The Value of Investing in Enterprise Risk Management

Using a survey of risk management practices in the insurance industry we examine the impact of enterprise risk management on firm performance. We find enterprise risk management improves firm operating performance. Firms with Chief Risk Officers, dedicated risk committees, and risk management entities that report to Chief Financial Officers experience higher cost efficiency and return on assets. Confidence that risk is reflected in their business decisions is also positively related to firm performance. We also find life insurers benefit from the development and use of economic capital models to a greater extent than property-casualty insurers. Even simple economic capital models improve the performance of life insurers.