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The 3 Pillars: A solid foundation for risk management software

3 pillars or risk management software

In the last ten years or so, the risk management landscape has undergone dramatic change, much of which has been driven by factors outside the risk manager’s traditional purview. Among those factors are the expanding scope and impact of corporate governance; surging rates of litigation; ever-changing regulatory requirements; and, last but not least, evolving practices in the self-retention and transfer of risk.  

Even in the face of such recent and ongoing changes, risk managers can stay ahead of the curve by maintaining their focus on sound risk management processes. What’s more, by focusing on sound risk management processes, risk managers can get more value from their risk management software.

In this blog post, I’d like to focus on three key pillars of risk management that, although important in their own right, also support the goal of enhancing the business value in risk management software.  

Whether your organization is relatively new to the use of risk management software or has an established system in place, a periodic review of the foundations supporting risk technology can be quite valuable.

Risk management processes, defined

For the purposes of this post, I define risk management processes as those that empower a risk manager to make critical decisions based upon information that is accurate, complete and relevant to the business environment. These processes are the bedrock upon which strategic planning and decisive action are based. If correctly integrated within the organization, risk management processes supported by software can transform raw data into valuable information, which in turn becomes business-critical knowledge about risk.

Pillar I: Understanding your organization’s risk position

The success or failure of an organization’s risk management strategy can be directly tied to how accurately and thoroughly risk managers answer fundamental questions like the ones listed below:

  • Are we on target to achieve our risk reduction goals?
  • Is this risk pattern reoccurring elsewhere? If so where and how?
  • Where should our loss control resources be prioritized and invested?
  • Is the current method of risk transfer optimal in today’s market climate?
  • Should we consider a higher level of self-retention?
  • Where can we reward good risk management practice?
  • How are we managing risk with our suppliers, partners or contractors?

On its own, the use of risk management software cannot overcome the challenges that an organization might face in answering such important questions. It’s true that technology plays an important role as an “enabler” when gathering, analyzing and disseminating data, but risk management software is only part of the total solution.

Pillar II: Supporting corporate governance

For many organizations, corporate governance has helped to elevate the function and discipline of risk management to the boardroom agenda. Today’s stakeholders not only expect, but also demand, a total commitment to the management of risk; sound risk management processes play a key role in fulfilling this obligation in the following ways:

  • First, risk management processes provide true visibility and credibility. The capacity to deliver regular, meaningful and high-quality management reports depicting up-to-date risk trends and analyses will help secure the board’s attention and support.
  • Second, the board may be held directly accountable by stakeholders for certain risk types and will therefore take comfort in knowing that processes are in place to assist with the qualification and management of risk. While no risk management process can detect every possible exposure upon the corporation’s risk radar, it should at least act as a barometer showing where there is a potential accumulation of exposure requiring further evaluation.
  • Third, the risk management process helps the risk manager to articulate his or her message among both internal and external stakeholders. For example, by internally circulating risk performance benchmark reports, the risk manager can justify the equitable basis upon which premium is apportioned among business divisions.

Pillar III: Strengthening the negotiating position

Within today’s market, one of the greatest challenges faced by risk managers is how to present risk in the best possible light during negotiations with new or existing markets. The duty of disclosure is still critical in establishing trust and integrity within the marketplace, but underwriters acknowledge that those risks presented with accurate, concise and complete information are the ones most likely to attract interest and influence preferential attention.

Whether we’re talking about risk management with or without the support of technology, sound risk management processes will certainly strengthen your position when negotiating cover, capacity and price with underwriters in today’s volatile marketplace by:

  1. Demonstrating the risk manager’s commitment to better understanding and managing the organization’s risk portfolio.
  2. Helping the risk manager remove unnecessary uncertainty and speculation when presenting the organization’s risks.
  3. Allowing the risk manager to put into place realistic and achievable risk reduction goals and maintaining an optimal level of self-retention of risk.
  4. Empowering the risk manager to marshal all the facts before negotiating with insurers (which also enables the risk manager to take prompt, decisive action and consider a far wider choice of options available in today’s market).
Michael Theut is a member of the Solutions Consulting team with Aon eSolutions. Please email Michael at michael.theut@aon.com

risk management software ROI

Mar 18, 2013

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