The complexity and unpredictability of the current economic environment is a frequent reminder that organisations confront several risks. The traditional approach to these risks has proven insufficient, forcing organisations to spend significant resources to manage risks. The identification and management of risks within an organisation are necessary for its success and longevity.
Risk management facilitates risk classification, and the response to risk while providing material control, the effectiveness of actions and regulations compliance. The ultimate risk management creates an innovative assessment of an organisation’s internal or external and estimated or retrospective vulnerabilities.
Traditional Risk Management
Traditional risk management can be defined either as an administrative or decision-making process. It incorporates four functions of management which are: planning, organising, leading, and controlling – all concerning an organisation’s activities and with the intent to minimise the unfavourable effects of accidental and business losses at a reasonable cost. However, this traditional approach is a fragmented approach to risk management and does not align with the idea that risk is treated as a whole.
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Enterprise Risk Management (ERM)
Enterprise Risk Management (ERM) is a new concept that transforms the traditional approach and condenses risk management into an integrated, comprehensive, and strategic system. The process of enterprise risk management aims to achieve a global focus on different aspects of organisational risk management. ERM applies to any organisation, and this is made possible through the development of various frameworks and risk management concepts, even the risk management standard – ISO 31000.
Five Ways ERM is different from Traditional Risk Management:
- Non-insurable risks – ERM goes beyond insurable hazards to incorporate risk areas that cannot be transferred through insurance.
- Multi-dimensional assessment – ERM considers the impact and probability of risks and does well to understand more about potential events.
- Analyses material risks and how they relate – ERM uses a variety of tools to examine interdependencies. These tools then help senior management better assign resources and prioritise risks.
- Proactive and continuous – ERM helps an organisation address risk or take hold of opportunities towards achieving strategic goals.
- Embedded in culture and mindset – a mature ERM process is systemic and ingrained in processes and ways of thinking.
The world is changing, and the risk management profession is not exempt. Many of what we know as traditional risk management tasks will soon become automated. Keeping pace with change and learning how to be a more active participant in an organisation’s success is vital.