Rules Engine Can Make Risks Easier To Swallow - InformationWeek

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4/28/2006
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Rules Engine Can Make Risks Easier To Swallow

This Florida insurance company is using a tool to more systematically assess risks that might affect the entire company, not just a policy-by-policy risk approach.

Risk is an everyday part of the insurance business. But most of the attention focuses on the risks associated with a particular insurance applicant--the up-front underwriting process and, later, the payout of claims. Blue Cross Blue Shield of Florida is using a technology-supported process to pay more attention to the broad risks inherent in insurance business operations as a whole.

Managing those risks remains something of a black art in the industry, with key senior managers assuming the task without a guidebook or legacy of known risk management passed down to them.

Risk isn't something to be eliminated from a company, says John Phelps, enterprise risk manager for Blue Cross Blue Shield of Florida. Instead, the company is trying to provide tools to help employees take the right risks for the right rewards. Instead of eliminating risk, the company's goal is to make good risk management "an organizational imperative," says Phelps, who's also chairman of the Enterprise Risk Management Development Committee of the Risk and Insurance Management Society, a professional organization that seeks to advance the practice of risk management.

There's good business reason to do so. Standard & Poor's, the credit rating agency, has started using this kind of broad definition of risk management as one of several criteria with which it evaluates insurance companies. It wasn't always a separate assessment category. "The companies that are seen to be the best performers in this category will be those that have robust risk management processes that are carried across the entire enterprise and form a basis for directing the firm's fundamental decision-making," wrote Standard & Poor's credit analyst David Ingram in an October report.

Phelps also points to a more fundamental reason. "If we can manage risks and uncertainty better than our competitors, then we'll have an advantage over them," he notes.

Technology's Role
To help assess risks, Blue Cross Blue Shield of Florida implemented an enterprise risk management software system that lets Phelps and 19 other managers describe a risk to the business that they perceive and assign it a numerical rating. The software is LogicManager Enterprise Risk Management from LogicManager.

Using a rules engine built around risk assessment, the software prompts a manager to think through a described risk. Is it an internal process or one that involves outsiders? What degree of trust can be assigned to the outside parties? By combining the assessments of many managers, the system serves as a tool for coming up with a more companywide view of risks. A rules-based assessment allows a more standardized way of grading the risks, Phelps says.

What kind of risks is he talking about? Anything that may prevent the company and its agents from making claims payments when customers need them, he says. Maintaining proper cash reserves is an obvious one. But there are operational risks as well as financial, and many of those involve IT systems, since their failure can bring the company to a halt. So the company has to assess the risk of a system failure and its disaster recovery plan. A Florida hurricane is a huge event for claims processing, but it also triggers operational risks around disaster recovery.

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