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Archive for April, 2014|Monthly archive page

Does Enterprise Risk Management add any value to traditional risk management?

In Uncategorized on April 27, 2014 at 12:06 pm

There has always been a debate over the requirement of ERM specialist when the same work can be done by a risk manager in traditional organisations.  The debate poses questions in our mind – Does ERM make any sense in cost benefit analysis? and How to check that risk is truly embedded in the organisation?

There is high cost, time and money involved in implementation of ERM while under traditional risk management, each unit manager is responsible to manage their own unit risk.  Traditional risk management does not provide interaction among the various risks which is seriously reflected in corporate decision making. It is a small example of how corporate fails if they don’t understand the problems and risks within their own units. This lead to genesis of idea of ‘Enterprise Risk Management’. ERM is an umbrella term which considers all risks in the organisation in holistic manner and helps companies to achieve their objectives within their risk appetite.

The next question that needed to be addressed is What is the right time to implement ERM? The industry realize the value of ERM only in hard times when some CAT event happen, or major regulatory penalty occur. These event wipe out major reserve of the insurance companies if not adequate risk management has been taken care of.  In hard market, the corporates have no money or very less money to spend on procedure for implementation of ERM, so, it is only the good time (soft market), when companies can invest on implementation of ERM.

In the last few weeks, I have visited many insurance companies in Indian insurance market and found that they are still in the position of understanding the value of ERM.  ERM has only positive and negative aspect – if perceived value of ERM is not understood, it will be looked certainly as a cost to the company and if understood it creates efficiency and reduce cost. The common and most adopted approach is defensive approach to tick mark the risk management options which is required by the regulatory bodies. Other developed markets have learnt their lessons in recent financial crisis and realized the value of ERM but now they face problem of understanding of ERM and benchmarking. My next blog will discuss the stages of development of risk management throughout the world. 

Feel free to contact me for any consultation or discussion of ERM in your organization. “ruchi(dot)agarwal at-the-rate”