By Shawn Derakhshani,
Internal Actuary, New Mexico Mutual
Enterprise Risk Management (ERM) in business
includes the methods and processes used by an organization to manage
risks and seize opportunities related to the achievement of the
organization’s business objectives. ERM provides a framework for risk
management that typically involves identifying particular
events or circumstances relevant to the organization's objectives
(i.e., risks and opportunities), assessing them in terms of
likelihood and magnitude of impact, determining a response strategy
and monitoring progress. By identifying and proactively addressing
risks and opportunities, business enterprises protect and create
value for their stakeholders, including owners, employees,
customers, regulators, and society overall.
ERM requires daily discipline and awareness especially in light
of serious economic challenges everyone has experienced since 2008. A strong argument can be made that greater ERM discipline and
awareness should be employed.
Having said that, will corporate
America
rise to the challenge or fall the vices of greed and irresponsible
profit? If corporate
America
is ready to respond, what will be the game plan? And, with more
attention to ERM, how will the role and responsibilities of anyone
with risk management in their title be enhanced to add appropriate
value to strategic planning?
For the insurance industry specifically, the following
interesting questions arise:
1.
What lessons have insurers learned from the financial crisis?
2.
What are the essential ingredients of a successful ERM
program in the modern environment?
3.
How much economic capital is adequate given the insurance
corporation’s risk tolerance?
4. What
is an appropriate reinsurance strategy and framework for assessing
reinsurance effectiveness?
5. What
are the risk based capital implications of asset allocation given
the liabilities?
6. How
much capital could be allocated to each line of business to achieve
overall capital efficiencies for the company?
7.
How might the firms set risk-adjusted performance?
Every risk manager must
understand his or her enterprise and the enterprise’s short-term
and long-term strategic objectives to identify and respond to the
risks and opportunities from all perspectives whether it be
financial, operational or compliance, generally. A strong knowledge of finance and actuarial science is
necessary in this effort to gain a clear understanding of the
financial condition of the enterprise both in the short-term and
long-term. It is also
essential to effectively communicate to board members and executive
management about the potential impact on earnings per share of risks
and opportunities.
The communication must
foster a substantive and ongoing two-way dialogue reaching beyond
mind-numbing reports and PowerPoint presentations. The risk manager must also actively listen and engage board
members and executive management through well-developed
interpersonal skills built upon a reputation of trust, integrity and
objective discipline.
ERM will become woven into
the fabric of standard business processes and risk managers must
move beyond merely policing the enterprise but also adding value in
the strategic business planning and success of the enterprise.
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