Enterprise Risk Management Essay Example | Topics and Well Written Essays - 1750 words

Enterprise Risk Management - Essay Example The reason lies in that it lacks the integrated approach to the management of risk which characterises enterprise risk management. It is precisely for this reason that regulators in Canada, Germany, the United Kingdom, the United States, and other developed countries have issued rules and guidelines that advocate an enterprise-wide approach to risk management, further pushing many companies to adopt ERM (Kleffner, Lee and McGannon, 2003). Quite simply stated, the drive towards the adoption of ERM, as opposed to RM is due to the fact that the integrated approach adopted by the former, and which is absent within the context of the latter, is regarded as a more effective and efficient approach to risk management. With that being the case, as this research will argue, the real question relates to the reasons why more corporations do not adopt ERM, as opposed to RM. In order to properly determine the reasons why ERM is considered superior to RM, it is important to define each of the two terms. These definitions will highlight the advantages and disadvantages of either approach and allow for a greater understanding of differences between them. Enterprise risk management has become a significant topic for larg... It provides an active, vital and comprehensive modelling approach for integrating all financial decisions and risks. This includes investment decisions, borrowing policies, liability, and setting of goals (Kleffner, Lee and McGannon, 2003). The comprehensive management of risks and the adoption of an integrated approach to risk management has several benefits. An enterprise with fully diversified losses requires much less capital than an enterprise with concentrated worst-case losses. In turn, the anticipated profitability of the company is affected by the degree of diversification since a reduction in capital will increase expected profits. The goal of ERM is to maximize the firm's overall profit, while maintaining its enterprise risks at acceptable levels (Mudge, 2000). Insurance companies, for example, should analyze their major risks so that adequate capital exists at the firm level to pay insurance policyholders in the event of legitimate insured losses. The desired level of capital depends upon the severity of claims. And since these claims are a direct function of random events, the insurance company must calculate a distribution of losses for its entire operations in order to set the proper level of firm-wide capital (Doherty, 2000). Due to this, Meulbroek (2002) insists that regulatory bodies should check these systems in order to validate that the risk management strategies are reasonably well developed and consistent with current approaches and practice. The firm-wide models are also known as Dynamic Financial Analysis. An ERM system consists of three primary elements. These are 1) a stochastic model for projecting a set of scenarios of the future --the scenario