Businesses need to review out of date ERM practices: Actuaries Institute

Billions of dollars’ worth of revenue from Australian business could be under threat from out of date enterprise risk management (ERM) practices.

While the Australian financial services industry is waking up to the competitive advantage of implementing ERM practices, actuaries think more work needs to be done in making businesses resilient and adaptable to external threats. These could include the pace of technological change, the impact of climate change and the rise in the power of the consumer, all of which could lead to hefty company losses if not managed appropriately.

This is just one of topics of discussion by the Actuaries Institute at today’s Enterprise Risk Management (ERM) seminar, ‘ERM 2013 – making it happen’ which brings together risk professionals and business line decision-makers across a range of industries.

Joshua Corrigan, Chair of the Institute’s Risk Management Practice Committee, explained that resilience is about ensuring organisations are adaptable in an ever-changing environment, so that companies can remain in the game and competitive when others are falling by the wayside.

“Businesses fail all the time because they are not resilient; they don’t adapt and don’t have the robustness to deal with downturns. Having a proper ERM framework and thinking about embedding resilience is going to become a source of significant competitive advantage,” said Mr Corrigan.

According to Mr Corrigan, corporate Australia needs the next evolution of ERM, a phase he has dubbed ERM 3.0, to truly succeed in the future. The first phase was all about assessing basic sensitivity levels of outcomes such as profitability to risk drivers, which was highly quantitative in nature.  The second phase is all about aggregating the various types of risks to try to predict what they mean at the enterprise level.  The third phase, which the financial services industry is increasingly moving into, is all about understanding and explaining uncertainty holistically and how it relates to enterprise strategy.

“People now have a greater understanding of risk and we now also have the tools, techniques, systems, and processes for dealing with complex enterprise risk problems which we didn’t have before. Those organisations that embrace these are more likely to not only protect themselves against significant risk events, but also derive competitive advantages through more sustainable performance.”

Mr Corrigan added that effective ERM is not something business can afford to dip in and out of and could well be the key to their survival.

“ERM is going to be a very important driver, perhaps the most important driver over the long term of competitive advantage. It is no longer just about keeping up with your competitors in the good times. There is strategic value in outperforming competitors in tough times,” said Mr Corrigan.

Embedding ERM from the ground up

Actuaries Institute CEO Melinda Howes said the Institute was committed to providing the best education necessary to enable actuaries and CROs to embed ERM into the DNA of Australian businesses.

“We have been working to engage the risk profession across a number of industries in meaningful ways through research, working parties, and education including the CERA (Charted Enterprise Risk Actuary) qualification. We are also in the early stages of implementing a risk education course for senior experienced risk practitioners from any background. All of this is to ensure that Australian financial services organisations have the resources they need to embed ERM into their business from the ground up,” Ms Howes said.

Click here for information about the ERM Seminar.

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“Continuing global financial market volatility and a spate of natural disasters in recent times, highlight the need for effective enterprise risk management,” said Melinda Howes, Institute of Actuaries CEO.

“In this context, we surveyed 250 actuaries and other professionals across Australia’s largest financial and commercial enterprises to see how our ERM practices compare globally and more importantly, what we can do to improve them.”

Australian financial institutions are generally risk averse – their risk appetite was rated “moderate” by more than half of the respondents (54%) with the next largest response (27%) rating it “somewhat low”.

Eighty one per cent of actuaries willing to compare Australia with other countries ranked Australian organisations as performing “above average” or “the middle of the pack” or “among the leaders in this field” for ERM practices and management of risk culture. Only 11% believe Australia lags the rest of the world.

Respondents highlighted the top three benefits of effective ERM implementation as: minimising losses to the organisation (75%); improving financial performance/maximising Return on Equity (64%); and managing expectations of customers, staff and investors (54%).

“Encouragingly, the survey showed most organisations (60%) believe they have an ERM program that is either “somewhat mature” – thoroughly communicated to staff and part of everyday discussions – or “moderately mature”, said Ms Howes. “Another 11% said their ERM program was “very mature”, that is, embedded and integrated in the business processes and culture of the organisation.”

However, while most respondents felt there was a commitment from the head of their organisation to effective ERM (84%), only 20% of that group thought it was a “very high” level of commitment.

Risk culture development
Despite the high reported levels of mature ERM programs in place, only 52% of organisations appear have an embedded, formalised risk culture communicated to staff, and only 37% of members surveyed said their organisation’s approach to building and fostering a risk culture is “good” or “very good”.

“The much lower proportion of organisations with an embedded, formalised risk culture compared to those with a mature ERM program reflects the challenge and long-term commitment required to change organisational culture,” Ms Howes said. “Embedding a risk culture in an organisation is the key to success.”

The survey showed the main barriers to developing a risk culture are: lack of commitment from leadership (51%), a poorly defined risk culture (46%), and poor communication to staff (37%).

Linked with those barriers, respondents were asked the most common failures of their organisation’s risk culture which included: ignorance of risk culture parameters and policies (49%), ignoring processes and reporting (43%) and poor governance practices (35%).

“Organisations should focus on eliminating barriers to developing a risk culture so ERM can be part of everyday decision making,” said Ms Howes.

Social and environmental factors

The majority of organisational ERM programs focus on operational risk factors (91%), followed by economic risk factors (77%) and strategic risk (71%) factors. Interestingly, fewer programs consider social (26%) or environmental (28%) factors.

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