Canadian Underwriter
Feature

Partnerships in Risk


September 1, 2003   by Garry McDonell, senior vice president at Aon ReedStenhouse


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It is not surprising that we have in many cases had to change the way we manage our business in this risk new environment. This includes a review of the role managing risk plays in the success of a corporation. It also means acknowledging the need to develop and maintain a clear and robust corporate culture that supports the management of risk.

Today, the increased complexity of risk requires a more comprehensive and strategic business approach across the enterprise. Traditionally, the relationship between a risk manager and a broker was simply that of a customer and a vendor. The broker was expected to be a procurer and distributor of insurance products.

The value of the broker/risk manager relationship was measured by the degree to which the broadest coverage could be obtained at the lowest cost. Given the mandate at the time, this approach made some sense, but it does not begin to meet the risk management needs and expectations of corporations in today’s environment.

To provide the competitive advantage corporations are seeking today, innovative risk managers understand that managing risk is more than simply protecting an asset. A comprehensive risk management program today seeks to protect and support the corporation’s strategic plan and generally reduce the volatility in outcomes that have a negative impact on its goals. For example, if a corporation’s plan is to maintain investment grade ratings, decisions with respect to insurance purchases, retentions and limits may be quite different than a corporation where the main goal is to reduce the cost of debt.

STRATEGIC RESOURCES

Strategic partnerships between brokers and risk managers offers a variety of expertise to corporations, thus enabling them to focus on their business or strategic plans. It is not unusual in today’s environment for a global brokerage with a risk management operation to have financial, legal, actuarial, engineering, research, and information technology expertise on hand.

A broker’s ability to assess constantly changing risk and manage the potential impact through customized solutions is essential to the partnership. This relationship seems to work best when both parties understand the other’s role. As is often the case, these shifts are fluid, they happen quickly and there is no time for duplicate efforts. If a risk manager and broker are investing time completing the same task reviewing policy wording, then the partnership is not operating efficiently and the corporation is not getting the maximum return on their investment in risk management.

A risk manager’s chief skills today include project management, communication, finance and strategic planning. It is impossible to be an expert in all of these fields, but it is necessary to possess a good understanding of each discipline. It is also the ability to understand and communicate risk to their organization, manage an array of resources directed to a specific task or outcome while developing and implementing a plan that spans three to five years that differentiates today’s risk managers from the previous generation of corporate insurance buyers.

Similarly, today’s broker must have the ability to shift focus and concentration depending on the ebb and flow of the client’s business, as it adjusts strategy and direction to keep pace with the changing market. This may mean fulfilling different or more integrated roles with the risk manager. It is the combined strength of this partnership that ensures a thorough understanding of a client’s business so that risk management becomes less a function within the business and more of a governing philosophy that supports the company’s strategic direction.

INTEGRATED RISK

Managing risk has become so integrated with running a business that companies operating without a formal risk management program are exposing their future to jeopardy. In 1994, the Toronto Stock Exchange (TSX), adopted the Corporate Governance Committee’s 14 recommendations as “best practices” guidelines. Every year, listed companies must both disclose and explain any deviations from these guidelines. One of the guidelines requires the board of directors of a company to assume responsibility for the identification of the principal risks and the implementation of appropriate systems to manage those risks.

Industry guidelines have been developed outlining the minimum standard for operating in today’s business environment. Included in those guidelines is a general risk identification and control program. In spite of this, the Conference Board of Canada (CBC) estimates that less than 40% of registered TSX companies comply fully with the guidelines. It is not difficult to foresee significant increased pressure on corporations to comply. Executing the risk management component of these guidelines will likely fall on the risk management team.

RISK TAKING

As a result of this, the risk manager/broker relationship must also change, and each must share responsibility for the other’s well being. In order for the broker to be a “full partner”, in the process, it has to understand the client’s “big picture”. In turn, the risk manager must be prepared to share the ownership for managing this process and thus share the responsibility for the company’s success with the broker. If this partnership is working properly, the broker becomes a “trusted advisor” with the same status and responsibility as the corporation’s legal, financial and investment strategic partners. Taking risk is what business is all about. Anticipate it. Understand it. Measure it. Manage it. Exploit it. That is what a long-term commitment to a partnership between a risk manager and a broker brings to the table.