From the fallout of the financial services meltdown to the specter of swine flu, risk managers have had their hands full. Insurance Networking News asked Ron Pridgeon, corporate property/casualty actuary, Tim Kelly, director of corporate risk and Dale Hall, chief life/health actuary of Bloomington, Ill.-based COUNTRY Financial how the carrier harnessed its 15-member enterprise risk management (ERM) team to mitigate risk.
INN: What was your risk management strategy for 2009?
DH: Our ERM team carefully reviewed and tested its plan for two adverse situations: market risk and H1N1.
Regarding market risk, a dramatic decline in the stock market and increased bond impairment prompted the ERM team to develop a stress test in April. The stock market had dropped 20% since January. Representatives of the actuarial, corporate risk, controllers and investment divisions developed a model to calculate impact on surplus and unrealized gain/loss under various scenarios. Existing mitigation strategies included diversification of asset types and industries. Stress test results prompted the team to further consider reducing equity exposure if conditions warranted. In addition, risk reduction would be weighed against the reward of equity investment. Throughout the recession, the team has monitored and analyzed monthly income reports and financial statements for changes in surplus and unrealized gains/losses.
With H1N1, the World Health Organization pandemic alert in April provided the impetus for review of the COUNTRY pandemic response plan. Prior to the alert, ERM team members monitored global and local presence of the H1N1 virus. A pandemic recovery plan included steps to allow employees to work from home for critical business functions; restrict travel, building access and meetings; and work in shifts.
After testing a model for a Level 6 alert, the team further decided to consider adding some customer self-service capabilities for specific policy changes. Financial representatives will be encouraged to use telephone or e-mail contact with clients.
INN: What are the key technology innovations you have implemented?
TK: The process of identifying risks across the company highlighted the need for some systems improvements.
Data security and privacy of customer information is a risk common to any organization that relies on this information to conduct business. The inherent risk of losing this data or having it stolen can have significant financial and reputational impact on the organization. COUNTRY management identified the area of data encryption as one that required stronger controls and additional technology to help mitigate risk.
Proper internal control over financial reporting is a requirement imposed by Sarbanes-Oxley Act and other federal regulations. The risk of not complying with these regulations would have significant impact. We acquired new software to monitor program change and access controls in order to strengthen internal control over financial reporting.
INN: How does your team's approach to ERM mirror industry strategies?
DH: Our ERM effort incorporates several strategies recently outlined in the "The Financial Crisis and Lessons for Insurers," authored by the Society of Actuaries and the Joint Risk Management Section.
Those strategies include:
* securing a strong risk management culture from the top down
* incorporating a wide variety of economic scenarios for stress tests
* establishing a robust liquidity management system
* understanding the limitations of models and related assumptions
* realizing that risk management is most effective when used to prevent a crisis rather than to manage one.
A strong risk management culture must start at the top. It is important for the lead risk officer to have access to the CEO and the board. And, ERM allows those within the organization to ask questions and ensure we're reviewing the same analysis from different angles.
INN: What benefits have you seen from your ERM efforts?
RP: ERM efforts have helped COUNTRY identify risk and shape its risk appetite. The never-ending endeavors to elevate awareness of risk means we have fully embraced its role as a risk shaper.
ERM is not so much a tool or process as it is a culture of uncovering, understanding, quantifying and addressing business risks. Developing an awareness of risk throughout the organization allows us to uncover the unknowns and develop a response structure to minimize their impact.
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