Enterprise Risk Management (ERM) considers risk management from the perspective of the entire company or organization. It's a top-down risk management methodology that identifies, assess, and prepares for potential losses, dangers, hazards, and other forms of harm that could disrupt an organization's operations, objectives and result in losses.
ERM is a holistic approach that necessitates management-level decision-making that may or may not be appropriate for a specific business unit or sector. As a result, the firm's monitoring is prioritized instead of each business unit being accountable for its risk management.
For example, if a risk manager at an investment Bank finds that two trading desks in separate parts of the firm have equal exposures to the same risk, the less significant of the two may be forced to minimize that risk. This choice is taken with the company as a whole in mind (not with the specific trading desk).
ERM not only requires companies to identify all of the risks they face and decide which risks to actively manage (as other forms of risk management do), but it also allows top executives to make executive risk management decisions that may or may not be in the best interests of a specific segment—but that is best for the company as a whole.
It is because risks might be categorized in specific business units that do not or cannot perceive the big picture. It also frequently entails distributing the risk action plan to all stakeholders as part of an Annual Report. ERM is now used in industries as diverse as construction, aviation, international development, public health, finance, energy, and insurance.
Businesses have used risk management for many years. Traditionally, risk management has relied on each business unit assessing and managing its own risk before reporting back to the CEO. Companies have recently begun to see the need for a more comprehensive strategy.
While ERM best practices and standards are continuously growing, COSO, an Industry body that monitors and updates such guidelines for businesses and ERM practitioners, has institutionalized them.
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To deal with their identified risks, management chooses one of the five risk response strategies listed below:
To secure financial stability for firms, ERM follows a highly different and ongoing procedure in which it actively detects and reassesses the numerous strategic and primary risks. There are five distinct elements to the procedure: