ERM Chapter 31

Question 1

What are the options for the resourcing of ERM implementation?

Answer 1

The organisation must decide whether the project will be resourced:

• internally, using existing staff with risk expertise and further training
• externally, through using risk professionals on a consulting basis
• a mixture of the above, calling upon consultants when the organisation faces gaps in knowledge or needs specialist advice
• implementation of ERM usually takes several years and requires a risk champion

Question 2

Outline the four questions a company should ask itself to ensure a successful ERM implementation.

Answer 2

1. governance structure and politics - who is responsible for risk oversight and critical RM decisions?
2. risk assessment and quantification - how will they make these decisions?
3. risk management - what decisions will they make to optimise the risk/return profile of the organisation?
4. reporting and monitoring - how will such decisions be monitored?

Question 3

Outline the three stages of implementation.

Answer 3

1. Loss reduction:
   - protect against downside losses
   > credit controls
   > investment and liquidity policies
   > other internal controls
   > audit processes
   > insurance coverage
2. Uncertainty management:
   - rather than focusing on loss reduction, ERM can be used to support a business’s profitability and business objectives more positively
   > credit models
   > market risk measurement and management techniques
   > increased management of operational risks
   > improved corporate governance policies
   > wider application of risk transfer
3. Performance optimisation:
   - take a more integrated approach to RM and bring RM into the business’s decision making e.g. pricing, strategic capital investment decisions
   > active management of its credit risk portfolio
   > active management of its balance sheet
   > re-engineering of processes to reduce operational risk and better understand and reduce costs

Question 4

Outline challenges to implementation.

Answer 4

Promoting risk awareness:

• set the tone from the top
• ask the right questions concerning risk
• establish a common risk taxonomy
• provide induction training and ongoing education
• link compensation to risk to reward desired behaviours

Implementing cultural change:
- a company’s culture can only be changed effectively:
> from the top of the organisation
> on an incremental basis
> as the profile of new recruits changes the views of the staff