Change is continuous.
The problem:
Head office could spend all their time analysing changes in exposure. In practice, trigger levels are used to reduce wasted effort. These thresholds filter out the noise, result – only the big changes are to be evaluated and re-judged. If the portfolio is big enough the net effect of small changes, may average out.
Sounds good, but the human response to this approach is always to make sure that any estimate of change comes to just below the trigger level. Moving exposure out of the reckoning is not good practice, but may be convenient both in terms of apparent competitiveness and gives increased confidence to those charged with steering the ship. In effect, real change moves off the balance sheet. A chance to steer away from the ice-field is missed.
Emerging liability risks are a great example. Size estimates are very uncertain at first. Subjective factors have a fairly free reign; probably driven by fashion and untested assumption. Firm opinion, compensates for factual uncertainty. A substantial change, can be demoted to obscurity. A minor change can be blown out of all proportion.
How can this be turned around?
Review triggers.
One very successful strategy is to finish every evaluation of change with a simple question: “What would need to change for this decision to become worthy of review“. By asking this question, the experts who have demoted or inflated a given topic are required to focus on the decisive facts or opinions. They then set the trigger for review. By definition, when that trigger occurs, it will get their meaningful attention. The very least that will happen is that they must find a new review trigger.
Helpfully, people can be tasked with looking for that particular change or producing a more rounded view of the assumptions that have been made. Review triggers can be quantitative e.g. the number of exposed staff exceeds 10,000, or qualitative e.g. scientists find objective evidence that this exposure plays a key role in disease causation.
Over time, a portfolio of review triggers is created. Lengthy impenetrable lists of emerging liability risks can be taken to a more influential level. With experience, the time-scale before a review trigger is likely to be reached can be estimated.
Correlations:
Quite often a given review trigger e.g. a legal opinion, will appear under several topic headings. Correlated loss becomes anticipated, the use of multiple individual thresholds becomes self-evidently illegitimate, a compound threshold is required.
Change recommendations:
Those same experts should also be asked, “if this change occurs, what should we do about it?” Often the decisive facts or opinions point very strongly at a specific management option. Having written it down, the readiness for change is increased. Having considered the actions, the review trigger can be be more accurately described/specified.
Summary:
This strategy increases readiness for change, increases objectivity and leads to the identification of correlations which would otherwise be missed. The final decision, to change or not, is a judgment that should only be placed in the hands of trusted, experienced business leaders. The review triggers strategy provides part of the platform for that judgment. It reduces the chance that junior staff might effectively take strategic decisions.
