What Is Enterprise Risk Management? Why It Matters And How To Use It

Learn the basics of enterprise risk management & ERM frameworks to ensure you’re not leaving your organization open to unnecessary risk.

Resolver
April 14, 2023 · READ

In enterprise risk management (ERM), risks are not only part of doing business but are often a source of hidden opportunities. However, knowing which risks are worth taking, when to take them, and how to respond to potential threats can be challenging. In this guide, we’ll take a comprehensive look at enterprise risk management and how it can benefit your organization. Whether you are new to ERM or want to improve your current strategy, you’ll find valuable information here.

Why is enterprise risk management important?

ERM is a crucial part of your organization’s strategy because it provides a clear framework to manage potential threats and respond to incidents. While it’s impossible to entirely eliminate risk events, effective risk management ensures that you can respond to incidents efficiently and with agility. By defining and improving your process, you can better plan for, manage, and mitigate risks, ideally preventing major incidents from happening. In addition, effective risk management frees you to focus resources where they’re needed most while also avoiding the consequences of poor planning.

Enterprise risk management is beneficial to your organization because it:

  1. Holistically helps manage risk: Enterprise risk management provides a comprehensive approach to identifying, assessing, and managing risks across your entire organization. By taking a holistic view of risks, companies can better understand how risks are interconnected and how they impact each other.
  2. Aligns risk management with strategic goals: Risk management is aligned with the organization’s strategic goals. By identifying and prioritizing incidents based on their potential impact on the organization’s objectives, enterprise risk management helps organizations focus on the risks that matter most.
  3. Enhances decision-making: Enterprise risk management provides organizations with a better understanding of the risks they face and their potential impact. This information can help you make more informed decisions and take appropriate actions to manage risks.
  4. Increases transparency and accountability: Promoting transparency and accountability by providing a clear and structured approach to risk management helps ensure that risks are identified, assessed, and managed in a consistent and transparent manner across your organization.
  5. Reduces costs and improves efficiency: Enterprise risk management can help organizations reduce costs and improve efficiency by identifying and prioritizing risks and taking proactive measures to manage them. By doing so, organizations can avoid or mitigate potential losses and disruptions and optimize their use of resources.

Enterprise risk management provides a comprehensive, integrated approach to managing risks across your organization, helping you better understand and manage risks, and ultimately achieve your objectives.

What are the building blocks of enterprise risk management?

Each enterprise risk management framework uses distinct building blocks of risk management. Examining and improving each part on its own will ultimately enhance risk management. Artificial intelligence and automation are vital for identifying and addressing risks. They help to detect vulnerabilities and reveal weaknesses in the system. By incorporating behavioral monitoring software, you can prevent potential risks. Collecting around-the-clock risk intelligence helps you stay informed of current risks and make informed decisions.

Translating risk tolerance into healthy boundaries instead of red flags will help to keep risks at bay. By considering future risk solutions and using expert guidance, you can confidently build an effective ERM framework. The goal should be to put all four pieces together to form a cohesive foundation for your enterprise risk management framework:

  1. The Casualty Actuarial Society (CAS) ERM Framework: Defines and unifies different aspects of risk and relies strongly on actuarial science.
  2. The Committee of Sponsoring Organizations of the Treadway Commission (COSO) ERM Framework: Emphasizes the importance of risk consideration in the strategy-setting process.
  3. The International Organization for Standardization (IOS) ERM Framework: Focuses on developing consensus-based, market-relevant standards to support innovation on a global scale.
  4. The Risk Management Society (RIMS) ERM Framework: Combines strategic risk management and enterprise risk management.

Maintaining a control environment

A controlled environment outlines how operations, compliance, and conduct should be handled. It also explains how to enforce and update expectations to maintain whatever environment you create. Your control environment is the foundation of all other risk management efforts and determines how incidents are identified and addressed.

Starting with a clearly-defined foundation will allow your enterprise risk management efforts to be more effective. Individual changes make a big difference. Clearly communicating expectations, conducting better risk assessments, trying a new strategy, and tracking the results of your changes work together to best support the other risk management efforts in your enterprise risk management framework.

Developing loss control

Loss control is the process of identifying, assessing, and controlling potential sources of losses that could negatively impact an organization’s operations and financial health. Developing loss control is an important aspect of enterprise risk management. It helps organizations minimize losses and protect their assets.

By implementing effective loss control measures, organizations can reduce the likelihood and severity of potential losses, such as property damage, injuries, and legal liabilities. This can result in lower insurance premiums, increased profitability, as well as improved reputation and credibility.

Loss control can also help organizations identify areas for improvement in their operations and processes. By conducting regular assessments and reviews of potential sources of loss, companies can identify areas where they can improve efficiency, reduce waste, and streamline operations.

Identifying and assessing risks

Identifying and assessing risks is a critical component of enterprise risk management. It helps organizations identify potential threats to their objectives and develop strategies to mitigate or manage them. This process enables companies to take a proactive rather than reactive approach to identifying and managing risks.

This way, organizations can make informed decisions about resource allocation and enterprise risk management strategies. This information can help to prioritize risks based on their potential impact and likelihood, allowing companies to allocate resources more effectively to manage the most significant risks.

Identifying and assessing risks can also help organizations better understand their business environment and the factors that may affect their operations. This process enables organizations to make informed decisions about resource allocation and enterprise risk management strategies, prioritize risks, and adapt their strategies to changing business environments. Ultimately, this can help organizations achieve their objectives more effectively and efficiently.

Risk response and reporting

Risk response and reporting are important components of enterprise risk management as they help organizations take proactive measures to mitigate potential risks and effectively communicate their risk profile. The process involves identifying and implementing measures to address the risks that have been identified. By taking proactive measures to address the risks, organizations can minimize the potential impact of the risk on their operations, reputation, and financial performance.

Effective risk reporting is also crucial as it helps organizations communicate their risk profile to stakeholders, including employees, customers, investors, and regulators. By providing transparent and accurate information on their risk profile, organizations can build trust and confidence with stakeholders, demonstrate their commitment to good governance, and comply with regulatory requirements. Risk reporting can also help organizations identify areas where they may need to improve their risk management practices, such as by enhancing their risk assessment or response processes.

Using Resolver for better enterprise risk management

Enterprise risk management is an essential part of any business strategy. By understanding the building blocks of risk management and adopting a proactive risk management platform, your company can be better protected from risk. With automation and AI, Resolver’s enterprise risk management solution can help detect and address risks better by identifying weaknesses and predicting incidents before they occur. With the added benefit of around-the-clock risk intelligence, your organization will enable incident prevention instead of post-breach response. Request a demo to learn more.

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