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Governance, ERM
   and Key Risks for 2012

FERMA European Risk Management
   Benchmarking Survey 2012

     Jean-Michel Paris, Ernst & Young
A shifting regulatory
1.   environment

2. Risk governance
3. Risk convergence?
4. Risk priorities
1.   A shifting regulatory
         environment
Major external factors
                                      triggering Risk Management

                                                                       Legal, regulatory or
                                                             61%       compliance requirements



As in the 2010 and 2008 study (see next page), compliance        33%   Clear requirements from shareholders
and legal requirements remain the main external factors
triggering Risk Management within companies.
                                                                 31%   Corporate social responsibility
Corporate social responsibility is still a key concern
especially for listed companies while catastrophic events
are less considered as a main trigger compared to 2010.          26%   Catastrophic event




                                                                 19%   Major insurance issue


                                                            17         Pressure from market
                                                                       %


                                                            14         %nalysts / rating agencies pressure
                                                                       A


   * Multiple choice question
Major external factors
                             triggering Risk Management




* Multiple choice question
A brief reminder on
                               the 8th EU Directive


           Boards are to…
           “monitor the effectiveness of the
           risk management and internal control
           systems”




* Multiple choice question
Impact of the regulatory
                                  environment: 8th EU Directive
                                      Overview of impacts

                 Most impacted
                 Least impacted




  The impacts of the EU 8th Directive are still poorly assessed and understood by a large
                        number of Risk and Insurance Managers.

* Multiple choice question
Impact of the regulatory
                           environment: 8th EU Directive
                                 Impacts on Executive Committees
Sufficient time available on the Executive               Executive Committee informed of major risks
Committee agenda to present the results of               of the company or group at each level?
Risk Management reviews?
                                                                           62%
                63%                                                                     Most
                                                                                        informed




               Definition of the risk appetite by the
               Executive Committee?
                                                         Approval of risk appetite by
                                                         the Board?



                                             53%


                                                        100%

                             Most positive



    Executives Committees still slow to take effects of EU 8th Directive on board
Impact of the regulatory
                           environment: 8th EU Directive
                               Impacts on Executive Committees

Managers formally made responsible for each     Risk Management function incorporated into a
risk?                                           "corporate governance division" with internal
                                                control, internal audit, ethics/compliance?



                                                                                 Least incorporated

  80%




                                                                       9%




 More than two thirds of respondents indicate that identified risks are attributed to
              managers who are responsible for their management
Impact of the regulatory
               environment: 8th EU Directive
                    Country focus
% of answers
2.   Risk Governance
Mandate of the Board, Audit
                             and/or Risk Committee
                     A limited scope and a mandate to be clarified

% of answers                                                                          CAPTION
                              Most advanced
                                                 Mandate of the Board, Audit and/or Risk Committee:
                              Least advanced
                                                           1) Monitor the effectiveness of the Risk Management system
                                                           2) Monitor and ensure the compliance of Risk Management
                                                              framework
                                                              with respect to standards / local regulations
                                                           3) Challenge the company’s risk appetite
                                                           4) Challenge the company’s Risk Management strategy
                                                           5) Challenge residual risk exposure and relevance of existing
                                                              mitigation actions

                                                 Emerging: no criteria included
                                      Maturity
                                                 Moderate: 1 or 2 criteria included
                                                 Mature: 3 or 4 criteria included
                                                 Advanced: all criteria included




   The mandate assigned to the Board, Audit and/or Risk Committee remains limited to
                        specific areas (55%) or unclear (10%).
Board oversight
                                A close and regular relationship

% of answers                                                                  CAPTION
               Most advanced
               Least advanced                      Emerging        Moderate             Mature      Advanced

                                                  No              Interaction      Topic of Risk   Risk
                                                  mechanism       with these       Management      Management
                                                  in place to     Committees       dealt with at   completely
                                                  ensure Risk     on an as         least on an     embedded in
                                                  Management                       annual basis    reporting to
                                                                  needed basis
                                                  interaction
                                                                                                   the Board
                                                  with the
                                                  Board of
                                                  Directors /
                                       Maturity   Supervisory
                                                  board / Audit
                                                  Committee




  Risk Management activity is globally correctly embedded in reporting to “the board”
(79%) and Risk Management topic is generally formally addressed by the board at least
                                 on an annual basis.
Risk management
                                                             - Reporting line
                                Increasing reporting at Top level


                                                                             CAPTION
% of answers
               Most advanced
               Least advanced                      Emerging         Moderate             Mature/Advanced

                                                 Reports to       Reports to       Reports to Audit (and/or risk)
                                                 other function   CFO, General     Committee, Board
                                                 or department    counsel/Head     of Directors/Supervisory Board,
                                                                  of Legal         CEO/Managing Director or
                                                                  Department,      General/Company secretary
                                                                  Head of
                                                                  Internal Audit


                                      Maturity




Risk Management function globally reports at Top Management level (93%), but reporting
at CFO level (36%) still remains widespread among certain countries such as Italy (59%),
                               Germany (55%) and UK (41%).
Independent assessment of
                       risk management framework
                  Towards a growing involvement of Internal Audit

% of answers                                                                  CAPTION
                             Most advanced
                             Least advanced
                                                  Emerging              Moderate / Mature                Advanced

                                                  No             Partially independent assurance        Complete
                                                  independent    provided                               independent
                                                  assurance      in collaboration with others parties   assurance
                                                  provided by                                           provided by
                                                  the Internal                                          Internal Audit
                                                  Audit


                                       Maturity




    Globally, Internal Audit is increasingly involved in the process of providing an
independent assurance on the quality/efficiency of the Risk Management system but its
                               role could be strengthened.
Risk governance
               Country focus (advanced practices)

% of answers
3.   Risk Convergence?
Alignment of
                             Risk management functions
                        Foundations in place for further coordination

% of answers                                                                      CAPTION
                           Most advanced
                           Least advanced
                                                     Emerging                Moderate/Mature       Advanced

                                                   Risk functions    Some coordination exists     Full risk
                                                   (risk mgt,        between the different risk   functions
                                                   internal audit,   functions                    coordination
                                                   internal                                       in place
                                                   control, EHS,
                                                   quality,
                                                   compliance)
                                                   are working
                                        Maturity   independently




    The different risk functions are no longer working “in silos”, however their level of
                                coordination remains limited.
Alignment of
                                       Risk management functions
                                            Coordination but no integration
                                                              CAPTION
 % of answers                                                                           % of answers
                                                                                                       Mature and Advanced Integration
                Most advanced
                Least advanced                  Emerging/        Mature     Advanced
                                                Moderate

                                             No or limited      Risk        Very
                                             integration of     Manage      close
                                             Risk               ment is     integrati
                                             Management         closely     on of
                                             with other         cooperati   Risk
                                             functions          ng with     Manage
                                                                other       ment
                                                                functions   with
                                                                            other
                                 Maturity
                                                                            functions




Risk Management works closely with other departments but integration is not systematic
Risk management
                                                organisation
Relationships between Insurance Management, Internal Control and Internal Audit




       Risk and Insurance Management: The most common partnership
Alignment of
                            Risk management functions
                                                          Coordination but no
                                       Sustainability /
                                       Sustainable
                                                              integration
                                       Development
Mergers and
Acquisitions




               Insurance
               Management


               Legal       RM
                                  Internal
                                  Control/
                       Business Internal Audit
                       Continuity
                                                          Risk Management first-rank partners
                                                          Close (3) or very close (4) relationship >
                                                          60%
                                                          Risk Management second-rank partners
                                                          Emerging (2) relationship >30%

                           Investor                       Risk Management third-rank partners
                           Relations                      No relationship (1) > 20%
Risk management
                                                              and Internal Audit

                  A growing relationship but still too limited synergies
% of answers                                                                         CAPTION
                          Most advanced
                          Least advanced
                                                        Emerging          Moderate             Mature     Advanced

                                                      No particular     Mutual            Coordination   Very close
                                                      relationship      reporting –       and            relationship
                                                      between Risk      coordination/     cooperation    between the
                                                      Management        cooperation       on the audit   two functions
                                                                        on a limited      plan
                                                      and Internal
                                                                        basis
                                                      Audit
                                                      functions
                                           Maturity   and/or
                                                      separate
                                                      reporting lines



  A minimum level of coordination between the two functions is now in place for most
                                European companies.
Alignment of
               Risk management functions
               Country focus (advanced practices)
% of answers
4.   2012 Risk Priorities
Risk management remit
2012 Risk importance
Top 5 Risks
2012 Risk priorities
                                                                     Risk importance
                                                              2012        2010     Variation
Competition, clients, partnerships, market strategy,
market
                                                              53%         53%          0%
Compliance, legislation, policy, regulations (national and
international)
                                                              37%         45%          -8%
Financial: interest rate & foreign exchange, debt, cash
flow, sovereign debt
                                                              36%         31%          5%
Reputation (social media, communication)                      33%       New 2012   New 2012
Planning and execution                                        29%         33%          -4%
Market risks (commodity price shocks, real estate market
                                                              29%         14%          15%
volatility)
Supply chain, business continuity                             26%         31%          -5%
Production, quality, cost cutting                             24%         32%          -8%
Human resources / key people, social security (labour)        21%         15%          6%
Political, expansion of government's role                     21%       New 2012   New 2012
IT / IS / data                                                20%         23%           -3%
Safety, health and security                                   19%         22%           -3%
Corporate governance                                          17%         20%           -3%
Assets (buildings, equipment)                                 17%         24%           -7%
Ethics, corporate social responsibility, fraud                17%         17%           0%
Social, economical issues                                     16%         30%          -13%
Environment, sustainable development, climate change          13%         16%           -3%
Product design, safety and liability                          12%         20%           -8%
Access to credit                                              11%         17%           -6%
Treasury                                                      10%          7%           3%
Internal control                                              10%         11%           -1%
Liability(ies) of the company or corporate directors and
officers
                                                              9%          12%          -3%
Civil, general, professional, criminal or cyber criminality   7%          10%          -3%
Dynamics, M&A                                                 6%           9%          -2%
Assets (cash, intellectual property)                          5%           9%          -4%
Risk Appetite
                                                                                                          by risk category
Companies’ risk appetite driven by risk category rather than risk significance
           60%
                 Risk taker zone                                                                                      No tolerance zone
                 High impact risks                                                                                    High impact risks

                                     Competition & market                                                   Strategic&Corporate Governance
                                                                                                            Financial
           50%
                                                                                                            External
                                                                                                            Operational
                                                                                                            Compliance& Ethics


           40%
                                                                                                                Compliance
         e                                                                   Financial
         c
         n
         a                                 Planning and          (interest rate & foreign
                                                                 exchange, debt, cah flow…)        Reputation
         t
         r 30%                              execution
         o                                               Supply chain,
         p                Market risks
         m
         i                                             business continuity
                                                                                    Production, quality
         k
         s
         i                                                      HR & social
         R 20%                                                   security                                              Safety, health & security
                 Political, expansion of                                          IT / IS / data
                                                     Social, economical                             Corporate
                  government's role
                                                            issues                                 governance
                                                                          Environment,
                                     Assets (buildings,                                                                       Ethics, Fraud, CSR
                                                                           sustainable Product design
                                       equipment)
                                                                          development                 Treasury
           10%                                      Access to credit
                                                                                                    Internal control
                                                                                        Liability(ies)
                                                                                                        Civil, general,
                 Risk taker zone               Dynamics, M&A
                                                                  Assets (cash, intellectual             professional No tolerance zone
                 Lowimpact risks                                          property)                                     Lowimpact risks
           0%
                                                                          Riskaverse

                                                                      Riskappetite

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Ferma survey part 2 - governance enterprise risk mnagement and key risks for 2012

  • 1. Governance, ERM and Key Risks for 2012 FERMA European Risk Management Benchmarking Survey 2012 Jean-Michel Paris, Ernst & Young
  • 2. A shifting regulatory 1. environment 2. Risk governance 3. Risk convergence? 4. Risk priorities
  • 3. 1. A shifting regulatory environment
  • 4. Major external factors triggering Risk Management Legal, regulatory or 61% compliance requirements As in the 2010 and 2008 study (see next page), compliance 33% Clear requirements from shareholders and legal requirements remain the main external factors triggering Risk Management within companies. 31% Corporate social responsibility Corporate social responsibility is still a key concern especially for listed companies while catastrophic events are less considered as a main trigger compared to 2010. 26% Catastrophic event 19% Major insurance issue 17 Pressure from market % 14 %nalysts / rating agencies pressure A * Multiple choice question
  • 5. Major external factors triggering Risk Management * Multiple choice question
  • 6. A brief reminder on the 8th EU Directive Boards are to… “monitor the effectiveness of the risk management and internal control systems” * Multiple choice question
  • 7. Impact of the regulatory environment: 8th EU Directive Overview of impacts Most impacted Least impacted The impacts of the EU 8th Directive are still poorly assessed and understood by a large number of Risk and Insurance Managers. * Multiple choice question
  • 8. Impact of the regulatory environment: 8th EU Directive Impacts on Executive Committees Sufficient time available on the Executive Executive Committee informed of major risks Committee agenda to present the results of of the company or group at each level? Risk Management reviews? 62% 63% Most informed Definition of the risk appetite by the Executive Committee? Approval of risk appetite by the Board? 53% 100% Most positive Executives Committees still slow to take effects of EU 8th Directive on board
  • 9. Impact of the regulatory environment: 8th EU Directive Impacts on Executive Committees Managers formally made responsible for each Risk Management function incorporated into a risk? "corporate governance division" with internal control, internal audit, ethics/compliance? Least incorporated 80% 9% More than two thirds of respondents indicate that identified risks are attributed to managers who are responsible for their management
  • 10. Impact of the regulatory environment: 8th EU Directive Country focus % of answers
  • 11. 2. Risk Governance
  • 12. Mandate of the Board, Audit and/or Risk Committee A limited scope and a mandate to be clarified % of answers CAPTION Most advanced Mandate of the Board, Audit and/or Risk Committee: Least advanced 1) Monitor the effectiveness of the Risk Management system 2) Monitor and ensure the compliance of Risk Management framework with respect to standards / local regulations 3) Challenge the company’s risk appetite 4) Challenge the company’s Risk Management strategy 5) Challenge residual risk exposure and relevance of existing mitigation actions Emerging: no criteria included Maturity Moderate: 1 or 2 criteria included Mature: 3 or 4 criteria included Advanced: all criteria included The mandate assigned to the Board, Audit and/or Risk Committee remains limited to specific areas (55%) or unclear (10%).
  • 13. Board oversight A close and regular relationship % of answers CAPTION Most advanced Least advanced Emerging Moderate Mature Advanced No Interaction Topic of Risk Risk mechanism with these Management Management in place to Committees dealt with at completely ensure Risk on an as least on an embedded in Management annual basis reporting to needed basis interaction the Board with the Board of Directors / Maturity Supervisory board / Audit Committee Risk Management activity is globally correctly embedded in reporting to “the board” (79%) and Risk Management topic is generally formally addressed by the board at least on an annual basis.
  • 14. Risk management - Reporting line Increasing reporting at Top level CAPTION % of answers Most advanced Least advanced Emerging Moderate Mature/Advanced Reports to Reports to Reports to Audit (and/or risk) other function CFO, General Committee, Board or department counsel/Head of Directors/Supervisory Board, of Legal CEO/Managing Director or Department, General/Company secretary Head of Internal Audit Maturity Risk Management function globally reports at Top Management level (93%), but reporting at CFO level (36%) still remains widespread among certain countries such as Italy (59%), Germany (55%) and UK (41%).
  • 15. Independent assessment of risk management framework Towards a growing involvement of Internal Audit % of answers CAPTION Most advanced Least advanced Emerging Moderate / Mature Advanced No Partially independent assurance Complete independent provided independent assurance in collaboration with others parties assurance provided by provided by the Internal Internal Audit Audit Maturity Globally, Internal Audit is increasingly involved in the process of providing an independent assurance on the quality/efficiency of the Risk Management system but its role could be strengthened.
  • 16. Risk governance Country focus (advanced practices) % of answers
  • 17. 3. Risk Convergence?
  • 18. Alignment of Risk management functions Foundations in place for further coordination % of answers CAPTION Most advanced Least advanced Emerging Moderate/Mature Advanced Risk functions Some coordination exists Full risk (risk mgt, between the different risk functions internal audit, functions coordination internal in place control, EHS, quality, compliance) are working Maturity independently The different risk functions are no longer working “in silos”, however their level of coordination remains limited.
  • 19. Alignment of Risk management functions Coordination but no integration CAPTION % of answers % of answers Mature and Advanced Integration Most advanced Least advanced Emerging/ Mature Advanced Moderate No or limited Risk Very integration of Manage close Risk ment is integrati Management closely on of with other cooperati Risk functions ng with Manage other ment functions with other Maturity functions Risk Management works closely with other departments but integration is not systematic
  • 20. Risk management organisation Relationships between Insurance Management, Internal Control and Internal Audit Risk and Insurance Management: The most common partnership
  • 21. Alignment of Risk management functions Coordination but no Sustainability / Sustainable integration Development Mergers and Acquisitions Insurance Management Legal RM Internal Control/ Business Internal Audit Continuity Risk Management first-rank partners Close (3) or very close (4) relationship > 60% Risk Management second-rank partners Emerging (2) relationship >30% Investor Risk Management third-rank partners Relations No relationship (1) > 20%
  • 22. Risk management and Internal Audit A growing relationship but still too limited synergies % of answers CAPTION Most advanced Least advanced Emerging Moderate Mature Advanced No particular Mutual Coordination Very close relationship reporting – and relationship between Risk coordination/ cooperation between the Management cooperation on the audit two functions on a limited plan and Internal basis Audit functions Maturity and/or separate reporting lines A minimum level of coordination between the two functions is now in place for most European companies.
  • 23. Alignment of Risk management functions Country focus (advanced practices) % of answers
  • 24. 4. 2012 Risk Priorities
  • 27. 2012 Risk priorities Risk importance 2012 2010 Variation Competition, clients, partnerships, market strategy, market 53% 53% 0% Compliance, legislation, policy, regulations (national and international) 37% 45% -8% Financial: interest rate & foreign exchange, debt, cash flow, sovereign debt 36% 31% 5% Reputation (social media, communication) 33% New 2012 New 2012 Planning and execution 29% 33% -4% Market risks (commodity price shocks, real estate market 29% 14% 15% volatility) Supply chain, business continuity 26% 31% -5% Production, quality, cost cutting 24% 32% -8% Human resources / key people, social security (labour) 21% 15% 6% Political, expansion of government's role 21% New 2012 New 2012 IT / IS / data 20% 23% -3% Safety, health and security 19% 22% -3% Corporate governance 17% 20% -3% Assets (buildings, equipment) 17% 24% -7% Ethics, corporate social responsibility, fraud 17% 17% 0% Social, economical issues 16% 30% -13% Environment, sustainable development, climate change 13% 16% -3% Product design, safety and liability 12% 20% -8% Access to credit 11% 17% -6% Treasury 10% 7% 3% Internal control 10% 11% -1% Liability(ies) of the company or corporate directors and officers 9% 12% -3% Civil, general, professional, criminal or cyber criminality 7% 10% -3% Dynamics, M&A 6% 9% -2% Assets (cash, intellectual property) 5% 9% -4%
  • 28. Risk Appetite by risk category Companies’ risk appetite driven by risk category rather than risk significance 60% Risk taker zone No tolerance zone High impact risks High impact risks Competition & market Strategic&Corporate Governance Financial 50% External Operational Compliance& Ethics 40% Compliance e Financial c n a Planning and (interest rate & foreign exchange, debt, cah flow…) Reputation t r 30% execution o Supply chain, p Market risks m i business continuity Production, quality k s i HR & social R 20% security Safety, health & security Political, expansion of IT / IS / data Social, economical Corporate government's role issues governance Environment, Assets (buildings, Ethics, Fraud, CSR sustainable Product design equipment) development Treasury 10% Access to credit Internal control Liability(ies) Civil, general, Risk taker zone Dynamics, M&A Assets (cash, intellectual professional No tolerance zone Lowimpact risks property) Lowimpact risks 0% Riskaverse Riskappetite