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Current state findings from various surveys an

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Current StateFindings from various surveysAn acknowledged need toimproverisk managementA recognition that aholisticapproach is appropriate and preferableERM can improve overallcapital managementand thus enhancecorporate value and competitivenessAvariety of approachesto improving risk managementThere are stillproblemsto overcome
A Paradigm ShiftTraditionalRisks managed in silosConcentrates onphysical hazards andfinancial risksInsurance orientationAd hoc / one-offprojectsEmergingCentralized mgt., withexec-level coordinationIntegrated considerationof all risks, firm-wideOpportunities forhedging, diversificationContinuous andembedded
The ERM 1.0 FrameworkEntity objectives can be viewed in the context of 4 categories:StrategicOperationsReportingComplianceERM considers activities at all levelsof the organization:Enterprise-levelDivision or subsidiaryBusiness unit processes
The ERM 2.0 Framework
4. How to Implement ERM?Some Guidelines
The ERM 2.0 Framework
Internal EnvironmentEstablishes a philosophy regarding risk management. Itrecognizes that unexpected as well as expected events may occur.Establishes the entity’s risk culture.Considers all other aspects of how the organization’s actions mayaffect its risk culture.
Objective SettingIs applied when management considers risks strategy in thesetting of objectives.Forms the risk appetite of the entity — a high-level view of howmuch risk management and the board are willing to accept.Risk tolerance, the acceptable level of variation aroundobjectives, is aligned with risk appetite.
Event IdentificationDifferentiates risks and opportunities.Events that may have a negative impact represent risks.Events that may have a positive impact represent natural offsets(opportunities), which management channels back to strategy setting.Involves identifying those incidents, occurring internally or externally, thatcould affect strategy and achievement of objectives.Addresses how internal and external factors combine and interact toinfluence the risk profile.
1. Risks IdentificationOperationalHazardPhysicalStrategicCapital / resource allocationIndustry / competitorsTechnologicalDatabasesSecurityConfidential informationStakeholderLegalComplianceRegulatoryFinancialCapital marketsCredit risksTaxesHuman capitalRetentionTrainingReputational
Risk appetite is the amount of risk — on a broad level — an entity is willing to accept inpursuit of value.Use quantitative or qualitative terms (e.g. earnings at risk vs. reputation risk), and considerrisk tolerance (range of acceptable variation).Key questions:What risks will the organization not accept?(e.g. environmental or quality compromises)What risks will the organization take on new initiatives?

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Term
Fall
Professor
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Tags
Credit rating, ERM

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