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Despite Flat Budgets, Many Firms Adjust Their Risk Management Programs

Source: RIMS and Marsh

Posted on 17 Jul 2009

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Despite generally flat budgets, more than four in 10 U.S. businesses are planning changes to their risk management programs this year.

The challenges posed by the global economic crisis and a desire for a more strategic approach to managing risk are driving the changes, along with the aim to reduce costs and gain a better understanding of complex and difficult-to-quantify exposures related to operations and strategy.

These are among the findings in the sixth annual Excellence in Risk Management VI: Strategic Risk Management in Practice report, a collaborative effort between Marsh and the Risk and Insurance Management Society, Inc. (RIMS). The 2009 report, which was based on a survey of 450 risk managers, C-suite and other executives involved in risk-related functions conducted during the first quarter of the year by Oliver Wyman, the management consulting unit of Marsh & McLennan Companies, Inc., examines the impact of the financial crisis on risk management, strategic risk management, and risk perspectives of top executives.

"Most organizations aspire to a more strategic approach to risk management, however, there are a number of challenges associated with reaching that goal," says Brian C. Elowe, a managing director of Marsh's Global Risk Management Division. "Nonetheless, organizations that take a strategic approach to risk management are better able to deal with the multidimensional challenges of the recession."

Notably, 70 percent of businesses with strategic risk management consider their approach effective in helping navigate the current financial crisis, compared with 35 percent of businesses using traditional risk management.

According to the report, 67 percent of businesses want to adopt a more strategic approach to risk management, of which enterprise risk management (ERM) is generally seen as a key component. The adoption of ERM appears to have reached a plateau at about 65 percent of firms, a trend first noted in last year's Excellence survey. This includes a growing percentage of firms during the past four years that are partially implementing ERM in their efforts to become more strategic.

"While the movement toward partial implementation of ERM may now be somewhat related to current economic conditions, it's more likely that many risk managers view partial implementation of ERM as a step along the way to get to a fully implemented ERM program," says Richard Roberts, Jr., ALCM, ARM, CPCU, RF, a member of the RIMS Board of Directors and corporate risk manager, Ensign-Bickford Industries, Inc. "Meanwhile, senior executives remain committed to this process, but need to know more about how ERM adds value. In fact, the value ERM brings to a firm comes in many areas that are not easily quantifiable, making it important for risk managers to effectively point out the qualitative benefits in addition to other ROI metrics."

Despite the need for more effective metrics and reporting around ERM, senior executives are keenly focused on this process. For example, when asked about top priorities for developing risk management capabilities in 2009, 58 percent of C-suite executives cited improving their organization's enterprise risk management compared with 42 percent of risk managers.

Other key findings from the 24-page Marsh-RIMS report include:

* Despite the tough economy, a small number of companies are looking at increasing risk management staffing (14 percent) or creating a corporate-level risk management function (6 percent). Given the deep recession, the number considering reducing risk management staffing (13 percent) is somewhat lower than expected.

* Companies that practice strategic risk management tend to view risk as something to optimize, not just to mitigate or avoid. There is a concerted effort to index risk against competitors and against the organization itself. And there is a stronger effort to weave risk issues into the overall conversation about the organization's business decisions.

* In order to adopt a more strategic approach to risk management to make the shift possible, many businesses need metrics demonstrating the value and ROI; and senior management commitment.

* Even in the current economic environment, fewer than 20 percent of risk managers perceive senior executives as being overly concerned about the cost or difficulty of implementing ERM and other strategic risk processes. Thus, they may well be willing to make such investments when convinced of the value.

* Organizations with a strategic approach are more likely to conduct studies on the cost of risk capital and other issues in a language that CFOs understand. When decisions are reached in such firms, the comfort level about the decision rises at all levels due to the shared language between financial officers and risk managers.

* Companies with strategic approaches to risk use a significantly greater number of tools and methodologies to identify, measure, and prioritize operational and strategic risks, as well as a wider range of risk measurement techniques. For instance, they are more than twice as likely as other firms to conduct qualitative self-assessments, and nearly three times as likely to run quantitative self-assessments. They are also more likely to employ risk mapping and run tabletop simulation exercises.

RIMS members can download a copy of the report, Excellence in Risk Management VI: Strategic Risk Management in Practice, at Others may access the report by registering here.