BI nterest in enterprise risk management (ERM) has continued to grow in recent years. 1 Increasing numbers of organizations have either implemented or are considering the adoption of ERM programs. At the same time, consulting firms have established specialized ERM units, rating agencies have begun to consider ERM in the ratings process, 2 and universities have developed ERM-related courses and research centers. Unlike traditional risk management, in which individual risk categories are managed separately in risk “silos,” ERM enables companies to manage a wide array of risks in an integrated, enterprise-wide fashion. Academics and industry practitioners and observers have argued that ERM helps increase the value of companies by reducing the volatility of their earnings and stock prices, reducing their costs of external capital, increasing their capital efficiency, and creating synergies among their different risk management activities. 3 More broadly, ERM is said to promote increased risk awareness within the entire organization, which is said to facilitate better operational and strategic decision-making. Nevertheless—and despite the substantial interest in ERM by academics and practitioners and the abundance of survey evidence on the prevalence and characteristics of ERM programs4—there is not much empirical evidence on whether and how such programs affect corporate values. 5 To begin making that case, we began gathering data five years ago. We conducted a study of the extent to which specific companies have implemented ERM programs, and then attempted to assess any effects on value associated with those decisions to adopt ERM. We focused our attention specifically on publicly traded US insurance companies in order to make use of their market-based measures of value and their greater public disclosures of ERM activity, as well as to control for differences that might otherwise arise from regulatory and market differences among industries.

The main finding of our study, which was published in the Journal of Risk and Insurance in 2011, was a strong positive correlation between corporate adoptions of ERM and measures of value and effective management, notably Tobin’s Q, after controlling for variables known to be associated with both higher values and decisions to adopt ERM. After discussing this association and its implications and most likely causes, we go on to review the more recent success of ERM at a number of insurance companies and the widespread adoption of ORSA standards by insurance regulators in 2015.