Enterprise Risk Management (ERM) : A Comprehensive Guide For 2021

INTRODUCTION

ERM DEFINITION – ERM is an acronym for Enterprise Risk Management. Enterprise risk management is the method of accessing risks to recognize threats to a company’s financial health and business opportunities. An ERM program aims to identify, categorize, and measure an organization’s risk tolerance capacity.

The standard approach to assessing business risk is to look at financial risks, regulatory risks and operational risks. If the exchange rate falls and interest rates increase, if new products aren’t approved by the FDA, or if your main warehouse breaks out with fire. To calculate the probability of an event occurring, multiply the potential impact by the probability of that event occurring. For low-impact events, even a high probability of occurrence has little impact on the company’s overall risk exposure. However, for high-impact events, even a low probability of occurrence may be devastating. 

Cybersecurity risks are becoming an increasingly important part of the ERM equation, posing a challenge to CISOs and other senior security executives. Quantifying the financial impact of a cybersecurity incident is challenging, if not impossible, and determining the probability of such an event is even more difficult.

The identification of significant risks and the implementation of appropriate risk responses are the cornerstones of ERM. Acceptance or tolerance of risk; avoidance or dismissal of risk; risk transfer or sharing via insurance, a joint venture, or another arrangement; and risk reduction or mitigation via internal control procedures or other risk management activities are all examples of risk responses.

Risk theory or risk policy, risk culture, and risk appetite are all essential ERM concepts. These are manifestations of the organization’s risk mentality and the level of risk it is prepared to take. 

1. The following are some examples of commonly used standards
2. Enterprise Risk Management Advantages
3. Enterprise risk management process
4. Core elements of enterprise risk management
5. What should your enterprise risk management framework include

1.The following are some examples of commonly used standards:

• Risk Management Principles and Instructions – ISO 31000 2018
• IRM/Alarm/AIRMIC 2002 is a risk management standard established in 2002 by the UK’s three major risk organizations.
• Risk Management – Risk Assessment Techniques (ISO/IEC 31010)
• Enterprise Risk Management – Integrated Framework (COSO 2004 and 2017)
• A Governance, Risk, and Enforcement Capacity Model based on the OCEG “Red Book” 2.0: 2009.

2.Enterprise Risk Management Advantages :

Companies should reflect on the upside of risk as well as the downside when developing ERM initiatives. The conventional strategy focuses on negatives, such as financial losses resulting from currency or interest rate trades in financial markets or financial losses resulting from a supply chain interruption or a cyber assault that threatens a company’s information technology.

Companies are also forced to think of competitive opportunities and strategic advantages that can come from risk management that is done well. Some of these “better choices” focus on risk analysis, such as where to place a plant or office abroad.

Increased knowledge of the organization’s risks and the ability to respond effectively

Increased trust in the achievement of strategic goals

Compliance with legal, regulatory, and reporting standards has improved.

Efficiencies and productivity of the organization have improved.

3.Enterprise risk management process:

Hazard risks are those that pose a significant risk to one’s life, health, or property.

Risks that are specifically linked to money are referred to as financial risks. They have financial implications such as cost increases or sales decreases.

Strategic risks are those that are influenced or generated as a result of strategic business decisions.

Operational threats are those that have a significant impact on a business.

4.Core elements of enterprise risk management:

Understanding the business’s plans and related risks (Strategy/Objective setting).

Provide a concise profile of key risks that may harm the company’s overall financials.

Risk assessment: Once threats have been identified, they are carefully investigated to evaluate their probability and potential.

Risk response: Think about different risk response methods and choose the best actionable paths to match perceived risks to management’s risk tolerances.

Communication and monitoring: Relevant data and information must be continuously tracked and shared through all levels of the company.

5.What should your enterprise risk management framework include:

• Risk management and internal control priorities are the goals of governance.
• A risk strategy is a statement of an organization’s risk attitude.
• Risk appetite refers to the type and amount of risk that is considered reasonable.
• Risk architecture refers to how risk management is set up and structured.
• Procedures for identifying and rating threats are detailed in risk assessment.
• Risk protocols are a set of documents used to report and analyze threats.
• Risk reduction and control mechanisms are needed as part of the risk response.
• Topics and goals for risk management training

CONCLUSION

ERM is a must-have for every financial institution since it covers all applicable risks. A management competency to manage risks well, comprehensively, and understand the interrelationship/correlation among various risks is supported by an ERM system and model. By combining what already exists to build a holistic and coherent view of the organization’s risk profile in the sense of its business plan, the effective institution embeds a strong ERM capacity and strategy into its culture.

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