As organizations’ risks become more complex and geographically spread, boards, regulators, rating agencies, and others are pushing for more “strategic” risk management protocols. Much of this increased demand falls on risk managers. Of the more than 1,000 respondents to Marsh’s recent Excellence in Risk Management VIII survey, 80 percent said leadership’s expectations of the risk management function have grown over the past three years.

So how does an organization start on the path to a more strategic risk management approach? For those already heading that way, how can they continue to make progress? What exactly is strategic risk planning, and how can it help meet ever-increasing expectations?

A Global View

Step back for a minute and consider the “10-mile high” vantage point as stated in the World Economic Forum’s (WEF) Global Risks 2011 report: “Effective risk management is not only about proactively reducing the downsides associated with global risks; it is also about seizing the opportunities for innovation and growth that may arise.”

The WEF report highlights a number of emerging risks, from water scarcity to organized crime to global governance. Yet, when we took a deeper look at some of these risks in our Excellence survey, we found that most organizations do not have them on their risk radar. And even when a company acknowledges the relevance of one of these risks to their organization, the survey shows that the vast majority have no internal actions associated with them. This “gap” creates additional volatility in a business and is one of the compelling reasons for a company to become more strategic in its risk planning.

In order to become more strategic, it is essential to understand the implications of such risks. For example, how will water scarcity change the operational decisions of where a product will be made? How will political instability in certain geographies affect customer deliveries, or timely delivery from suppliers? How will all of these changes together relate to the availability and cost of insurance?

Being strategic involves focusing more on how these broader issues manifest themselves in an organization, and how material these risks are. Only through this analysis can an organization be assured that its risk strategies will have the greatest positive impact on reducing volatility.

Dynamic Risk Framework

Strategic risk planning is embedded in an alphabet soup of methods: enterprise risk management (ERM); governance, risk and compliance (GRM); and the Committee of Sponsoring Organizations (COSO) ERM standards, to name a few. Sometimes all exist within one organization, but are cut off from interaction by organizational silos. Each year, the Excellence survey finds that a siloed approach to risk management is the most cited barrier to fostering a strategic approach within organizations.

Part of our role as a broker and risk advisor is to help companies tear down the silos, cut through the myriad of approaches, and focus on what is relevant, what is actionable, and what is measurable. One way we facilitate a more strategic discussion begins with Marsh’s Dynamic Risk Framework.

Organizations that align around this framework can focus on the risks (volatilities) that emanate from their business models. Once these risks are understood, building a strategy around them keeps the organization focused on the most relevant issues and on supporting the key performance indicators (KPIs).

Alignment within the organization, a critical element in becoming more strategic, will follow.

The Role of Analytics

A key attribute of any strategic risk plan is the use of appropriate analytics. What are the metrics that support an effective plan? How are these metrics used to develop solutions and to keep an organization aligned around an effective strategy?

The Excellence survey asked about the use of a number of analytical tools and techniques. It quickly became clear that most organizations focus on budget-oriented tools that isolate the costs associated with traditional risk management: insurance, claims, and administration. Less than 12 percent of all organizations said they focus on the cost of capital associated with volatility as a component of their total cost of risk (TCOR), making TCOR a static, budget-focused number instead of a dynamic tool that recognizes the potential impact of volatility. Equally, most organizations do not know what their risk bearing capacity (RBC) is; making it difficult to create a risk strategy.

A Strategic Approach

We’ve also found that nearly 95 percent of our clients expect strategic planning as a key deliverable from their brokers. One way we help clients move to a more strategic platform is through Marsh 3D, a disciplined approach that maximizes the return on a client’s risk management investment through lower costs, increased efficiencies, and improved business risk decisions.

Our approach involves digging into a number of questions, including:

• What does your risk management department need?
• How much risk should your company consider taking?
• What is the value of managing volatility?
• How can you track and quantify your strategic risk management investments?

The period of economic disruption that began three years ago has changed the expectations on risk managers. Senior leadership expects more from the function, including a desire to see it better integrated with overall company strategy. As with any challenge, the new demands come with new opportunities for those risk managers.

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