Milliman on ERM: Partnering with the experts
Milliman has developed a strategic alliance with Reunion Asia Pacific, which has significant depth of capability and expertise in the energy markets. Milliman consultants Joshua Corrigan and Neil Cantle, and Reunion Asia Pacific co-founders James Moulder and Stephen Batstone discuss why risk mitigation is absolutely fundamental in the energy markets and how a partnership between Reunion, which provides expertise in electricity, and Milliman, which provides risk management expertise, helps clients solve problems.
Video transcript
Joshua Corrigan (Principal, Milliman): Risk and understanding risk is really the common language across a number of organizations and across a number of industries. Market risk is market risk no matter whether you are working for a bank or an insurance company or an employee benefits firm.
Neil Cantle (Principal, Milliman): We are now helping people in most industries you could care to think of. So as we go into areas which aren't traditional insurance or financial services, it's very important for us that the client feels that they have access to domain expertise as well as ours.
Joshua Corrigan: We have developed a strategic alliance with an organization called Reunion Asia Pacific. Reunion is based in New Zealand and they have significant depth of capability and expertise in the energy markets.
James Moulder (Co-founder, Reunion Asia Pacific): We had subject matter expertise in energy markets but we needed to extend some of the tool sets that we had developed with our clients into an area that Milliman was far more familiar with because it has this core expertise and a lot of the more advanced statistical techniques.
Stephen Batstone (Co-founder, Reunion Asia Pacific): So clients understand why a company like Reunion that has a high degree of expertise in electricity would want to partner with a company like Milliman that brings all those analytical frameworks that we don't have to the problems that our clients are facing.
Understanding your risk exposures
Joshua Corrigan: Reunion has a number of clients within the energy markets within New Zealand. Their clients have had significant challenges with their risk frameworks. Traditionally, they haven't viewed risk as a very integrated component to how they make decisions within their organization.
Stephen Batstone: A lot of people think that electricity is one of those markets where it's all about wires and transmission towers and things spinning inside turbines. But now the market side of electricity has opened up a whole area of financial and technical complexity that we didn't have 20 years ago.
James Moulder: The price in the Australian market, for example, can quite easily sit at 60 dollars a unit for days if not weeks. And then over a couple of hours on a hot afternoon it can spike to 12500 dollars a unit. And while it's for a short time, those huge prices can have a fundamental effect on risk.
Joshua Corrigan: So within the energy space, risk mitigation is absolutely fundamental because one of the biggest exposures organizations have is to the wholesale energy price and being able to understand the dynamics and being able to understand the financial consequences and subsequently being able to mitigate those financial consequences through trading operations, that's a core part of an energy organization's risk management program and framework.
Neil Cantle: A lot of that really comes down to the core skills in understanding uncertainty, developing the very best of tools and techniques and helping clients get to grips with that and then explaining it in a way that they understand.
Gaining value from data
Joshua Corrigan: Energy companies have a significant degree of granularity in the data. They are literally having to resolve the price of electricity on 30-minute intervals across a wide range of nodes, 24/7, it never stops.
James Moulder: We tend to measure our databases and so forth in tens of gigabytes, which are large data sets for businesses of our type. So the ability to look for opportunity and risk in that data does require some pretty particular skills.
Stephen Batstone: The industry's management of that data hasn't come a long way since 2002, so I think there are some great opportunities with cloud databases and web-based tools to start doing some smart things with that information.
James Moulder: The work with Milliman is about how do we start to delve into the data that we hold, work out where those drivers are, and build a Bayesian network to help describe the risk. But also describe the value.
Neil Cantle: We've had a lot of success working with energy companies, helping them understand the uncertainties they face, thinking that through, and then delivering frameworks which they can use to plan going forward, so that combination of domain expertise with Milliman's expertise has been extremely valuable for that client.