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What is ERM?

10 important questions on What is ERM?

What are the benefits of ERM?

Increased organisational effectiveness; tackle interdependencies between risks. As top-down coordination to make various risk functions work cohesive and efficient.

Better risk reporting; prioritize the level and content of reporting that should go to management, to filter. This makes it more relevant and risk are seen in a timely manner, like a risk dashboard. Overall goal of reporting is to improve transparency.

Improved business performance; improved capital allocation, risk transfer strategies, better knowledge of what risks should be pursued and which should be avoided. Lower insurance costs, market value improvement, early warning signals, loss reduction regulatory capital relief.

What are the responsibilities of the CRO?

- Providing overall leadership, vision and direction
- Establishing an integrated risk management framework
- Develop risk management policies (incl. risk appetite through specific risk limits)
- Implement risk indicators and reports
- Allocation of economic capital (optimize risk portfolio)
- Communicate risk profile to board, regulators and other stakeholders
- Develop analytics, systems and data management capabilities

What are the different components of an ERM program?

1) Corporate governance (establish top-down risk management, incl controls)
2) Line management (business strategy alignment, integrate with revenue)
3) Portfolio management (think and act as a fund manager, aggregate exposures, diversification, monitor concentrations)
4) Risk transfer (transfer out concentrated or inefficient risks, mitigation)
5) Risk analytics (develop advanced analytical tools, external drivers)
6) Data and technology resources (integrate data and system capabilities)
7) Stakeholder management (improve risk transparency for key stakeholders)

ERM - Corporate Governance

Establish the appropriate organizational processes and controls to measure and manage risks across the company. Responsibilities:
- Risk appetite in terms of policies, tolerance and target debt-rating
- Ensure proper risk management skills in the organization
- Establish structure of ERM (roles, resp.)
- Integrated risk measurement framework (all risk types)
- Risk assessment and audit processes
- Shaping a risk culture (tone from top in actions)
- Opportunities for organizational learning

ERM - Line Mangement

Perhaps the most important phase in the assessment and pricing of risk is at its inception. Line management must make sure that business strategy aligns with corporate risk policy when pursuing new business and growth opportunities. Expected losses and cost of (risk) capital must be included in pricing.

ERM - Portfolio Management

Not just to be the cumulative effect of business transaction. Rather, act like fund managers ans set portfolio targets and risk limits to ensure appropriate diversification and optimal portfolio returns. Focus on natural hedges by combining financial risks, it thereby has a direct link to shareholder value maximization. It should optimize the overall risk/return. Although integration financial risks is one thing in the ERM process, non-financial risks must be integrated in overall ERM.

ERM - Risk Transfer

PM is supported by risk transfer strategies that lower the cost of transferring out undesirable risks and increase capability to focus on desirable risks. Use derivatives for transfer of undesirable risks or attract desirable risks that can't be originated. Use natural hedges.

ERM - Risk Analytics

Supported efforts to quantify and manage risk types on a more consistent basis. Alternatively, analyse risk transferring strategies on NPV and EVA, by which its support strategic capital planning.

ERM - Data and Technology Resources

One of the greatest challenges within risk management is the aggregation of underlying business and market data, due to different systems, definitions, etc. There is no single vendor software package that provides a solution for ERM.

ERM - Stakeholder Management

Risk management is not just and internal matter, external stakeholders like regulators should be integrated as well to improve risk transparency and assure sound business practices. But also reports to the board of directors, to feed them with major risks. Moreover, analysts increasing focus during investor calls on risk management capabilities.

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Part 1: Foundations of Risk Management

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What is ERM?

10 important questions on What is ERM?

What are the benefits of ERM?

What are the responsibilities of the CRO?

What are the different components of an ERM program?

ERM - Corporate Governance

ERM - Line Mangement

ERM - Portfolio Management

ERM - Risk Transfer

ERM - Risk Analytics

ERM - Data and Technology Resources

ERM - Stakeholder Management

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