Alternative to Risk Management

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If you are a regular reader of our blog, thank you and if not, welcome. To our regular readers, you may have noticed how we write about different categories of insurance or in digital marketing verticals. The vertical for business insurance in Ohio Insurance Solutions has touched on many specific items such as Worker’s Compensation, Technology, Errors and Omissions, and Kidnap and Ransom.

This week I want to discuss a more holistic approach to risk that has been around for about 20 years, Enterprise Risk Management (ERM).

ERM can be defined as, “An approach to managing all of an organization’s key business risks and opportunities with the intent of maximizing shareholder value.” [i]. In other words, an ERM approach can be utilized to address a wide range of critical organizational risks. At the same time, ERM is focused on not just managing or mitigating, risk but adding benefits to organizations. ERM took on greater importance in the aftermath of the financial crisis of 2008.

In particular, the Dodd-Frank Act, which was passed in 2010, requires certain financial firms to form risk committees that are responsible for the oversight of enterprise risk management practices. This legislation has encouraged the use and implementation of ERM among both large and smaller firms in the United States and Brexit has increased its use by countries in the European Union

There are distinct differences between ERM and traditional risk management. In contrast to ERM, “traditional risk management is concerned with an organization’s pure risk, primarily hazard risk” [i]. While ERM includes speculative risk, or a chance of loss, no loss, or gain, as well as pure risk. ERM focuses on ways an organization can generate value in the process of addressing risk and not just the chance of loss. ERM involves managing all of an organization’s risks to help that organization meet its objectives in a much more holistic approach to risk than the traditional siloed approach to managing risk.

The implementation of ERM can be difficult and must have the total “buy in” of all team members. As a business owner getting all of your trusted advisors involved is also key to the successful implantation of ERM. To discuss Enterprise Risk Management in more detail, contact your Trusted Choice Independent Insurance Agent at Richey-Barrett Insurance.

Resources: [i] Elliott, Michael W. “Enterprise Risk Management” The Institutes 1st Edition (pp. 1.3, 1.7, 1.18, 1.26, 7.23) 2015.

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