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5 Best Practices for Treasury and Finance Risk Managers

  • By Steven Jones
  • Published: 10/4/2017
riskjengaAre your company’s risk management decisions aligned to its strategic and financial objectives? Do you empirically support risk management decisions and adjust course and strategy to keep pace with the changing risk landscape and financial strength of your corporate objectives? If you have answered “no” to one or both questions, you are likely not managing risk as efficiently across your company as you could. Even worse, you may be exposing the balance sheet to catastrophic scenarios that could significantly impair your company’s performance.

The good news is that strategy, data and capabilities exist to solve this problem. Furthermore, the risk management team can make progress towards building alignment immediately.

Three major factors in the last 10 years are creating a sea change for risk management teams:

Senior executives have increased recognition of the importance of risk management for protection against a wide set of risks and issues.
As a result risk management teams find themselves more likely reporting into the finance department or a chief risk officer and presenting to a risk review board managing enterprise and insurable risk issues. With this change comes an increased expectation that strategy and decision making are validated and meet the corporate standards for allocating capital and operating expenses.

Companies are experiencing an increasingly complex risk environment which is leaving executives looking for better ways to assess, quantify and project loss potential. As companies expand globally, implement complex technologies and connect with businesses and customers in new ways, we are creating more points of failure and business risk which is new to risk management professionals.

Data and technology capabilities have never been as mature to provide risk management teams comprehensive data integration platforms, analytics to assess and quantify risk and capital frameworks to evaluate the financial tradeoff of risk financing.

The result is a multidimensional disorganized mosaic that requires risk management teams to constantly up their own games to effectively ensure the needs of their company are addressed and protected. Alignment of corporate risk philosophy with the decisions and actions of a risk management team are critical to delivering value to the company beyond renewing insurance programs at slightly less premium year over year.

So what is a risk management team to do? Five things:

Define & Align Risk Philosophy – seek to understand the overall goals and capital objectives of the company and translate the strategy into a quantified corporate risk tolerance. This appetite and capacity to bear risk will be used to ensure decisions the risk management team is making to retain and transfer risk are aligned appropriately with the objectives of the company. 

Understand Critical Risks – while the concept of identification of emerging risk issues has been prevalent for years, it is important to note that risks are dynamic. Take cyber for example, which is not emerging but is rapidly evolving. Companies should leverage industry loss data to identify the likelihood and financial impact similar type companies have experienced and seek to understand how risk and issues relate to their own profile. Cast the net broadly, spanning strategic, financial and operational risk categories, but qualify and quantify to whatever extent possible to help the company prioritize the issues. 

Quantify Cost of Risk – if you want to add immediate value to leadership, develop a costing framework that aggregates fixed and variable costs in your risk profile across the portfolio. Despite this being a fairly straightforward concept, many companies do not have a clear understanding of how they spend their “risk dollars” or the protection it affords them. Furthermore, consider costs spanning paid and reserved losses, administration costs to manage your risk portfolio and premiums the company pays to transfer risk, e.g., insurance premiums. Finally, build a roadmap or plan to impact the costs and protection gaps over a period of time.

Optimize Risk Financing – the goals of risk transfer for any company should be to get the broadest coverage at the lowest cost with confidence the insurance company will be there when you need them in the event of a claim. An economic “trade-off” analysis enabled by data, analytics and capital theory can help to ensure the company is well positioned heading into market negotiations.  

Minimize Retained Risk/Cost – costs related to retained risk often represent a significant and possibly majority of costs in a company’s total cost of risk. Risk management teams should consistently evaluate variances to industry averages, identify opportunities to influence both before and after claims and closely monitor the process of cost savings initiatives over time.

Treasurers already make decisions regarding financial risk and hedging leveraging capital and probability theories. They are increasingly expecting risk management teams to improve their decision making in a similar manner, recently confirmed in AFP’s Strategic Role of Treasury survey. If you weren’t able to respond “yes” to the two questions at the beginning of this article, expect you will need to in the future. Through leveraging a set of best practices, mature data, technology and analytics and a proven methodology, you can address these gaps today. There are better ways to manage risk.

Steven Jones is Head of U.S. Analytics, Managing Director at Marsh. Jones will lead a session on capital efficiency for risk financing at AFP 2017 in San Diego. Check out a One Day Pass.

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