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Understanding the Risk Maturity Model in ERM

Risk management is increasingly being viewed as a fundamental and strategic process by businesses of all sizes to ensure not only profitability and compliance with legislation, but also long-term sustainability and continuity.  In this article, we will explain what risk management maturity is, how t

risk maturity

Risk management is increasingly being viewed as a fundamental and strategic process by businesses of all sizes to ensure not only profitability and compliance with legislation, but also long-term sustainability and continuity.

In this article, we will explain what risk management maturity is, how to assess it, and what questions the company should ask to determine where it stands in terms of this method.

Risk Maturity Models

This term refers to an organization’s level of risk management readiness, or the information it has about the mechanism and how it is implemented. Risk management maturity, in general, helps businesses to assess how well they handle the various risks to which they are exposed. What is more, why is it necessary to know where you stand in terms of risk management maturity? It is critical because it allows you to see what is working and what is not, and then structure and develop steps to get to the highest level of risk management maturity possible.

Models of risk management maturity

There are a variety of models that can be used to assess an organization’s risk management maturity. Here are a few examples:

Maturity of Risk Index

It was founded in 2011 by Aon and the University of Pennsylvania’s Wharton School. Based on the assessment of activities relevant to corporate governance and decision-making, this index helps managers, executives, and risk practitioners in general to define which are the key areas of their risk management process.

The following ten characteristics are taken into account in this assessment suggested by Aon and The Wharton School Risk Maturity Index:

  • At the board level, understanding and dedication to risk management is a key element in making decisions and driving value.
  • A senior executive who directs and supports the implementation of key processes and risk management strategies.
  • Risk communication that is transparent.
  • At all levels of the company, a risk culture that promotes full engagement and transparency.
  • Using internal and external data and information, identify current and emerging risks.
  • Participation of key stakeholders in the implementation of a risk management plan and policy formulation.
  • Information on organizational and financial risks is gathered and formally incorporated into the decision-making process.
  • Information on organizational and financial risks is gathered and formally incorporated into the decision-making process.
  • Integration of risk management data with human resource systems to promote long-term business success.
  • To understand risk and show added benefit by risk management, sophisticated quantification approaches are used.
  • Shift the attention away from avoiding and minimizing risks and toward leveraging risk and risk control strategies that add value.

The maturity level of the organization is measured on a scale of 1 to 5 based on the information gathered:

Level 1 or initial risk identification and mitigation: the company recognizes and mitigates threats on its own. The risk management mechanism has a restricted scope.

Level 2 or fundamental: the organization’s main threats are poorly understood, managed, and monitored. Risk management capabilities are minimal, and the knowledge available on this method is ad hoc.

Level 3 or defined: the organization addresses its main risks, has the tools to evaluate, control, and track them, but there may be anomalies within the organization.

Level 4 or operational: the organization’s key threats are identified, and activities to mitigate them are carried out regularly. Information on risk control is specifically considered when making decisions.

The company has a high capacity to classify, assess, control, and track its threats at level 5 or higher. Risk management is a dynamic mechanism that adapts to changes, as well as a process that offers competitive advantages.

Auditors’ measurement model

Basil Orsini, the Director of Internal Audit for the Department of Human Resources in Canada at the time, established it in 2002. The calculation of risk management maturity in this model is based on five key aspects:

  • It is all about the culture.
  • Leadership and dedication are required.
  • Organizational systems integration.
  • Skills in risk control.
  • Monitor and report.

The maturity levels defined based on the evaluations conducted for each of these points are:

Incipient: no structured risk management mechanism has been introduced, and there is no deliberate recognition or control of these risks.

Known: despite the existence of a structured risk management system, its administration is fragmented, decentralized, and insufficiently trained.

Defined: the risk management system in place is followed, and policies and procedures involving the entire company are in place.

Managed: risk management has been properly established, and the organization’s risk tolerance has been clearly defined. Risk management is integrated into the corporate culture, and metrics for continuous assessment and control are in place.

Questions to ask to determine the level of risk management maturity.

When undertaking an evaluation to determine how risk management is implemented in the enterprise, which must be considered a critical component of all processes, it is critical to consider a variety of questions that cover the most important aspects, such as the government, the management process, personnel, technology, risk appetite, policies and procedures, and so on.

These questions will help you determine the company’s risk management maturity level. The highest level (advanced or optimized) should be aspired to because it demonstrates that risk management is developed in an organized, comprehensive, and timely manner, involving all members of the organization’s staff, and thus it is possible to meet strategic goals and maintain long-term business continuity.

Author

Daniel Jack

For Daniel, journalism is a way of life. He lives and breathes art and anything even remotely related to it. Politics, Cinema, books, music, fashion are a part of his lifestyle.

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