Sounds familiar and seems on point; but is it? This actuarial construct is useful and adds to our understanding of many types of risk. But if we had these estimates down pat, then how do we explain the financial crisis and its devastating results? The consequences of this failure have been overwhelming.
Enter "risk velocity," or how quickly risks create loss events. Another way to think about the concept is in terms of "time to impact" a military phrase, a perspective that implies proactively assessing when the objective will be achieved. While relatively new in the risk expert forums I read, I would suggest this is a valuable concept to understand and more so to apply.
It is well and good to know how likely it is that a risk will manifest into a loss. Better yet to understand what the loss will be if it manifests. But perhaps the best way to generate a more comprehensive assessment of risk is to estimate how much time there may be to prepare a response or make some other risk treatment decision about an exposure. This allows you to prioritize more rapidly, developing exposures for action. Dynamic action is at the heart of robust risk management.
After all, expending all of your limited resources on identification and assessment really doesn't buy you much but awareness. In fact awareness, from a legal perspective, creates another element of risk, one that can be quite costly if reasonable action is not taken in a timely manner. Not every exposure will result in this incremental risk, but a surprising number do.
Right now, there's a substantial number of actors in the financial services sector who wish they'd understood risk velocity and taken some form of prudent action that could have perhaps altered the course of loss events as they came home to roost; if only.
How can we better understand the velocity of risk? First, look at how the circumstances of concern are impacting others who may have the same or similar exposure. Talk to risk owners who've already been affected and get insight and intelligence about how the event evolved for them. When did they first see evidence of its appearance? What horizon scanning methods did they use to see it coming?
Consider where attorneys seem to be directing their attention and resources. Consult subject matter experts in your company who understand developments in the fields of technology, advertising or research. Find out what they're concerned about and understand why. These efforts, while typically limited in scope and rigor, can reveal much about the potential for new risks and the speed at which they may emerge, influenced heavily by product development goals and pressures.
Finally, use a group of managers who have some accountability for strategy and tactics and spend time interviewing them and getting their inputs on where they're going and what factors are driving their plans.
Collectively, these efforts can give you a few of the many data points you can leverage to piece together a picture of emerging risks and some context around the speed with which they could develop and cause loss.
The more of these elements you can assess, the more opportunity you'll have to develop and implement loss prevention plans that could allow you to avoid the loss altogether. Between your efforts at prevention and control you may be able to avoid or mitigate your next crisis, an experience you can live without.
CHRIS MANDEL is the enterprise risk manager for a leading financial institution and a former president of the Risk and Insurance Management Society.
September 1, 2009
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