Sunday, May 16, 2010

Conclusions on ERM

I guess it's only fitting that I explored ERM as a term paper, with it being such a hot topic these days. This doesn't solve global warming or anything urgent concerning most people on the streets, but I hope it gives a refreshing perspective on how to tackle an issue, especially one as complex and as alienating as risk management.

Enterprise Risk Management has become a focal point of discussion in board rooms and regulatory institutions in recent years, thanks to the progressive integration of economies and financial markets across the globe. With this global expansion of commerce and trade, comes a new set of business dynamics that not all organizations are acquainted with or accustomed to. Indeed, amid the emerging opportunities brought about by transnational economic integration and development, comes a kind of fragility in this new economic paradigm. Globalization has its blessings and curses, as depicted by the Financial Crisis of 2008.

The traditional talk on profits, margins, returns and costs are now passé, as the subjects of risk, risk management, and Enterprise Risk Management have begun to draw attention from those with the authority to mobilize resources and influence decision making in organizations. The proponent sees the roles of risk professionals growing ever more relevant and critical in ensuring the realization of organizational goals and objectives.

After having explored the frontiers of Enterprise Risk Management, it is apparent that much has evolved through the years and yet there are still many loose ends to tighten. Gone are the days when only profit maximization and cost minimization mattered. Risk now plays a major part in the process of decision making and strategies formulation. Organizations may find it difficult or confusing to have to contend with so many systems and frameworks being sponsored and advocated by different groups, institutions, and association; bolstered by their respective credentials. Standardization has always been a key objective for proponents of Enterprise Risk Management, even though the very nature of risk asserts a rather intangible and variable concept regardless of which industry an organization may belong to. In any case, the basics of published ERM frameworks out there are similar; these are, define the risks, quantify them, determine the responses, implement, operationalize, establish monitoring and create feedback mechanisms. There are many variants by which advocates can present an ERM framework, but what is most important is perhaps an organization’s willingness and initiative to become aware and not be victimized by ignorance from the relevant risks.

Risk management though does not come for free. Resources have to be committed and spent. This is probably one of the reasons why some organizations take ERM or some form of risk management as a burden rather than an ally in ensuring that goals and objectives are achieved. The intangibility of the return or the benefit can indeed give an impression of pointlessness. This dilemma happens to be one problem that insurance companies have to contend with. Marketing insurance products and convincing the public to hedge themselves against the undesirables of tomorrow is part of the challenge in selling insurance. The assurance or sense of comfort can sometimes be taken for granted especially when the main point is to hedge against the uncertain. Who in their right mind would wish for an undesirable event to manifest? As long as the risk or peril does not manifest, the risk management mechanisms are not fully appreciated, especially when time, attention, and resources could have seemingly been diverted to more immediately profitable undertakings. In any case, however, the benefits to an organization, operating under an ERM regime, are real. Risk management is not a futile exercise. It is a revolutionary function that recognizes an organization’s relationship with its internal and external business environments. Enterprise Risk Management ups the ante by advocating an extensive and all-encompassing risk management initiative that leaves no stones unturned.

Enterprise Risk Management, if to prove successful for an organization’s sake, must encompass and permeate through a company’s culture. Risk management, especially in the insurance industry, can be tricky because risk factors can sometimes be unquantifiable. The very nature of risk as an unanticipated loss or liability further highlights the need for a firm’s workforce to understand and practice ERM. Risk management, though a relatively new function in organizations, has now been given greater attention by higher management after the financial debacle of 2008. It may still have a long way to go though before uniformity and formalities are established as different industries and companies possess unique attributes and business needs that make effective Enterprise Risk Management elusive to practitioners.

Insurance companies have long been mindful of the relationship between risk and profit-making. After all, as most experienced insurance professionals would commonly quip, “Insurance business is no charitable undertaking.” Many techniques and arrangements had been devised by insurance companies through the decades in order to ensure the attainment of organizational objectives. Reinsurance activities are key symbols of how a company can meet risks head-on with the proper tools of manipulation. Instead of running away from risks, insurance companies are capable of reaping benefits from them. The operations aspect of an insurance company’s risk management framework are relatively refined and developed when compared to other industries. This probably stems from the insurance industry’s core competence in handling risks.

There are still many issues to be dealt with in developing and implementing Enterprise Risk Management. The insurance industry stands as an excellent example of how commitment to understanding risk can yield many business-relevant tools, systems, policies, and procedures. Other sectors and their member firms need only to take the initial steps of commitment formulated by pundits in order to develop a risk management program. Once consciously prepared to do so, an organization can then embark on the epiphanic journey towards an authentic Enterprise Risk Management framework.

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