The Evolving Role of the
Chief Risk Officer
Presented by
Allen Monroe
International Quality and Productivity Center
San Francisco, October 30, 1998
Risk I N FO
Session Objectives
 Review
Need for integrated risk
management approach
 Review
a Unified Conceptual
Framework that applies to all types
of risk
 Show
how to leverage
contemporary technologies to
achieve integrated risk
management.
Risk I N FO
I. The NEED for Integrated
Risk Management
 Would
you accept with 100% certainty:
Your Sales Director’s contention that sales
will increase 20% next quarter because the
product you are about to introduce “beats
the pants off the competition?”
• Your Nuclear Engineer’s contention that,
because of redundant systems, there is no
chance of an accident that would result in
explosion of release of radioactivity?
•
Risk I N FO
Most Jobs have a Singular Objective
 Maximize
sales.
 Cut expenses to the minimum.
 Get the new product to market on time.
 Meet the quarterly budget forecast.
 With
such single-minded objectives,
WHO is weighing the tradeoffs?
Risk I N FO
The “Textbook” Approach
 Five-step
risk management process:
• Identify risk exposures
• Quantify risks
• Avoid and Transfer risks through safety,
engineering, contractual, and other means.
• Retain those risks which remain to the
extent they are within the organization’s
financial capacity
• Insure risks above the organization’s own
retention capacity.
Risk I N FO
Shortcomings of
Textbook Approach
 What
if insurance is currently priced at less than the
“burn rate?” (expected losses)
 What if insurance is not available, or appears to be very
expensive for certain risks or certain limits?
 What
if the rate of return on loss control investments
fails to meet company targets?
• With these thoughts in mind, let’s turn to a Unified
Conceptual Framework that applies to all types of risk.
Risk I N FO
II. Seeking a new definition
of Risk
 Old
distinction between insurable risk and
“business risk” is becoming blurred.
 Fortuitous
risks and non-fortuitous risks
not always separable
 Defining
risk as the “chance of loss”
ignores the fact that frequency of small
losses can add up to a fairly predictable
annual cost.
Risk I N FO
Understanding Risk from a
Financial Perspective
 Financial
theorists define risk as:
• Uncertainty as to achieving an
Expected Outcome, observed through:
• Variability from an Expected Result.
Risk I N FO
Risk is Integral to all
Economic Activity
 The
VALUE of an investment,
such as a company’s stock is:
 Based both on the
• Amount of the Estimated Future
Earnings Stream, and the
• Degree of Uncertainty in realizing
those estimated earnings.
Risk I N FO
Valuation Formula
Value =

E
arnings 1...n
__________
Required
Rate of Return
Risk I N FO
Components of ROI Analysis of Risk
Reduction or Transfer Expenditures
 Stream
of after-tax Revenue over
time = each year’s Net Expected
Savings attributable to Risk
Reduction
 Importance
of Timing
 Importance
of after-tax Discount
Rate
Risk I N FO
Effect of Risk Reduction
Expenditures on Valuation Formula
Cost of Risk Transfer = “Premium” less
“Expected Losses”
 “Benefit” of Reduced Risk translates into a
lower Required Rate of Return “discount”
factor applied to the stream of future earnings.
 Net Benefit of Risk Reduction or Transfer
expenditure is the combined effect on V=E/R.
 Net
Risk I N FO
Example
 Before
Risk Reduction:
• Present Value of $1 billion annual after tax
income for 30-yr. horizon / .09 required rate of
return = $10.27 billion.
 After
Risk Reduction:
• Present Value of $.95 billion annual after tax
income for 30-yr. horizon / .085 required rate of
return = $10.61 billion.
 Decision:
Yes, proceed with risk reduction.
Risk I N FO
Effect of Differing Risk Characteristics
affecting Economics of Risk Transfer
 Principal
•
•
•
•
Risk Characteristics:
Frequency of Loss
Average Severity of Loss
Degree of “Internal” Correlation with other risks
Relative “External” (I.e. Insurance or Capital
Markets) risk correlation.
 These
factors affect the cost and benefit of
risk transfer.
Risk I N FO
Typical Risk Characteristics
 Workers
Compensation:
• High frequency, low severity, good internal correlation except
for persistent exposures, good relative external correlation
except for long-tail exposures.
 General
Liability
• Medium frequency, potentially high severity, moderate / high
internal correlation, good relative external correlation.
 Property
• Low frequency, high potential severity, general lack of internal
correlation, excellent relative external correlation.
 Currency
Risk I N FO
Risk I N FO
III. Leveraging Technology to achieve
Integrated Risk Management
 Scott
McNealy: “The network is the
computer”
 Ability of HTML web pages to
connect to any other computer
connected to the Internet
 One web page can draw data or
applications from many computers
at the same time.
Risk I N FO
Consequences of the new
Technologies
 Integration
of differing types of data
from varied systems can be achieved
at much lower cost than previously.
 Routine tasks of gathering
information, processing transactional
data, and reporting are becoming
less demanding.
 More attention is given to strategic
risk management.
Risk I N FO
Rapid Acceptance of StandardsBased Technologies
 Corporate
Use of email
and Intranets /
Extranets has reached
nearly 100% in very
few years.
 Rapid move toward
embracing standards.
Risk I N FO
Technology enables
Consolidation of Responsibility
 Internet
Technology is highly
“scaleable”
 Geographic
location of
personnel becoming much
less important
Risk I N FO
The Power of the New
Technology
 Makes
possible a “Risk Management
Control Center,” with all relevant information
accessible via desktop computer.
•
•
•
•
•
•
•
Facilities database with GIS map interface
Loss data and modeling tools
Certificates of insurance data
Insurance policy summaries
Online Underwriting presentations
Accident / Injury reports, OSHA 200 log
Loss control / safety training via streaming video
Risk I N FO
Objective
 Achieve
the best
combination of risk
reduction, risk retention,
and risk transfer;
consistent with the
optimum effect on the
firm’s overall Value.
Risk I N FO
Contact Us
Allen Monroe
Founder and CEO
RiskINFO
234 West Baltimore Avenue
Larkspur, CA 94939
(415) 927-8824
Email: allen@riskinfo.com
Web Site: http:www.riskinfo.com
Risk I N FO
Contact Us
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