ERM improves decision making and reduces risk: AIRMIC

Enterprise Risk Management (ERM) can be shown to significantly reduce the net risk exposure of organisations and to support improved decision making, according to the findings of a major study commissioned by AIRMIC (the Association of Insurance and Risk Managers). However, a number of key building blocks need to be in place for successful implementation.

The research, carried out by DNV (Det Norske Veritas), was based around case studies of five large organisations. It was supported by analysis of information of twenty other additional enterprises.

The five case studies featured the BT Group, DLA Piper, Nestle, Solvay and a large UK government agency.

A key point to emerge from the report is that, to be successful, ERM has to be proportionate to the level of risks involved. In total, 13 key hallmarks of successful ERM were identified, including the use of risk management as a creative process, ensuring sufficient effort is allocated to treating risks after the analysis phase and that risk information is used by senior managers in their decision making.

The successful ERM exercise must also be well-defined, with the desired benefits set out in advance and progress measured against a series of targets.

“By reducing risk exposure ERM should also make it possible for organisations to spend less on their insurance without in any way compromising their operations or balance sheets.

Paul Howard, who heads the association's Risk Management Committee

“This research shows that Enterprise Risk Management really does help companies in both their strategic and operational decision-making provided it rests on firm foundations. The important point here is that ERM actually enables organisations to become more enterprising because, if you understand and minimise your risks, you have the knowledge and confidence to do new things,” said AIRMIC deputy chair Paul Howard, who heads the association’s Risk Management Committee.

“By reducing risk exposure ERM should also make it possible for organisations to spend less on their insurance without in any way compromising their operations or balance sheets.”

However, technical director Paul Hopkin sounded a note of caution: “If you get it right, then the benefits are far-reaching, but not all ERM programmes are successful. You do need a clear idea of what you’re trying to achieve and how you’re going to do so, you must communicate effectively with your colleagues and you must have the proactive support of your Board.”

“We believe it was the first research of its kind ever conducted into ERM from a ground-up perspective, and we were delighted with the enthusiasm of AIRMIC members keen to take part. We’re very grateful to those organisations that made it possible by agreeing to pool their knowledge,” said Richard Archer, who led the research at DNV.

The project covered both the private and public sectors, and began in December 2006.