Ask Why More Often Than How

Ask Why More Often Than How

By Sam Phillips

"It's not so hard to be an innovator." So says this issue's extremely humble pioneer. And Prakash Shimpi should know something about innovation, considering he's worked across academic and professional associations to develop the theory and practice of Enterprise Risk Management (ERM).

Shimpi, FSA, CFA, joined the Tillinghast business of Towers Perrin in November 2004 as practice leader with global responsibility for ERM. He leads the New York firm's overall efforts in the ERM area, focusing on life and property/casualty insurers and extending to the broader non–insurance corporate sector, as well.

Recently, Shimpi took some time away from innovating to explain how he's helped to shape the continuing evolution of ERM.

What inspired you to take a non traditional career path culminating in your current position as practice leader with global responsibility for Enterprise Risk Management with the Tillinghast business of Towers Perrin? Perhaps my career path is non traditional for most actuaries, but it was perfectly natural for me. I didn'tset out thinking about a traditional or non traditional career, and I don'tthink that's the way most people develop their careers. I simply looked for things that I was interested in doing and then sought out the best places to do them from. For example, I began in the banking industry where I had the opportunity to apply operations research techniques to solve portfolio problems for asset managers, (who turned out to be mainly life insurers). Then I moved from the trading world to corporate finance, where I felt I could help senior executives at insurance companies by combining insurance and capital markets know how. When I moved to Swiss Re to start up their financial services business, it was because I wanted to apply banking techniques to make insurance more tradeable. And now, I have moved quite naturally to Tillinghast to address enterprise risk management issues for insurance and non insurance clients by bringing actuarial risk management principles together with corporate finance perspectives. I chose Tillinghast as the best platform–with the right skills, resources and expertise–for me to participate in and, in some way, help shape the continuing evolution of ERM.

You are seen as an innovator in the field of Enterprise Risk Management (ERM). What most influenced your development as an ERM strategist? It's not so hard to be an innovator. You have to ask "why" more often than you ask "how." Why you want to do something can lead you to how you should do it. And there are lots of ways of doing something?usually depending on the skills or tools that you have at your disposal. In ERM, the "why" has been a bit elusive and we've had lots of "hows"–risk avoidance, risk control, risk mitigation (e.g., hedging and insurance) and so on. The recent focus on ERM has had a lot of momentum due to corporate failures (Enron, WorldCom, Parmalat) so the compliance and governance aspects are quite apparent. I began looking at ERM well before these developments to try and find a positive rationale for why firms (not just insurers) need to manage risk. I have had the good fortune to work at Swiss Re and Tillinghast to ask this question in a real context for clients. Perhaps some of that work–whether as transactions in the market or as research articles–has contributed to this notion that I am an innovator. But as we say in New York, that and 75 cents will get you a regular cup of coffee.

What about your actuarial training and experience has been most helpful in your career? Other than a couple of years as an actuarial trainee in the UK, I have not worked formally as an actuary. But all my work has involved the principles and techniques that I have learned in actuarial science. As actuaries, we don'toften give ourselves enough credit for our distinctive know how. Like other "quants," we know a lot of mathematical and statistical techniques, but perhaps more importantly, we know how to bring that information into financial analysis. Over the years, the transactional and managerial experience has moved me further away from some of the number crunching that I used to do. But the feel for the numbers is still there and an important part of the skill set.

What are the biggest challenges you've had to overcome and how did you overcome them? I have been fortunate to be involved in the early stages of many market developments. One of the biggest challenges in a new market is to bring those who say "it can't be done" around to your side of the table. I had that experience many times at Swiss Re. A few examples will illustrate. First, when I set up Swiss Re Financial Products ("we don'thave the expertise to do derivatives"), then when I did our first cat bond deal ("investors won't buy cat risk") and finally when I had management responsibility to bring the underwriting and banking cultures together ("bankers will never understand insurance risks" and "underwriters don'tknow how to price risk like a trader"). In all these cases (and others as well), it is important to recognize that all points of view are legitimate and need to be addressed. This takes patience, perseverance, lots of face to face discussions, and the details to back up your points of view. And it also helps a lot when the CEO and Board are on your side!

What has been the secret to your success? Success? If I were successful, I would stop. Perhaps the secret, if there is one, is to see new challenges and opportunities and constantly move forward to address them. My dad had some advice that I have come to appreciate more and more over time: "It is low aim and not failure that is a crime."

What are the three things that an actuary should do if he or she wants to take advantage of opportunities presented in Enterprise Risk Management? I'm tempted to say "location, location, location!" Being in the right place at the right time always helps. Seriously, though, the first thing is to move out your comfort zone. ERM embraces issues that are not part of the conventional actuarial world–but no one else has a lock on those issues either. ERM applies to all types of firms, so look further afield. Second, beef up your experience in handling general management issues. There is a lot of technical work that needs to be done in ERM, but if you wish to play a broader role, your management experience will count. Third, do it now. ERM is an emerging field with many of the techniques and tools still in development. Getting in early, even in a more technical or junior role, can give you on the job training and experience that will be worthwhile in the long run.

What are your future goals? First of all, I'd like to accomplish my current goals–to help Tillinghast clients leverage the power of risk to create value. The future is so far away that I've not started thinking about it yet. The best I can hope for is to be prepared to identify interesting opportunities early enough and act upon them with enough conviction to make a difference. My most important long term goal, of course, is to see my two young children grow up to be happy and doing things they are interested in, without pulling out too much of my hair along the way.

What will the practice of Enterprise Risk Management look like in 10 years? I have a Monte Carlo simulation that can give me a range of possibilities at multiple time horizons, including year 10! But I'll spare you the details and focus on the one that I'd like to see happen. I'd like to see ERM develop into a normal business practice. On a day to day basis, it should help managers better understand the dynamics of their business and keep a finger on the pulse of the operations in real time. Prospectively, it should tie in to the corporate planning process and give management additional insights into the risks and opportunities in their businesses and the impact of the various strategies they have at their disposal. The governance and compliance issues will be a necessary prerequisite and the leading companies will be the ones that can use ERM strategically.

How do you turn risk into opportunity? Simple. First of all, don't look for a cloud with every silver lining. And second, recognize that the glass is always full–you just have to figure out what it is filled with!