Enterprise Risk Management: A Value Proposition

To understand Enterprise Risk Management (ERM), one needs to understand the concept of risk management or, instead, the traditional definition and focus of risk management. Traditional risk management frequently concentrates on identifying and managing specific risks inside certain departments or functions, or on specific categories within silos (i.e., Credit Risk, Market Risk, Third-Party Risk, etc.).? Traditional risk management also focuses on reducing costs and reducing, avoiding, transferring risk and, to a lesser extent, exploiting or pursuing risk. Enterprise Risk management, on the other hand, has a broader focus on a comprehensive strategy for detecting, evaluating, and managing the risks of a company.

ERM aims to include risk management in all facets of an organization's decision-making processes.? The entire business must work together to identify possible risks, evaluate their implications, and devise solutions to reduce or manage them. One significant distinction between enterprise risk management and conventional risk management is that ERM assists businesses in anticipating and managing risks, safeguarding their assets, reputation, and long-term performance.

The COSO Enterprise Risk Management (ERM) Framework offers businesses a systematic method for identifying, evaluating, addressing, and tracking risks that potentially influence the accomplishment of their strategic goals. The framework places a strong emphasis on how risk management should be integrated into an organization's broader governance and operational procedures. The 5 main elements of the COSO ERM Framework are summarized as follows:

• Governance and Culture: This section emphasizes the significance of supervision, governance mechanisms, and the development of an organizational culture that supports efficient risk management. It underlines the need to incorporate risk management into an organization's core principles, goals, and regular operations.
• Setting strategies and goals: Organizations must match their risk management initiatives with their overall strategic objectives. This part of the process focuses on how an organization's risk appetite, risk tolerance, and risk profile should affect how it makes strategic decisions.
• Performance: This part discusses how risks are handled while business operations are carried out. It emphasizes the importance of efficient risk assessment, reaction planning, control initiatives, and communication across all organizational levels.
• Review and revision: A crucial component of the framework is continuous improvement. The significance of continual monitoring, assessment, and adaption of an organization's risk management procedures is emphasized by this component. It also takes new threats and shifting conditions into account.
• Information, communication, and reporting: Clear communication of risks and their implications throughout the company is essential for effective risk management. The need of timely and correct information is emphasized in this component in order to assist decision-making and reporting to stakeholders.

Though the COSO definition is extensive and expands beyond the focus of Traditional Risk Management, the definition of ERM provided by the Casualty Actuarial Society (CAS) for the Insurance Industry provides an even more comprehensive focus on ERM that centers around value.? CAS details ERM as the discipline by which an organization in any industry assesses, controls, exploits, finances, and monitors risk from all sources for the purpose of increasing the organization's short- and long-term value to its stakeholders.? One can identify the difference between the two definitions as COSO focuses on the aspects of governance. In contrast, the CAS focuses on governance and the value proposition associated with the management of risk.

Whether using COSO or the CAS definition, ERM is a more inclusive approach to risk management and, as such, requires one to identify that the traditional way of managing risk has some disadvantages in today's diverse business environment.? Creating value is an essential part of any business strategy.? Risk management is not immune to this requirement.? Therefore, having a purely risk-averse approach or attitude toward risk is not seen as beneficial and has now become a liability for those who are associated with the risk discipline.?

Front-line business Units require a more holistic view of risk from risk practitioners to support the business in its venture for genuinely managing the risk associated with its activities. Guarding against loss is just one part of the risk equations.? The reward aspect is also of great benefit and should be a core competency for the risk practitioner.? When risk practitioners can provide value in terms of risk, there is a more collaborative environment created.? There is a culture that begins to take shape that is risk-aware.? Also, there isn't a fear that risk strategies will hinder growth within the business.? Risk is seen as a benefit to the business and not something that should be focused on only when there are problems.

In summary, the definitions and frameworks by COSO and CAS, while presented in different terms, all emphasize a comprehensive and integrated approach to risk management across an entire organization. The objective is to align the risk appetite of the organization with its strategy, goals, and objectives, ensuring value preservation and creation.

What are your thoughts and experience with Enterprise Risk Management (ERM)?? Your thoughts and comments are welcome.