Internal Environment: The Components Of Enterprise Risk Management

2.1 Components of Enterprise Risk Management

Enterprise risk management consists of eight interrelated components. These are derived from the way management runs an enterprise and are integrated with the management process. These components are:

• Internal Environment – The internal environment encompasses the tone of an organization, and sets the basis for how risk is viewed and addressed by an entity’s people, including risk management philosophy and risk appetite, integrity and ethical values, and the environment in which they operate.

• Objective Setting – Objectives must exist before management can identify potential events affecting their achievement. Enterprise risk management ensures that management has in place a process to set objectives and that the

Thus, the components are also criteria for effective enterprise risk management. For the components to be present and functioning properly there can be no material weaknesses, and risk needs to have been brought within the entity’s risk appetite.

3. Casualty Actuarial Society framework

In 2003, the Casualty Actuarial Society (CAS) defined ERM as the discipline by which an organization in any industry assesses, controls, exploits, finances, and monitors risks from all sources for the purpose of increasing the organization's short- and long-term value to its stakeholders. The CAS conceptualized ERM as proceeding across the two dimensions of risk type and risk management processes. The risk types and examples include:

· Hazard risk

Liability torts, Property damage, Natural catastrophe

· Financial risk

Pricing risk, Asset risk, Currency risk, Liquidity risk

· Operational risk

Customer satisfaction, Product failure, Integrity, Reputational risk; Internal Poaching; Knowledge