Madonna may have touted the benefits of living in a material world, but one expert in enterprise risk management wants brokers to consider materiality when looking at a client’s strategic business plan.
Materiality? It is the concept of what is material to an organization, says Michael Yip, National Practice Leader – Enterprise Risk Management (ERM) at BFL CANADA, a way to focus on what drives an organization.
“The concept of ERM is based on the need to focus risk management efforts on issues and opportunities that are material to any organization. ERM and risk management in general, isn’t something that focuses on every issue,” Yip told Insurance Business. “There has to be a way to focus the limited risk management capital in order to assist the organization, and it is centered around defining and understanding materiality.”
The concept of materiality should be second nature to insurance brokers, says Yip, as developing a risk profile for their business clients is part of the job.
“From an insurance company point of view, when an organization or a corporation has a firm grasp of materiality, it is much easier to articulate the risk management controls, the mitigation actions,” he says, “things that an organization has put in place to manage their overall risk profile. That seems to be more concrete, easier to understand, from the insurer’s point of view.” (continued.)
Insurers and brokers are definitely exposed to some very relevant information in support of the whole concept of understanding the risk profile of an organization, says Yip. So, from his perspective, they are already in the midst of evaluating the elements that go into a review or assessment of materiality.
“It is one of the reasons that BFL felt the need to develop this capability,” he says, “as we are naturally aligned to begin thinking more strategically about risk issues with our clients; the corporations that we deal with. So I think it is very natural for insurers and brokers alike to start expanding their discussions – as simple as what is your tolerance for taking on risk, or your deductible levels.”
It is those elements that go into a broader calculation or assessment of materiality.
“There are certain drivers that an organization will be willing to go after – for example, if they want to be the greenest corporation,” he says. “Because every organization is different, risk tolerance for every organization is going to be different depending on the management philosophy, depending on what industry they are in. Is it highly regulated? Do they have a risk-averse culture? The concept of materiality is a big picture, yet you need to break it down.”
The concept of materiality is very intuitive for a lot of organizations, particularly a lot of senior management, suggests Yip.
“Executive management especially often feel like they know what their material thresholds are. But the challenge is being able to articulate that, so the rest of the organization can be able to appreciate it and act accordingly,” notes Yip. “That’s where I think a lot of the challenge is.” (continued.)
The real hurdle is convincing companies they need a materiality assessment – especially those individuals who are at the controls.
“I’ve heard that on many, many occasions,” says Yip. “The privately-held companies tend to have the philosophy, ‘I don’t need to know this. It’s what we do on a day-to-day basis.’ Whereas with the publicly-traded firms, there is an obligation to almost have a third-party come in and validate and assess and confirm what the management team is already feeling.”
For brokers to broach the topic of how much risk their business clients are willing to take, a good jumping off point might be organizations like the Risk and Insurance Management Society, says Yip.
“Organizations like RIMS have a number of very basic tools that organizations can follow,” he says. “And it is a very simple checklist that we use at BFL CANADA to start some of our engagements. And really, it is critical to understand the current state of risk management for the company: do you have a formal risk management statement? Do you understand what materiality is?”