Development ladder of ERM from banking to insurance industry

Many people might ponder over the questions arises out of the development of risk management - when risk management was enough to secure the organization asset & people And why this new concept of Enterprise Risk Management emerged. The major reason of emergence of new thought process was the implementation of risk management in organizations. ERM provides holistic view of organizational issues which traditional risk management was not able to highlight. The concept of Enterprise risk management just 4 decades old; it was started 37 years back from banking industry. In year 1974, Basel committee started with banking supervision which was amended after 14 years and focus shifted to minimum risk based capital requirements.

COSO was organized in 1985 to sponsor the National Commission on Fraudulent Financial Reporting, an independent private-sector initiative that studied the causal factors that can lead to fraudulent financial reporting. COSO (Committee of Sponsoring Organizations) of the Treadway Commission is the joint initiative 5 private sector companies – American Accounting Association, American Institute of CPA (AICPA), Financial Executive International (FEI), The Association of Accountants and Financial Professionals in business (IMA) and The Institute of Financial Auditors (IFA).

In early 1990’s, a long series of high profile corporate fraud, accounting scandals took place which created the need of revamping the regulations. In year 1992, London market introduced Cadbury Report for new regulations covering various aspects of corporate governance. After London all other market also implemented similar regulations on risk management – National standards on Risk management in Australia and New Zeland (1995), Canada (Dey Report, 1997), Japan and UK (2000). In year 1996, US taken bold steps by development of national standards on Risk Management by establishing NAIC (National Association of Insurance Commissioners in United States) and introduced risk based capital requirement for insurance companies which later developed in year 2002 passage of Sarbanes-Oxley Act (SOX). In year 2004, COSO established Enterprise Risk Management Integrated Framework which is one of the greatest achievements in this area.

Very recently,EU based insurers have to comply with Solvency II regulations by 2012 and they have far reaching implications for those insurers that are unable to accurately assess and prove their liabilities and/or show regulators that they have sufficiently de-risked by transacting across multiple lines of business. This has alerted all other nationals to come up with either their own regulations or follow international regulations to get long term stability.

 Comments Please.

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