Filed Under:Claims, Education & Training

Building a Champion ERM Risk Committee

Following the Plays of the 'Pros'

Insurers like to win. Highly competitive in their markets, they are constantly looking for new techniques to get an edge over rivals, while adjusting to the rough consumer and regulatory turf. Toughening up for the future, insurers are developing enterprise risk management (ERM) programs to strengthen their operations against financial blows.

One of the key steps in developing an ERM program is creating a risk committee to advise the board of directors on strategic risks. The risk committee also helps make decisions on key issues that impact day-to-day operations. To build a champion team, sports professionals set firm goals and objectives, invest in talent, appoint dynamic leaders, and commit themselves to extended periods of intense training. Similarly, companies must take concrete steps to build a winning roster of risk experts.

What additional factors should go into the risk committee selection process? How can companies build stronger risk teams? Stealing a few plays from the “pros,” here are some ideas for kicking off a new risk committee with a running start.

Identify Goals and Objectives for the Team

“If you aim at nothing, you will hit it every time.” - Anonymous

When creating a risk committee, the board should fully define the mission for the group at inception, establishing clear short- and long-term goals. Having a clear-cut vision for the committee gets the team heading in the right direction as soon as the clock starts. Some short-term goals for a risk committee include:

  • Developing a risk committee charter outlining the committee's responsibilities, composition, frequency of meetings, authority, and the charter review process.
  • Establishing a reporting structure for flow of information between the committee, the board, and other risk management functions in the organizational hierarchy.
  • Evaluating the current procedures for risk and control assessments company-wide, analyzing any gaps, and recommending proposed changes.
  • Helping the board scope and define the risk appetite of the organization.

Longer term, the risk committee may be charged with tasks such as reviewing strategic initiatives in light of the risk profile and appetite of the company. A risk committee’s feedback provides a unique perspective to a proposed project that might otherwise be overshadowed by sales or marketing goals. The committee may also help ensure that personnel, resources, and processes continue to be available to maintain strong ERM practices. Members may be asked to review public disclosures or speak to rating agencies on related issues. 

Formally documenting goals and calendaring activity establishes a game plan for a risk committee, and scouts out what skills and experience the committee members should have. New team members can be recruited and other financial or system resources obtained, in light of the specific tasks outlined.

Making the Best of Draft Picks

Talent wins games, but teamwork and intelligence wins championships.” – Michael Jordan

The next challenge is to flesh out a full roster of talent with complementary skills and experience. Initially, a first cut from the talent pool is based on technical skill, with individuals selected to reflect the size of the company, its lines of business, and key operational areas. Actual experience with risk and related issues is helpful, although the pool of “experienced” ERM professionals may be relatively shallow. Pinch-hitters without specific ERM experience are often recruited from the financial, accounting and actuarial departments.

From there, selecting the best individuals for the team is an art, where the committee’s need for superior technical risk and financial expertise must be balanced with “softer” management skills.  Communication, motivation and negotiation are as much a part of a risk committee as the ability to read financial reports, or calculate risk-related equations. Enthusiasm and attitude toward the ERM program can also be just as important as specific knowledge. Setting the tone from the top, individual members can dictate whether ERM-related projects will be viewed as a grit-your-teeth burden, or an exciting opportunity to improve the business. Attitude can speed or delay projects, encourage or punish disclosures, and reward or stifle innovation.

Many of the issues coming to the risk committee will be of significant importance to other board-level groups. Overlap or sharing of members may not only prevent redundancy, but also help committee members “cross-train” to gain experience in different arenas. Thus, the committee may want to have members from other committees, such as the audit or compensation committees. Some companies also choose to have at least one member who is a non-employee or “outside” director, whose experience can add breadth and depth to the team.

Finally, the board should interview and appoint committee members in a multi-stage, or “tag- team approach.” In some companies, committee members are selected by a chief risk officer or another single manager, without much debate or input by the board. This creates a danger that the team may become too slanted in a particular functional or technical area. Instead, appointees should either be screened by at least two individuals with different organizational responsibilities, or reviewed by a vote of the whole board. As with any team, a well-balanced roster typically produces better results.

Selecting a Team Captain or Coach

Your role as the captain will give the ship direction, purpose and ultimately success.” – Dale Brown, coach

Many winning teams thrive on structure that is created from the bottom up, yet are guided by strong, confident leadership from the top, by captains or coaches. Some of the best coaches are experts in their field, but also exhibit certain qualities or values that organize and motivate the team, moving the group forward. 

Risk committees should also have a leader, typically the committee head, who may or may not also be the company’s chief risk officer. He or she may not have the strongest risk background, but must be able to call on additional resources when needed. More importantly, he or she will also have the personal qualities of a coach. These qualities may include:

  • Strong organizational skills, with a firm understanding of what time commitment and education will take the team to make deadlines and reach goals.
  • A deliberate appreciation of each individual’s strengths and gifts, and the knack of deciding how best to allocate those resources to a team task.
  • Composure under pressure, with willingness to shoulder responsibility for major decisions or setbacks, rather than pass the buck.
  • Concern for the relationships between team members, and the understanding that people need to feel secure and valued as a team member in order to make their best efforts. Good captains spend time integrating newcomers into the group. They may also help resolve conflicts between current members, with sense of balance and fairness.

Spring Training: Orientation & Warm Up

Build for your team a feeling of oneness, of dependence on one another, and of strength to be derived by unity.” Vince Lombardi, coach

Pre-season training, team building, conditioning, and practice are all important first weeks in a championship season. Likewise, a newly-formed risk committee should spend time on a few foundational activities before jumping into action. Some preliminary activities to help set the committee’s vision, alignment, and commitment might start with a critical review and tweaking of the committee’s mission as established by the board, and drafting of a committee charter.

For many committees, specific time should be allocated to ensure that the committee members receive some basic education on ERM principles, tools, reporting, financial principles, and so on. This ensures a baseline of common knowledge, and instills a coherent sense of purpose for the committee. Not all team members will have the same background, training, opinions or perspectives. Also, since many will report to different stakeholders, a review of who the stakeholders are for ERM efforts can be enlightening. The group should then review short and long-term goals, making any changes only after exploring individual member expertise.

Practice Makes Perfect

The more I practice, the luckier I get.” – Jerry Barber, golfer

The average basketball team plays 82 games in a regular season before the playoffs. For baseball, it is 162 games. Each game must be fought, and even if the team loses one game, it may win a season based on the skills it has developed over time in each battle. Championship games are the culmination of hard work accomplished during the year.

While keeping their ultimate mission or goals in mind, risk committees must also put in hard work consistently over long periods, to fully understand and assess risk. Risk and controls are reviewed both at a point in time, and over time. Instead of meeting just at year-end, risk committees typically have a regular schedule of meetings throughout the year, as well as set protocols for ongoing communication and keeping everyone “in the loop.”

Motivation can be difficult to maintain for any long-term effort. To maintain motivation for a risk committee, set performance goals for the committee (whether or not tied to compensation). Just meeting or exceeding goals can be a boost to a team. For individual committee members to stay motivated and engaged in ERM efforts, they may appreciate non-financial opportunities, such as working closely with the executives, senior managers, or new business. Alternatively, individual risk committee members may want or need ongoing training and education as a condition of their participation. Explore what help drives these professionals day-to-day.

Managing Setbacks

It may sound strange, but many champions are made champions by setbacks.” – Bob Richards, Olympian vaulter

How a team handles setbacks such as injuries or losing streaks is an important indicator of their future success. The best teams conduct routine self-assessments, and seek honest feedback from their owners, managers, or fans, debriefing after each game. Plays and strategies are continuously updated. Poor performers are identified quickly, and are given the resources or additional training to develop weak skills.

Risk committees should also foster a culture of continual self-improvement, in an open environment. As part of this, they should encourage fair criticism, hear out “risky” new ideas, and proactively solicit comments from their respective stakeholders. Failures, setbacks, and delays along the way should be addressed promptly, with a focus on fixing the process or problem, rather than pointing fingers of blame.

Planning for Next Year 

“You can always become better.” – Tiger Woods

Finally, champion teams look ahead beyond the trophy to next year. Risk committees too must continually think to the future. Consider succession planning for committee members. Current members may also want to be given some rotation of assignments, roles, and tasks within the committee, to gain fresh perspectives and add more value to future discussions. If new team members are joining, a refresher of ERM basics training or team-building activities may be needed to kick-off committee efforts for a new year. Don’t assume what worked (or didn’t work) today will be the same next year.

With proper focus, training, and motivation risk committees help insurers achieve their risk management goals, and gain a winning edge over their competition.

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