The ERM Advantage

When it comes to managing risks, adopting simple capital models and appointing dedicated risk managers are key.
COMPANIES THAT USE enterprise risk management (ERM) techniques can realize millions of dollars in reduced costs and boosted revenues, according to researchers in the field of risk management and insurance. They include Tyler Leverty of the Wisconsin School of Business at the University of Wisconsin-Madison, Martin Grace and Richard Phillips of Georgia State University in Atlanta, and Prakash Shimpi of the New Jersey-based firm Fraime LLC.

The group evaluated survey results and financial data from a global sample of insurance companies with ERM programs. They found that three ERM actions were the most advantageous: using simple economic capital models (ECMs) to determine how much money to set aside to cover risks, appointing a dedicated risk manager or department, and requiring that manager or department to report to the board or C-suite leaders. The average insurer that adopted these practices realized US$83.3 million in cost savings and $49.5 million in revenue enhancement. Researchers showed no added value to using advanced ECM methods.

Many firms use ERM to manage their exposure to risk but might be unsure of the right strategies to use, says Leverty. “It’s one thing to believe effective risk management efforts have an impact,” he says. “We have been able to directly document their impact on reducing firm costs and enhancing revenues.”

“The Value of Investing in Enterprise Risk Management” was published in the June 2015 issue of the Journal of Risk and Insurance.