When it comes to identifying and managing the risks of your business, there are two ways to go about doing so. These are traditional risk management and enterprise risk management. While similar in concept, there are some significant, yet subtle differences between the two. In this guide, we will be discussing the differences between traditional and enterprise risk management.
Insurable vs. Non-Insurable
One of the most significant differences between traditional risk management (TRM) and enterprise risk management (ERM) is the focus on insurable versus non-insurable risks. TRM focuses solely on risks that can be insured. For example, risks that can be insured include an employee slipping on a wet floor and breaking their arm or a fire destroying a section of the workplace.
The costs of both of these risks, if they do happen to occur, can be covered by using the proper insurance. Thus, traditional risk assessment and management can be used to effectively prepare for this type of situation. Not only does ERM account for these more traditional risks, they also help identify risks that are not insurable. “What kinds of risks are these?” you may be wondering.
Say the reputation of your company becomes damaged due to the slander of a disgruntled former employee. Or maybe a data breach occurs within your company, and hackers release sensitive information out into the public. These are risks that can be very damaging and no amount of money can fix. ERM frameworks aim to identify these potential risks and determine the best course of action to prevent these kinds of situations from occurring.
Past vs. Future
What do we mean by this? Think of it in terms of driving a car. TRM is very similar to looking in your rearview mirror and peering at what is behind you, whereas ERM is looking straightforward through the windshield at the road in front of you. The traditional risk management process is reactive and sporadic, as opposed to proactive and consistent.
TRM typically only occurs after an incident has already happened and is done in an effort to prevent that situation from happening again. On the other hand, ERM looks to the future and attempts to determine potential events and situations that could, or are even likely to, occur. Once this is done, a strategic plan is developed to reduce the risk of that situation happening in the first place, as well as how to effectively handle the situation if it does occur.
We don’t want to minimize the importance of learning from your mistakes, as mistakes and mishaps are inevitable when it comes to running a business. However, being prepared for those mistakes and having a plan in place for how to deal with the aftermath is far more effective than stumbling blindly in the dark.
Keep in mind, risk management is not simply relegated to wet floors and accidents. As mentioned earlier, ERM is used to take a look at the bigger picture. Having the ability to analyze market trends, determining how your business will adapt to changes in the industry, and coming up with strategic objectives to give your business a competitive advantage are all hallmarks of an enterprise risk management strategy.
Standardized vs. Dynamic
TRM is very commonly practiced in the world of business, and, thus, it has become very standardized. The two most common standards that companies refer to when managing risks are COSO and ISO 31000. Despite the fact that both of these standards have been updated to a certain extent about the advantages of taking risks and reaping the benefits, they are still heavily skewed towards managing and avoiding risks.
ERM is far more dynamic and makes it much easier to adapt on a case by case basis. No two businesses are the same, and, similarly, no two businesses are run in exactly the same way. Some business owners are more conservative, while others are more prone to being spontaneous and taking risks. An ERM program is certainly geared more towards the latter.
There is no true right or wrong choice when it comes to choosing between TRM and ERM. They both serve different purposes, but there is no denying that ERM is far and away the more fluid, adaptable, and dynamic of the two methods.
Risk-Averse vs. Risk-Taking
Many people think of risks as a negative thing, and traditional risk management treats them as such. However, it’s not controversial to say that no business can succeed without taking risks. Risks often go hand-in-hand with opportunities, and ERM works to determine which risks are worth taking and which ones are worth avoiding all together.
ERM programs help business owners and the board of directors make educated and intelligent decisions. They also work alongside management teams to determine which risks are far too great and which ones have the potential to lead to a lot of gain. TRM only sees risks as something that can cause the business to lose money, instead of seeing them as opportunities for growth and expansion.
Manage Your Risks with Help from Cowell James Forge
Whether you choose a traditional or enterprise risk management standpoint for your business, there is no denying that some form of risk assessment and planning is required for businesses to succeed. Here’s a relatable example: we’re assuming that most people, going into 2020, did not expect the entire globe to suffer at the hands of a worldwide pandemic.
That kind of thing is hard to prepare for, and some businesses did not make it through the pandemic, while others thrived. Planning for these kinds of huge economic and social impacts are what risk management is all about. Businesses who adopt TRM risk assessment will likely look at the pandemic and plan how to deal with the possibility of another one in the future, whereas businesses who utilize ERM saw the pandemic as an opportunity to grow and adapt.
Either way, risk management is important to a business’s survival, as is having suitable insurance when unexpected circumstances arise. At Cowell James Forge Insurance Group, we offer a vast array of business-related insurance plans, including business owners insurance, general liability insurance, fiduciary liability insurance, and, of course, risk management services. Take a look at all the different ways that we can set your business up for success.