September 2012 Bermuda Re/insurance
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The report places special responsibility with the public leaders charged with protecting the financial system, those entrusted to run the regulatory agencies, and the chief executives of companies whose failures drove the crisis. These individuals sought and accepted positions of significant responsibility and obligation.
Ultimately the tone at the top with respect to risk-taking is perhaps the most crucial issue facing financial institutions, and regulators now have a keen interest in holding individuals accountable for their actions.
Consequences
The consequences of failing to adhere to the onerous regulatory and internal policy compliance requirements can be severe, including regulator-imposed capital ‘add-ons’, directives to strengthen a firm’s governance controls, business restrictions, sanctions and fines. To thrive in this significantly more rigorous regulatory environment, financial institutions can no longer afford either to surprise regulators, or to be surprised by them.
To avoid a serious breakdown in trust, leading organisations
have begun to appoint managers at the most senior levels to head up their regulatory affairs functions and build stronger communication and working relationships with regulators across the board. They are also setting up systems that allow them to manage regulatory requirements and demands in an efficient and coordinated fashion, which further supports the argument for an ERM framework.
While implementing a strong and effective ERM framework is now a business imperative, there are other justifying factors; these are potentially as attractive as the push factors are essential.
Pull factors Operating culture
The New Zealand men’s national rugby union team (the All Blacks) is, arguably, the most successful sports team of all time. Among their accolades, the All Blacks have won a record 75 percent-plus of all rugby matches they have played since 1903 and were named the International Rugby Board (IRB) Team of the Year in 2005, 2006, 2008, 2010 and a record fifth time in 2011.
For a team to be so successful, some basic elements must be
established. For example: • Team members must understand their common goal and vision;
• Team members must have a clear understanding of their role and the roles of others in the team. This in turn increases credibility and accountability;
• There must be good communication; and Globalisation
As companies grow and expand, clear communication, consistent reporting and a common language become vital. This is particularly important when operations span different countries or industries resulting in the transnational or trans-operational circulation of ideas, languages, and business culture.
Global companies cannot be efficiently managed in silos. A
strong, truly global ERM framework supports the achievement of common understanding.
Further, as a result of the financial crisis, there is now increasing pressure from regulators to maintain sufficient capital in the jurisdiction which is most exposed to risk. It is not uncommon for regulators to require companies to transfer capital from their parent entity, often at short notice, in order to address any perceived shortfall (either in level or quality) of capital to meet local regulatory capital adequacy requirements.
In this new world where capital is less plentiful, business units will be required to compete for capital allocations. An effective
“Risk is a part of God’s game, alike for men and nations.” —Warren Buffett
• There must be a commitment to excellence. The operating culture, particularly with respect to risk, is set by the ‘tone at the top’.
These elements form the broad structure of Deloitte’s Nine Fundamental Principles of a Risk Intelligence Program. A strong ERM framework embeds the foundations for a successful, cohesive team which achieves its goals and objectives and is able to support sustained growth. This adds to the argument for investment in an effective ERM framework.
Deloitte’s point of view: ‘The risk intelligence enterprise’ ™
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