There has been much discussion as to the evolution of the Chief Risk Officer (#CRO) role. Since the #Solvency II ‘go live’ date in January 2016, the tide has slowly turned in favour of those CROs who can support delivery of the firm’s strategic agenda.
Many CROs have become more engaged in the review of Group Business Plans and now provide an independent and forward-looking assessment of the strategic options, objectives and initiatives. Stress and Scenario Testing (#SST) is one tool CROs can apply to Balance Sheet base projections, to help the Board understand the assumptions and vulnerabilities inherent in the Business Plan.
The Prudential Regulation Authority (#PRA) recently highlighted the need for firms to select a suitable range of scenarios, sensitivities applicable to the main risk types (for example, equity market falls, increasing Bond spreads etc.) and severities of stress. The PRA has also highlighted the importance of considering a ‘walkthrough’ scenario, where the firm does not attempt to quantify likelihoods, but instead talks qualitatively about a possible sequences of events and possible mitigating actions. Finally, the PRA highlights that firm’s should not be content the scenarios represent the maximum severity, and there is a chance that more severe scenarios could happen.
Many CROs lack a clearly defined approach to complete a strategic assessment of the Group Business Plan, instead defaulting to a vanilla style ‘Risk Category-Description-Mitigating Actions’ table.
This approach is inherently limited as it fails:
- To focus on the firm’s strategic narrative
- To focus on the two key levers that deliver value creation and value capture
- To consider the complex and dynamic cause-and-effect linkages across four perspectives
It is imperative CROs critically assess Group Business Plans by initially focusing on the firm’s grounded and compelling strategic narrative which:
- Defines the firm’s potential
- Maps a path towards fulfilling that potential
- Describes mega-trends and industry developments
- Focuses on a few critical imperatives the firm must implement
Focus on two key levers
The strategic risk assessment should focus on two key levers:
- Revenue Growth – how the firm understands the customers’ needs and differentiates accordingly
- Productivity improvement – how the firm allocates resources and capabilities, including capital
A soft insurance market, an evolving risk landscape and a prolonged low interest rate environment, have all conspired to create a challenging trading environment.
It has been proven those firm’s that consistently outperform competitors have done so by allocating capital to those internal projects and investments that exceed the firm’s stated Return on Capital.
Operational Excellence, Customer Intimacy and Product Leadership have all created dynamic and complex connected business risks that are likely to materialise in ways not previously envisaged. Forward-looking strategic risk profiles, if developed and applied correctly, can offer valuable insights and provide a trigger to analyse strategic positioning relative to competitors.
(3) Internal process
Internal processes must be adapted to support alternative income streams, increase customer value through development of existing management processes and enhance product specifications.
(4) Learning and growth
Functional excellence and employee competencies must be built across the firm, supported by an increased deployment of technology.
CROs must develop their approach to completing strategic risk assessments by focusing on the two levers of growth and productivity and considering value creation and value capture from four interdependent perspectives. By doing so, CROs can not only provide valuable insight as to the strategic risks inherent in the Group Business Plan, but also identify opportunities for Business Model innovation.
Seven out of ten of the most valuable businesses by Market Capitalisation are platform-based (Alibaba, Facebook, Apple…..) and a significant portion of this value is driven by intangible, rather than tangible assets. Platforms offer the opportunity for participants to create significant direct and indirect network effects, reduce costs and turn the aggregation of data into valuable business insights and a superior customer experience.
Darren provides Enterprise Risk Management advisory services to the Insurance and Investment Management sectors. Helping Board and C-level executives address strategic challenges, by delivering solutions that create Enterprise Value and improve business performance.
Darren is an experienced executive with over 20 years’ global experience with multinational companies, including Chief Risk Officer reporting to the Board.
Darren is an Honorary Visiting Fellow of the Digital Leadership Research Centre, Cass Business School where he also holds an Executive MBA. Darren is a Certified Fellow of the Institute of Risk Management (CFIRM) and Chartered Insurance Risk Manager (ACII) of the Chartered Insurance Institute.
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