Research On Improving The Establishment Of The Enterpirse-wide Risk Management (ERM) Framekwork

Enterprise-wide risk management (ERM) is the latest generation of riskmanagement framework which differs from traditional risk management.According to Chun-hwa credit rating agency’s data, the ERM practices of Taiwan’sproperty and casualty insurance industry based on Standard and Poor’s rating criteriais at “adequate,” behind excellent and strong. Therefore, one of the objectives ofthis research was to understand and identify the existing ERM framework in theTaiwanese property and casualty insurance industry and how it differs frominternational standard to provide to the Taiwanese and Mainland Chinese insuranceregulatory agencies as a reference in promoting and monitoring the establishment ofthe ERM framework in their respective regions. In addition, from a comprehensiveview, understand the development of ERM framework in other international propertyand casualty insurance industries. In all, this research offers a proposal onimproving the establishment of the ERM framework for Taiwan’s property andcasualty insurance industryThis paper uses two kinds of research methodology: First, through literaturereview method to examine various relevant literature, including: corporategovernance, risk theory, corporate value, risk management culture, objective of ERM,risk identification, risk appetite, risk assessment, risk response, control activities,information and communication, and monitoring and auditing. Second, thequestionnaire and interview research method. This method differs from a samplingsurvey method in that the subject in this research are targeted companies, not randomsampling. A two-stage research method is used. First, questionnaires were mailout to14Taiwanese property and casualty insurance companies, then therespondents from their respective companies were interview to insure its accuracy.In addition, as ERM frameworks are tailor made in nature, it is not appropriate forstatistical inferring population by using a small sample size. The results fromanalyzing the data received from the14effective questionnaire collected only represents the current status of the14property and casualty insurance companies.The purpose of this research is not intended to extrapolate these results to representthe Taiwanese property and casualty insurance industry as a whole, and thereforeeliminates the problem of confidence level in this research. The questions in thequestionnaire survey were designed based on Standard and Poor’s method ofevaluating the ERM practices of property and casualty insurance companies.By using the Statistical Package for Social Studies (SPSS) software to analyzethe current status of the ERM framework for the14Taiwanese property and casualtyinsurance companies, the results derived by using descriptive statistical analysisshowed a large gap between the current status of the subject companies andinternational standards. The4main problems are as follows:1. Lack of risk management culture, including:i. Under-qualified risk management professional and compensation notaligned to risk management performance;ii. Lack of integration of risk management and corporate governance;iii. Lack of understanding of the risk management model at themanagement level;iv. Lack of risk management training and training program;v. Neglect risk management as a competitive tool;vi. Inadequate disclosure of risk management information;vii. Inadequate risk management documentation;viii. Poor integration of risk management and business objectives;ix. Inappropriate allocation of risk management responsibility.2. Inadequate levels of internal risk control, including:i. Inadequate risk identification;ii. Weak risk auditing;iii. Inadequate budget controls.3. No integration between risk management and capital management.4. Neglect on strategic management.Furthermore, this study showed a number of factors that significantly influencethe establishment of the ERM framework. Meanwhile, they can explain99.8%of the variance for return on asset. These factors include:First, there are5factors that influence risk appetite level: return on asset, returnon capital, return on risk capital, total assets, and reinsurance premium.Second, claim retention is the main factor that influence the number of riskmanagement professionals from obtaining certificates.Third, claim retention influences risk auditing.Forth,3factors are shown to influence risk limit and rules: return on asset,return on capital, and return on risk capital.Fifth, claim retention will influence management control.Sixth, there are4factors that influences scenario analysis of extreme event,they are: return on asset, return on capital, return on risk capital, and total assets.The strategies for improving the establishment of the ERM framework for the14Taiwanese property and casualty insurance companies based on the problemsidentified above are as follows:1. Improve the quality of risk management culture, this includes:Strengthen risk management culture awareness;i. Encourage employees to take risk management related professionalcertificate exams;ii. Implement corporate governance in accordance with regulatoryrequirements;iii. Strengthen management’s understanding of the risk managementmodel;iv. Improve risk management training and training program;v. Improve disclosure of risk management documentation;vi. Improve documentation of risk management documents;vii. Align risk management and business objectives.2. Strengthen internal control, including:i. Increase risk management professional’s risk identificationcapabilities;ii. Implement a standardized risk auditing system;iii. Strengthen budget controls. 3. Integrate risk management into capital management.4. Emphasize on the importance of strategic risk management.Lastly, this research provides some insight for China’s property and casualtyinsurance industry. They are as follows:1. Strengthen the quality of risk management culture;2. Solidify the integration of risk management into capital management.