Enterprise Risk Management

ARM revisions reflect growing use of ERM

The Institutes revises core ARM courses to present a more enterprise-related approach

By Michael J. Moody, MBA, ARM

Enterprise risk management (ERM) is rapidly becoming the predominant approach to risk management for organizations in all business sectors. Initially it was limited to the financial service sector; however, over the past half dozen years, it has been expanding its scope of influence to all types of businesses, worldwide. As a result, there is a real gap in training regarding ERM. Certainly, the Risk and Insurance Management Society (RIMS) has been doing its part to spread the word regarding ERM, but additional training sources are necessary to address the educational needs.

For years, one of the primary sources for traditional risk management training has been The Institutes via its Associate in Risk Management (ARM) designation program. This three-course program has provided many risk managers with their first formal view of risk management. Recently, says Michael W. Elliott, CPCU, AIAF, senior director of knowledge resources at The Institutes, ARM program curriculum has been updated to reflect an ERM approach, while continuing to provide a base of knowledge on insurable (hazard) risks.

An enterprise view

For years, the nucleus of the ARM designation has been its three core courses: ARM 54—Risk Assessment (now titled Risk Management Principles and Practices), ARM 55—Risk Control (now titled Risk Assessment and Treatment), and ARM 56—Risk Financing. However, recently all three of these courses have been updated to reflect the changing role of management in dealing with an enterprise-wide view of risk.

For the past several years, The Institutes has also offered an Associate in Risk Management for Public Entities (ARM-P) designation program which was available upon the completion of the three core ARM courses plus RMPE 352—Risk Management for Public Entities. In 2009, The Institutes added a specific designation for ERM, which included completion of the traditional three-course ARM programs, plus passage of ERM 57—Enterprise-Wide Risk Management: Developing and Implementing. Successfully completing all four courses would lead to an Associate in Risk Management-ERM (ARM-E) designation. However, over this period, the three core ARM course materials had not been updated.

But recently, according to Elliott, The Institutes began to review the information in the ARM 54 course and came to believe that some major revision was needed. He points out that "in conversations with RIMS as well as some internal survey data of our own, we could see it was time for a change. Risk managers are being asked to look at all of the risks in their organizations. While most risk managers do not yet have the title of Chief Risk Officer, they are being required to take an enterprise view." It was clear they were "moving far beyond traditional insurable risks," says Elliott.

He adds that it was important to "orientate students who were taking ARM course work to the bigger picture." He points out that ARM 54 was the logical place to begin providing a "high level overview of ERM." The revisions resulted in "about 80% of the material being new," Elliott notes. And, rather than focusing on Risk Assessment, it now is a true overview of Risk Management Principles and Practices. It is designed to provide "enough information to understand what is going on today, issues that go beyond what traditional risk management ever looked at before." In addition to the traditional insurable (hazard) risks, the course addresses operational, financial and strategic risks. Also covered in ARM 54 is the interaction between risk managers and internal auditors, as well as the role of the board in risk oversight. Elliott points out that it's this risk oversight that is driving the ERM movement.

"Changes in SEC requirements where ERM practices must begin appearing in corporations' proxy statements have created significant interest in board oversight." Interest from rating agencies and other interested parties is also moving ERM acceptance forward.

Specific revisions

Among the more important changes to ARM 54 are:

• It has been significantly revised to reflect an enterprise-wide approach to commercial risk management.

• Content has been added on global risk management standards and guidelines (ISO 31000, COSO-ERM, etc.).

• Content has been added on hazard (insurable), operational, financial, and strategic risks.

• Commercial insurance policies are discussed from a global perspective.

• Application exercises are provided throughout.

These changes are reflected in the new ARM 54 course document titled Risk Management Principles and Practices which provides an excellent introduction to anyone who is searching for a starting point for gaining more knowledge regarding ERM. The ERM 57 course provides more in-depth ERM content; however, ARM 54 is a good starting point.

Additionally, ARM 55 (Risk Assessment and Treatment) has also been extensively revised. According to Elliott, "about 40% of the course material has been revised to coordinate with 54." He indicates that in reviewing the previous versions of the ARM texts, "we found there was some overlap in content between ARM 54 and 55. Also, the content covering exposure assessment was separated from the content covering control of those very same exposures. We found it more efficient to combine the discussion of assessment and treatment (an ISO 31000 term that is broader than 'risk control') into one course." Elliott points out, "To be up to date on risk exposures, we also needed to add content on new types of risk, such as climate change risk and cyber risk."

Specifically the following items in ARM 55 have been revised:

• It now combines the risk assessment content from the previous version of ARM 54 (Risk Assessment) with the risk control content of the previous version of ARM 55 (Risk Control).

• Content has been added on root cause analysis, business continuity, reputation risk, climate change risk, cyber risk, and international law.

• Application exercises are provided throughout.

Most of the contents of ARM 56 (Risk Financing) have remained basically the same. Only about 20% of the contents of ARM 56 were revised. Elliott notes that "most of the content in the previous version of ARM 56, such as self-insurance, retrospective rating, captive insurance, and reinsurance, only needed minor updates." He continues by pointing out that "most students found the financial risk section to be difficult to grasp, so we revised that section by first discussing traditional financial risk and its treatment through derivatives and securitization in one assignment. We then apply these concepts by discussing insurance derivatives and insurance-linked securities, including catastrophe bonds, in the assignment that follows. The previous version combined all these concepts into one assignment. Global content on structuring an international insurance program also has been added to the course."

The timing of the implementation of the revised courses should not be a concern to any student who is already involved with the ARM programs. According to Elliott, the online and print study materials for all three courses were released on October 15, 2012. He also notes that they will begin phasing in exams starting with the next testing period (January 15, 2013). "Students will have the option of taking an exam  based on the new material or the previous ARM material for the first two testing windows in 2013." However, he notes, "After June 2013, the previous material will no longer be used."

Conclusion

As an emerging discipline, ERM has made giant strides in many corporations, but there are still some people who, while interested, do not know how to proceed. Thanks to the revisions that The Institutes have made in their ARM courses, any interested person can pursue a designation that provides a grounding in ERM principles and treatment alternatives for various types of risks. It is obvious that the revisions have taken a great deal of work, but the end product includes an excellent overview of ERM and can provide any interested party with a current overview of this important topic.

The author

Michael J. Moody, MBA, ARM, retired as the managing director of Strategic Risk Financing, Inc. (SuRF), a firm that had been established to advance the practice of enterprise risk management. As a regular columnist, he continues to actively promote the concept of enterprise risk management by providing current, objective information about the concept, the structures being used, and the players involved.