Mercer’s Head of Operational Risk Assessments Gregg Sommer explains how Mercer assesses operational risk management.
The importance of risk management in organizational development processes could not be overstated and the emphasis on such operational risk assessment in organizations across the globe has never been greater. Having worked with hundreds of managers presiding over many types of asset classes, Gregg and his team have defined three key areas of understanding that are needed for assessment and creation of a successful operational risk management plan.
The emphasis on operational risk assessment in organizations across the globe has never been greater. Having worked with hundreds of managers presiding over many types of asset classes, Gregg and his team have defined three key areas of understanding that are needed for any assessment.
“We spend a significant amount of time trying to understand the culture of an organization as a business and operations,” Gregg says. Understanding the way a firm is organized and governed, as well as how a given operating model is put in place to support investment strategies, is critical to understanding any operational risks.
The second aspect is the tactical processes. Questions to ask include: How are things handed off? How automated are they? Is there potential for errors? “Trade errors happen far more often than clients are aware of,” Gregg notes.
“We all need support from expert third parties,” Gregg says. The last area involves determining what those third parties are, how they’re assessed and monitored, and what role they’ll play in the organization’s ongoing strategy.
Once these areas are well understood, it’s time to start evaluating them using the best practices established from working with many organizations over time. Mercer’s benchmarking-based approach enables a consistent approach even when the team is assessing different strategies.
“We’ve established a benchmark and something we can pair to within each strategy,” Gregg says. “If we go into a trading strategy that has a great deal of high-volume, versus a private market strategy, there are clearly different risks,” he explains. That’s why it’s necessary to understand the risks and operating model that are appropriate to a specific strategy; a “one-size-fits-all” approach won’t do.
Moreover, best practices are dynamic. “We have to understand that the marketplace is constantly changing,” Gregg says. From changes in automation to regulations, those assessing operational risk need to stay up-to-date and adapt their practices accordingly.
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