach to ERM, click here to watch LogicManager’s video on Getting Started with ERM.