Optimizing Your GRC Technology Ecosystem

Most organizations rely on multiple technologies to manage GRC across the enterprise. Optimizing a GRC technology ecosystem aligned with a defined GRC process structure improves risk-informed business decisions and achievement of strategic business objectives. This illustration outlines ways to continuously optimize your GRC technology ecosystem for

  • greater process consistency
  • and development of actionable information.

An integrated GRC technology ecosystem built on common vocabulary, taxonomy and processes enables

  • more accurate and timely reporting,
  • increased reliability of achievement of objectives
  • and greater confidence in assurance with less burden on the business.

Here are just a few of the key benefits:

Process and Technology Alignment

  • Common methods for core tasks, uniform taxonomies, and consistent vocabulary for governance, risk management and compliance across the organization
  • Risk-based actions and controls that ensure timely responses to changed circumstances
  • Standardized GRC processes based on understanding where in the organization each defined process takes place and how data is used in managing risks and requirements
  • Connected technologies as necessary to gain a complete view of the management actions, controls and information needed by each user

Governance Systems to include:

  • Strategy / Performance
  • Board Management
  • Audit & Assurance Tools

Risk Systems to include:

  • Brand & Reputation
  • Finance / Treasury Risk
  • Information / IT Risk
  • External Risk Content
  • Third Party Risk

Compliance Systems to include:

  • Policies
  • Helpline / Hotline
  • Training
  • EHS (Environment Health and Safety)
  • Fraud / Corruption
  • Global Trade
  • Privacy
  • Regulatory Change
  • AML (Anti Money Laundering) / KYC (Know Your Customer)

Enabling Systems to include:

  • Data Visualization
  • Analytics
  • Business Intelligence
  • Predictive Tools
  • External Data Sources

Protective Systems to include:

  • Information Security
  • Data Protection
  • Assets Control

Benefits and Outcomes

  • Enhanced tracking of achievement of objectives and obstacles
  • Connected reporting for board/management/external stakeholders
  • Timely understanding of impact from operational decisions
  • Actionable view of changes needed to meet regulatory requirements
  • Clear action pathways for resolution of issues and process reviews
  • Consistent risk assessments feeding into advanced analytics
  • Improved predictive capabilities to support strategic planning
  • Control testing and audit trails for response to regulators and auditors
  • Greater confidence in assurance with less burden on the business
  • Enterprise-wide, departmental and geographic control standards

OCEG

Tips for Optimization

1. Process Framework

  • Identify tasks appropriate for standardization and schedule implementation across units
  • Assess vocabulary used throughout organization for inconsistencies and establish rules
  • Adjust process model periodically to continue alignment with business objectives and activities

2. Technology Ecosystem

  • Periodically review GRC technologies for gaps and duplication of systems
  • Assess appropriateness of connection of systems for data sharing and user access
  • Maintain a current road map for re-purposing and acquisition of technologies

3. Outcome Management

  • Apply standard processes for resolution of issues and remediation of identified process framework or technology ecosystem weaknesses
  • Enhance reporting capabilities with refined report structure and delivery methods/schedules
  • Ensure all users apply the process framework and understand how best to use the technology

Click here to access OCEG’s illustration in detail

Mastering Risk with “Data-Driven GRC”

Overview

The world is changing. The emerging risk landscape in almost every industry vertical has changed. Effective methodologies for managing risk have changed (whatever your perspective:

  • internal audit,
  • external audit/consulting,
  • compliance,
  • enterprise risk management,

or otherwise). Finally, technology itself has changed, and technology consumers expect to realize more value, from technology that is more approachable, at lower cost.

How are these factors driving change in organizations?:

Emerging Risk Landscapes

Risk has the attention of top executives. Risk shifts quickly in an economy where “speed of change” is the true currency of business, and it emerges in entirely new forms in a world where globalization and automation are forcing shifts in the core values and initiatives of global enterprises.

Evolving Governance, Risk, and Compliance Methodologies

Across risk and control oriented functions spanning a variety of audit functions, fraud, compliance, quality management, enterprise risk management, financial control, and many more, global organizations are acknowledging a need to provide more risk coverage at lower cost (measured in both time and currency), which is driving re-inventions of methodology and automation.

Empowerment Through Technology

Gartner, the leading analyst firm in the enterprise IT space, is very clear that the convergence of four forces—Cloud, Mobile, Data, and Social—is driving the empowerment of individuals as they interact with each other and their information through well-designed technology.

In most organizations, there is no coordinated effort to leverage organizational changes emerging from these three factors in order to develop an integrated approach to mastering risk management. The emerging opportunity is to leverage the change that is occurring, to develop new programs; not just for technology, of course, but also for the critical people, methodology, and process issues. The goal is to provide senior management with a comprehensive and dynamic view of the effectiveness of how an organization is managing risk and embracing change, set in the context of overall strategic and operational objectives.

Where are organizations heading?

“Data Driven GRC” represents a consolidation of methodologies, both functional and technological, that dramatically enhance the opportunity to address emerging risk landscapes and, in turn, maximizing the reliability of organizational performance.

This paper examines the key opportunities to leverage change—both from a risk and an organizational performance management perspective—to build integrated, data-driven GRC processes that optimize the value of audit and risk management activities, as well as the investments in supporting tools and techniques.

Functional Stakeholders of GRC Processes and Technology

The Institute of Internal Auditors’ (IIA) “Three Lines of Defense in Effective Risk Management and Control” model specifically addresses the “who and what” of risk management and control. It distinguishes and describes three role- and responsibility-driven functions:

  • Those that own and manage risks (management – the “first line”)
  • Those that oversee risks (risk, compliance, financial controls, IT – the “second line”)
  • Those functions that provide independent assurance over risks (internal audit – the “third line”)

The overarching context of these three lines acknowledges the broader role of organizational governance and governing bodies.

IIAA

Technology Solutions

Data-Driven GRC is not achievable without a technology platform that supports the steps illustrated above, and integrates directly with the organization’s broader technology environment to acquire the data needed to objectively assess and drive GRC activities.

From a technology perspective, there are four main components required to enable the major steps in Data-Driven GRC methodology:

1. Integrated Risk Assessment

Integrated risk assessment technology maintains the inventory of strategic risks and the assessment of how well they are managed. As the interface of the organization’s most senior professionals into GRC processes, it must be a tool relevant to and usable by executive management. This technology sets the priorities for risk mitigation efforts, thereby driving the development of project plans crafted by each of the functions in the different lines of defense.

2. Project & Controls Management

A project and controls management system (often referred to more narrowly as audit management systems or eGRC systems) enables the establishment of project plans in each risk and control function that map against the risk mitigation efforts identified as required. Projects can then be broken down into actionable sets of tactical level risks, controls that mitigate those risks, and tests that assess those controls.

This becomes the backbone of the organization’s internal control environment and related documentation and evaluation, all setting context for what data is actually required to be tested or monitored in order to meet the organization’s strategic objectives.

3. Risk & Control Analytics

If you think of Integrated Risk Assessment as the brain of the Data-Driven GRC program and the Project & Controls Management component as the backbone, then Risk & Control Analytics are the heart and lungs.

An analytic toolset is critical to reaching out into the organizational environment and acquiring all of the inputs (data) that are required to be aggregated, filtered, and processed in order to route back to the brain for objective decision making. It is important that this toolset be specifically geared toward risk and control analytics so that the filtering and processing functionality is optimized for identifying anomalies representing individual occurrences of risk, while being able to cope with huge populations of data and illustrate trends over time.

4. Knowledge Content

Supporting all of the technology components, knowledge content comes in many forms and provides the specialized knowledge of risks, controls, tests, and data required to perform and automate the methodology across a wide-range of organizational risk areas.

Knowledge content should be acquired in support of individual risk and control objectives and may include items such as:

  • Risk and control templates for addressing specific business processes, problems, or high-level risk areas
  • Integrated compliance frameworks that balance multiple compliance requirements into a single set of implemented and tested controls
  • Data extractors that access specific key corporate systems and extract data sets required for evaluation (e.g., an SAP supported organization may need an extractor that pulls a complete set of fixed asset data from their specific version of SAP that may be used to run all require tests of controls related to fixed assets)
  • Data analysis rule sets (or analytic scripts) that take a specific data set and evaluate what transactions in the data set violate the rules, indicating control failures occurred

Mapping these key technology pieces that make up an integrated risk and control technology platform against the completely integrated Data-Driven GRC methodology looks as follows:

DDGRC

When evaluating technology platforms, it is imperative that each piece of this puzzle directly integrates with the other; otherwise, manual aggregation of results will be required, which is not only laborious but also inconsistent, disorganized and (by definition) violates the Data-Driven GRC methodology.

HiPerfGRC

 

Click here to access ACL’s study

The evolution of GRC

Attitudes to governance, risk and compliance (GRC) activities are changing among Tier 1 financial institutions. The need to keep up with rapid regulatory change, and the pressure of larger, more publicised penalties dealt out by regulators in recent years have prompted an evolution in how risk is viewed and managed. Financial firms also face an increasingly volatile market environment that requires them to remain nimble – not just to survive, but to thrive.

As a result of these market developments, GRC is now seen, rather than as one strand of the business, as a far more integrated activity with many companies realigning resources around the ‘three lines of defence’ model. GRC is increasingly being treated as an enterprise-wide responsibility by organisations that are successfully navigating these challenging times for global financial markets. This shift in attitudes is also leading to a rethink in relation to the tools used by all three lines of defence to participate in GRC activities. Some are exploring more innovative solutions to support and engage infrequent users – particularly those in the first line of defence (1LoD). The more intuitive design of such tools enables these users to take a more active role in risk-aware decision-making.

These and other innovations promise to bring greater effectiveness and efficiency to an area into which firms have channelled increasing levels of resource in recent years but are struggling to keep up with demand. A recent survey carried out by Risk.net and IBM found that risk and compliance professionals acknowledge the limitations of existing operational risk and regulatory compliance tools and systems to satisfy current and future GRC requirements. The survey polled 106 senior risk, compliance, audit and legal executives at financial firms including banks (53%), insurance companies (21%) and asset management firms (12%). The results revealed that nearly one third of these respondents remain unimpressed with the effectiveness of their organisation’s ability to cope with the complexity and pace of regulatory change. Nearly half gave a similar response regarding their organisation’s efficiency in this area.

With these issues in mind, many of the firms surveyed have started to explore user-experience needs more deeply and combine the results with artificial intelligence (AI) capabilities to further develop GRC systems and processes. These capabilities are designed to enhance compliance systems and processes and make them more intuitive for all. As such, user-experience research and design has become a key consideration for organisations wanting to ensure employees across all three lines of defence can participate more fully in GRC activities. In addition, AI-powered tools can help 1LoD business users better manage risk and ensure compliance by increasing the efficiency and effectiveness of these GRC systems and processes. The survey shows that, while some organisations are already developing these types of solutions, there is still room for greater understanding of the benefits of new and innovative forms of technology throughout the global financial markets. For instance, nearly half of respondents to the survey, when asked about the benefits of AI for GRC activities, were unsure of the potential time efficiencies such tools can bring. More than one-quarter were undecided on whether AI would free up employees’ time to focus on more strategic tasks.

Many organisations are still considering how to move forward in this area, but it will be those that truly embrace user-focused tools and leverage innovative technologies such as AI and advanced analytics to increase efficiencies that can expect to reap the rewards of successfully managing regulatory change and tackling market volatility.

LoD

Current and Future Applications

The survey highlights that financial firms already recognise that these solutions can be used to more efficiently manage the regulatory change process. For example, AI-based solutions can provide smart alerts to highlight the most relevant regulatory changes – 35% of survey respondents see AI as offering the biggest potential improvements in this area.

Improving the speed and accuracy of classification and reporting of information – for example, in relation to loss events – was another area identified for its high AI potential. Nearly one-third of respondents (31%) see possibilities for improvement of current GRC processes in this area. Some financial firms have already started to reap the rewards of this type of approach. Larger firms are typically ahead of the game with such developments, often having more resources to put into research and development. Out of the 13% of larger firms that have seen a decrease in GRC resources over the past year, one-third of survey respondents attribute that to “tools and automation improvements”.

Similarly, 44% of those polled work at organisations already making improvements to improve end-to-end time and user experience in relation to GRC processes and tools. A further 19% plan to do this in the next 12 months and, in line with this, 64% of survey respondents expect their firm’s GRC resources to increase over the next 24 months (see figure 8). While it is not clear from the survey whether these additional resources will be specifically directed towards AI, more than 80% of respondents work at organisations currently considering AI for a range of GRC activities.

The most popular use of AI among financial firms is to improve the speed and/or accuracy of classification and reporting information, such as loss events – 19% of respondents say their organisation is currently using AI for this purpose, with 81% currently considering this type of use. Such events happen fairly infrequently, so training employees to classify and enter such information can be time consuming, but incorrect classification can have a real impact on data quality. By using natural language processing (NLP) tools to understand and categorise loss events automatically, organisations can streamline the time and resources required to train employees to collect and manage this information.

According to the survey, 83% of respondents are also currently considering the use of AI tools to develop smart alerts that will highlight any new rules or updates to existing regulations, helping financial firms manage regulatory change more efficiently. Many organisations already receive an overwhelming amount of alerts every day relating to new rules or changes, but some or all of these changes may not actually apply to their businesses. AI can be used to tailor these alerts to ensure compliance teams only receive the most relevant alerts. Using NLP to create this mechanism can be the difference between sorting through 100 alerts in one day and receiving one smart alert that has been identified by an AI-powered solution.

Control mapping is another area to which AI can add value. When putting controls in place relating to specific obligations within a regulation, for example, compliance teams can either create a new control or, using NLP, detect whether there is already an applicable control in place that can be mapped to record the organisation’s compliance with the rule. This reduces the amount of time spent by the team reading and understanding new legislation or rule changes to determine applicability, as well as improving accuracy and reducing duplicate controls.

Click here to access IBM’s White Paper

Insurance Fraud Report 2019

Let’s start with some numbers. In this 2019 Insurance Fraud survey, loss ratios were 73% in the US. On average, 10% of the incurred losses were related to fraud, resulting in losses of $34 billion per year.

By actively fighting fraud we can improve these ratios and our customers’ experience. It’s time to take our anti-fraud efforts to a higher level. To effectively fight fraud, a company needs support and commitment throughout the organization, from top management to customer service. Detecting fraudulent claims is important. However, it can’t be the only priority. Insurance carriers must also focus on portfolio quality instead of quantity or volume.

It all comes down to profitable portfolio growth. Why should honest customers have to bear the risks brought in by others? In the end, our entire society suffers from fraud. We’re all paying higher premiums to cover for the dishonest. Things don’t change overnight, but an effective industry-wide fraud approach will result in healthy portfolios for insurers and fair insurance premiums for customers. You can call this honest insurance.

The Insurance Fraud Survey was conducted

  • to gain a better understanding of the current market state,
  • the challenges insurers must overcome
  • and the maturity level of the industry regarding insurance fraud.

This report is a follow up to the Insurance Fraud & Digital Transformation Survey published in 2016. Fraudsters are constantly innovating, so it is important to continuously monitor developments. Today you are reading the latest update on insurance fraud. For some topics the results of this survey are compared to those from the 2016 study.

This report explores global fraud trends in P&C insurance. This research addresses

  • challenges,
  • different approaches,
  • engagement,
  • priority,
  • maturity
  • and data sharing.

It provides insights for online presence, mobile apps, visual screening technology, telematics and predictive analytics.

Fraud-Fighting-Culture

Fraudsters are getting smarter in their attempts to stay under their insurer’s radar. They are often one step ahead of the fraud investigator. As a result, money flows to the wrong people. Of course, these fraudulent claims payments have a negative effect on loss ratio and insurance premiums. Therefore, regulators in many countries around the globe created anti-fraud plans and fraud awareness campaigns. Several industry associations have also issued guidelines and proposed preventive measures to help insurers and their customers.

Fraud1

Engagement between Departments

Fraud affects the entire industry, and fighting it pays off. US insurers say that fraud has climbed over 60% over the last three years. Meanwhile, the total savings of proven fraud cases exceeded $116 million. Insurers are seeing an increase in fraudulent cases and believe awareness and cooperation between departments is key to stopping this costly problem.

Fraud2

Weapons to Fight Fraud

Companies like Google, Spotify and Uber all deliver personalized products or services. Data is the engine of it all. The more you know, the better you can serve your customers. This also holds true for the insurance industry. Knowing your customer is very important, and with lots of data, insurers now know them even better. You’d think in today’s fast digital age, fighting fraud would be an automated task.

That’s not the case. Many companies still rely on their staff instead of automated fraud solutions. 67% of the survey respondents state that their company fights fraud based on the gut feeling of their claim adjusters. There is little or no change when compared to 2016.

Fraud3

Data, Data, Data …

In the fight against fraud, insurance carriers face numerous challenges – many related to data. Compared to the 2016 survey results, there have been minor, yet important developments. Regulations around privacy and security have become stricter and clearer.

The General Data Protection Regulation (GDPR) is only one example of centralized rules being pushed from a governmental level. Laws like this improve clarity on what data can be used, how it may be leveraged, and for what purposes.

Indicating risks or detecting fraud is difficult when the quality of internal data is subpar. However, it is also a growing pain when trying to enhance the customer experience. To improve customer experience, internal data needs to be accurate.

Fraud4

Benefits of Using Fraud Detection Software

Fighting fraud can be a time-consuming and error-prone process, especially when done manually. This approach is often based on the knowledge of claims adjustors. But what if that knowledge leaves the company? The influence of bias or prejudice when investigating fraud also comes into play.

With well-organized and automated risk analysis and fraud detection, the chances of fraudsters slipping into the portfolio are diminished significantly. This is the common belief among 42% of insurers. And applications can be processed even faster. Straightthrough processing or touchless claims handling improves customer experience, and thus customer satisfaction. The survey reported 61% of insurers currently work with fraud detection software to improve realtime fraud detection.

Fraud5

Click here to access FRISS’ detailed Report

The Global Risks Landscape 2019

Is the world sleepwalking into a crisis? Global risks are intensifying but the collective will to tackle them appears to be lacking. Instead, divisions are hardening. The world’s move into a new phase of strongly state-centred politics, noted in last year’s Global Risks Report, continued throughout 2018. The idea of “taking back control”— whether domestically from political rivals or externally from multilateral or supranational organizations — resonates across many countries and many issues. The energy now expended on consolidating or recovering national control risks weakening collective responses to emerging global challenges. We are drifting deeper into global problems from which we will struggle to extricate ourselves.

During 2018, macroeconomic risks moved into sharper focus. Financial market volatility increased and the headwinds facing the global economy intensified. The rate of global growth appears to have peaked: the latest International Monetary Fund (IMF) forecasts point to a gradual slowdown over the next few years. This is mainly the result of developments in advanced economies, but projections of a slowdown in China—from 6.6% growth in 2018 to 6.2% this year and 5.8% by 2022—are a source of concern. So too is the global debt burden, which is significantly higher than before the global financial crisis, at around 225% of GDP. In addition, a tightening of global financial conditions has placed particular strain on countries that built up dollar-denominated liabilities while interest rates were low.

Geopolitical and geo-economic tensions are rising among the world’s major powers. These tensions represent the most urgent global risks at present. The world is evolving into a period of divergence following a period of globalization that profoundly altered the global political economy. Reconfiguring the relations of deeply integrated countries is fraught with potential risks, and trade and investment relations among many of the world’s powers were difficult during 2018.

Against this backdrop, it is likely to become more difficult to make collective progress on other global challenges—from protecting the environment to responding to the ethical challenges of the Fourth Industrial Revolution. Deepening fissures in the international system suggest that systemic risks may be building. If another global crisis were to hit, would the necessary levels of cooperation and support be forthcoming? Probably, but the tension between the globalization of the world economy and the growing nationalism of world politics is a deepening risk.

Environmental risks continue to dominate the results of our annual Global Risks Perception Survey (GRPS). This year, they accounted for three of the top five risks by likelihood and four by impact. Extreme weather was the risk of greatest concern, but our survey respondents are increasingly worried about environmental policy failure: having fallen in the rankings after Paris, “failure of climate-change mitigation and adaptation” jumped back to number two in terms of impact this year. The results of climate inaction are becoming increasingly clear. The accelerating pace of biodiversity loss is a particular concern. Species abundance is down by 60% since 1970. In the human food chain, biodiversity loss is affecting health and socioeconomic development, with implications for well-being, productivity, and even regional security.

Technology continues to play a profound role in shaping the global risks landscape. Concerns about data fraud and cyber-attacks were prominent again in the GRPS, which also highlighted a number of other technological vulnerabilities: around two-thirds of respondents expect the risks associated with fake news and identity theft to increase in 2019, while three-fifths said the same about loss of privacy to companies and governments. There were further massive data breaches in 2018, new hardware weaknesses were revealed, and research pointed to the potential uses of artificial intelligence to engineer more potent cyberattacks. Last year also provided further evidence that cyber-attacks pose risks to critical infrastructure, prompting countries to strengthen their screening of cross-border partnerships on national grounds.

The importance of the various structural changes that are under way should not distract us from the human side of global risks. For many people, this is an increasingly anxious, unhappy and lonely world. Worldwide, mental health problems now affect an estimated 700 million people. Complex transformations— societal, technological and work-related—are having a profound impact on people’s lived experiences. A common theme is psychological stress related to a feeling of lack of control in the face of uncertainty. These issues deserve more attention: declining psychological and emotional wellbeing is a risk in itself—and one that also affects the wider global risks landscape, notably via impacts on social cohesion and politics.

Another set of risks being amplified by global transformations relate to biological pathogens. Changes in how we live have increased the risk of a devastating outbreak occurring naturally, and emerging technologies are making it increasingly easy for new biological threats to be manufactured and released either deliberately or by accident. The world is badly under-prepared for even modest biological threats, leaving us vulnerable to potentially huge impacts on individual lives, societal well-being, economic activity and national security. Revolutionary new biotechnologies promise miraculous advances, but also create daunting challenges of oversight and control—as demonstrated by claims in 2018 that the world’s first genemodified babies had been created.

Rapidly growing cities and ongoing effects of climate change are making more people vulnerable to rising sea levels. Two-thirds of the global population is expected to live in cities by 2050 and already an estimated 800 million people live in more than 570 coastal cities vulnerable to a sea-level rise of 0.5 metres by 2050. In a vicious circle, urbanization not only concentrates people and property in areas of potential damage and disruption, it also exacerbates those risks— for example by destroying natural sources of resilience such as coastal mangroves and increasing the strain on groundwater reserves. Intensifying impacts will render an increasing amount of land uninhabitable. There are three main strategies for adapting to rising sea-levels:

  1. engineering projects to keep water out,
  2. naturebased defences,
  3. and peoplebased strategies, such as moving households and businesses to safer ground or investing in social capital

to make flood-risk communities more resilient.

In this year’s Future Shocks section, we focus again on the potential for threshold effects that could trigger dramatic deteriorations and cause cascading risks to crystallize with dizzying speed. Each of the 10 shocks we present is a “what-if” scenario—not a prediction, but a reminder of the need to think creatively about risk and to expect the unexpected. Among the topics covered this year are

  • quantum cryptography,
  • monetary populism,
  • affective computing
  • and the death of human rights.

In the Risk Reassessment section, experts share their insights about how to manage risks. John Graham writes about weighing the trade-offs between different risks, and András Tilcsik and Chris Clearfield write about how managers can minimize the risk of systemic failures in their organizations.

And in the Hindsight section, we revisit three of the topics covered in previous reports:

  • food security,
  • civil society
  • and infrastructure investment.

wef1

wef2

click here to access wef-mmc-zurich’s global risks report 2019

 

Successful risk management today may start with governance, risk and compliance (GRC)—but it shouldn’t end there

As more and more organizations embrace digital transformation, business risk grows in scope and complexity, and the need to manage it in a more agile, responsive manner becomes increasingly pressing.

GRC in its initial incarnation—a set of tools for managing compliance risk— remains valuable for that specific challenge, but it aligns less precisely with today’s evolving definitions of risk and risk management. The answer is not to abandon GRC, though; rather, it’s to allow it to evolve into an approach that is better suited to today’s multifaceted challenges: integrated risk management. This paper maps out the path from a pre-digital, compliance-driven riskmanagement strategy to an adaptable, integrated approach that can keep pace with the fast-changing digital world.

STARTING POINT: RECOGNIZING NEW RISKS

GRC emerged early in this century as a way of improving corporate governance and internal controls to address regulatory compliance requirements. Today, however, the need has evolved from better managing compliance risk to better managing overall risk. And the definition and scope of risk itself has evolved as well, with areas such as digital third-party risk coming into play and moving to the forefront. Strategies that drive business success today, such as technology adoption or market expansion, are creating new opportunities—but at the same time, they are introducing more risk. Consider these examples:

DIGITAL TRANSFORMATION

Digital transformation is clearly a strategic priority today; IDC recently forecast spending in this area to reach $1.3 trillion in 2018. Digital transformation creates new opportunities to thrive and compete—but it also creates digital risk. Digital business typically involves fast-moving projects supported by processes that require a multitude of different applications, expanding the points of risk and the stakes for the organization. The key to seizing the opportunities is managing the risk in critical areas:

  • VENDOR AND OTHER THIRD-PARTY RELATIONSHIPS: Looking to move more quickly and nimbly to exploit business opportunities, organizations are increasingly relying on external parties, such as service providers (especially cloud service providers), vendors, contractors and consultants. This increases risk, since organizations don’t have direct control over the risk a third party creates—but they are nevertheless responsible for managing the risk in third-party relationships.
  • COMPLIANCE AND OVERSIGHT: That brings us to the area that originally led to the emergence of GRC: compliance risk. That risk has not gone away; it’s only been joined by other risks, such as those described above. Given the increasing complexity of business and IT today, compliance has grown more complex, increasing the risk associated with it.

The examples described above represent major categories of risk for organizations today, but they are by no means the only risks organizations face. Every organization is a complex ecosystem of people, processes and technology, and risk can be hidden away in many areas.

NEXT LOGICAL STEP: AN INTEGRATED VIEW OF RISK

A HORIZONTALLY INTEGRATED VIEW
As areas of risk within organizations continue to grow beyond just compliance risk, the need to view them as an integrated whole becomes increasingly clear. There are two primary reasons for this.

  • One is that it’s simply unrealistic and operationally unsustainable to manage them separately, using different risk management platforms.
  • The other reason—far more critical than the first—is that most areas of organizational risk today don’t really exist independent of other risks; rather, they cross over into other areas.

For example, if engaging with a cloud service provider presents a security risk, that’s both a digital risk and a third-party risk. And if that risk isn’t addressed, it may result in issues across multiple areas, from business disruption to compliance. Therefore, organizations need to be able to leverage business processes to build an integrated picture of risk that crosses operational functions and fosters a multidisciplinary approach to risk management. Think of this as a horizontally integrated view of risks that needs to be managed.

AND A VERTICALLY INTEGRATED VIEW
A horizontally integrated view is important—but incomplete. The other part of the picture is a vertically integrated view that connects strategic and operational risk. In the early days of GRC, independent functions were focused more on operational risks with less emphasis on connecting to the strategic business impact. Business and IT were essentially separate functional parts of an organization and there was little connection between these two worlds. That changed as enterprise GRC became a requirement of risk management.

Today, however, when business and technology are intimately connected (or at the very least, mutually influential), risk management must link operational risks to business strategies and vice versa. Security events are a great example. At RSA, we talk about Business-Driven Security™, which puts security-related IT incidents in a business context and makes it possible to calculate the business impact of a security event—and vice versa. This kind of interrelationship allows organizations to bridge the gap between security teams and their business counterparts, creating an environment in which they can reduce the risk that security incidents will negatively affect the business or that business decisions will negatively affect IT. The interrelationships between strategic business goals and operational events are becoming increasingly impactful.

  • A decision made at the strategic level will cascade down and affect the organization’s ability to manage a risk in operations;
  • a seemingly minor operational event can spiral out of control and impact strategic direction.

Thus, connecting the top-to-bottom, strategic-to- operational view of risk—as illustrated in the accompanying graphic—is essential to truly understanding, and addressing, the obstacles to achieving business objectives.

GRC

Click here to access RSA’s White Paper

EIOPA: Peer review assessing how National Competent Authorities (NCAs) supervise and determine whether an insurer’s set­ting of key functions fulfils the legal requirements of Solvency II

The main task of the European Insurance and Occupational Pensions Authority (EIOPA) is to

  • enhance supervisory convergence,
  • strengthen consumer protection
  • and preserve financial stability.

In the context of enhancing supervisory convergence and in accordance with its mandate, EIOPA regularly conducts peer reviews, working closely with national competent authorities (NCAs), with the aim of strengthening both the convergence of supervisory practices across Europe and the capacity of NCAs to conduct high-quality and effective supervision.

In line with its mandate, the outcome of peer reviews, including identified best practices, are to be made public with the agreement of the NCAs that have been subject to the review.

BACKGROUND AND OBJECTIVES

Enhancing the governance system of insurers is one of the major goals of Solvency II (SII). The four key functions (risk management, actuarial, compliance and internal audit) as required under the SII regulation are an essential part of the system of governance. These key functions are expected to be operationally independent to ensure an effective and robust internal control environment within an insurer and support high quality of decision making by the management. At the same time it is also important that these governance requirements are not overly burdensome for small and medium-sized insurers. Therefore SII allows NCAs to apply the principle of proportionality in relation to compliance with key function holder requirements for those insurers.

Under SII, insurers may combine key functions in one holder. However, such combinations have to be justified by the principle of proportionality and insurers need to properly address the underlying conflicts of interest. Holding a key function should generally not be combined with administrative, management or supervisory body (AMSB) membership or with operational tasks because of their controlling objective. Thus, these combinations should rather occur in exceptional cases, taking into account a risk-based approach and the manner in which the insurer avoids and manages any potential conflict of interest.

This peer review assesses how NCAs supervise and determine whether an insurer’s setting of key functions fulfils the legal requirements of SII with a particular emphasis on proportionality. The peer review examines practices regarding:

  • combining key functions under one holder;
  • combining key functions with AMSB membership or with carrying out operational tasks;
  • subordination of one key function under another key function;
  • split of one key function among several holders;
  • assessment of the fitness of key function holders; and
  • outsourcing of key functions.

The period examined under the scope of this peer review was 2016 but also covered supervisory practices executed before 2016 in the preparatory stage of SII. The peer review was conducted among NCAs from the European Economic Area (EEA) on the basis of EIOPA’s Methodology for conducting Peer Reviews (Methodology).

Detailed information was gathered in the course of the review. All NCAs completed an initial questionnaire. This was followed by fieldwork comprising visits to 8 NCAs and 30 conference calls.

MAIN FINDINGS

The review showed that NCAs in general apply the principle of proportionality and that they have adopted similar approaches.

SUMMARY RESULTS OF THE COMPARATIVE ANALYSIS

  • Supervisory framework: Approximately half of NCAs use written supervisory guidance for the application of the principle of proportionality. Larger NCAs in particular use written supervisory guidance in order to ensure consistency of their supervisory practice among their supervisory staff.
  • Approach of NCAs: Most NCAs have a similar approach. NCAs assess the insurers’ choice of key function holders at the time of initial notification regarding the key function holder’s appointment. If any concerns are noted at this stage, for example regarding combinations or fitness, NCAs generally challenge and discuss these issues with the insurer, rather than issuing formal administrative decisions.
  • Combining key functions in one holder: This occurs in almost all countries. The most frequent combinations are between risk management and actuarial functions and between risk management and compliance functions. Combinations are most commonly used by smaller insurers but are also seen in large insurers. EIOPA has identified the need to draw the attention of NCAs to the need to challenge combinations more strongly, especially when they occur in bigger, more complex insurers, and to ensure that adequate mitigation measures are in place to warrant a robust system of governance.
  • Holding the internal audit function and other key functions: The combination of the internal audit function with other key functions occurs in 15 countries, although the frequency of such combinations is relatively low. Moreover, there were cases of the internal audit function holder also carrying out operational tasks which could lead to conflicts of interest and compromise the operational independence of the internal audit function. It is important to emphasise that the legal exemption of Article 271 of the Commission Delegated Regulation EU (2015/35) does not apply to the combination with operational tasks.
  • Combining a key function holder with AMSB membership: Most NCAs follow a similar and comprehensive approach regarding the combination of key function holder and AMSB member. In this regard, NCAs accept such cases only if deemed justified under the principle of proportionality. This peer review shows that two NCAs request or support combinations of AMSB member and the risk management function holder regardless of the principle of proportionality in order to strengthen the knowledge and expertise regarding risk management within the AMSB.
  • Combining key function holders (excluding internal audit function holder) with operational tasks: In nearly all countries combinations of risk management, actuarial and compliance key function holders with operational tasks occur, but such combinations generally occur rarely or occasionally. However, several NCAs do not have a full market overview of such combinations with operative tasks. Adequate mitigating measures are essential to reduce potential conflicts of interest when key function holders also carry out operational tasks. The most common combinations are the compliance function holder with legal director and the risk management function holder with finance director.
  • Splitting a key function between two holders: About half of the NCAs reported cases where more than one individual is responsible for a particular key function (‘split of key function holder’). The most common split concerns the actuarial function (split between life and non-life business). NCAs should monitor such splits in order to maintain appropriate responsibility and accountability among key function holders.
  • Subordination of a key function holder to another key function holder or head of operational department: This is observed in half of the countries reviewed. An organisational subordination can be accepted, but there needs to be a direct ‘unfiltered’ reporting line from the subordinated key function holder to the AMSB. In cases of subordination, conflicts of interest have to be mitigated and operational independence needs to be ensured including the mitigating measures concerning the remuneration of the subordinated key function holders.
  • Fitness of key function holders: Most NCAs assess the fitness of the key function holder at the time of initial notification and apply the principle of proportionality. Several NCAs did not systematically assess the key function holders appointed before 2016. These NCAs are advised to do so using a risk-based approach.
  • Outsourcing of key function holders: Most NCAs have observed outsourcing of key function holders. According to the proportionality principle, an AMSB member may also be a designated person responsible for overseeing and monitoring the outsourced key function. Eight NCAs make a distinction between intra-group and extra-group outsourcing and six NCAs do not require a designated person in all cases, which may give rise to operational risks.

BEST PRACTICES

Through this peer review, EIOPA identified four best practices.

  • When NCAs adopt a structured proportionate approach based on the nature, scale and complexity of the business of the insurer regarding their supervisory assessment of key function holders and combination of key function holders at the time of initial notification and on an ongoing basis. The best practice also includes supervisory documentation and consistent and uniform data submission requirements (for example an electronic data submission system for key function holder notification). This best practice has been identified in Ireland and the United Kingdom.
  • When an NCA has a supervisory panel set up internally which discusses and advises supervisors about complex issues regarding the application of the proportionality principle in governance requirements regarding key functions. This best practice has been identified in the Netherlands.
  • When assessing the combination of key function holder with AMSB member, EIOPA considers the following as best practice for NCAs:
    • To publicly disclose the NCA’s expectations that controlling key functions should generally not be combined with operational functions for example with the membership of the AMSB. Where those cases occur, NCAs should clearly communicate their expectation that the undertaking ensures that it is aware of possible conflicts of interest arising from such a combination and manages them effectively.
    • To require from insurers that main responsibilities as a member of the AMSB do not lead to a conflict of interest with the tasks as a key function holder.
    • To assess whether the other AMSB members challenge the key function holder also being an AMSB member.

This best practice has been identified in Lithuania.

  • When NCAs apply a risk-based approach for the ongoing supervision that gives the possibility to ensure the fulfilment of fitness requirements of KFHs at all times by holding meetings with key function holders on a regular scheduled basis as part of an NCA’swork plan (annual review plan). The topics for discussion for those meetings can vary, depending for example on actual events and current topics. This best practice has been identified in Ireland and the United Kingdom.

These best practices provide guidance for a more systematic approach regarding the application of the principle of proportionality as well as for ensuring consistent and effective supervisory practice within NCAs.

EIOPA NCA KFH

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