Europe-Wide Risk Management

WHY HAS RISK BECOME SUCH AN IMPORTANT ISSUE FOR CFOS / FDS?

In a world where corporate governance and transparency is top priority, and where companies are looking for new challenges – new products and processes, new countries to sell to and in which to produce, M&A, a new regulatory environment – it is of utmost importance that CFOs / FDs are aware of all new risks coming to their companies and how to deal with these risks, so that the companies can protect their balance sheet and comply with increased reporting obligations.

WHAT TYPES OF RISK ARE OF MOST CONCERN TO CFOS / FDS?

Dependent on the activity of their companies a first priority in risk management may reside in dealing with property risks (e.g. in the paper industry), but most of all on possible business interruption after property claims, or on liability risks (e.g. in the pharmaceutical industry). New risks have emerged, too, such as 'reputational risks' (which can be managed through good communication in the event of a major problem), and executive liability (e.g. directors and officers' liability, pension trust liability, employment practices liability). Also the whole area of cyber risks, linked with the Internet and sales through this channel, may create new areas of risks, with knock-on effects in the area of fraud and crime. Producing in far-away countries like China can offer new opportunities, but also new types of risk.

WHAT DIFFERENT APPROACHES TO RISK EXIST ACROSS EUROPE AND THE WORLD?

The basic way to approach risk is through a risk management standard that will guide you through the different steps. The father of all risk management standards is to be found in Australia (Australian / New Zealand Standard). In Europe, the better-known risk management standard is the FERMA, Airmic, Alarm and IRM Standard of 2002. This standard explains the process needed to start and fulfil the risk management process.

The integrated framework on COSO enterprise risk management (AS/NZS 4360:2004) gives a detailed description of the risk management framework, with emphasis on business risk. This framework provides:

• Key principles and concepts
• A common language
• Clear direction and guidance

WHY SHOULD FDS / CFOS LOOK AT ADOPTING AN ERM STRATEGY?

As the largest risk can be hidden in the smallest part of a group, it is important to approach risk management in a global manner, over all companies of the group and all risks. Based on a clear strategy of identifying and improving risk positions, the CFOs / FDs can then, in the final step of transferring risks, opt for an optimisation of this risk-financing through establishing a 100% (re)insurance company of the group (captive) to cover parts of these 'rest' risks.

FERMA AND ITS RELATIONSHIP WITH THE EU

FERMA brings together the national risk management associations of 12 countries to form the Federation of European Risk Management Associations.

FERMA's mission is to coordinate the best practice guidelines and approach to risk management throughout Europe. It has adopted the risk management standard which is now translated in 14 languages.

FERMA represents the interests of European industry with respect to risk management issues and is part of the decision-making process at European level, for instance on the Environmental Directive (avoidance of mandatory insurance / participation in experts group), the Reinsurance Directive (specific status for reinsurance captives has been negotiated), enquiries from the DG Competition on market practices, and FERMA acts as an expert on risk management issues for the Commission during seminars in acceding countries.

For the third edition, FERMA will organise the risk management benchmarking to establish the status and trends of risk management in Europe, and will present the results during its October seminar (supported by Ernst & Young and Axa Corporate Solutions).

Every second year, the forum gathers the whole of the European risk management community during a major conference. FERMA is launching a European risk management course called PRORIM in October 2006, which will be an e-learning distance course (supported by the Leonardo da Vinci project).