Review of ERM Basics: Types of Risk, Key Risk Indicators, and Risk Treatment

638 WordsJan 26, 20183 Pages
Generally speaking, Hampton lists three components of Enterprise Risk: Business Risk, Financial Risk, and Hazard Risk. Business Risks are those that could prevent an organization from establishing and maintaining a sustained competitive advantage. Failure to update products or services, obsolescence cause by progression of technology, a change in consumer preferences, and weakening of the market for a product or service all fall under Business Risk (Hampton, 2009, p. 5). Financial Risk is the possibility funds will be inadequate for continued operations. Inadequate initial capitalization, changes in A/R or A/P, excessive debt relative to assets, high interest rates, and liquidity issues caused by financial structure are all facets of Financial Risk (Hampton, 2009, p. 6). Hazard Risk is the least predictable and the most sever; by definition it produces loss without the possibility of gain. Hazards may include such things as fire damage to facilities, physical injury to employees or customers, or frivolous lawsuits. While most businesses insure for the physical damage, there is no way to recoupe the time lost while production is at a standstill (Hampton, 2009, p. 7). Organizations can determine the potential presence, level, or trend of a risk through the use of Key Risk Indicators, or KRIs. KRIs are forward looking indicators that can indicate present or emerging risks, the level of risk exposure, and trending or changes in risk exposure. KRIs are closely tied to

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