ERM in Three Lines*

One of the challenges with enterprise risk management (ERM) is how much is written on the subject.  I find it useful to identify the key components.  This provides a structure to sort out the detailed views and comments, though it is also more than that. If you are a busy CRO or senior risk leader, identifying the key components enables you to take stock and think about challenges and improvements that may be relevant to your priorities. 

Here is an attempt to sum up ERM and provide that clarity in three headlines.

1.       A vision of the ERM purpose 

My preference for financial services is ‘protect and enable’. This highlights that risk management is more than just about avoiding the downside; it is about how risk management supports decision making, including the role of the CRO in that decision making. (More on ‘protect and enable’ and different views from practitioners shared on Crescendo Advisors’ blog are available here.)

2.       An articulation of how to deliver and embed ERM in the business 

This is your ERM framework, roles and responsibilities, policies, and risk appetite. They must provide the right balance between the level of detail and clarity to create a durable product and support business implementation.

3.       Evidence of the outcomes of vision and articulation of ERM (1 and 2 above) 

This is the outcome of the ERM, i.e. the assurance that is provided to the Board. This means that a feedback mechanism that supports improvement is in place. This is partly about risk or thematic reviews, but it also represents a wider perspective that involves 1^st line and 3^rd line as well. I also find that focusing on assurance is more ‘real’ than a discussion on the extent to which processes are implemented or embedded.

At the risk of oversimplifying, here is my own take on the UK insurance business position on these three aspects

• The articulation of the ERM vision is progressing but there is still work to be done. There is a sense that, broadly speaking, people operate according to the ‘protect and enable’ vision without articulating it as clearly as it could be.  

• Good progress has been made articulating how to deliver and embed ERM in businesses; all businesses have ERM frameworks and policies in place.  Some are considering external reviews after the frameworks have been in place for some time.  

• The biggest challenge ahead is evidencing ERM implementation and providing structured assurance to the Board about ERM expectations. This is a challenge for risk management function (risk reviews?), first line (business and control reviews?) and internal audit (coordinate with first and second line?).  Please get in touch if you want to receive a paper with initial thoughts on this challenge. 

Do you agree with views about these views about the insurance sector in the UK? How about banking and asset management? How is this seen in other countries?

*  No pun intended about the three lines of defence.

If you found this post of interest, you can subscribe and receive further posts by email. See the box on the right-hand side of the blog's screen or click here.

Integrating Artificial Intelligence in Risk Governance in Financial Services

I have written a number of articles about the interaction between artificial intelligence (AI) and governance and risk management.  My latest piece highlighted the impact that AI tools can have on a firm’s risk profile (here).  I am in the process of gathering my thoughts on how to provide for the ongoing and timely monitoring of AI-based tools, including their integration in business governance and risk management in financial services.

While reading on the subject (and keeping up with the pace of the Oxford FinTech Programme), I came across a succinct and interesting paper from Singapore’s Monetary Authority (here) that articulates how the principles of fairness, ethics, accountability and transparency can - and should - be applied to promote the use of AI in the financial sector. 

The paper highlights four useful points for senior management and Boards considering the strategic use of AI-based tools.

1. It is important to invest time and effort understanding and monitoring the decision making of AI based tools – i.e. do not regard AI-based tools as black boxes. 

2.  AI decisions are subject to the same ethical standards that apply to decisions made by staff – i.e. if AI-based tools purport to make decisions as humans would, but without their ‘feelings’, they should be scrutinised like humans.

3.  Governance has an important internal element not just an external one - i.e. firms should not rely on regulatory initiatives to support them delivering appropriate outcomes.

4.  The use of AI-based tools is transparent to consumers in terms of their use and outcomes – i.e. while there are limits to explanations that can be provided this cannot be dismissed altogether.

The paper also includes a number of practical illustrations that highlight the principles identified.

All in all this paper represents a useful starting point for firms to consider how they can equip themselves to benefit from the opportunities that AI technology offers for their businesses.

If you found this post of interest, you may want to subscribe and receive further posts by email. See the box on the right-hand side of the screen or click here.