While companies have struggled for years with how to define Enterprise Risk Management (ERM), leading to multiple methodologies and approaches, ERM implementations have been largely ineffective. The ineffective implementations are usually due to a lack of needed technology, a silo’d approach, a compliance-driven focus, or a lack of support from the top of the organization. The results — limited effective practice and minimal value. Yet in today’s economy with the globalization of business, rising expectations from shareholders and constantly increasing reforms in regulations, the corporate sensitivity to risks, risk relationships and their potential, material impact is at an all-time high.
Corporations continue to get attention and pressure from all perspectives to incorporate ERM into the business process and strategic planning. It is expected that Standard & Poor’s actions will be a catalyst to bring ERM and its long-anticipated benefits to the forefront.
Moodys has four pillars to its risk management assessment:
- Risk Governance
- Risk Management
- Risk Analytsis and Quantification
- Risk Infrastructure and Intelligence
“A. M. Best believes that ERM – establishing a risk-aware culture, using sophisticated tools to consistently identify and manage, as well as measure and manage risk correlations – is an increasingly important component of an insurer’s risk management framework….”
“A.M. Best perceives risk management as paramount to an insurer’s long-term success. As such, within the rating process, each company – regardless of its size or complexity – is expected to explain how it identifies, measures, monitors and manages risk.”
(January 25, 2008)
Enterprise Risk Management Points of Value
ERM should be at a strategic level and should be implemented holistically into an organization. Doing so can bring intrinsic, quantifiable value including:
- Better communication at the executive level
- Better, more strategic business planning
- Smaller losses in adverse times (less volatility)
- Rebounding more quickly from losses (quicker recovery)
- The establishment of better future practices (learning from mistakes)
