S&P Use Of ERM In Ratings Explained

Standard & Poor's will soon be making enterprise risk management an integral part of its rating process and corporations need to prepare for this, executives with insurance broker firm Aon said.

The advice was the subject of a Web seminar sponsored by the Chicago-based insurance broker discussing the strategic method of understanding and managing risk.

Laura Taylor, managing director and ERM national practice leader for Aon, said S&P announced earlier this year that it will be making ERM part of its rating review process beginning 2009.

To ready businesses for the process S&P will begin employing ERM commentary as part of its ratings, but not issue a rating on the company's ERM until 2009, she said.

The aim will be to "confirm areas of strength, determine areas for development, and prepare" for raising the bar on the company's risk management culture and process, Ms. Taylor explained.

She said there are four components to the process:

o Strategic risk management

o Risk control process for key risks

o Management of emerging risks

o Overall risk management culture and governance process

In the initial meeting analysts will be examining the company's culture and governance and strategic management. She said the questions will be basic, but predicted that many executives may find they cannot answer those questions easily and should prepare now.

Laurie Champion, director in Aon's ERM practice, said the primary aim should be to develop a plan that is consistent and meets with best practices standards, yet works for their own individual company.

The process, she said, should improve strategic thinking and planning of board officers and executives. It can also improve a company's risk-reward ratio for projects, develop key performance indicators and help to allocate resources more effectively.

Ms. Champion noted that the push for ERM controls is beyond S&P ratings and is becoming a concern of boards of directors.

"It is not an optional exercise but a fundamental requirement of good governance," she said.

She noted that a good S&P rating for a business' ERM system will mean reduced cost of servicing debt, improved access to capital and cost of capital, and increased investor confidence.

Mike Giacobbe, a director with Aon global risk consulting, noted that a broker, such as Aon, can help develop an effective ERM program by coming in and reviewing or developing a company's program. The resulting report will point to what needs to be done to meet S&P's standards.

The Web seminar is available online at www.aon.com/webseminars.