The Risk Institute Provides Research and Tools for OSU Student Project with Abbott Nutrition

During my junior year I was enrolled in the Healthcare Industry Cluster at the Fisher College of Business. As part of this program I was assigned to a group that would work on a semester long project with Abbott Nutrition. Our project scope was very broad. We were tasked with finding the best tools and practices in the healthcare industry for identifying, mitigating and communicating operational risk. My teammates, Alex and John, and I had very limited exposure to risk management. Alex was taking a Risk Management class during that semester, John was the risk officer for his fraternity, and I had done projects in sovereign risk management in a previous internship. We felt pretty under-qualified for the task at hand.

From the very beginning of this program our instructor told us that the network each of us had developed at Ohio State would be of value to the companies we worked with. With this in mind, we decided to begin our research at The Risk Institute at OSU. Our approach was simple, Abbott wanted us to find the best software that other companies were using to assess risk. So we would meet with The Risk Institute, ask them for some software recommendations and walk out with a list of tools to show our Abbott project leaders. We were surprised to find that conversations about culture would shape our research and project much more than conversations about technical tools. Phil and Denita, of The Risk Institute, shared with us the results of their annual survey and it was evident that integrated Risk Management had become a necessary tool for growth, not just a reactionary strategy. It was through our conversations with The Risk Institute that we first learned that an advanced risk software is ineffective if the inputs are flawed or shaped by a culture that doesn’t value risk management.

The expertise and vast amount of research housed within The Risk Institute allowed us to learn from other cases of poor and effective risk management cultures. It also validated our arguments when we went back to the Abbott team and told them that we should be focusing more on risk culture. It’s difficult to quantify cultural risk and easy to dismiss it as just “buzz words” so it was important to us that we had The Risk Institute’s research to back us up.

In the end of the semester we were able to offer Abbott a recommendation for a software that we thought would meet their desire for an automated, streamlined tool to analyze risk. We also focused on tools and strategies that would allow them to take a deeper look into aspects of their culture that were perhaps enabling risky behavior to go without mitigation. The Risk Institute directed us towards a group called the Barrett Values Centre who sells a product called the Cultural Values Assessment. This tool identifies gaps between employees’ personal values, their perceived company values, and their optimal company values. We recommend this to the Abbott team and they agreed that it seemed like a great tool to quantify their cultural risk. Driven by what we learned with The Risk Institute, we also encouraged them to engage in more cross-functional benchmarking across Abbott. Our project was within the Quality team at Abbott. At one of our presentations there was an employee from a different department. We were discussing a specific risk analysis tool that our team in Quality thought was brand new. However, according to that outsider who attended the meeting, that tool was already being used elsewhere in the company. Through this experience, we identified that Abbott has a somewhat “silo’ed” structured and could really benefit from more cross functional integration. We are confident that our partnership with The Risk Institute throughout that semester enabled us to elevate the discourse on cultural risk to the forefront of risk discussions at Abbott Nutrition.

Four things you need to be doing with risk capital

Photo curtesy of iStock

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Risk capital gives financial firms the cushion they need to protect liability holders from unexpected losses. Simply put, risk capital is your home-run money — funds that are invested in high-risk, high-reward investments. It reduces debt overhang that could limit borrowing capability and makes the costs of bankruptcy or firm distress more remote.

But there’s a catch — adding risk capital can only benefit firms’ balance sheets if it is allocated efficiently, according to a study co-authored by Isil Erel, Academic Director of the Risk Institute and Distinguished Professor of Finance at The Ohio State University Fisher College of Business.

The study, “A Theory of Risk Capital”, was co-written by Erel, Stewart C. Myers at MIT Sloan School of Management, and James A. Read Jr. at The Brattle Group Inc. in Cambridge, Mass. In the study, Erel, Myers, and Read focus on diversified firms with safe and risky businesses in their portfolios. The firms have customers and counterparties who are not willing to bear significant default risk.

Know if your company’s risk capital really working for you — here are the four things you need to know and be doing.

1) Risk capital must be allocated

  1. To assess profitability,
  2. To make investment decisions,
  3. To price products and services, and
  4. To set compensation.

2) Efficient risk capital allocation has to do two things: 1) there can be no risk that changes in the business portfolio that would affect the credit quality of the firm’s liabilities, and 2) firms have to avoid shifting risk capital from one business to another.

3) Of course, your business is doing all that already, so what do you really need to focus on? Your marginal default rate in order to allocate the risk capital.

The marginal default rate is the derivative of the value of the firm’s option to default with respect to a change in the business size, according to the study. The required amount of capital depends on the target credit quality and on the risk of the business portfolio. Businesses with the largest marginal default values should receive the most risk capital and be charged most of the costs of the risk capital.

4) Risk capital can help expand your business, but keep in mind that riskier businesses need free passes to expand, which will increase the default risk. These risky businesses might also operate at a lower credit quality.

To mitigate the effects on credit quality of the overall business, businesses shouldn’t use risk capital that’s fixed in the short term.

Remember, any asset or activity with uncertain returns requires risk capital. By focusing on marginal default values, credit quality, and risk within the business portfolio, firms can us risk capital efficiently to help improve their bottom lines.

If you want to dig deeper into this (and other) of the latest risk research, the full paper and accompanying translation are available on our website.

Navigating Political Risk in Uncertain Times

social-media-politicsJoin us on November 15 at 10 a.m. to explore effective ways to manage political risk and gain insight on how to navigate the landscape and find potential for competitive advantage.

Whether your organization is a multinational player or just starting to explore expansion into the global market, political risk cannot be ignored or underestimated. Political risk is taking on new forms, both real and perceived, and may be at its highest level since the Cold War. Companies have to elevate their awareness of inherent challenges of everything from political violence to currency inconvertibility.

Executives will learn:

• To identify, measure, and manage political risk

• To examine the macro-level political risks that could affect your business interests

• About the relationship between the state and market in social and economic relations

The Institute will welcome Les Brorsen, Americas Vice Chair Public Policy at EY; Professor Richard Herrmann, Professor & Political Science Department Char at The Ohio State University; Roger Schwartz, Senior Vice President at Aon Risk Solutions; and Sarah Brooks, Associate Professor of Political Science at The Ohio State University.

If you’re interested in attending, contact Denita Strietelmeier at (614) 688-8289 or send an email to RiskInstitute@fisher.osu.edu. For more information about this and the upcoming sessions in our Risk Series, please visit our website.

Risk Modeling: The Past and the Future

Risk Institute Portraits Fisher Hall - Third Floor Feb-02-2016 Photo by Jay LaPrete ©2016 Jay LaPrete

By  Philip S. Renaud II, MS, CPCU
Executive Director, The Risk Institute
The Ohio State University Fisher College of Business

 


No one can foresee the future, but risk managers are tasked with anticipating and using all resources at their disposal to predict what lies ahead. Risk modeling, based on data analytics, is one of the critical tools any risk practitioner can employ. However, like all things, modeling has undergone a transformation in recent years as more data is available upon which to base the models.

With risk modeling playing an increasingly crucial role in risk management, The Risk Institute at The Ohio State University focused its March Executive Education Session on Risk Modeling: The Past and the Future. Over 70 attendees were at the program from 27 companies and universities that gathered for the presentations and insightful Q&A on the topic.IMG_4839 Crop

The half-day session included a three-person panel of experts moderated by The Risk Institute Academic Director, Dr. Isil Erel. The panel was comprised of:

  • Rongsheng Gong, Vice President, Head of Risk Modeling and Analytics, Huntington National Bank
  • Al Schulman, Vice President (retired), Enterprise Risk and Capital Management, Nationwide

The session focused on the essential nature of risk modeling as a risk management tool and its role for both financial and nonfinancial firms. The speaker presentations centered on how risk models have changed as business, regulatory and economic environments have evolved over time. The impact of the recent financial crises was cited numerous times during the discussion as the speakers highlighted how previous risk models created by industry, banking and government failed to identify the magnitude of the risk impact to multiple business sectors.

The trio of presenters went in-depth for session attendees to understand the evolving, complex and at times volatile economic conditions impacting a firm’s markets and operations.IMG_4971 Crop

According to our speakers, five key lessons on effective risk modeling include:

  1. The financial crisis has led to both an increased knowledge of risk models and a decreased confidence in those same models.
  1. Since the crisis, new model considerations include counterparty risk, funding liquidity, regime-switching and government guarantees.
  1. The current system of banks, insurance companies and nations is highly and dynamically connected.
  1. Managing model risk includes multiple levels of validation for every step of its development.
  1. No matter how sophisticated the risk model, the human element is still the most important.

The session emphasized how financial firms since the recession have adapted their risk models to the changing business, economic and regulatory environments. Additionally the speakers focused on the interconnectedness of institutions (banks, insurers and government) and how that plays a vital role in managing how risk is modeled.

The session proved thought-provoking and demonstrated The Risk Institute’s unique role in uniting industry thought leaders, academics and highly respected practitioners in an ongoing dialog to advance the understanding and evolution of risk management. The Risk Institute’s conversation about risk management is open and collaborative with its relevance across all industries and its potential as a tool for competitiveness and growth.


For more information about upcoming events, our students, partners or research, visit our website: fisher.osu.edu/centers/risk.