The drivers and value of enterprise risk management: evidence from ERM ratings (original) (raw)
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The Value of Investing in Enterprise Risk Management
Journal of Risk and Insurance, 2014
Using a survey of risk management practices in the insurance industry we examine the impact of enterprise risk management on firm performance. We find enterprise risk management improves firm operating performance. Firms with Chief Risk Officers, dedicated risk committees, and risk management entities that report to Chief Financial Officers experience higher cost efficiency and return on assets. Confidence that risk is reflected in their business decisions is also positively related to firm performance. We also find life insurers benefit from the development and use of economic capital models to a greater extent than property-casualty insurers. Even simple economic capital models improve the performance of life insurers.
2013
This paper addresses two critical questions related to the performance of Enterprise Risk Management (ERM): whether its implementation adds value to the firm and whether it undergoes stages in order to mature. It confirms both arguments: that ERM creates value when the infrastructure is fully embedded within a company’s operations, and it matures. When using the traditional methods for measuring value creation in non-life insurance, the combined and operation ratios fail to capture the benefits of ERM in a consistent manner. The more scientific measure, return on capital and surplus, which takes a portfolio view of performance, better captures the benefits of ERM than the traditional one. The results confirm the need to treat the implementation of risk management in a holistic manner if the true benefits are to be realized. Therefore, the quality of value creation depends on the level of integration of risk into the operations, underwriting, investment, human resources, reporting, c...
Risk and Financial Management, 2021
This study aims to examine and analyze the ability of the ERM (enterprise risk management) to mediate the influence of the firm size, leverage, profitability, and institutional ownership on the firm value of the insurance sub-sector listed on the Indonesia Stock Exchange for the period 2015-2019. This study used 12 samples from 16 insurance companies listed on the IDX in 2020 that met the criteria for purposive sampling. The data were processed using a path analysis approach. The results of the research show that firm size has a significant positive effect on ERM, DER and ROA has a significant negative effect on ERM, and institutional ownership were found to have no effect on ERM. Meanwhile, DER and institutional ownership have a significant negative effect on firm value, while firm size and ROA have no effect on firm value. Using the Sobel Test it was found that ERM as an intervening variable was unable to mediate the effect of firm size, DER, ROA, institutional ownership on firm v...
International Journal of Engineering Technologies and Management Research, 2019
Enterprise risk management (ERM) has gained an increased attention among the corporate managers in the recent past as a strategic approach to managing risk. This study empirically verifies whether the adoption of ERM has an impact on firm performance and uses both primary and the secondary data relating to the insurance companies listed on the Colombo Stock Exchange. Return on equity (ROE) is used as a proxy to measure the firm performance and multivariate regression analysis is used to analyze data. The findings of this study suggest that there is a weak positive relationship between the adoption of ERM practice and the return on equity. Out of the eight ERM functions assessed, only 'event identification' and 'control activities' show a weak positive relationship with ROE. Other ERM functions indicate that there is a weak negative relationship with ROE. The findings of this study contradict with some scholars who find there is a significant positive relationship between adoption of ERM and firm performance. Owing to the contradictory nature of the findings, this study induces corporate managers to pay a close attention to the cost-benefits analysis when designing and implementing ERM system and not to heavily invest and extensively relied upon ERM as a vehicle for creating long-term shareholder value.
Enterprise Risk Management and Firm Performance
Increased volatility in the business world has exposed the inadequacy of traditional but fragmented approaches to risk management. This has led to an integrated approach to measuring and managing risks known as enterprise risk management (ERM). While past studies of ERM disclosures have examined it within the context of corporate governance and internal control, its relationship to firm performance has received little attention. While business performance changed radically between 2008 and 2009 during the financial crisis and economic recession, only minor increases in risk exposure, risk consequence or risk management strategies were found from 2007 to 2008. ERM information did not predict or have any appreciable effect on business performance.
Does enterprise risk management influence market value – A long-term perspective
Risk Management, 2016
This article explores if and how Enterprise Risk Management (ERM) influences market values of large US non-financial companies in the period from 2003 to 2012. This is the first empirical study that brings evidence on the effect of ERM on the value of non-financial companies and that explores not only the market reaction to the ERM announcement, but also the investors' perception of long-term ERM usage. Our research shows evidence that ERM has a positive effect on the market value for a short period of time following the announcement of ERM implementation. After 2.67 years, the market premium for ERM companies fades away, so a company does not have a higher market value just because it has ERM. Our results indicate that ERM does not contribute to a company's market value in the long term.
Enterprise Risk Management and Firm Performance Validated Through 2
— Enterprise Risk Management (ERM) is an essential technique, used to manage a myriad of risks in a holistic manner. This paper presents an ERM implementation framework which is operationalized by fourteen elements. It highlights the impact of ERM towards the firm's performance measured through Economic Value Added (EVA) factors. The research design incorporates descriptive and cross-sectional analysis. Data was collected from 120 public listed companies in Bursa Malaysia through questionnaires survey. Results of the empirical analysis show that ERM implementation has significant positive impact on firm's performance. The results support the hypothesis that the firms which implements ERM will enhance their performance as validated through the perceived measurement of EVA factors. This study offers a perspective of measuring ERM implementation impact through EVA factors as compared to the accounting measures.
Risk is inherent to all functions of a business. Enterprise risk management (ERM) is for the measurement and the management of all significant risks of the business holistically irrespective of types and sources. Consequently, the portfolio of enterprise risk includes both objective and subjective elements. Two key benefits of ERM-i.e., shareholder value creation and securing competitive advantage-have been derived from the empirical study. The traditional financial approach, e.g., Economic Value Added, was found inadequate to measure the performance of ERM. The Balanced Score Card is adopted to identify the other value drivers of the firm and framing appropriate communication strategies. Finally, a conceptual framework of measuring the benefits of ERM has been proposed. The study offers significant advances in the current debate on the performance of enterprise risk management, in particular, minimizing the existing gap between the academic understanding and practitioners' experience on the topic.
Canadian Center of Science and Education, 2018
This study explores the impact of the adoption of enterprise risk management (ERM) practices on firm performance. A sample of forty five banking and finance companies listed on the Colombo Stock Exchange (CSE) was selected for this study and uses both primary and secondary data for the empirical analysis. The extent of adoption of ERM practices was assessed by using the ERM integrated framework of committee of sponsoring organization (COSO) of the Treadway Commission of USA. Return on equity (ROE) is used as a proxy to measure the firm performance and uses multivariate regression analysis to assess the impact of key ERM functions on firm performance. This study finds none of the eight key ERM functions suggested by the COSO's ERM integrated framework has a significant impact on firm performance. Event identifications, risk assessment, risk response and information & communication indicate a positive impact on firm performance. However, none of those impacts were significant. Surprisingly, empirical evidence reveals that objective setting; event identification, control activities and monitoring of ERM functions have a negative, but not significant, impact on the firm performance. These findings induce the corporate managers to pay a close attention to the cost-benefits considerations when designing and implementing ERM practices and not heavily relied upon and extensively invest on ERM as a vehicle for creating firm value.
Impact of Enterprise Risk Management Practices on Performance of insurance companies in Sri Lanka
International Conference on Business and Information ICBI 2020(online), University of Kelaniya, 2020
Enterprise risk management (ERM) has gained an increasing attention among the corporate managers in the recent past as a strategic approach to managing risk. This study empirically verifies whether the adoption of ERM has an impact on firm performance and uses both primary and the secondary data relating to the Sri Lankan insurance companies. 230 executive level employees from 26 Sri Lankan insurance companies have been selected as the sample of this study using stratified random sampling technique and primary data were collected using a structured questionnaire. Return on Assets (ROA) and Tobin"s Q are used as proxies to measure the firm performance and ERM practices have been measured based on the guidelines of COSO ERM framework. Descriptive statistics, Correlation analysis and regression analysis are used to analyze data. Results of the mean testing reveals that three components of COSO ERM framework namely, Internal Environment, Objective setting and Risk Assessment indicate a high level of practice. Further, correlation analysis indicates two independent variables namely, control environment and Information & communication have a significant relationship with ROA. At the same time, two independent variables namely, objective setting and Information & communication have a significant relationship with Tobin"s Q. Hypotheses testing identified that Control activities; Information & communication and monitoring are the most crucial variables which have a positive impact on the performance of the insurance industry. These results indicate that, even though the level of implementation of ERM practices in Sri Lankan insurance industry is moderate / high levels, the other than Control activities, Information & communication and monitoring all other five components are not showing significant impact towards the performance. It implies that the expected value addition from the ERM practices have not been achieved by the Sri Lankan insurance companies yet. Findings of this study contributes methodologically as researcher used robust model to measure ERM practices and the results may be helpful to Insurance companies in Sri Lanka to improve their ERM practices and to adopt efficient strategies to improve firm financial performance through the implementing proper ERM practices.