Enterprise RM On The Rise

The term refers to a comprehensive consideration of a companys risk exposure. It goes past traditional hazards and financial risks and looks at operational and strategic risks. The concept came out of the financial services sector and is spreading into other industries today, the study's sponsors say.

The chief benefits of ERM are twofold–it provides a complete view of a firms risks, and looks for ways to integrate "financing techniques with organizational practices and process," according to the sponsors of the survey, entitled, "Enterprise Risk Management: Implementing New Solutions."

ERM was found in some form among 41 percent of the companies surveyed. The report states that Europe is the furthest ahead at 53 percent, compared to 34 percent in North America and 33 percent in Asia. (Without having seen the survey, Jack J. Hampton, executive director of the New York-based Risk and Insurance Management Society, speculated that cultural differences in how risk management is viewed could account for the fact that more survey respondents in Europe said they are instituting ERM than those in North America.)

Those employing ERM are more confident about managing their various exposures, the survey found. Of those saying they are very confident about managing risks, 90 percent employed ERM, while only 45 percent of those not employing ERM could say that.

Reducing insurance costs was not the only motivating reason for a companys decision to employ ERM, the survey found. Companies look toward ERM to:

Better understand risk across business units.

Safeguard against earnings-related surprises.

Respond effectively to low-probability catastrophic risks.

Effectively gain cost savings by managing internal resources and capital.

In economic terms, 84 percent of companies surveyed felt ERM can improve a companys P/E ratio and cost of capital. Of publicly held companies, 48 percent said that improving their P/E ratio was a major goal of their ERM program. Also, of those publicly held companies surveyed, 50 percent believe shareholders would view ERM activities as beneficial and would recognize it as a corporate best practice.

Those surveyed feel the major threats to their company are the ones they have the least ability to manage–customer loyalty, competitive threats and operational failure–and that ERM can help bolster their risk management efforts in these areas.

In implementing ERM, companies must overcome internal opposition to the program and the lack of coordination between risk management and strategic planning, the survey's sponsors concluded. Companies must also develop the information technology to track risk throughout the organization, they said.

One of the problems with ERM cited by those surveyed was trying to develop a means of measuring its results. Fifty-three percent felt that the inability to develop a quantifiable method to measure intangible risk was a major problem.

The report on the survey also reviewed case studies of companies employing ERM, including Koch Industries, Pioneer, and Swissair Group.

The survey also goes into the infrastructure needs in developing an effective ERM program. Among the items identified were building support for the program, minimizing the bureaucracy, and striking a balance between local and central control of the business units.

Deciding on a corporate structure is also important to the success of the operation, the survey's sponsors said. Structural options range from elevating the risk manager to a leadership role, to creating an ERM council or committee, the sponsors said.

Copies of the report are available through EIU at www.store.eiu.com.

Reproduced from National Underwriter Property & Casualty/Risk & Benefits Management Edition, July 13, 2001. Copyright 2001 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.

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