The obvious example is that which represents the more significant aspects of the current financial crisis; huge amounts of mortgage defaults; unfathomable aggregations of loss in credit default swaps; inordinate quantums of market confidence destruction and the resulting 50 percent portfolio reductions in the wake, etc, etc.
In recent years it has been reflected in the more traditional insurable risk realm with record-setting natural catastrophe seasons and increasingly severe terrorism events. The fundamental insurance concept of pooling and sharing risk for profitable diversification is threatened. Even the expected level of loss is growing increasingly unexpected in actual results.
Examining the risk discipline and its evolving practice, I see management by extremes beginning to subsume the norm. So here are some examples of how this looks.
Reams of Data--Little Data Intelligence:We have tons of "risk" related data but limited ability to interpret it and use it in order to head off losses that were ostensibly preventable or at least reducible.
Many Risk Tools--Little Integration: Risk technology is rapidly evolving and new tools are emerging. Unfortunately, few of these tools can talk to each other or to other major corporate platforms that hold the exposure and loss data so critical to understanding and managing risk in an increasingly complex business environment.
Many Risk Stakeholders--Few Accountable Players: There are numerous functionaries that need to cooperate in a cross-enterprise approach to understanding and managing risk. Whether they be auditors, compliance leaders, financial risk specialists, etc., all have overlapping needs and need to be coordinated to leverage opportunities that are often overlooked.
Many Perspectives--Few Holistic Approaches: Everyone has an opinion and few are the same. Endless debate and searching for answers often overwhelms action. As a result, you end up with few participants who could enable the execution of great risk management strategies. A single, senior level and enabled power broker is frequently the only solution.
Backward--Forward: Traditional risk management has often spent more analytical time looking at historical losses and trends and much less on truly looking ahead, strategically. Yet what we don't know about the future is likely the most important element of what can cause the most harm. Old habits die hard and forward thinking and out-of-the box views are slow to emerge.
Small Stuff--Big Stuff: Many ERM initiatives have started with the key question: what are our most significant risks? However, beyond the listing of the results, people often manage things that are better understood and easier to grasp. This has already led to the downfall of many major entities.
Short Term--Long Term: A similar and often limiting characteristic of our work is the time horizon we consider. Again, focusing on the short term is easier than gaining clear perspective on the longer term. Perhaps the common 12-month insurance policy is the culprit; perhaps 12-month fiscal management. Driving more robust risk decision making through balancing these polarized perspectives will enable more holistic and effective management of risk, everywhere it's practiced.
CHRIS MANDEL is the enterprise risk manager for a leading financial institution and a former president of the Risk and Insurance Management Society.
April 1, 2009
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