Thursday, February 11, 2010

On Enterprise Risk Management – A View from the Insurance Industry by Wolfgang Errath & Andreas Grunbichler

Risk is an inarguable facet of life and is further highlighted in the everyday functioning of society and the commerce of man. Insurance, as a business conceived as an economically profitable undertaking, exists to provide citizens with a means to hedge and somehow protect themselves from the uncertainties of life and the results that come with the corollary activities done through the existence of human civilization. No one can indeed foretell what the future holds, but it is always in everyone’s interest as well as desire to have that assuring sense of comfort, that tomorrow’s conditions do not deviate from the preferred. Applying this rationale to larger “organisms” of society, companies, associations, partnerships, and corporations; organizations do not necessarily shield individuals or even groups of people from risks, perils and the undeterminable conditions that they may encounter in the future. To exaggerate the idea, anything can happen to anyone or anything; barring of course those that are beyond the laws of physics or those inconceivable by common logic, reason and improbable convergence of circumstances. Enterprise Risk Management formalizes a critical organizational function that would otherwise be described as soothsaying. All the more is the concept of Enterprise Risk Management deserving of attention from insurance companies, those that expose and economically concern themselves with the variability of tomorrow. Most people would note, if not tritely, that ERM needs to be integrated to the organizational culture and of course, without any challenge, it does. In fact, is risk not already an apparent part of life? To even deny it would only result in futility. And so, it is to my understanding that all people, whether they work for an insurance or non-insurance related company, are aware of risks. There are certainly a lot of risks and perils that one (whether a person or a company) must be aware and be careful of. But if to equate this keen awareness to fear, why is it that there are still companies that go down in flames? Is the fear of the risk of bankruptcy, scandal or organizational failure not enough to serve as an innate safeguard for a business entity? We, of course, have to bear in mind that people work for varying reasons, but whether it be noble or selfish, a machine is only as efficient or effective as the parts that compose it. This is how I perceive ERM, it is an alignment of the expectations of every employee of the risks out there and the things that have to be done to keep the company functioning at the preferred conditions. In uniformity and coordination, ERM encourages the establishment of standards and parameters, whether these be quantitative or qualitative in nature. Fear of organizational failure alone does not ensure survivability, ERM channels this sense of urgency to something synchronized and concrete. In fact, innate in this concept is not passivity in recognizing the risks of the past, but a proactive call for all stakeholders of a company to keep things running at optimal conditions, just in case tomorrow becomes inhospitable.

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