What advantage does centralized risk management (ERM) offer?

Centralized risk management, often encapsulated under the framework of Enterprise Risk Management (ERM), provides notable advantages, particularly in achieving economies of scale and recognizing offsetting exposures. By having a centralized approach to risk, organizations can aggregate risks across different units or departments, leading to a more holistic understanding of their risk profile.

Economies of scale are achieved when the central risk management team can implement standardized risk assessment tools, policies, and procedures across the organization. This efficiency reduces redundant efforts and minimizes costs associated with the development and implementation of risk management practices in each individual unit. Furthermore, centralized risk management allows for the identification and recognition of offsetting exposures across different units. For instance, if one department has a risk exposure that is mitigated by the risk profile of another department, centralizing this information can lead to a more accurate assessment of overall risk. This comprehensive view allows the organization to utilize its resources more effectively and allocate capital where it is needed most, thereby managing total risk more efficiently.

In contrast, customized risk strategies for each unit may lead to fragmentation and inefficiencies. Greater individual accountability might promote responsibility but can also lead to siloed thinking that overlooks the interdependencies of risks. Less oversight in risk decisions could undermine the overall risk management framework, exposing