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Enterprise Risk Management

Or Enterprise Risk and Assurance

Management

What is ERM?

Concerned with a broad financial and

operating perspective

Recognizes interdependencies corporate,

financial, and environmental factors Strives to determine and implement an

optimal strategyto achieve the primary

objective: maximize the value of the firm

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Goals of ERM

Ensure business continuity

Enhance opportunities for the company to

achieve its objectives

Create and increase company value

Make risk management more cost-efficient

Stabilize earnings

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Evolution of ERM

Historically: risk silo mentality Mid-1990s:

First Chief Risk Officer

First use of ERM terminology

Late-1990s: Risk-related regulatory requirements (e.g., Turnbull)

Earnings protection insurance debuts

2001:

September 11 Corporate scandals

Beginning of efforts to improve corporate governance

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Current State

Findings from various surveys

An acknowledged need to improve risk

management

A recognition that a holistic approach isappropriate and preferable

ERM can improve overall capital management

and thus enhance corporate value and

competitiveness A variety of approaches to improving risk

management

There are still problems to overcome

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A Paradigm Shift

Traditional

Risks managed in silos

Concentrates on

physical hazards andfinancial risks

Insurance orientation

Ad hoc / one-off projects

Emerging

Centralized mgt., with exec-

level coordination

Integrated consideration of

all risks, firm-wide

Opportunities for hedging,

diversification

Continuous and embedded

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Types of Risks

Operational Hazard

Physical

Strategic

Capital / resourceallocation

Industry / competitors

Technological

Databases Security

Confidential information

Stakeholder

Legal Compliance

Regulatory

Financial

Capital markets

Credit risks

Taxes

Human capital

Retention Training

Reputational

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Issues in ERM Implementation

Different corporate cultures require different

ERM approaches

Who is going to be the ERM champion withinthe company

Among senior executives

Among departments / functions

How to embed a risk management culture

and responsibilities throughout the firm

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Components of the ERM Process

Determine corporate objectives

Risk identification

Goal: comprehensiveness

E.g., self-assessment

Risk measurement

Volatility measures Value at Risk (VaR)

Impact

Likelihood

Size of loss

Likelihood

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Components of ERM (cont.)

Assessing the impact

Stress or scenario testing

Stochastic simulation Examine and select alternative risk

management tools and techniques

Traditional risk transfer Natural hedging / diversification

Integration of risks

E.g.,

dynamic

financial

analysis

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Keys to Success in ERM

Senior management commitment andsponsorship

Embed a risk management culture in the

corporation at the operational level

Provide for accountability, both specific

and widespread

Clearly defined responsibilities for

coordination and maintenance

Adequate communication