Banks and insurers spend large
amounts of money on risk management.
Increasingly this expenditure tends to be part of an ERM programme where
a holistic and enterprise-wide view is adopted.
This involves delivering appropriate tools and changing the business
culture.
There are many challenges to
deliver successfully an ERM programme.
It is usually accepted that one of them is embedding ERM. However, the changing nature of financial
services means that the main challenge to deliver an ERM system would be managing
a process of continuous improvements and getting ERM to work over a period of time rather than
at a point in time. This has a number of implications for how
financial institutions should regard ERM programmes.
An immediate implication is that delivering
an ERM system would be less of a ‘big-bang’ where this vision is adopted from
the outset. First steps would likely be
material to signal the enterprise-wide dimension and start changing the culture. However, an important part of the cultural
change would be about explicitly recognising that it is a process of continuous
improvements. This should also bring
about a focus on easy-wins, which is usually regarded as contributing to the
success of transformation processes.
Where an ERM programme has been
going on for some time, this alternative approach would require a different
vision and a change in the ‘tone from the top’.
This would mean a change in the risk culture of the business. Given that the vision is more pragmatic and
consistent with the changing nature of financial services, I would not envisage
a significant challenge from modifying the culture.
In my view, the real challenge
arising from an ERM perspective of continuous improvements is identifying what
are those changes that should happen over time.
This requires initially identifying the minimum that must be implemented
to meet the expectations of various stakeholders. This approach also requires identifying and
monitoring the maturity of the ERM system in a structured manner at regular
intervals. That goes beyond taking stock
of what has been implemented and should cover the effectiveness of the tools
and processes that have been put in place.
Gaps will not necessarily reflect shortcomings in the implementation but
changes in the business and in the markets.
There are already tools available
to assess the maturity of an ERM system, which would provide useful starting
points. For example, the International
Actuarial Association published an ERM assessment tool that covers 14 categories
ranging from board engagement to risk management culture and rates an insurer’s
position as ‘early’, ‘intermediate’ or ‘advanced’. Internal audit functions would be well placed
to lead these assessments given their independence from business and risk
function.
Understanding the maturity of
your ERM system is fundamental to ensure that there can be an adequate
assessment of the costs and benefits of alternative improvements so that these
can be prioritised accordingly. This perspective
means that one of the key documents for senior management of an ERM programme would
be robust road-maps that set out prioritised improvements.
Overall, a perspective of
continuous improvements means that the process to deliver an ERM system becomes
as important as the objective. This is more likely to result in genuine embedding.
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