For insurers, enterprise risk management (ERM) often starts as a compliance-driven initiative. However, as companies put ERM processes in place that provide deeper insight into operations and allow organizations to improve their decision-making, they learn the best reason to implement ERM is it is good for business.

"ERM not only has validated observations of risks we face, it's helped us identify opportunity," says Scott McEntee, controller, Farmers Mutual Hail Insurance Company of Iowa (FMH).

"At FMH, ERM has become a formal process that raises awareness by breaking down silos and allows us to make better business decisions," adds Darin Roggenburg, CFO. "It has improved education at all levels of leadership in the company by providing a perspective that's not just about the individual business unit but a holistic approach to FMH."

Roggenburg and McEntee will be presenting at Wednesday's session on ERM, titled "A Balancing Act: Driving Strategy, Improving Transparency, and Providing Compliance Solutions," at 9:15 a.m. The session's theme of "balance" reflects the challenge of putting different goals in harmony.

"There are regulatory changes taking place and risk-focused examinations going on in every state. Rating agencies are asking for a forward-looking view of risks. There also are internal objectives, such as strategic planning, that benefit from the holistic approach of ERM," explains session moderator Mary Peter, director of enterprise risk management at Eide Bailly, LLP. "ERM impacts and benefits all these areas while improving communication and collaboration across the enterprise."

Companies also need to balance ERM with other pressing tasks. "Insurers are challenged to prioritize ERM along with all the other multiple demands that require resources of time and money. It can be a difficult initiative," she says.

In the session, McEntee and Roggenburg will outline the steps FMH took to create and implement an ERM process. Previously, FMH's ability to identify and assess risks at an enterprise level was tied to its strategic planning process. But since that process occurred once a year, it was difficult to respond to risks and opportunities in a timely manner.

Planning and Process

"We recognized in a rapidly changing business environment, our strategic planning process wasn't working from a risk management perspective," McEntee says. "We needed a process that was flexible, up-to-date, and would help us identify emerging or changing risks on a quarterly or even weekly basis."

FMH set out to create a dynamic and adaptive ERM process that was both separate from and complementary to its annual strategic planning. At the same time it began the ERM initiative, the company also was undertaking an ambitious enterprise architecture project.

FMH began its ERM initiative at the board level with the creation of a steering committee and ERM project team, led by McEntee. From the earliest stages of the project, he stresses, communication with key stakeholders who had a line-level view of risk was essential.

"We began by interviewing the board and executive management group. We broadened that to senior managers, then line managers," he explains. "In all our interviews, we focused on the same type of issues: What keeps you awake at night? Where are the opportunities?"

As those issues would percolate to the top, they were laid onto a matrix that identified the particular type of risk, the probability of its occurrence, and its enterprise impact. Individual risks were compiled and compared against those of other areas, resulting in the initial identification of 14 high-priority areas for action.

Objectives and Outcomes

FMH had several key objectives in ERM: facilitating the strategic planning process; improving communication and cutting through business silos in a way that also would address internal political issues; and positioning the company for rating agency evaluations and risk-focused examinations.

The session will detail how FMH's approach to ERM has indeed elevated risks to the strategic level. "The process brings all the risks together in one place where they're easy to focus and execute on as a board," says Roggenburg.

"ERM is feeding risks directly into the strategic planning process," McEntee adds. "It's no longer a matter of different constituents claiming something represents a risk or opportunity. Now, we have a tool that validates those claims and helps FMH focus resources where they need to be."

The objective nature of the ERM process has helped FMH address organizational politics. "We have a matrix that provides a clear view of companywide risk assessment that eliminates hidden agendas and pet projects," says Roggenburg.

"Breaking down silos has been extremely important," says McEntee. "Our ERM process has extracted the risks out of individual areas and layered them onto what's important to FMH."

The improved communication that results from cutting through silos is a key benefit many insurers realize. "ERM provides an opportunity to collaborate with other parts of the organization," Peter says. "The sharing that takes place is unprecedented."

Although FMH has not yet undergone a risk-focused examination, the benefit of ERM to the process already is apparent. "We will be due for an exam in 2011, and we are confident the documentation around risks, controls, and testing of those controls will make the examination process go smoothly," McEntee affirms.

The project also is having an impact on FMH's enterprise architecture initiative. "The ERM process itself has identified areas where we need to revamp our architecture or systems to stay current in the marketplace," McEntee says. The architectural committee is using ERM output, as well, to evaluate whether to build or buy technology to achieve its objectives.

Perhaps most important, ERM allows insurers to respond quicker to emerging risk and be proactive. "Insurers always have been good at evaluating risk retrospectively--looking at what already has happened," Peter says. "With an ERM viewpoint, they can look prospectively to discover emerging risks sooner and uncover opportunities to align with strategic goals and objectives."

"Instead of responding only annually to enterprise risks through our strategic planning process, the ERM matrix will be presented to our board on a regular basis," McEntee says. "As risks change, it allows management at all levels to have a clearer focus. Additionally, it puts the responsibility for identifying our emerging risks at the managers' level, which gives their business units more ownership in the process."

"ERM has given us a living, breathing document," Roggenburg sums up. "It is a holistic view that identifies critical issues for us, not just the risk of the month or the fire of the day."

Special Reports /

Achieving Balance in Enterprise Risk Management Proves Good for Business

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