Sedgwick CMS 2009 Capabilities Overview...Business Resiliency and Sustainability . Extent to which...

Sedgwick © 2012 Confidential – Do not disclose or distribute.

www.sedgwick.com

Chris Mandel, SVP, Strategic Solutions, Sedgwick, Inc.

Long Island RIMS April 21, 2015

Copyright © 2013 by Sedgwick - Confidential – Do not disclose or distribute.

Copyright © 2013 by The Hartford. Confidential. All rights reserved. No part of this document may be reproduced, published or posted without the permission of The Hartford.

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What are emerging risks?

Where do emerging risks fit in risk strategy?

What are top emerging risk?

What are the traits that define emerging risks?

Where do emerging risks fit on the loss curve?

A look at one risk manager’s view into emerging risks

What are some practices & process useful in managing emerging risks?

How do emerging risks relate to strategy?

Agenda

Sedgwick © 2013 Confidential – Do not disclose or distribute. 4

A Broad and Fuzzy Paradigm

“There are known knowns. These are things that we know that we know. There are known

unknowns. That is to say, there are things we know we don’t know, but there are also

unknown unknowns. These are things we don’t know we don’t know.”

- Donald Rumsfeld, U.S. Sec of Defense (2002)

WHILE THE RISKS LESS UNDERSTOOD ARE DIFFICULT TO ADDRESS, THEY ARE OFTEN SO SUBSTANTIAL IN IMPACT, THEY CAN’T BE IGNORED


What is an Emerging Risk?

Those issues hat have not manifested themselves sufficiently to be

managed using the tools commonly applied to more developed exposures. They are “those risks an organization has not yet recognized or those which are known to exist, but are not well understood

RIMS’ “Emerging Risks and ERM

A condition, situation or trend that could significantly impact the Company’s financial strength, competitive position or reputation within the next 5 years. Emerging risks involve a high degree of uncertainty. It is unclear where an emerging risk will land on the loss curve.

Anonymous actuary


Other Definitions

Lloyds: An issue that is perceived to be potentially significant but

which may not be fully understood or allowed for in insurance terms and conditions, pricing, reserving or capital setting. PWC: Those large scale events or circumstances beyond one’s direct

capacity to control, that impact in ways difficult to imagine today. S&P: Risks that do not currently exist.

What about black swans?

Global ERM Survey Key Findings • Board level commitment critical to decision making and driving value

• Dedicated senior executive to drive and facilitate

• ERM culture encouraging full engagement and accountability at all levels

• Stakeholder engagement in RM strategy development and policy setting

• Transparency in risk communications

• Integration of financial and operational risk data into decision making

• Need for sophisticated quantification to understand risk and demonstrate value proposition

• ID of new and emerging risks using internal and external data sources

• Move from avoidance and mitigation to leveraging options for value

Source: Aon Corporation 2010 7

BI’s Top 10 Risks of 2014

• Product recalls dominated the headlines. This was especially true in the automotive sector as industry heavyweights

• Cyber risk - 2014 also was marked by a rapid rise in cyber risk. According to a study by PricewaterhouseCoopers L.L.P., the number of global cyber security incidents in 2014 increased 48% over 2013. The Target breach alone was last estimated at $350m in losses.

• Ebola fear - The Ebola outbreak that hit several West African nations throughout 2014

• Aviation disasters - High-profile mishaps and attacks also affected the aviation and space sector.

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More of the 2014 Top 10

• Catastrophe losses - 2014 was notable for a relative lack of losses due to hurricanes and convective storms in North America; Napa Valley quake value ranges from $250 million to $1 billion.

• Competition - Abundant capacity throughout much of the commercial insurance sector in 2014

• Acquisitions - Market conditions prompted strategic recalculations as mergers and acquisitions continued to reshape the insurance landscape.

Most “emerging” risks are not truly emerging

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Top “Emerging” Risks for 2015

• Political: Oil Volatility • Cyber: Risk of the Cloud • Aviation: Drones • Terrorism: Islamic

Extremism • FI’s: Technology Partners • ERM: Outsourcing • Analytics: Balance Sheet

Overconfidence • Environment: Extreme

Weather

• Executive Risk: Derivatives • Asset Mgmt: Demand for

Transparency • Real Estate: Cyber Risk of

Tenant Data • Benefits: The Changing Face

of Human Capital • Brazil: Corruption • Personal Risk: Device

Ubiquity

The discipline of risk management has

evolved from strictly a value preservation-

based focus to a balanced focus between

protecting assets and creating or enhancing

value.

Operating Risk

Credit Risk

Model Risk

Entrepreneurial Risk

Regulatory Compliance Risk

Future/White Space

•Target Models (3B); Lifetime Value Models •Churn Models; Discount Engine Models •Upsell Models; Sales Territory Models

•Public Relations & Marketing Initiatives •Industry Coalitions •Client/CPA Webinars

•EDI Program •RCX Stale Date Fees •Taxpay Premium Processing Fee

•Federal Deposit Frequency Program •Client Penalty Abatement Service •IRS/Paychex Partnerships

•$100M Revenue Over Past 5 Years •EGTRRA Restatement •PBS, HRO, 401(k) Service Fees

Risk Management

A flexible and dynamic risk management

discipline is uniquely positioned to quickly adapt to change and identify opportunistic

risk to create new streams of revenue and

increase value

Value Preservation to Value Creation

A VIEW INTO EMERGING RISKS IS CRITICAL TO THE VALUE FOCUS

RIMS Risk Maturity Model

Root Cause Discipline

Degree of discipline applied to measuring root cause by: 1) determining sources 2) understanding impacts 3) identifying trends, and 4) measuring effectiveness of ontrols .

Risk Appetite Management Degree of accountability for (1) defining acceptable boundaries 2) calculating and articulating risk tolerance 3) developing a risk portfolio 4) considering scenarios, and 5) attacking gaps between perceived and actual

risks.

ERM Process Management Degree that a repeatable and scalable risk management process is integrated into business and

resource/support units, using a sequential series of steps that support uncertainty reduction and promote opportunity exploitation.

Adopt ERM Approach Denotes the degree of executive support for an ERM-based approach within the corporate culture.

Activities cut across all processes, functions, business lines, roles and geographies.

Copyright © 2010 Risk and Insurance Management Society, Inc. All rights reserved. 12

Business Resiliency and Sustainability

Extent to which an organization integrates business resiliency and sustainability aspects for its operational planning into its ERM process.

Performance Management

Degree to which organizations are able to execute on vision and strategy in tandem with risk management activities.

Uncovering Risks UNCOVERING RISKS Degree of quality and coverage (penetration) throughout the

organization for uncovering uncertainties related to organizational goals achievement.

RIMS Risk Maturity Model

Copyright © 2010 Risk and Insurance Management Society, Inc. All rights reserved. 13

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Traits of Emerging Risks

Emerging Risks

High Level of Uncertainty

Lack of Consensus

Uncertain relevance

Difficult to Communicate

Difficult to Assign

Ownership

Systemic or “business practice”

issues

Source: RIMS Executive Report Emerging Risks and Enterprise Risk Management © 2010 RIMS


First Order of Business: Risk Types

Strategic • Acquisitions • Business Model • Competition • Demographic

Changes • Disruptive

innovation • Market • Etc.

Operational • Customer service • Infrastructure • Processes • System capabilities • Talent • Etc.

Financial • Capital • Cash flow • Credit • Debt obligations • Foreign exchange • Liquidity • Etc.

External • Economy • Environment • Geopolitical • Regulatory • Tax policies • Weather events • Etc.

Do Some Risks Matter More?

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FREQ

UEN

CY/L

IKEL

IHO

OD

SEVERITY/IMPACT

Choosing Your Risk Range Focus

< Expected Loss Pt

Typical Actuarial Loss Curve with the Black Swan Sitting on Tail

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Macro-level Categories to Consider

Environmental

Systemic

Cultural

Technological

Societal

Geopolitical

Economic


Emerging Risk Identification Tactics

Surveys/Questionnaires Financial Statements Records and Files Flowcharts Personal Inspection Industry Check Lists Events Experts/Delphi Type Methods Environmental Scanning Scenario Analysis Trend Analysis

Risk Management Stakeholders

Key Focus

Targeted Outcome

Emerging Risk Management Process

Enterprise Risk Management

Risk Process Effectiveness

Identification and Management of Significant Risks

Process Efficiency

Process Efficiency

Effective & Efficient Process Execution

Internal Audit

Control Testing

Effective Controls

Compliance

Compliance Risks

Regulatory Compliance

Controller

Financial Reporting

Sox 404 Compliance

Business Units

Business Performance

Controlling Risks to as well as Meeting

Objectives

Unified Strategy

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Best Practices for ID and Assessment

Conduct emerging risk reviews Integrate or align ER reviews with the planning processs(es)

Drive agreement on key assumptions and test them with rigor

Challenge conventional thought processes and the status quo

Apply the right methods to better understand and predict ERs

Balance an internal vs external environmental view

Manage ERs within the risk appetite and tolerances of your firm

Adapted from RIMS’ Emerging Risks and ERM Report (2012)



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Healthcare

Aging workforce

Rising medical costs • Pharmaceuticals

Affordable Care Act (ACA) aka ObamaCare

Wellness programs • Discounted health care costs/employee contribution

Changing employee demographics • Ethnic

• Age/Sex/Skills

• Priorities

• Cultural shift



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Workforce issues - talent attraction and retention

Baby boomers retiring – 10,000 baby boomers a day have been turning 65 since 1/1/11 and will continue until 2030

• Smaller future workforce

Future workforce will be very technology savvy

Future workforce will be more demanding • Telecommuting

• Flexible hours, etc.

Work/life integration vs. balance



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Emerging claim challenges

Impact of Affordable Care Act

Legalized marijuana • Drug test issues

Gay marriages and domestic partnerships

Increasing proportion of fraud



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Emerging claim challenges

Use of electronic devices while driving • Mobile phone use

• Hands-free

• Texting

• GPS

Natural disasters • High variability of CAT events

• Super Storm Sandy

• CAT modeling Change Impact



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Technology

Legacy systems

IT security

Cyber issues • Identity theft

• Malware

• Business interruption

• Target >>>>>>>>>>>>>>>


Is Cyber Risk Still “Emerging?”



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A Lloyds of London View

An emerging risk is "an issue that is perceived to be potentially significant but which may not be fully understood or allowed for in insurance terms and conditions, pricing, reserving or capital setting"

Wildfire Proliferation

Rising property values and population location choices has increased the risk of wildfires in certain regions.

Solar Storm Risk to the North American Electric Grid

The impact of solar storms on North America’s electric grid.

Business and Insurance Implications of Food Safety and Food Security

Risks associated with food insecurity and issues arising from food safety.



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CAT Risk Trends: Tornados

Tornado risk trends re changing frequency and severity.

Cognition Challenges

Behaviors which affect risk identification and decision-making.

Hurricanes & long-term climate variability

The relationship between hurricane activity and long-term climate trends.

Arctic Environmental Challenges

Rapidly changing Arctic environment is creating both opportunities and risks for businesses operating in this region.



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Pandemic: Potential insurance impacts

Consideration of the impact the next pandemic could have on the insurance industry.

Nanotechnology

A review of the potential effect the new area of nanotechnology could have on the insurance industry.

Electromagnetic fields from mobile phones:

Whether exposure to electromagnetic fields from mobile phones can cause health problems or impact the insurance industry.

Digital risks views of a changing landscape

The fast changing field of digital risk, including business impacts.

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Emerging Risks in a Strategic Context

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Identifying emerging risks Rating emerging risks on relevance,

importance and uncertainty Monitoring impact of and reporting

on emerging risks

Emerging Risks in a Strategic Context

Copyright © 2010 Risk and Insurance Management Society, Inc. All rights reserved.

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Identification, assessment and ownership effectiveness of risks

Calculation of investment , resource needs and capital

allocation

Risk appetite and tolerance statements for key risk categories

Evidence of control environment/effectiveness

Actions to close gaps

Risks to objectives Risks arising from plans to meet

objectives Confirmation of risk appetite and

tolerance Plausible and relevant scenarios

Strategic Planning

Risk Appetite Framework

Emerging and Dynamic

Risks

Integrated Enterprise Risk Profile

Control Framework

Scenario and Stress Testing

Strategy, Scenarios, Stress Testing and Emerging Risks


Uncertainty

• Low frequency / high impact

• Potential to grow rapidly

Consensus

• Lack of recognition internally and externally

• Drivers, impacts, probability not clear

Relevance

• Uncertainty over effect on objectives

• Perception of being too futuristic to matter

© 2010 Risk and Insurance Management Society, Inc. All rights reserved. 35

Communicate

• Perception as “unlikely” • Little perceived bearing

on existing circumstances

Ownership

• No one champion / accountable individual

• Potential consequences impact multiple resources and objectives

Issues

• Embedded in existing practices

• Complexity not clearly understood

Characteristics of Emerging Risks

Source: RIMS Executive Report Emerging Risks and Enterprise Risk Management © 2010 RIMS

Scanning the External Environment

Interviews

External Scanning

•Importance •Relevance •Probability •Immediacy •Impact •Level of

Uncertainty

Emerging Risk [Periodic] Report •Trend/Event •Implications

Strategic Directions • Key

Indicators • Owner • Plan • Threshold

Warnings • Monitoring

Future Focused Emerging Risk Scanning

MACRO MICRO

36 Copyright © 2010 Risk and Insurance Management Society, Inc. All rights reserved.

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Identify Relative to Objectives

Identify an emerging risk event that would significantly impact a specific organizational objective

Completely new

• Shifts in clients' buying behavior • Major shifts in customers' demands or

expectations • General consumer trends in

communication, lifestyle or buying • Emerging or new service requirements

(e.g. PCI compliance) • Laws/regulations limiting planned

activities • First to market technology innovations • Downturn in major economies • Government bans or mandates

(e.g., disallowing coal power generation or mandating social programs)

Extremely rare events

• Acts of terrorism • Political uprisings • Client or vendor liquidity/solvency

issues • Government interference/expropriation

of assets • Environmental change • Pandemic • Unavailability of “free” resources, e.g.,

air, water, earth, societal infrastructures


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SAMPLE EMERGING RISK ASSESSMENT INTERVIEW QUESTIONS What keeps you up at night? What might impede your ability to

serve our customers and significantly impair your long-term objectives?

What risks will be important for our sustainability ten years from now?

What are the consequences to the organization if the risk occurs?

What are the early warning signs that the risk may occur?

Identify – Open Ended Surveys

Interviews


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Identify – “What If” Surveys

SAMPLE “WHAT IF” EMERGING RISKS INTERVIEW QUESTIONS there is, or will be, a unique competitor? our brand value changes? raw materials critical to production become unavailable or

unaffordable? significant government regulations were enacted that impeded our

growth in [our industry]? our competition launches a cutting-edge technology that provides

greater scalability, simpler integration, and cost less than our products?

the industry’s margins change? we don’t have the right data? everything happens at once?

Interviews


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Scoping the External Environment

ORGANIZATION SPECIFIC

Clients Customers Vendors/Supply Chain Distributors

MICRO/INDUSTRY

Direct Competitors

Indirect Competitors Markets Sectors Analysts Strategic

Alliances

MACRO

Cultural/Social Technological Economic Environmental Political/Legal Regulatory

Strategic Planning

Operational Planning

External Scanning

Source: Risk and Insurance Management Society, Inc.

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ENVIRONMENTAL SCAN

EXTERNAL

INTERNAL

MACRO MICRO

Rating Emerging Risks

What is …. relevant? important? certain?

External Scanning


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•Importance •Relevance •Probability •Immediacy •Impact •Level of

Uncertainty

A Process for Rating Emerging

Risks

Risk

Important and Relevant

Certain

Uncertain

Not Important nor Relevant Ignore

Probability Immediacy

Impact


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Using Scenarios for the Most Uncertain Risks

Scenario 1: Protectionism

Scenario 2: Oil Prices

Scenario 3: “Green”

movement

Objective Example: Global Expansion

Consider potential consequences if scenario plays out

Select leading

indicators and signposts


Reporting: Emerging Risk Heat Map

1 1

2 Global oil prices 3

3

Relative Uncertainty

Rela

tive

Impo

rtan

ce

4 Scientific breakthroughs

6

Capital availability 5

5

Higher

Higher

Lower

Lower

6 Market demand 4

7

“Green” movement sustainability

7 2

Global protectionism

Political Instability

Tariffs

Key skilled talent shortage

Information availability

44 Copyright © 2010 Risk and Insurance Management Society, Inc. All rights reserved.


The Opportunity for Risk Managers

Uncover the unknown or poorly understood threats to businesses Bringing resources to bear to address the risks

efficiently Building resiliency and sustainability

Leveraging risks that lend themselves to

exploitation

Emerging Risk Process Summary

Integrate in ERM Strategy

Identify Emerging Risk Relative to Goals & Objectives

Assess Risk Interconnectedness & Determine Appropriate Responses

Monitor and Report Leveraging KRIs tied to KPIs



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3 Keys to Success

Separate the Emerging Risks Processes: Emerging risks are fundamentally different than more internal/short-term/operational risks, and many companies recognize the need for a separate, more qualitative and creative process (often led by dedicated committees or teams) for identifying and managing emerging risks.

Rely on SMEs: ERM teams often bring in individuals with a specialist-level understanding of particular external/macroeconomic trends, using them to help create scenarios, assess the likely direction of trends and measure the potential magnitude of their impact on the enterprise.

Use Robust Scenario Planning: Due to their longer-term nature, major external emerging risks require an effective scenario planning process to build confidence that their impact has been correctly assessed.

A Simple Process Template to Achieve Resilience

Emerging Risk

Management

FRAME YOUR RISK

APPETITE & TOLERANCES

ID & ALIGN STAKE-

HOLDERS

ASSESS EXTERNAL &

INTERNAL EXPSOURES

DETERMINE WHAT

MATTERS & TO WHOM

MAKE THE CASE FOR

PREP & RESPONSE

MONTOR COMMUNICAE

REPORT ADJUST


Take-a-ways for Risk Managers

Design and Implement an ER Process Uncover the unknown or poorly understood

threats to businesses Bring resources to bear to address the risks

efficiently Build resiliency and sustainability Leverage risks that lend themselves to

exploitation Leverage emerging risk processes for

competitive advantage

THANK YOU ! Chris Mandel. RF. CPCU, ARM SVP, Strategic Solutions Sedgwick, Inc. [email protected] 210-845-5804

For information on Sedgwick Services contact MICHAEL CHIARAMONTE | Director, Business Development

Sedgwick Claims Management Services, Inc. DIRECT 203.328.0412 CELL 845.558.5707

EMAIL [email protected] www.sedgwick.com | The leader in innovative claims and productivity management solutions

mailto:[email protected]


http://www.sedgwick.com/

Christopher E. Mandel, CPCU, ARM SVP, Strategic Solutions, Sedgwick, Inc.

Christopher E. Mandel is the SVP for Strategic Solutions at Sedgwick, Inc. He is engaged in helping Sedgwick chart its future through the long term planning for products, services and strategic solutions for this claims and productivity management firm. He is also co-founder and EVP, Professional Services for rPM3 Solutions, LLC as well as founder and president of Excellence in Risk Management, LLC. both independent consulting firms specializing in governance, risk and compliance, with a special emphasis on enterprise risk management. rPM3 Solutions holds a patent for a unique risk measurement process known as ARQ™. Prior to electing early retirement and for ten years from 2001-2010, Mr. Mandel was head of enterprise risk management for USAA Group, a $165 billion diversified financial services organization. At USAA, he designed, developed and led the enterprise-wide risk management and corporate insurance centers of excellence. He also served as President and Vice Chairman, Enterprise Indemnity CIC, Inc., an Arizona based alternative risk financing facility.

Mr. Mandel has more than 25 years of experience in risk management and insurance in large, global corporates. He

has pioneered the development of cross-enterprise risk management capabilities resulting in S&P rating USAA as “excellent and a leader in ERM” from 2006 through 2010. In 2007, Treasury and Risk Magazine bestowed the Alexander Hamilton Award for “Excellence in ERM” on USAA. Mr. Mandel has been a long term senior leader in the Risk and Insurance Management Society including being elected President and Chief Risk Officer and was named Risk Manager of the Year in 2004.

Mr. Mandel’s deep, wide and diverse experience in all facets of risk management and insurance allows him to offer

those interested in managing risk with excellence to engage him to provide everything from a comprehensive strategy and complete ERM framework to targeted guidance, tools, techniques and/or training. Mr. Mandel’s innovative approach to making risk a key strategically placed and results oriented function results from solidly connecting risk management outputs to a company’s key performance metrics and ultimately, mission accomplishment.

Mr. Mandel received his B.S. in Business Management from Virginia Polytechnic Institute and State University and an

MBA in finance from George Mason University. He holds the CCSA, CPCU, ARM and AIC designations and is a frequent industry speaker, teacher and writer. He writes the “Risk Innovation” column for Risk and Insurance magazine and in 2008 was elected a member of Risk Who’s Who (RWW). He also wrote the Ask a Risk Manager column for Business Insurance from 1996 through 2008.

CONTACT: [email protected] 210-698-8056 o 210-845-5804 m

https://www.sedgwick.com

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Sedgwick, Inc.

The leader in innovative claims and productivity management solutions

Sedgwick Claims Management Services, Inc. is the leading North American provider of

innovative claims and productivity management solutions. Sedgwick and its affiliated companies deliver cost-effective claims, productivity, managed care, risk consulting, and other services to clients through the expertise of more than 10,000 colleagues in 195 offices located in the U.S. and Canada. The company specializes in workers’ compensation; disability, FMLA and other employee absence; managed care; general, automobile and professional liability; warranty and credit card claims services; fraud and investigation; structured settlements; and Medicare compliance solutions. Sedgwick and its affiliates design and implement customized programs based on proven practices and advanced technology that exceed client expectations. For eight years in a row, Sedgwick has been awarded the distinguished Employer of Choice® certification, the only third-party administrator (TPA) to receive this designation. In 2011 and 2012, the company was named the Best Overall TPA by buyers of risk services through an independent survey conducted by Business Insurance. For more see www.sedgwick.com.

© 2013, Sedgwick Claims Management Services, Inc. applies to all content except where otherwise noted

http://www.sedgwick.com/

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“List” Surveys

Interviews

Source: World Economic Forum 2009 Source: Zurich Dealing with the Unexpected 2010


A little knowledge is dangerous. So is a lot.

- Albert Einstein

Uncovering Risks

Existing Repositories

Identification Partners

Who to Include

Interview Questions

Documenting the Results

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Identifying Emerging Risks


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