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12 questions chief risk officers should ask after a major loss

Corporate Risk Tools and Technology|Insurance Consulting and Technology|Reinsurance
Insurer Solutions

By Dave Ingram | July 12, 2019

CROs can use lessons learned from a major loss to make necessary adjustments in risk strategy that position their organizations for future success.

After a major loss, a very human reaction would be to just turtle up, abandon your strategies and play it as safe as you can. But the strategic chief risk officer (CRO) can lead the company on a different path — a path that will lead to minor (or, if needed, major) adjustments to strategy after the loss. However, this requires a clear head, quick reaction and the right approach.

After a major loss, strategy and execution must be examined in light of what was known, or knowable, when the decisions to accept the risks were made. This article, a part of the Day in the Life of the Strategic CRO series, provides 12 questions that a CRO can use to find out what, if anything, needs repair.

The right approach is to deflect the “witch hunt” mentality to find someone to blame for the loss and to terminate them and every part of the company strategy that they had championed.

Instead, the strategic CRO must lead the examination of all risk taking and risk management strategy elements that led to the loss. Each part of the strategy needs to be examined in light of what was known, or knowable, when the decisions of how to select and mitigate a risk were made, rather than with the hindsight that is available after the loss happens.

This examination can start at the very top of the risk management strategy with these questions:

  1. Was the strategic risk trajectory appropriate for the company’s financial situation, the risk environment and the primary strategic objectives of the organization?
  2. Did the specific plans of the company in the years prior to the loss support the chosen trajectory?

Here, risk trajectory means the choice of either:

    • Increasing risk faster than surplus
    • Increasing surplus faster than risk
    • Balancing the growth of risk and capital. 

The wrong choice of risk trajectory may leave a company in too fragile of a situation, and therefore more sensitive to losses. Or, the losses might be just the inevitable consequence of being in the risk business.

Companies can make good decisions but execute them poorly. A major loss might result from a bad decision, or a good decision and poor execution.

  1. Were the risk appetite, tolerance and limits set through a robust process that considered the pertinent factors?
  2. Was compliance monitored regularly?
  3. Was the company in compliance, especially for the risk that resulted in the major loss?
  4. If risks exceeded their limits, were actions take to get back in compliance?

The choice of risk appetite, tolerance and limits can have a major impact on risk taking activities, but only if compliance is monitored and if there are real actions taken as a result of breaches or near-breaches.

  1. Did the risk assessment process use the best available methodology?
  2. Was that methodology actually used?
  3. Were the risk assessments performed and reported in a timely manner?

The best risk management requires the best risk assessments so that actions are taken at the right moment. There is often a trade-off between the accuracy and timing of risk assessments. The best number, delivered too late for corrective action is of little value.

  1.  Were the planned mitigations capable of reducing the frequency and/or severity of losses in the manner expected?
  2. Were the planned mitigations carried out as expected?

Mitigations are your defense. If you chose the right mitigations and executed them well, then you would have expected to be safe.

And finally:

  1.  Did your peers suffer comparable losses?

There are several parts to the answer to that one, like were they similarly exposed, did they use the same mitigations to similar effect (or lack thereof).;

So if there was a flaw in your approach to this risk that resulted in the major loss, these 12 questions ought to help find it for you.  And if the CRO can lead the company through the process of answering these questions and finding that flaw, then management will be able to continue with the intended strategy and corrections as needed, rather than abruptly fleeing their strategy and seeking some other path.

And if these 12 questions do not reveal a weakness, then it is quite possible that the event that precipitated the loss was just bad fortune.

Previously in the Year in the Life of the Strategic CRO series: 3 drivers of epic risk culture failures.

About the Author

Dave Ingram
Head of Willis Re ERM Advisory

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