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ERM failings fuelled GFC

ERM failings fuelled GFC

RMIA president Brian Roylett has blamed a lack of positive risk management culture for contributing to the global financial crisis.Many organisations have failed to adopt effective…

RMIA president Brian Roylett has blamed a lack of positive risk management culture for contributing to the global financial crisis.

Many organisations have failed to adopt effective enterprise-wide risk management cultures and behaviours, adding fuel to the global financial crisis, according to Risk Management Institution of Australasia (RMIA) president, Brian Roylett.

Speaking at a recent Lloyd's of London business briefing, he maintained that there had been no systemic failure of risk management as a business discipline but, rather, "perhaps we have failed risk management".

Roylett criticised some boards of directors which, during unprecedented economic growth and profitability, had begun to reward executive management for achieving outstanding financial performance without due consideration to the "risk and opportunity equation - the higher the financial returns the greater the risks to the organisation".

However, he noted that not all organisations in a particular industry group, including the financial services sector, had sustained identical fates during the crisis.

"Many major corporations have demonstrated true organisational resilience during difficult times, primarily due to reinforcing a sound, enterprise-wide risk management culture across all business activities of the organisation," he said.

Roylett urged organisations to create a liability risk management culture and adopt enterprise-wide risk management standards, guidelines and frameworks.

"Develop the internal competencies to effectively manage liability risk exposures and determine the organisation's risk thresholds - that is, the capacity of the business to retain financial risk and manage appropriate levels of retained risk," he said, adding that the status of the insurance market cycle influenced the degree to which organisations implemented effective liability risk management, practices and procedures.

"During intense market competition among underwriters, an organisation's liability risk management plan may have minimal influence on premiums."

He maintained that soft market conditions created an internal impression within insured organisations that an effective liability risk management capability was not a determining factor in setting premium pricing, resulting in less emphasis on liability management and controls. Hardening market conditions created a "temporary" focus on liability risk management, often resulting in superficial measures being implemented to satisfy underwriters' requirements, he said.

- Mark Phillips

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ERM failings fuelled GFC
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