Risk Quantification Through Value-Based Frameworks

RIMScast

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Integrating Risk Management in Decision-Making

This chapter emphasizes the critical role of enterprise risk management in organizational decision-making through value-based frameworks. It discusses the use of risk metrics to inform strategic choices and highlights the upcoming ERM conference 2024, along with a giveaway for Risk World 2025.

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Welcome to RIMScast. Your host is Justin Smulison, Business Content Manager at RIMS, the Risk and Insurance Management Society.

In this episode, Justin interviews Trisha Sqrow, of Marsh Advisory, and our Council Vice-Chair 2024, Suzanne Christensen, of Franklin Templeton Investments, and making his debut on RIMScast is Karthick Dalawai, of Penn Mutual Life Insurance Company. Karthick, Suzanne, and Trisha discuss value-based frameworks in terms of benefits, their experience with them, and value metrics. They share the concept of a value-based Enterprise Risk Management (ERM) framework to align risk management activities with the creation of shareholder value. They mention risk quantification methodologies to assess financial and non-financial risks. They explain the use of scenario analysis to tailor risk management practices to your organization's risk appetite and objectives and give ideas on how to get buy-in from the boardroom. Listen in for ways to implement a value-based ERM framework in your organization.

Key Takeaways:

[:01] About RIMS.

[:15] About this episode. From RIMS headquarters in New York, we will be joined by three members of the RIMS Strategic and Enterprise Risk Management Council to discuss risk quantification through a value-based framework.

[:43] The RIMS ERM Conference 2024 will be held on November 18th and 19th in Boston. Opening keynote speaker John Hagel recently appeared here on RIMScast. Register at RIMS.org/ERM2024.

[:58] We will talk about everything from RMIS and AI to D&O, ESG, the SEC, and various other acronyms. If you are a RIMS-CRMP holder, you can earn recertification points by attending the RIMS ERM Conference 2024!

[1:16] For those of you interested in studying for the exam, a pre-conference workshop will be held on-site on November 16th and 17th. Register now; a link is on this page!

[1:30] The next RIMS-CRMP Exam Prep will be held with Purima virtually on November 14th and 15th. The next RIMS-CRMP-FED Exam Course will be hosted along with George Mason University from December 3rd through the 5th.

[1:45] Links to these courses can be found on the Certifications page of RIMS.org and through this episode's show notes.

[1:53] RIMS Virtual Workshops! Elise Farnham of Illumine Consulting recently joined us here on RIMScast. On December 4th and 5th, she will host Applying and Integrating ERM. On December 17th and 18th, she will host Captives as an Alternate Risk Financing Technique.

[2:14] Other dates for the Fall and Winter are available on the Virtual Workshops calendar, RIMS.org/virtualworkshops.

[2:23] Interview! Returning to the show are Trisha Sqrow, of Marsh Advisory, and our Council Vice-Chair 2024, Suzanne Christensen, of Franklin Templeton Investments, and making his debut on RIMScast is Karthick Dalawai, of Penn Mutual Life Insurance Company.

[3:00] These brilliant minds, Trisha, Suzanne, and Karthick, will present the session "Risk Quantification Through Value-Based Frameworks" to kick off Day 2 of the RIMS ERM Conference 2024 on November 19th.

[3:15] Today we'll get tips on how to launch a value-based framework, what the benefits and limitations may be, and how to convince your board to buy in. Karthick Dalawai, Trisha Sqrow, and Suzanne Christensen welcome to RIMScast!

[4:54] Karthick explains that Enterprise Risk Management in its current form and where it goes from here to enable leaders to make informed decisions tie back to metrics and the quantification of results.

[5:22] Doing risk management thematically is good and influential, but anything you don't quantify you can't improve. Risk quantification is essential for a good enterprise risk management program.

[5:49] Trisha's risk management path has evolved toward a value-based framework. She suggests an organization could start by measuring its overarching risk appetite, understanding its risks, and putting its ERM framework in place.

[6:22] The parameters could be how much financial, regulatory, or strategic risk you want to take. Hone in on what the risk translates to by quantifying the value.

[7:03] The metrics may not always be dollar amounts. There may be safety value metrics, or cyber security impacts. There is a way to tie those back to financials in many cases, but you can look at different values.

[7:51] Karthick says it's easier to quantify financial risk than intangibles like cyber risk or talent risk. Having a common denominator makes it possible to explain risk so IT, HR, and all departments understand the enterprise risk, not just the risk in their slivers of the organization.

[8:58] Defining risk under a value-based framework takes three keys: uncertainty, deviation from the company strategy, and taking the right opportunities to increase value. If you planned to grow 10% and you grew 15%, analyze that opportunity. What was the cost of that benefit?

[10:20] Suzanne adds that scenario analysis helps. Why did your growth vary from your planned growth? What do you have to have in place to manage it? With a 15% growth, you'll need more resources and a plan for the logistics. You may need to make a lot of other arrangements.

[11:06] You need to think about those things in contingency mode. Scenario analysis does that; it helps you work through those plans.

[11:30] Karthick describes the possible limitations of a value-based framework. The common denominator is a financial metric. Executives need to understand what factors contribute to that value. Tying the risk appetite to the value occurs high in the organization. It's all-encompassing.

[12:07] You have to break the framework into layers by what it means for the different business units and how they measure business. Rightly implemented, a value-based framework is of great value; otherwise, people might become disconnected from it.

[12:37] Suzanne agrees that people might not buy in if the framework is not well-implemented. Suzanne and Karthick discuss avoiding bias and starting with wrong assumptions.

[13:02] Karthick believes that gets into the risk culture of the organization. Is it conservative or more aggressive? When you have a quantifiable and measurable risk appetite, some people may tend not to breach it at all. Many times, risk decisions need not be risk-optimized.

[13:48] Having a measurable risk metric guides how much risk people can take to add value to the organization, not just to manage the downside. Tie it back to the business metrics through which leaders measure their performance. Having a good manager is a win-win.

[14:16] Suzanne adds that weighing the cumulative impact of multiple decisions while figuring out a strategy for the organization helps you think about the risk appetite of the firm and if there is room to take more risk.

[14:53] Trisha considers the risk culture of the organization in helping people understand value-based frameworks. There are a lot of conversations to be had with various departments. A financial office does not have the same risks as a manufacturing facility or an airport.

[15:28] Work with the people looking at safety metrics and help translate them into dollar amounts, considering insurance and claims. What value does the framework add?

[15:45] Help people understand the value-based framework and have conversations around it. How much risk can you take?

[16:19] Plug Time! RIMS Webinars! On October 31st, TÜV SÜD GRC discusses "Mastering Property Renewals: Strategies for Success in 2025 with Risk Engineering".

[16:34] On November 4th, I will be hosting a special RIMS Webinar presentation, "Lessons from Veterans on Strategic Risk Leadership". That session will feature insights and perspectives from risk managers who previously served in the United States Armed Services.

[16:53] On November 14th, Marsh will present "Risk Perception and Management: Insights for a Changing Landscape".

[17:00] On November 21st, HUB International returns with the fourth installment of their Ready for Tomorrow series, "From AI to the SEC: The Future of D&O Litigation and Regulatory Exposures".

[17:15] On November 25th, Resolver returns to discuss "The Future of Risk & Compliance: 5 Key Insights for the Modern Leader".

[17:23] On Thursday, December 12th, OneTrust returns to deliver "Staying Vigilant: 7 Practical Tips for Ongoing Third-Party Risk Monitoring"

[17:32] More webinars will be announced soon and added to the RIMS.org/webinars page. Go there to register. Registration is complimentary for RIMS members.

[17:44] Back to My Interview with Suzanne Christensen, Trisha Sqrow, and Karthick Dalawai.

[18:22] Karthick says to ask the executives at your organization if they use the deliverables from ERM in their day-to-day decision-making and how they tie into the metrics. If you get a positive answer, you're in a good spot. If not, a value-based framework is a good solution.

[19:00] Every executive business leader manages P&L and understands dollarized values. Value-based frameworks are good tools if they are implemented in the right way.

[19:21] Trisha says to consider your impact scoring. That's the beginning of your risk appetite. Work toward getting a common denominator.

[19:40] Suzanne comments that to make better, more confident decisions in the organization, and get the executives engaged in the conversation, you want to understand what their tough decisions and challenges are.

[20:03] In what would the executives like more transparency and understanding to make their tough strategic or day-to-day decisions? Connect with them where their challenges are as a starting point. That immediately proves value to the organization.

[20:41] Trisha and Suzanne have publications discussed in episodes linked in the show notes. Suzanne authored a report on emerging risks and board reporting, "Navigating the Complexities of Emerging Risks". Trisha co-authored "Developing and Refining Risk Appetite and Tolerance".

[21:21] Suzanne and Karthick will be two of the panelists in the closing general session of the RIMS ERM Conference 2024 on November 19th. That's going to be a forward-looking discussion that will be a lot of fun. [21:57] During that closing session, we're going to give away a registration to RISKWORLD 2025 in Chicago! Everyone should stick around for this session!

[22:16] Thank you all so much for joining us today here on RIMScast!

[22:25] Special thanks to Trisha Sqrow, Karthick Dalawai, and Suzanne Christensen of the RIMS Strategic and Enterprise Risk Management Council.

[22:36] On November 19th, they will kick off Day 2 of the RIMS ERM Conference 2024 in Boston, with a session about Risk Quantification through a Value-based Framework. That will not be the only session they will present, so if you like what you heard, register now at RIMS.org/ERM2024.

[22:59] Links to the guests' prior RIMScast interviews and their respective reports are in this episode's show notes.

[23:12] More RIMS Plugs! The RIMS ERM Conference 2024 will be held in Boston, Massachusetts on November 18th and 19th. Register today at RIMS.org/ERM2024!

[23:27] The RIMS App is available to RIMS members exclusively. Go to the App Store and download the RIMS App with all sorts of RIMS resources and coverage. It's different from the RIMS Events App. Everyone loves the RIMS App!

[23:58 ] You can sponsor a RIMScast episode for this, our weekly show, or a dedicated episode. Links to sponsored episodes are in our show notes. RIMScast has a global audience of risk and insurance professionals, legal professionals, students, business leaders, C-Suite executives, and more. Let's collaborate and help you reach them! Contact pd@rims.org for more information.

[24:40] Become a RIMS member and get access to the tools, thought leadership, and network you need to succeed. Visit RIMS.org/membership or email membershipdept@RIMS.org for more information.

[24:57] Risk Knowledge is the RIMS searchable content library that provides relevant information for today's risk professionals. Materials include RIMS executive reports, survey findings, contributed articles, industry research, benchmarking data, and more.

[25:12] For the best reporting on the profession of risk management, read Risk Management Magazine at RMMagazine.com. It is written and published by the best minds in risk management.

[25:26] Justin Smulison is the Business Content Manager at RIMS. You can email Justin at Content@RIMS.org.

[25:33] Thank you all for your continued support and engagement on social media channels! We appreciate all your kind words. Listen every week! Stay safe!

Mentioned in this Episode:

RIMS ERM Conference 2024 will be in Boston, MA Nov. 18–19 | Register Now

RIMS DEI Council

RIMS-Certified Risk Management Professional (RIMS-CRMP)

RIMS Strategic & Enterprise Risk Center

NEW FOR MEMBERS! RIMS Mobile App

RIMS Executive Report: "Developing and Refining Risk Appetite and Tolerance"

RIMS Professional Report: "Navigating the Complexities of Emerging Risks"

RIMS-CRMP Stories — New interview featuring Dan Elliott!

Submit Your Nomination for 2025 Risk Manager of the Year — Part I is due on Oct. 31!

RIMS Webinars:

"Mastering Property Renewals: Strategies for Success in 2025 with Risk Engineering" | Sponsored by Global Risk Consultants, a TÜV SÜD Company | Oct. 31, 2024