THE ENVIRONMENT AND RISK MANAGEMENT
To meet these new challenges and obligations, the risk management profession has developed a strategic process that allows companies to distinguish and manage their exposures in a comprehensive and coordinated manner throughout the organization. This approach, commonly referred to as enterprise risk management (ERM), represents an evolution in the way that companies control risk. ERM, as its name suggests, provides senior management with the ability to identify, measure, prioritize and manage insurable and non-insurable risks across the entire enterprise. By assessing risks across all business functions, the process generates a comprehensive understanding of an entity's risk profile and how it evolves, and helps to create a proper risk management strategy to match that evolution.
Enterprise risk management thus affords the company strategic depth, focuses effort, and helps management decide where to prioritize resources in keeping with the company's fundamental objectives and its defined tolerance for risk. Since most companies within the same industry confront similar risks, those that institute a proper risk management approach can protect value, create competitive advantage, generate growth, and safeguard against earnings-related surprises. A joint study released by the Economist Intelligence Unit and Marsh & McLennan Companies (MMC) shows that the majority of companies believe that implementation of ERM has the potential to improve P/E ratios and reduce the cost of capital.
Like traditional risk management approaches, ERM seeks to convert uncertainty into risk. Uncertainty cannot be managed and, when neglected, becomes a barrier to capital markets, growth, performance as well as insurance coverage. By contrast, risk can be managed. Risk does not imply that outcomes are adverse, just that they are not known in advance. Risk is a continuum where unknown exposures become recognized, the associated uncertainty is analyzed and understood and the risks are measured and appropriately managed. The objective is to identify risk and then manage it to the corporation's benefit to preserve assets, create opportunities and realize value.
STRATEGIC ENVIRONMENTAL RISK ASSESSMENT (SERA)
To help companies cope with the potential impacts of environmental exposures, Marsh, Inc., a unit of MMC, developed the Strategic Environmental Risk AssessmentSM process. SERA is an integrated, comprehensive approach that identifies, measures, prioritizes and manages environmental risks consistent with the organization's business and financial objectives. As with any enterprise risk management approach, SERA is a 'pre-loss' exercise designed to help senior management mitigate potential exposures before they occur. This reduces expenses; lowers cost of capital through mitigating or more effectively financing risk, maximizes cash flow and creates a common 'risk' language relating to environmental risks and overall risk throughout the organization. While SERA is most commonly applied to manage corporate risk, many public entities — including cities, counties and public authorities — have also found the process instrumental in helping to identify and address their own portfolios of risk exposures and opportunities.