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Embedding enterprise risk management - a process of evolution - EY - India

Finesse: July-October 2011

Embedding enterprise risk management — a process of evolution

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Background

Business opportunities and risks are constantly changing in today’s challenging global economy. A key factor for a company to create sustainable value includes the risks (strategic and tactical) it is willing to take and its ability to manage them effectively.

Implementation of enterprise risk management (ERM) provides the opportunity to achieve a robust and holistic top-down view of the key risks facing an organization, and to manage these risks strategically to increase the likelihood that organizational objectives are achieved. In addition, the requirement of complying with Basel II (banking) or Solvency II (insurance) to demonstrate sound and prudent risk management is driving overall ERM implementation.

According to the survey conducted by the Professional Risk Managers’ International Association in August 2010, ERM continues to capture the top slot in future trends relating to risk and compliance. It is now accelerating the management agenda due to pressures being exerted by a large number of stakeholders, including the following:

  • Rating agencies: This is a core element of the rating process and affects the cost of capital for companies.
  • Regulators: This is a core process through which companies achieve their strategic objectives and protect their regulatory capital.
  • Investors: They want to understand the risk and return for their investment and be convinced that the company is extracting value through its risk management.

However, currently, many Indian companies are applying the traditional risk management model in their businesses, which makes ERM their future goal. The evolution from the traditional risk management model to ERM is fairly challenging, and therefore, it is important to have an appropriate framework in place for its implementation.

1. ERM framework — aspects to be considered while implementing ERM

Organizations need to consider the following aspects while implementing ERM:



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