ERM Meaning

ERM Meaning, enterprise risk management is the process that can be applied in strategy settings across the organization where one can identify, assess, control, measure, and monitor opportunities and risks to achieve the financial objectives.

Capital and financial risk management are based on the management’s tolerance for risk, performance objectives, economic constraints, and the ability to satisfy the regulatory and rating agencies. 

Risk appetite refers to the danger an organization can undertake and successfully manage over a given duration. 

Firms need to handle operational (caused by direct or indirect loss, resulting from inadequate or failed internal processes, system and people from external events) and strategic risks (the damage to reputation, competition, technological innovation, regulatory trends, and capital availability).  

ERM is necessary because – 

• Such a strategy is designed to minimize direct and indirect costs related to the financial crisis, volatility, earnings, and negative shocks in the markets and it also helps in the decision-making process where one can select the best investment opportunities.

• Several SME adopts the ERM approach to avoid poor performance to enhance their survival and competitive abilities. 

• SMEs, due to the lack of management capabilities and lack of resources, are focused on ERMs that can enable a firm to reduce different types of costs linked to the operational and non-operational activities. 

• ERM is crucial for business activities in the current era and is deemed to be the core factor for supportive competitiveness. 

• It facilitates to develop a unique strategy to lower the potential losses and open doors for the exploitation of new opportunities. 

• It helps to manage different types of risks and answer to unexpected threats to ensure flexibility and take the benefits of opportunities that in turn, facilitate competitive advantage. 

There are many advantages of using ERM –

• Its successful implementation equips the firm with techniques to effectively manage risks. 

• It can increase profitability by lowering the various operational and marginal costs and reducing the uncertainty related to stock market movements.

• It can help to get higher operational performance.

The top management is responsible for the organizational strategy; long term planning and cost reduction and they need to be aware of the practices that can influence decision making, costs, and related activities.  

Chinese firms often follow cost-based competitive strategies instead of differentiating based strategies that require higher financial abilities and resources, and such a competitive strategy has a significant influence on the performance of a company. 

How to implement it?

The current state assessment should be studied carefully to see how ERM components, principles, and concepts can be applied to an entity where the core team identifies formal and informal policies, practices, processes, and techniques.

• The implementation plan is used to update, enhance, and add depth and breadth to cover the assessment design and development. 

• Capability development is the stage where the firm determines the people, process capability, and technologies.

• The core team should be established that is made aware of the strategic planning and framework components, concepts, and principles.

• The timing and form of executive sponsorship are determined.

• The initial plan is created with key project phases, milestones, timing and it serves to communicate and coordinate with the team leader.

• Actions like deployment plans, reward reinforcement mechanisms, training, and monitoring are required for implementation.

• The team continuously requires monitoring, reviewing, and strengthening the capabilities in this regard. 

Significance– 

• Rating agencies evaluate risk management as part of their overall assessment of financial strength to inspect the enterprise market value. 

•  Boards and senior management look for ERM to help strike the right balance between risk-reward to assess the competition and predict volatile risks or softening of rates. 

• Most analysts, investors, regulators, and rating agencies want the insurer to make risk consideration as part of their operations. 

The liquidity crisis and the turmoil in the decade have highlighted the complexity and vitality, raising the need for constantly evolving adaptive risk assessment and response.

In 2008, the ERM ability helped management to alter underlying assumptions and make a critical judgment to identify the factors that cause a financial crisis.  

However, many banks are using the in–house ERM abilities over several years and failure of such systems to predict losses have raised scepticism related to the usefulness of the strategy.