COSO Enterprise Risk Management: Understanding the New Integrated ERM Framework

Chapter 2. Risk Management Fundamentals

Risk management had been considered as primarily only an insurance-related concept for many years. An individual, organization, or enterprise would use a risk-based approach to make a decision as to what type and how much insurance to purchase. The factors of relative risk and the cost to cover that risk have always entered into the decision to purchase insurance. Risks and insurance costs also change over time. Fire insurance to cover an individual’s home is an example of this. Back in the days of oil lanterns for light and straw for the horses stored in a nearby stable, there was always a high risk of fires. We only need to think of the great Chicago fire of 1871 where, as legend suggests, a cow kicked over a lantern and caused a fire that devastated the city. The risk of that type of fire is not that great today, and fire insurance is not that expensive, in a relative sense. However, there is always the possibility of a lightning strike or electrical malfunction to cause a fire in the home; mortgage finance companies require fire insurance coverage and, even if having no mortgage, all prudent persons today will purchase such fire insurance even if not required. A destructive fire to one’s home presents a low-level but consistent risk. While the cost of homeowner fire insurance is relatively low, an individual homeowner might assess other types of potential risks, such as for earthquakes, and not purchase insurance because of an assessed ...