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Why Good Risk Governance is essential for firms?

In Uncategorized on October 15, 2016 at 5:56 pm

“ Behind a successful man, there is a great woman” – Famous saying

We can also say that the success of a business is based on good risk governance. Risk and governance are inseparable in current dynamic business environment, and when together adds beauty to social life as well as personal life . In fact, good risk governance acts like a mature woman in providing oversight and guidance on major business decision involved based on their inter-disciplinary experience, and knowledge. Business values are set similar to the foundations of value system in a house.

Failure of governance is one of the major causes of insolvency of companies in the last few decades. Developed countries such as UK are considered to be proficient in developing risk governance than the developing countries. Controlling risk and uncertainty is painful, perhaps combating all of risk and uncertainty with 100% success rate is extremely challenging. Do we understand the reasons why it is so? There are few ideas:

  • Doing nothing and believe in fate;
  • Learn risk governance and implement it ;
  • Implement a well-developed risk governance framework by experience professionals
  • Join a foundation course or read a book on risk governance and then implement it and for mature practice hire experts.

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This is only applicable when we at least understand the value of good risk governance.

Is it possible to run an enterprise whether it is large or small without setting formal risk oversight, processes, risk limits and controls? It is very clear that diffusion of risk governance (governance related to risk related matters) across countries is very divergent due to different understanding  and the way it is implemented. There is no standard format to implement risk governance. Without foundational understanding of the concept, trial/error is not a prudent option at early stages however, affording high cost of enrolling experts pose financial challenge.

Tremendous governance gaps are overlooked from decades. Risk is like belief in death, we always know there is death but whether we will die, may be that’s not acceptable notion. Similarly, none of us are worried because we always think – it will happen to others and not to us. Risk issues that are relevant for the corporate board may not hold true for the committees. There is a significant gap in the understanding, communicating and especially in dealing with the risk. One of the major aims of risk governance is to reduce surprises in the organisation by understanding current risk, anticipating future risks and developing systems with enough resilience so as to demonstrate good risk governance practices. In reality, inclusion/exclusion of a single risk such as cyber security takes considerable time and effort. Further, not upgrading information systems to track, monitor and integrate risk raised  tensions. There are many unanswered questions:

To handle this, we need risk specialists in the board who can make independent internal controls. Board level risk committees are common.

  • Are these committees have enough understanding of risk or situation is like ‘a blind man is leading another blind’ ?

Tone at the top tolerates exceptions, complacency, and unequal treatment which should not ideally be considered.

  • What are the limits of these exceptions?
  • How much corporate frauds can be tolerated? Who is responsible?
  • Does blame game actually works?

There is no state of urgency of implementing good risk governance. It is a lousy, multi-year process with no reward. The benefits of good governance are always visible in bad times. However, in good times, it is considered as a compliance or administrative burden which has reflected in more tick-box approach rather than actual implementation. It is the ethical, behavioural and moral conducts of a woman which makes a woman ‘great’ not simply the beauty. Definition of great woman varies significantly so do the definition of good risk governance but both of them surely protect from a ‘fall’ and motivates for a ‘rise’ in personal life and business environment. Thats what risk governance means to us in practice.

Your comments are welcome.

 

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Do Indian insurance market need a professional CRO forum?

In Finance, Legal, Risk Management, Uncategorized on January 18, 2016 at 3:01 am

Recently, I interviewed CRO’s and senior management of Indian and UK insurance companies and found that most of UK insurance companies CROs often discuss risk related matter locally every month and at least attend two international CRO forums/institutes such as GARP, IRM or CRO forums at London market every year. They have also attended many risk certifications and top risk trainings. Surprisingly, I found rarely any CRO in India discuss risk related matters at local level and very occasionally they attend international level forums.

Decision Making Process, Risk Management

A CRO forum is a group of professional risk managers and CRO developing and promoting industry best practices in risk management. It is a platform where CRO’s can join together and discuss their issues. Recently, there is an increase in financial investments by foreign partners of many Indian insurance companies such as Standard Life, Aviva, AXA, Tokio Marine and Bupa. Efficient risk management is one of the most crucial aspect by these giant foreign MNC’s. India is emerging insurance market and there is high potential for growth.

Insurance companies in India are managing risk in their own silos from long time. Currently, there is no common forum where insurance companies can discuss their problems in managing risk and improve awareness about emerging risks. A platform is needed where foundational information can be provided on how to adopt and implement robust risk frameworks. A common pool of funds needed for research for setting examples of best practices and learning from mistakes. Perhaps, a Centre for Risk Governance would be best option.

Risk management implementation has to be enhanced at local, national and international level but how that remains an open question. Visibility of benefits of improving risk management practices are not short-term. Without enough capital, training of senior management in risk management is practically impossible. In such scenario, a CRO forum can play a promising role in uplifting Indian insurance industry risk management expertise. This is a need of hour.

Building trust and sharing data pose another challenge. Does it risk the reputation of insurance companies? Think of positive side, if it could be possible to have a forum where we can discuss risk related issues, enhance risk capacities and embed risks into strategic decision making, it would be few of the most desired objective for the companies. This obviously, require a professionally managed CRO forum with independent governing body.

Kindly share your views.

Why Understanding of Risk Management is Important for Managers?

In Uncategorized on September 17, 2015 at 4:25 am

Understanding of risk is complex which scare people to develop its understanding. Michael Power, Professor of London School of Economics (LSE), has brought attention to different boundaries of risk management from ‘Risk Management of nothing’ to ‘Risk Management of Everything’. This can be interpreted: one cannot totally avoid the risk management and cannot claim to include all existing risk. Inclusion and exclusion of risk depends upon the understanding of risk itself within management.

In this blog, first I will discuss what a manager is supposed to do and why he/she faces dilemmas in management of risks. Then how those dilemmas can be tackled through better understanding of risk management.

A manager does not supposed to do all work by himself/herself rather he/she engage in planning, organising, directing and controlling. The management major role is to enhance motivation of the team to deliver work in timely and effective manner with agreed quality to achieve organisational objectives.

Risk navigation can be a tight rope walk

Several questions arise when management process actually followed during practice at grassroot level.

  1. How to estimate the risks during planning of management activities
  2. How to organise work so that it can get complete on time with agreed quality without operational errors?
  3. If I pass on the information to my colleagues, how I will make sure it is understood same and performed in the same manner as directed?
  4. There is a likely chances of realizing a gap between the expectation set and the actual results? How to control the risk to achieve organisational objectives?

Management knowledge of risk should not only confined to resolving dilemmas but also to enhance strategies. A better planning, organising, directing and controlling can only be achieved if management understand their own risks. For example, if a company would like to construct a building and have experience of 5 years. The company recorded its own risks for example 100 risks related to construction in particular geography and use industry risk data. This company can better estimate the risk from a new company in the market having no experience of handling construction risks.

All companies face operational errors whether they are large or small. Understanding of the operational risks can make safety systems more profound and robust to deal with possible errors. It is observed that corrections of errors do not pose much issues rather repetition of errors make blunders and cause failures.

The understanding of risks also support managers to grow in their career path. Board of the director, CEO of the company has to deal with risks at strategic level which have higher impact though, general management has to face only day to day risks. Expectation of understanding of risk from an agent of the company and director would be substantially different. Risk Management is an important part of Management at all level and cannot be separated. Don’t, get frighten from risk just learn to deal with it, the benefits will follow you.

“A ship is always safe at the shore – but that is NOT what it is built for.” – Albert Einstein

Multiple Interpretation of Risk and Uncertainty

In Uncategorized on March 5, 2015 at 3:28 pm

Risk deals with syndrome of multiple interpretations and boundary less. Through this blog, I would like to clarify few terms associated with risk and uncertainty.  

Risk and loss: We usually relate risk with loss.  Loss is a common experience that can be encountered many times during a lifetime by losing someone or something or that result in disadvantage. A common difference between a loss and risk is former results only in negative consequence while risk may have positive or negative consequences though, people often forget benefits out of taking good risks.

Perils and Hazard:  Hazard arises from the material, operational, or occupational characteristics of an insured property. It is a substance for which there is valid evidence that it is combustible, compressed, and explosive or water (moisture) reactive. Though, a peril is something that can cause a loss. Examples include falling, crashing your car, fire and lightning while a hazard is any condition or situation that makes it more likely that a peril will occur.

A hazard may be Physical hazards, like smoking, or skydiving or Moral hazards (most of which are avoidable), like dishonesty for example burning down the stocks in the godown when your company goes bankrupt to collect insurance money or buying insurance on someone with yourself as beneficiary and then killing them or Morale hazards, like a careless attitude since “insurance will pay for it.” Simply put, hazards are the circumstances or source of potential damage whereas peril is a serious or immediate danger.

Insurance companies deals with small, medium and large risk of individuals and corporate. They use plethora of such terms very frequently which is often confused by many. A most classic example is “what is difference between risk and uncertainty”.  Insurance companies are happy to insure predictable risk which should not certainly happen.  

Interpretation 1:  Unpredictable risk cannot be insured. 

Interpretation 1: Unpredictable risk cannot be insured

Interpretation 2:  An uncertainty is insurable or not? For example natural disaster are predictable and unpredictable both – so, some are insured whereas all cannot be insured.

Interpretation 3: The risk which will certainly occur after a period of time or after an event, is also not insurable.

Interpretation 4: Risk has its own characteristics so do the loss.

Interpretation 5: Insurance is more dependent upon perils though, premium rate varies significantly on the basis of hazards.

There can be many more. Understanding of risk and uncertainty is highly debatable so do its measurability and immeasurability. A possible reason for multiple interpretation can be Risk viewed from multiple perspectives. This makes subject interesting however, it appears more complex if seen holistically.

Does Enterprise Risk Management add any value to traditional risk management?

In Uncategorized on April 27, 2014 at 12:06 pm

There has always been a debate over the requirement of ERM specialist when the same work can be done by a risk manager in traditional organisations.  The debate poses questions in our mind – Does ERM make any sense in cost benefit analysis? and How to check that risk is truly embedded in the organisation?

There is high cost, time and money involved in implementation of ERM while under traditional risk management, each unit manager is responsible to manage their own unit risk.  Traditional risk management does not provide interaction among the various risks which is seriously reflected in corporate decision making. It is a small example of how corporate fails if they don’t understand the problems and risks within their own units. This lead to genesis of idea of ‘Enterprise Risk Management’. ERM is an umbrella term which considers all risks in the organisation in holistic manner and helps companies to achieve their objectives within their risk appetite.

The next question that needed to be addressed is What is the right time to implement ERM? The industry realize the value of ERM only in hard times when some CAT event happen, or major regulatory penalty occur. These event wipe out major reserve of the insurance companies if not adequate risk management has been taken care of.  In hard market, the corporates have no money or very less money to spend on procedure for implementation of ERM, so, it is only the good time (soft market), when companies can invest on implementation of ERM.

In the last few weeks, I have visited many insurance companies in Indian insurance market and found that they are still in the position of understanding the value of ERM.  ERM has only positive and negative aspect – if perceived value of ERM is not understood, it will be looked certainly as a cost to the company and if understood it creates efficiency and reduce cost. The common and most adopted approach is defensive approach to tick mark the risk management options which is required by the regulatory bodies. Other developed markets have learnt their lessons in recent financial crisis and realized the value of ERM but now they face problem of understanding of ERM and benchmarking. My next blog will discuss the stages of development of risk management throughout the world. 

Feel free to contact me for any consultation or discussion of ERM in your organization. “ruchi(dot)agarwal at-the-rate cgpworldwide.com” 

Does new regulatory bodies FCA and PRA help the insurance regulations?

In Uncategorized on December 9, 2013 at 6:45 pm

Failing to meet its complete objectives, FSA is replaced by the Financial Conduct Authority (FCA) and Prudential Regulation Authority (PRA) in  April 2013 as per the requirement of Financial Services Act 2012. There are a few significant changes made in the Supervisory and Prudential guideline given by  FSA guidelines before 2012 and new guidelines given by FCA and PRA. FCA objective is to secure consumer protection, to protect and enhance the integrity of the UK financial system and to promote effective competition in the interests of consumers.

Since 2013, there are 4 Distinct Approaches applied in Implementation of Enterprise Risk Management by PRA – Rules, guidance, Single firm Assessment and Assurance.  PRA Approaches are divided among financial services companies into 4 Broad Categories. The approach from small Insurance Companies (Category 1) is very clear; there is no expectation of ERM implementation however the companies are expected to abide by the rules given by PRA. The approach for medium Insurance Companies (Category 2) should work a step ahead and should have their Risk Appetite statement and planning to implement ERM.  From the large Insurance Companies (Category 3), PRA expects them to agree and understand Enterprise Risk Management framework. Nevertheless, Insurance Companies in this category must inform PRA about any risk which has aggregation from Risk Appetite. In the last, from very large Insurance Companies (Category 4), PRA expects to take care of all 3 line of defence as well as to take care of program of continuous Assurance work. It looks obvious that PRA is now able to understand that Prudential Guidelines can’t be implemented in all firms in the same way and considering the problems of Insurance firms in their decisions which shows a positive attitude by the regulator.

Very recently, FCA has published a document on Risk Outlook( Authority, 2013) which focus on different aspect of problems faced by Insurance firms in ERM implementation. According to Solvency II guidelines, the risk management is not a one day process or deadline driven which can be accomplished over a short period of time. Even though, some companies are able to implement but its effectiveness is still questioned by the experts. FCA is now looking for long term solutions and more effective and robust ERM framework rather than showing top records of implementing ERM in black and white. In this Report they try to find out inherent biases and heuristics, inadequate financial capability, conflicts of interest, culture and incentives, ineffective competition, economic and market trends, technological developments, regulatory and policy changes, information asymmetries are the key drivers for conduct of risk. When Insurance firms takes into accounts these drivers into consideration while linking it with business plan can create Embedded risk culture in the organization which will ultimately benefit to Insurance firms and consumers. The recent draft guidelines of International regulations like Conframe may affect the present regulation in UK but subject to acceptability.

A journey from Cadbury, Turnbull reforms to Solvency ii, Industry demands need of regulations on national level stating the expectation from insurance companies rather following distinct guidelines of different regulations.

Risk learning and ERM go hand in hand

In Uncategorized on October 8, 2013 at 8:52 pm

It is well said by no other than Warren Buffet: Risk comes from not knowing what you’re doing.” 

Enterprise Risk Management is a holistic view to risk management. It involves top management, board of directors in making strategy within the risk appetite of the organization which leads to fulfilment of organizational objective. The definition looks complex but it is based on very simple concepts. Last week during my discussion with Chief Risk Officer (CRO) of an Indian Insurance company, we identified two way of performing a simple task – one way of doing this is to learn from trial and error and repetition of same task, many times which ultimately leads to give us feeling of being expert and experienced and the other approach of doing is to get knowledge about technical aspect of simple task and learn from other experience and start doing it. Same applies to personnel involved in risk identification, assessment, evaluation and risk control. It can be argued that doing same mistakes over a long period of time without realizing what is wrong and right, does not change solvency position of the organization in case of adverse situations like catastrophic event, deep recessions.

Risk learning is an emerging concept and not discussed yet within the academicians and practitioners very often. A good example of this is maintaining a loss register internally within the organisation and for the industry as a whole and share within the group for the betterment. Do we really use it in our working? When we install a new machine or involve new process – do we first spend some time on gaining technical knowledge and experience through risk learning or just start working on it. It can be argued what is good and valuable for the organization in such case? What will be the benefit of spending huge money in gaining expertise vs. cost of risk?

It can be interpreted that Risk learning is way to learn from critical feedback in existing system and learning from error made by others when we apply it in a new system. This new perspective ‘An improvement in ERM program through Risk Learning’ can make revolution in existing system and improve performance to greater degree.

Comments welcome.

Why entrepreneurs are moving beyond the Next Big Thing to solving the Next Big Problem

In Uncategorized on October 7, 2013 at 12:28 pm

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Buy it on Amazon

A new book, Planet Entrepreneur, published to coincide with the upcoming World Entrepreneurship Forum in Singapore has highlighted the need for entrepreneurs to work with policy makers and world leaders to create a ‘New Humanism’.

From energy to education, social needs to social media, a new generation of global entrepreneurs have the opportunity to fundamentally change the planet for the better.

Whether it is climate change, pollution, poverty, economic stagnation, or underemployment – the world needs innovative, workable solutions more than ever.

Through real-life examples, Planet Entrepreneur explains where the entrepreneurial revolution is headed and explains how anyone can become more entrepreneurial.

Written by members of the World Entrepreneurship Forum, the first global think tank fully dedicated to entrepreneurship, each chapter focuses on different aspects of the challenges and opportunities currently being encountered and solved by entrepreneurs, including:

• The cutting-edge ideas and real-world skills that today’s best entrepreneurs use most often

• Using technology to solve real-world problems

• Social entrepreneurship and the end of charity

• Empowering women and minority entrepreneurs

• The global rise of the self-employed entrepreneur

• Opportunities for improving housing, food, sanitation, among the world’s most needy people

• Making the marriage of business and the environment work for all

• Social media as a launching pad for your ideas

Planet Entrepreneur also outlines how entrepreneurial ‘eco-systems’ can be developed by young and old to provide sustainable growth to benefit the whole planet. From Detroit to Delhi, the teenage tech-whizz and rebel retiree can be part of an entrepreneurial eco-system that helps to provide wealth and social-justice for all.

Planet Entrepreneur explains how the world’s best entrepreneurs are making a profit or meeting a pressing social need, and how you can too. Today’s problems are too urgent and the implications for our future too dire to ignore.

We are now all living on Planet Entrepreneur.

Planet Entrepreneur

Wiley Editions

http://www.world-entrepreneurship-forum.com/NEXTBIGTHING

Buy it on Amazon

Twitter: #ePlanet @WEntFr

A ‘Generalist’ or a ‘specialist’ who performs better?

In Uncategorized on July 14, 2013 at 5:53 am

A Generalist is the person who has worked in almost each area and then become an overall expert like Chief Executive Officer (CEO) of the company while a specialist is the person who excels in particular area and get professional qualification and experience in the same area over the period of time like Chief Risk Officer (CRO). A few days back, I travelled  to attend ‘World Entrepreneur Forum’ held at Hotel Trident, Mumbai which gave me an opportunity to discuss the debate with Mr Chandrashekaran at General Insurance Council (GIC). 

The debate started when a generalist can do almost all the work eg; 90% of work with good efficiency why we need specialist? The other aspect of debate is about specialist which emphasize upon the excellence that provides so called last 10% of quality assurance which a generalist is not able to provide. The problem arise where there are limited funds available or during the financial crisis when organization wants to cut the cost – who should be sacrificed on altar at such situation? Is it worthwhile to keep expert in each area in comparison to cost involved? For example: Salary of CEO is almost equivalent to CRO however, most of the job can be done by CEO.

If we observe the recent financial crisis, the insolvencies of the companies are not due to bad credit rating, not even not following regular procedures rather due to bad risk management or due to ignorance of care of rest 10% factors which were overlooked by the generalist management. It can be seen that generalist provides the good product/service but to get the best out of it, specialist services are needed.

Risk Appetite of Insurance Companies – Eat, Drive and Accepts Risk Carefully

In Uncategorized on March 18, 2013 at 10:51 am

Risk Appetite in context of Insurance companies is the amount of risk the insurance company is willing to take to get an optimum risk return balance in their investment portfolio. It is obvious that large companies can accept large risk, small can accept small so what’s difficult, why companies are not able to take the optimum risk according to their capacity. How it works?

Insurance companies accept the risk of individuals/corporate and makes different portfolio of risk eg: fire, marine, motor etc. The Premium for portfolio of risk is invested into the chosen set of risky assets.

Good Risk Appetite statement reflects upon the company’s decision making to take in controlled and orderly manner which will produce profit.  Good Risk appetite statement linked to good strategy can save companies from crisis. Do check your appetite before taking decisions as you take in case of eating food also – overeating makes you fat (In case of insurance companies makes your portfolio risk, provide losses), malnourishment makes you weak (in case of insurance companies, less business makes your survival difficult in the market).

Same applies when we buy a car, when we buy a Maruti 800 small car, it’s really risky to drive it at the speed of 140 km/hr; while if you buy Mercedes Benz, it is average risk to drive at same speed on a reasonable safe road due to built-in safety feature.

“Eat, drive and accepts risk carefully according to your appetite”.Image