ENTERPRISE RISK MANAGEMENT FOR POOLS & CITIES. May 8, 2014 William B. Heberton NLC Mutual

Transcription

1 ENTERPRISE RISK MANAGEMENT FOR POOLS & CITIES May 8, 2014 William B. Heberton NLC Mutual

2 ERM as Commercial Concept Generally considered a commercial concept. Commercial enbbes have no guarantees of conbnuing access to revenues or capital. Enterprises ohen have life- cycles. Concerned with profit and loss. Many subject to daily public valuabon. Risk of ruin is a real concern.

3 Insurance Impairment Statistics AM Best s 1977 to 2012 Ra#ng 1- Year 5- Year 10- Year 15- Year A++/A+ 0.05% 0.64% 1.91% 3.72% A/A- 0.17% 1.93% 4.69% 6.78% B++/B+ 0.77% 5.37% 10.19% 13.86% B/B- 2.17% 10.53% 19.09% 26.13% C++/C+ 3.73% 14.62% 27.07% 33.20% C/C- 5.90% 18.40% 34.59% 46.44% D 7.57% 26.28% 42.33% 51.12% Secure 0.23% 2.05% 4.56% 6.78% Vulnerable 3.76% 14.88% 26.37% 34.10% All 6.50% 3.54% 7.11% 10.04%

4 Municipal Public Entities Very different view of life. No concept of life- cycle. Guaranteed stream of revenues via taxabon. Generally not subject to compebbon. Catastrophic scenarios ohen met with support from State or Federal resources. Risk of Ruin is a foreign concept.

5 What Are Pools? Pools clearly face most of the awributes that commercial enterprise face. Really don t resemble the public enbbes they serve. Capital calls are generally not viewed as a viable risk strategy. For all intents and purposes you are insurance companies!

6 DRAMATIC CHANGE IN INSURANCE GlobalizaBon of risk. Growth of offshore capacity. ConsolidaBon of US Industry. Rise of alternabve markets. Growing impact of capital markets on insurance pricing.

7 Regulation/Oversight How does state regulabon/oversight fit the New World Order. AIG and other near insurance failures exposed holes in state regulatory system. RBC as formulaic approach failed to recognize full organizabonal risk. Rise of global nature of risk raise call for global standards. Limited ear for we are different.

8 COSO ERM Definition A process, effected by an enbty s board of directors, management, and other personnel, applied in strategy se`ng and across the enterprise, designed to idenbfy potenbal events that may affect the enbty and manage risks to be within its risk appebte, to provide reasonable assurance regarding the achievement of enbty objecbves.

9 CAS ERM Definition The discipline by which an organizabon in any industry assesses, controls, exploits, finances, and monitors risks from all sources for the purpose of increasing the organizabon s short and long- term value to stakeholders.

10 ERM Milestones 2002 Sarbanes Oxley Act of Casualty Actuarial Society defines ERM and presents framework 2004 COSO framework published 2007 S&P inibates evaluabon of ERM as factor in bond rabngs for financial companies 2007 Casualty Actuarial Society creates CerBfied Enterprise Risk Analyst(CERA)

11 ERM Milestones (cont.) Global Financial Crisis EU Solvency II DirecBve in Dodd Frank introduces Treasury into Insurance oversight. Own Risk and Solvency Assessment (ORSA)- second part of Solvency II NAIC 2011 ORSA proposal

12 DFA vs. ERM DFA: Financial modeling generally used to evaluate surplus and return adequacy. ERM: Consistent re- evaluabon of business and appebte for risk to meet stakeholder objecbves. Financial risk evaluabon and DFA are tools to aid the process.

13 ERM vs. Good Management ERM is good management! ERM calls for commitment through out the organizabon and its board. EffecBve ERM is an imbedded systemic commitment to conbnuous process improvement. Heavily impacted by organizabonal complexity. ERM Bes directly to strategic thinking!

14 Advantages for ERM in Pools ProporBonality. Single state. RelaBve lack of complexity. Management highly engaged in decisions to take risk. Greater freedom to establish objecbves. Close working relabonships. You know your members!

15 Why Practise ERM? Encourages broadened thinking. Framework for decisions. Explicitly addresses uncertainty. Can reveal opportunity. Destined to be the future of risk management

16 Getting Started Need desire for conbnuous evaluabon and improvement. Establish objecbves. Create register of risks/events. Analyze the risk. Evaluate cost benefit relabonship. Establish relabve importance. PrioriBze. Establish ownership/act. Review/monitor. Repeat!

17 NLC MUTUAL KEY RISK AREAS Business model risk. ReputaBon risk. Regulatory risk. Staffing risk. UnderwriBng risk. Reserving risk. Claim handling risk. Dependence on reinsurance. Asset risk. Other operabonal risk.

18 Risk Register & Ranking Governance Operational Public Image Compliance Technology Hazard Human Resource Financial Business Model Political Competition Underwriting Reserving/Claims Reinsurance

19 CAPTURING ALL THE RISKS Look objecbvity at yourself. Look at issues your peers have faced. Look at other insurer issues. Look at catastrophic events. Try to understand the tail of your loss distribubon. Look globally. Ask what if!

20 ERM Presents Opportunity Opportunity to minimize or avoid events before they occur. PredicBve modeling and analybcs can be highly cost effecbve. Enhanced member Be- ins. Enhanced member benefits. Unique claims handling or mibgabon. OpportuniBes to ublize capital or resources more effecbvely.

21 Thoughts About Risk Some risks cannot be managed. Some provide opportunity. Some can be avoided. Some can be reduced. Some can be mibgated. Some can be transferred.

22 Tools for Managing Risk Coverage document flexibility. UnderwriBng selecbvity. Pricing flexibility. Premium offsets. Limits, sub- limits, caps. Claims made vs. occurrence. Excess insurance/reinsurance. Peer ideas. Training/educaBon. Outside experbse.

23 Board Expectations Work with management, at a strategic level to define a framework to monitor the management of business opportunibes and risks, and the mibgabon of risks.

24 Does ERM Fit Public Entities? Yes! Provides planorm to develop common understanding of issues. Provides clear goal based means for prioribzabon of issues. Improves resource allocabon decisions. Creates effecbve monitoring of risks. View not necessarily shared by public enbbes themselves.

25 Who? Executive Team (Leadership Team) City Manager/County Administrator Finance Public Works Police Chief/Sheriff Parks Human Resources/Risk Attorney

26 Closing Risk management needs to be interwoven into all aspects of a firm s business and should be a part of the calculus of all decision- making. Dr. Randall S. Kroszner Governor, Federal Reserve Board