Lecture #7 Part #2
Having learnt about Risks, Risk Management and Components of Enterprise Risk Management, I hope jotting down their benefits will be a cake walk for you. By now you should be able to tell the benefits of Enterprise Risk Management yourself.
ALIGN RISK APPETITE AND STRATEGY: Enterprise Risk Management ensures that the entity's risk appetite and strategy are aligned. It ensures that the risk appetite does not in anyway affect the entity's strategy in achievement of its objectives.
LINK GROWTH, RISK AND RETURN: The Enterprise Risk Management ensures that the entity gets the required return for taking calculated risks and that the returns are commensurate with the risk that has been undertaken by the enterprise. Enterprise Risk Management helps in identifying risks and helps to manage them in such a way that the risks are established at acceptable levels to ensure the growth and return objectives of the entity are met.
ENHANCE RISK RESPONSE DECISIONS: ERM provides suitable techniques and methodologies, not only to identify risks, but also to select the appropriate risk responses based on the situation. The responses could be risk avoidance(response to avoid the risk) , risk reduction( response to reduce the impact of the risk), risk acceptance (accepting the risk and moving on) or risk sharing . These are the responses to be made by the entity based on the risk. ERM helps entity in selecting the above said responses appropriately.
MINIMIZE OPERATIONAL SURPRISES AND LOSSES: By identifying potential risky events, by providing assistance in selecting appropriate risk responses, ERM proves to be extremely beneficial in minimizing surprises and losses. Nothing comes as a surprise to the enterprise, as the enterprise is armed and ready to meet them and know how to handle them.
IDENTIFY AND MANAGE CROSS- ENTERPRISE RISKS: When risks occur, it does not usually affect one department or one function of the enterprise, but usually affects its inter-related functions, inter-related departments as well. Hence it is said that the ERM also helps in identifying and managing cross- enterprise risks.
PROVIDE INTEGRATED RESPONSES TO MULTIPLE RISKS: ERM provides combined responses applicable for multiple risks which occur across the entity.
SEIZE OPPORTUNITIES: As we have learnt earlier, ERM not only identifies events with risk, but also identifies events which provide opportunities. Hence, it helps the entity in grabbing the opportunity and making right use of it.
RATIONALIZE CAPITAL: The ERM enables company to assess the overall capital needs of the entity.
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