Auditing ERM by Tommy Seah

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Tommy Seah speaks on Auditing ERM in Malaysia

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Auditing ERM by Tommy Seah

  1. 1. Enterprise risk management (ERM) By TOMMY SEAH Enterprise risk management (ERM) continues to be a hot management topic for many industries. However, the early implementers remain primarily in the financial services industry. The main reason for this is that financial risks more naturally lend themselves to the quantification that is a central part of the ERM process. As a result, banks and now insurance companies are farther along in implementing ERM than most other sectors. Added scrutiny However, most insurance executives are now concerned about their ERM programs. What are these programs doing to actually change the way decisions are being made throughout the organization? These concerns have recently been underscored by the attention that ratings agencies are giving to ERM efforts. S&P now has a separate rating just for ERM. A large part of S&P’s ERM focus is going to be on the extent to which insurers have successfully embedded ERM into their business decision-making process. Other rating agencies are likely to follow suit. One of the reasons that insurers are not quite there yet, is that most ERM approaches lack the quantitative rigor and metrics to support decision- making. Most banks and insurance companies have a capital-centric focus when it comes to ERM metrics. While this can be very useful, it cannot fully support decision-making. To connect ERM to decision-making, companies need to go one step further. That next step is value-based ERM. New perspective Value-based ERM is a concept that has been around for a while. The approach is designed to solve one of the key shortcomings of ERM, i.e. the lack of connection between enterprise risk management and value-based management. This approach makes the quantification of value central to all aspects of the ERM process. This enables companies to easily integrate ERM into their business decision-making processes—from strategic planning to tactical decision-making to pricing.” Using a value-based approach allows companies to express risk in terms of the current and potential impact on the value of the enterprise. This is the alignment with decision-making. It takes the ERM approach and simplifies it in terms of a key metric—value. Now you’ve got something that everyone in
  2. 2. the company understands and that everyone must care about—enterprise value. OUTLINE The value-based ERM approach Identification of key risks—The company must pre-qualify those risks critical to the enterprise. Develop risk scenarios—Due to the nature of the risks, this is done separately for financial risks and operational risks. Financial Risks Operational Risks

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