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June 03, 2010
ERM: Is it possible to merge 2 worlds?
Risk dynamics makes Enterprise Risk Management "ERM" an extremely hot topic, attracting students, researchers and practitioners who continuously look for ways to make their activities more accountable and understandable by the rest of the world.
What remains a puzzle, is that currently 2 worlds co-exist in the ERM universe:
The world of ERM in Financial Institutions brought to life by mathematicians, actuaries, financial engineers and other “soft-sciences” professionals developing systems to assess, quantify and manage credit, liquidity, market and operational risks based in capital sufficiency models, and
The world of ERM in non Financial Institutions brought to life by chemical, financial and risk engineers and other “hard-sciences” professionals developing systems to assess, quantify and manage operational and catastrophic risks based in maintenance, operational and physical concepts.
Many ERM concepts, systems and methodologies have been tested, others are being developed, some have proved to be flawed and many are currently in some people’s dreams.
Is it possible to build bridges between these 2 ERM worlds?
In the end, in each world, the same earthlings (not different beings) are striving every day for a similar outcome: Improve the human ability to predict the consequences, timing and probabilities of uncertain events.
Such co-existence has diverted into 2 quite distinct professional profiles, which group themselves in also distinct professional associations. Professional organizations such as PRMIA and RIMS “Risk and Insurance Management Society”, just to mention 2 of the most important professional associations rising in the need to manage risks.
• RIMS has 80 chapters: 68 in the US, 10 in Canada, one in Japan and one in Mexico.
• PRMIA has a diversified global membership of more than 68,945 members in 198 countries represented by 60 chapters in major cities around the world
• RIMS is focused on risk management originated by insurance buyers and is dominated by non financial institutions.
• PRMIA is focused on risk management originated by financial engineers and is dominated by financial institutions.
This division also happens in many other regions, like in the UK and Latinamerica, just to name a few.
Is it possible for PRMIA and RIMS to start discussions about setting common goals?
If we, risk practitioners, want to see a real and positive influence of ERM in the future world, we need to show that ERM can help address many problems. But currently, the efforts are diluted with so many angles and perspectives that ERM itself has become a problem to justify!
Closing the gap between PRMIA and RIMS, I see the SOA “Society of Actuaries” and the CAS “Casualty Actuaries Society”. Both actuarial associations share events and activities with PRMIA and RIMS.
Can the CAS or the SOA serve as catalysts to see ERM evolve into real enterprise-wide or corporation-wide ERM?
In the meantime, if anyone reading this blog has seen or thought of an approach, experienced discussions or epiphanies about the potential fusion of these 2 worlds, the one of ERM in Financial Institutions and the other of ERM in non-financial Institutions, don’t be greedy, please share it!
Posted by Gustavo at June 3, 2010 10:10 PM
Probably PRMIA and RIMS use common quantitative methods but they operate in different markets. If they merge a specialisation option must be provided. Also, a global professional crisis may emerge where accountants and academic graduates claim to master all fields as the market cannot differentiate between accounting,finance,risk management,actuary and enterprise
Posted by: Tapiwa Mukwapuna at June 8, 2010 02:33 PM
Hey Great points that your are making...You only spoke of North America..the same situation replicates itself in other parts of the world.
Well, I think that it will be hard to realize..
Actuarial professions have their ERM focus solely on quantification...they only dream of quantifying everything..all they care about is capital...risk management is really second!
Acccoutants, through COSO, dream of implementing controls everywhere..that is their forte..and that is all they care about, hoping for more consulting contracts! Think of SOX!
RIMS and all those insurance brokers, who support that organization, all they care about is sell insurance for some unrecognized risk that some companies might discover...that is all they care about..so that they can make more money!
So, maybe the only way, would be for some public purpose to come out, where, as a matter of public policy and interest, it would be judged to be in the interest of society to bring those perspectives together in a more coherent approach...In the latin world, this would be under the creation of a Professional Body...
In the mean time, just get the most from each of them and use whatever seems appropriate to analyse and manange your own risk situation...
Posted by: Michel at June 25, 2010 07:11 PM
I agree with the basic contention of fusion of the two world. This will strengthen the practices and may lead to optimise the best risk management tools. Financial and non-financial world not only interact continuously, but are also affected almost simultaneously by the similar risk factors. However, if you see closely ,the impact on financial world is much more speedily and severe. Non-financial institutions have slow impact and there are other aspects to safeguard them. This results in different approaches to ERM. Actual difference is between discrete and continuous change factors. So, quantitative tools are slightly different.
While making effort towards unifying the two worlds, this difference must be remembered by every practitioner
Posted by: Kaushal Kishore at July 2, 2010 09:10 AM
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