The effect of a fuller adoption of enterprise risk management (ERM) on value creation has been borne out in several prominent studies in recent years. A 2011 study by Robert E. Hoyt and Andre P. Liebenberg of 275 insurance companies found that those implementing ERM programs over an 11-year period enjoyed a 20% premium in firm value over those that didn’t. Standard & Poor’s five-year-old “ERM opinion” rating program for North American and Bermudian insurance companies likewise has reported a stronger positive change in equity prices and lower stock volatility in most years for insurers that it rates as being “excellent” or “strong” ERM programs.
The recent survey conducted by the Milliman Risk Institute of 125 North American risk executives on the state of their companies’ ERM efforts showed that Trendsetters are far more willing to get value out of ERM in the following ways (see part 3 for information about the Beginners, Transitionals, and Trendsetters levels):
• Enhanced board oversight: 81% of Trendsetters create value in this area versus 57%, collectively, of Beginners and Transitionals. This ensures that the board is not only more closely attuned to the company’s risk profile, but also better prepared to act on suggested improvements to the ERM framework and processes.
• Higher-quality strategic planning: 75% of Trendsetters versus 50% of Beginners and Transitionals. An efficient economic capital model makes for better strategic planning, improving the company’s ability to evaluate strategic initiatives such as mergers and acquisitions.
• Better capital efficiency: 81% of Trendsetters versus 55% of Beginners and Transitionals. Better risk-based decisions lead to improved capital efficiency, yielding better return on assets.
• Improved performance management: 100% of Trendsetters versus 53% of Beginners and Transitionals. A clearly defined risk appetite statement sharpens performance management, both at the company and business-unit levels.
• Stronger brand reputation: 63% of Trendsetters versus 48% of Beginners and Transitionals. A robust ERM system is more likely to prevent negative incidents that could damage a company in the eyes of investors and other stakeholders. Further, it enhances the company’s reputation for grasping the risks and rewards in new opportunities.
In Part 6 of this blog series, we will look at an illustrative case study of a Trendsetter company.
To download a copy of the full report, click here.
For more information, please contact Mark Stephens.