LEADERS

ONLINE

Women Leaders

311 guin.tif

Patricia L. Guinn

Risk and Opportunity

Editors’ Note

Patricia Guinn joined Towers Perrin in 1976, after graduating with honors from Hendrix College (Arkansas). She held numerous senior-level positions in the firm before being appointed Managing Director of the Risk & Financial Services business of Towers Perrin, which provides management and actuarial consulting and reinsurance intermediary services to the insurance industry and risk consulting to organizations of all types. She also oversees the firm’s enterprise risk management and retirement risk solutions practices. Guinn is a fellow of the Society of Actuaries and a member of the American Academy of Actuaries.

Company Brief

Towers Perrin (www.towersperrin.com) is a global professional services company that helps organizations improve performance through effective people, risk and financial management. The firm provides innovative solutions in the areas of human capital strategy, design and management and in risk and capital management, reinsurance intermediary services and actuarial consulting. Towers Perrin has offices and business partner locations in the United States, Canada, Europe, Asia, Latin America, South Africa, Australia and New Zealand.

How has the insurance industry changed in the past 5 to 10 years?

The pace of change in the insurance industry has been as great as it has been in any other industry due to several factors, including continued globalization; a more comprehensive approach to managing risk that includes seizing opportunities, as well as protecting the downside; and new regulatory requirements that address solvency and other corporate governance issues. In conjunction with new risk financing and risk mitigation vehicles, we’ve seen significant growth in private equity and hedge funds’ interest in the industry.

At the same time, the industry has faced mega-risks, the likes of which we’ve never seen before. In just the past seven years, the U.S. has experienced both the 9/11 terrorist attacks and Hurricane Katrina, which are the two biggest insured losses of all time. More recently, the credit crunch of 2007 is impacting the ability of companies to invest in growth strategies, such as mergers and acquisitions. There are also emerging risks to consider, such as older-age mortality, obesity, and climate change. As a result of these massive events and trends, insurance companies, as well as those in other industries, are taking a more comprehensive approach to managing risks and opportunities.

What do you mean by “a more comprehensive approach to managing risks and opportunities”?

What we’re talking about is an enterprise-wide approach to understanding risk that gives companies a framework for identifying the range of risks they face, quantifying those risks, and then developing and executing solutions for those risks. This approach also provides a pathway for recognizing and taking advantage of business opportunities that may result from risk. It’s a way to get executives from every part of the organization thinking about the company’s risks and opportunities in a quantitative fashion by using a common language. It helps them break out of their silos and see important linkages between functions, so they can better understand how a change in one area affects results in another area.

What types of risks and opportunities are included in this assessment?

Because every organization is different, each one will have different risks and opportunities, and their importance will vary from company to company. However, there are four broad categories that contain most of them. The first category is strategic risk and opportunity, which includes things like the company’s business model, strategy, and execution; the second category is financial risk and opportunity, which encompasses the cost of capital, interest rates, credit, and similar items; the third category is operational risk and opportunity, which focuses on business processes and infrastructure; the fourth category is people/workforce risks and opportunities, which includes things like employees’ skill sets, their levels of engagement in the business, and the company’s ability to attract and retain the right people.

Why are companies interested in assessing risks and opportunities at this point in the economic cycle?

First, companies have been focusing on growth after a number of years of cost containment. A growth imperative makes a clear understanding of risks and opportunities more important than ever. For example, a comprehensive understanding of the potential upside and downside of a merger or a new product gives companies a competitive edge. Second, companies concerned about the sub-prime lending problem are looking for ways to strengthen their processes for managing financial risk.

What do you see as the top risks and opportunities in financial services today?

We recently completed a global survey of 1,452 CEOs and senior executives, including 200 in the insurance industry, 167 in banking, and 77 in other financial services businesses. We asked them about their top risks and opportunities, and the first thing we found was that, across all industries, business leaders tend to see more opportunity than risk. In fact, our financial services respondents told us that, for them, risk equals opportunity, because they are in business to help other companies mitigate and financially offset their risks. We also found that executives who work in companies that already use some form of enterprise risk management are significantly more confident in their ability to manage risks and exploit opportunities than other executives are.

What can companies do about risks that seem to come from out of the blue?

There will always be unanticipated risks, but implementing an enterprise-wide risk management [ERM] program will help companies better identify and mitigate the risks they can anticipate.

Is there a downside to this enterprise approach to risk management?

Doing it right takes time and sustained effort. There is a fairly large commitment involved in undertaking ERM, but on the balance, it’s worth it.