From Traditional risk management to new generation of Enterprise risk management (ERM)

In the traditional risk management, corporate houses and institutions manage their risk exposed to each department/ unit for example: lack of capital financing by finance department, but it was limited to operational risk and financial risk. Risk manager role was to arrange insurance at nominal rates and interact with various committees and top management. The problem occurred in recent financial crisis which lead to closure and insolvency of many firms like Enron.

The major problem was lack of co-ordination among the various departments of corporate to manage such risk which increased cost of managing risk. Situation becomes worse when some risk are neither eliminated nor reduced even no insurance is taken which are disastrous in nature.

Now as per the guidelines of EURO Solvency II and SOX, in Europe and US, insurance companies need to follow Governance, Risk and compliance (GRC) which has three components. Top management can control the overall risk by having corporate governance, establishing the Enterprise risk management (ERM) concept in the organisation which gives holistic picture of the risk and in the last, by establishing compliance framework.

Ruchi Agarwal
MBA, FIII, ACII
Principal Consultant
Cambridge Global Partners