Diversity of Risk Management in Europe
Since 2002, FERMA along with AXA Corporate Solutions and Ernst & Young have conducted a survey on risk management in Europe. This year the survey had 555 respondents from more than 16 countries. The report summarizes the survey results and highlights a positive trend towards increased risk management maturity, the five families of risk management, early signs of bringing risk management and strategy together, moving towards more precise risk quantification and the future of the insurance cycle.
A Positive Trend towards Increased Risk Management Maturity
The survey has found that a majority of European companies have established policies, charters, and defined processes related to risk management. Companies are continuing to enhance their risk management fundamentals and narrow the execution gap that occurs from knowing the risk and determining how to handle the risk. The goal is to have risk management practices embedded in the day-to-day operations so companies can be better prepared when a risk issue occurs. European companies have realized that good internal practices can also help them meet external guidelines as well. By having risk management intertwined with operations, companies will now be able to respond to real-time situations more effectively and minimize losses and surprises.
Five Families of Risk Management
The report highlights five “families” (or stages) of risk management process maturity and summarizes the results about companies in each family:
Rules-driven companies represent 39% of respondents and are those companies that operate in a highly regulated sector. These companies often include financial institutions and public bodies.
- Balanced and sophisticated companies represent 26% of the survey respondents. These companies focus on balancing their shareholders’ interest in conjunction with compliance objectives. These companies are rather large firms and financial institutions.
- Fire fighters made up 18% of the survey respondents whose companies tend to focus on compliance and merely react to adverse events. These companies are limited to how much they can invest in risk management and are small to medium sized companies.
- Self-motivated companies represent 9% of survey respondents and focus on shareholders’ needs instead of regulatory forces and are private owned, mid-sized companies in commerce.
- Happy-go-lucky companies represent 8% of respondents and are companies new to risk management and have an unsophisticated risk management approach. These companies are small public bodies that have not seen a need for risk management in the beginning stages of development.
Early Signs of Bringing Risk Management and Strategy Together
Companies in Europe are realizing that for risk management to be truly effective it needs to be linked with real time decision-making strategies. Therefore, companies are seeing the increasing need to link risk management with their strategy planning activities. Self-motivated and balanced and sophisticated companies are the best at being able to link risk management and strategy decisions together.
Moving Towards More Precise Risk Quantification
It is important for companies to be able to quantify their risk. Companies quantify global corporate level risk, certain categories of risk, and certain activities or geographical locations of risk. The tools that companies decide to use depend on the type of risk they need to quantify. Most companies use internal databases and internal brainstorming, along with value at risk and scenario simulation models. The balanced and sophisticated and self-motivated companies use the most sophisticated techniques while the happy-go-lucky and fire fighter companies use the most basic techniques.
The Future of the Insurance Cycle
European companies will continue to use insurance to transfer risk. Traditional insurance companies are increasing the number of services they provide to companies. Companies are now increasing their deductibles and retentions as a loss prevention method.
As European companies move forward and become more mature in their risk management approach they will be expecting to see a tangible return on their investment other than being compliant with regulations. Companies will begin linking risk to performance, which will in turn improve the risk management process.
Citation: “Risk management benchmarking survey 2008” FERMA. Oct. 30, 2008
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