Enterprise Risk Management (ERM) beginning to be ineffective when there was some things, which are no reinsurance, risk management functions turn to be silo function and deprived of daily function in business, also if risk management associated with compliance and internal audit, and if capital used only as compliance regulations issues but not as one of the core supporter in business. On the other hand, ERM be effective if made as a part from the business planning cycle, risk evaluation, mitigation, and control every responsibilities of each employee, and also if capital used as supporting business and not only as a report materials. This is described by chief risk officer of Tokio Marine Regional Asia Pacific, Jim Qin.
According to him, ERM process need to begin with understanding governance and risk culture, risk appetite, identity and assess risk, risk measurement, monitoring, reporting and managing risk, and two last processes last that is a link to business strategy or capital planning, and the ‘what if’ analysis. Three things that need to be emphasized is the process of the first and last to ensure the process of ERM going well. As an organization runs well, capital projection, capital plan, and business planning supported by the withdrawal of a good decision to get business strategy network.
The trend in the business planning are often not in accordance with traditional business strategy. As a result, business strategies that first opens may not in line with an organization’s risk appetite and risk objective. “Risk management have to walk in tandem with business activity who keeps ongoing.” By the size of some form that based on risks, the steps of which has to work started from calculations of the amount of risks, allocate infrastructure and non infrastructure that will be used to calculate risks, the measurement of performance, and remuneration calculations based on risks.
Qin also convey four things to do in an organization or corporation, which are the development of new products, reinsurance placement, merger and acquisitions, and capital management. In four steps, it is needed to questioned some way to formulate business strategy to the efficiency.
Some example of risk scenarios that might happen are recession, fraud, the failure of the information technology system, the financial crisis, error in determining the amount of the price, pandemics, and natural disasters. Therefore, it takes a first step to construct a model of economic capital which is the stress testing. Stress testing used to identify potential disturbance or threat that might happen even though it is a rare chance, then remain focused on its worst risks and events that followed. This instrument is used to make risks planning, continuance planning and manage a business to a continuation, the accumulation of control, and regulations.