Question

List and describe five key concepts that differentiate Enterprise Risk Management (ERM) from Traditional Risk Management (TRM).

Answer 1

ERM is a contemporary risk management process of planning, organising, leading, and controlling the activities of a company with the aim of minimising the effects of the risk associated with these activities on the company's capital, investment and profits.

Detail	ERM	TRM
Focus	ERM process is undertaken with the perspective of adding value to the business while ensuring reduction in losses	TRM was undertaken with the intent of reducing the occurrence and potential of loss in a business
Span	ERM has a holistic approach towards risk management starting at the top (top management) of the organisational structure and covering all units under it together	TRM has a departmentalised approach meaning that each unit is responsible for its internal risk management
Aggregation	ERM collates the risks associated with activities of different units. Such an aggregation helps identifying those risks which act as a natural hedge for another, thus, enabling reduction in risk management cost at the organisational level	TRM looks at each unit's risk individually, thus, eliminating the potential for internal hedging
Timing	ERM is a continuous risk management process and the steps are taken before the occurrence of a risk event, that is, it is proactive in its form	TRM steps are undertaken at different time intervals or in the occurrence of a risk event, thus, it is reactive in form
Upside/Downside	ERM is a comprehensive process looking at both, an upward as well as a downward deviation. Analysis of upward deviations can be considered as analysis of potential opportunities	Traditionally, risk was viewed only from a decline perspective, therefore, TRM considers only risk associated with reduction in value or losses