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Assessing Fire Risk: How Insurance Companies Evaluate Your Property
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Ferenc Bognár Ferenc Bognár Scilit Preprints.org Google Scholar * and Petra Benedek Petra Benedek Scilit Preprints.org Google Scholar
Received: 28 July 2021 / Revised: 2 September 2021 / Accepted: 5 September 2021 / Published: 9 September 2021
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Assessing and mitigating compliance risk is now considered one of the core measures of business success. Although failure mode and effect analysis (FMEA) is widely used in construction, its application in the financial sector is relatively new, mainly related to compliance risk assessment. This paper presents the results of an exploratory study based on the potential applicability of FMEA in the focus of compliance experts at one of the largest commercial banks in Central and Eastern Europe. This study aims to establish a compliance risk assessment process based on the strengths of qualitative and quantitative assessment methods. Applying FMEA based on nominal group techniques and further statistical analysis provides an opportunity to compare expert judgment and participant consensus levels. As a result, it quantifies the similarity or difference between the evaluation patterns and provides objective feedback for evaluation. Finally, this paper proposes the use of peer-ranking and agreement test statistics with the probability and impact of non-adherence as a measure to evaluate failure detection.
The rapidly changing legal environment has created a compliance management function that oversees external and internal regulations and manages compliance. Porter and Kramer (2011) pointed out that a business is embedded in society, and the success of a company and the development of society are interrelated. Organizational integrity means that practices follow clear values that are consistent with societal expectations. Effective compliance operations support the achievement of integrity by encouraging compliance. In addition, compliance and trust are related (Braithwaite and Makkai 1994; Faizal et al. 2017; Wong and Jensen 2020). Thus, alignment affects international and domestic reputation, cooperation, and competitiveness (Castelfranchi et al. 1998; Kaminski and Robu 2016; Heidinger and Gatzert 2018; Kim 2019). In contrast, Ayadi et al. .
The first major publications on organizational compliance management described the link between transparency, business ethics, and compliance (Paine 1994; Trevino et al. 1999). Turner Review (2009) analyzes the global banking crisis, while Silverman (2008) provides a comprehensive overview of organizational compliance management. Compliance management can be considered advanced in some sectors such as financial services. Results from previous studies (Danescu and Spatacean 2011; Saramawati and Lubis 2014; Safari et al. 2015; Nor et al. 2017).
From a regulatory perspective, the federal agency sentencing guidelines (Murphy 2002), as last amended in 2018 (2018 federal agency sentencing guidelines) under the Sarbanes-Oxley Act (2002). And the COSO Internal Controls Integrated Framework (COSO 2013) serves as the primary guide for effective compliance management (McNally 2013). Thus, modern compliance involves following both the letter and the spirit of the statute.
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Good corporate governance means having internal controls and internal infrastructure in place to manage risk. Enterprise-wide risk management (EWRM) practices improve firms’ decision-making and contribute to firm survival and value creation (Manab et al. 2010). Ng et al. (2013) highlighted a negative relationship between risk management committee characteristics and risk taking in Malaysian insurance companies. According to one study (Sheedy et al. 2019) that critiques the definition of risk culture, it is the relative preference given to risk management over other competitive advantages (such as short-term profitability) of a financial institution. It can lead to financial problems.
At the organizational level, an electronic Delphi-based study presented a possible alternative to focus group consensus-based assessment of compliance issues using a questionnaire technique (Velez et al. 2020). However, the level of agreement between raters can only be calculated using simple majority without statistical analysis (without providing decision makers with more detailed information). The study presents an innovation in assessing compliance issues.
Haji Shahverdi and Zomorodian (2020) modeled a bank’s risk assessment practice using structured interviews, surveys, and checklists to obtain expert opinion. The collected data were analyzed with a risk matrix, where the impact and probability of occurrence of each factor was determined. According to Losiewicz-Dniestrzanska (2015), traditional risk mathematics can be used in compliance assessment. However, strategically important information may be hidden or considered irrelevant in relation to risk detection. Therefore, methods with more criteria for compliance risk assessment provide more detailed assessment results.
Since compliance risk assessment can be interpreted as a multi-level decision-making issue, it is natural that consensus on the topic of compliance is challenged. According to Nicholas and May (2017), there are no guidelines for applying specific levels or rating systems to prioritize risk areas. However, an effective evaluation system must ensure consistent conclusions are reached (Nicolas et al., 2017). Consistency can be estimated using statistical data related to evaluation.
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The complexity of risk assessment can generally be managed using three approaches: quantitative, qualitative, and both. Typical methods in quantitative assessment methods and processes are combinations of these methods such as Failure Mode and Effect Analysis (FMEA) and its variants (Liu et al., as well as Partial Risk Mapping (PRISM) methodology (Bognár and Benedek 2021). Through the FMEA methodology, the potential presence or failure of specific processes Risks can be assessed and prevented from occurring. According to Chapman (1998), qualitative methods are usually represented by focus group techniques (Coker et al. 2014), Delphi methods (Velez et al. 2020) or brainstorming techniques. In general, The assessment process can be conducted through focus groups (Sutton and Arnold 2013). The most important reason for using focus group techniques in risk assessment is to involve assessors in structured meetings and to promote the production of reliable and first-hand information (Zainuddin et al. 2020).
Kim et al. .
The main thrust of this study was to describe a possible methodological process that would guide compliance experts in ranking compliance risks with statistical probabilities of agreement levels.
This study focused on developing a risk assessment process based on focus groups that could provide feedback on the level of agreement between assessors through multivariate assessment. The research question of this paper is: Can a compliance risk assessment process based on FMEA be developed that can also monitor the level of team agreement?
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Using FMEA as a nominal group technique, we can show that experts from a given organization perceive risk in a similar way to each other, but differently compared to external experts (A2).
The paper is organized as follows. Section 2 presents a risk approach to compliance management. Section 3 introduces the methodology and empirical study, including materials. Section 4 presents the results, and Section 5 discusses the results obtained. Finally, Section 6 summarizes this paper, including suggestions for future research.
Over the past 30 years, regulatory changes have resulted in their monitoring becoming an independent task. “Compliance is a complex concept because it encompasses many others, including financial, economic, tax, commercial, legal, ethical, sustainability and property compliance” (Boros 2019, p. 547).
COSO’s Integrated Internal Control Framework presents international best practices for internal control. In the model, internal control is a process designed to provide reasonable assurance that organizational objectives are achieved
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