Enterprise risk management frameworks and implementation

Enterprise Risk Management

The difference between enterprise risk management and traditional risk management

Traditional risk management focuses on pure risks. In this context, pure risks are defined as risks involving losses or no losses. The condition of a pure risk does not allow for a favorable outcome than the current situation. Owning a home is a typical example of a pure risk. The home might be hit by an earthquake, burn down or be infected by insects. If none of these happens, then the owner will not be in a position for losses (Damodaran, 2008).

Traditional risk management focuses on pure risks because of various reasons. People who worked in the insurance field developed and taught the concept of risk management. The focus tends to be on risks, which insurers could be willing write. The job duties of some risk managers are limited to purchasing insurance as many other options are easily available for exploration. This pure-based risk focus is also advantageous because the short-term risks represented the financial position of the organizational in most cases. Fires might easily make a company go out of business (Damodaran, 2008).

Efforts geared towards reducing the chances of fire or reducing the damage caused by fire or a contingency plan might enable the company to continue in business. These were traditionally beneficial for businesses. Besides, limited options or reasons for dealing with financial risks like foreign exchange rates, fluctuations in quality market, and changes in interest rates when this field was first developed existed (Damodaran, 2008).

At the emergence of enterprise risk management, foreign exchange rates were globally recognized, inflation rates were a major concern and interest rates were stable. All these were concerns for most corporations. Under the traditional risk management, the primary risks comprised of hazards including windstorms, fire or property damage. By then, environmental risks had not yet advanced into significant losses. At this point, pensions were neither regulated nor guaranteed (Damodaran, 2008). As the primary risks confronting companies were hazards, the focus of traditional risk management was on these sorts of risks.

In the wake of 1970s, enterprise risk management gained popularity. This is because financial risks became the most vital source of business uncertainty. Shortly then, tools to handle financial risks emerged. The tools permitted financial risks to be managed in ways similar to how pure risks were managed in the past. This prompted the developed countries to sign agreements to ensure the stability of exchange rates (Damodaran, 2008). This agreement was meant to introduce stability in rates of exchange. The variations in the exchange rate prompted operating results and balance sheets of companies in global trade to fluctuate. Such instability influenced the performance of many corporations.

The emergence of a new risk area did not increase to include into company domains. For this to be achieved, corporations were required to learn about financial tools and move away from sorts of risks frequently covered by insurers. Innovators who introduced risks management might have espoused this bold step. Its failure was expensive to corporations and to the field of risk management (Damodaran, 2008). With the rise of enterprise risk management, traditional risk managers have been pushed into a broad spectrum of risk analysis like financial risk management coupled with other risk analysis forms.

An analysis of two recommendations in the report

This section shows why organizations must determine risk response strategies and develop effective internal communication and reporting protocols. Risk response strategies refer to the approaches used to deal with risks identified and quantified. This element states that risks must be evaluated in terms of their probability and impacts. This must be done a manner that enables organizations to rank risks in a hierarchy of importance. This is commonly known as severity or the integration of probability and impact. Risk response strategies are entirely based on risk tolerance. Risk tolerance based on severity is a stage when risks cannot be acceptable and below the acceptability level. A number of strategies have been introduced to address risks (Tonello & Conference Board, 2007). They include mitigation, transfer, and acceptance.

Mitigation strategies focus on unacceptable risks with the aim of minimizing their impact or probability to a stage where their severity drops below the highest tolerance level. This involves taking money from the contingency budget expected for the value of the risk before mitigation.