Risk management

The crisis which has hit the world economy has pinpointed corporate vulnerability and altered the image of their leaders in the eyes of public opinion. It is within the framework of this multidimensional crisis that decision makers and risk managers have to assess situations with an exceptional character in most cases hindered by the lack of financial resources.

The former patterns of risk management turned out to be inadequate or non operational. It is essential that new models be proposed which are more efficient, better adapted to the new requirements because the crisis has paradoxically allowed the emergence of new risks: fraud, loss of image, computer piracy, …

Background to risk management

The introduction of risk management in the industrial and economic sectors has been carried out gradually throughout several stages.

  • 1945:
    Risk management first appeared in the United States following the Second World War.
  • 1965:
    United Kingdom was the first European country to adopt the concept.
  • 1975:
    The increase of insurance premiums was behind the entry into effect of risk management in the economic sector.
  • 1980's:
    High-risk industries (chemistry, petrochemical, gas, oil) have adopted this function on the aftermath of the Bhopal catastrophe in India (1984) and the Chernobyl in Ukraine (1986).
  • 1990's:
    As of 1990, risk management has developed thanks to the growing corporate needs. Henceforth, it extends to various economic fields. A more comprehensive management, relying mainly on the institution of preventive measures and on the elaboration of a survival plan towards crisis that emerged.
  • 2000's:
    In 2008, according to a survey conducted by the consultancy firm INGEA, the frequency of natural catastrophes and the financial and technological dangers account for the recourse to the comprehensive risk management scheme.

A new concept

Risk management is a set of techniques pertaining to the definition and to the identification of the risks which may affect corporate business.
It applies to any company, regardless of its size and its outreach. Being available in several sectors, this subject regards the commercial as well as the industrial sectors.
Risk management targets two key objectives:

  • Eliminating or reducing risks incurred by corporate sector and the institution of control, funding and legal safety programs in order to make the achievement of the predefined objectives possible.
  • Assessing the results emanating from the program implementation by noting the gaps that are likely to affect the objectives to be attained and taking appropriate measures to eliminate those gaps.

The objectives of a developing subject

Being more and more present in corporate strategy, risk management aims at:

  • Protecting corporate brand and the company's reputation.
  • Helping corporate business launch new projects.
  • Listing risks in a clear and structured way, filing them in order of priority and measuring their frequency.
  • Diminishing as much as possible the financial impact on the occurrence of a random event.
  • Reducing legal and professional third party liabilities.
  • Increasing the stability of corporate operations.
  • Clearly defining corporate insurance needs.
  • Maintaining all of the resources with a view to achieving economic optimization.

Reaching these objectives rests on the profound knowledge of the risk management systems which can be summed up in the following:

  • A risk culture including the behavioral features of the company's personnel.
  • A general policy that is mindful of genuine risks management to make them more tolerable. The top management department aims at optimizing personnel's safety and that of company's assets.
  • A strategy resting on the identification of risks and the implementation of internal safety rules.
  • A plan designed to reduce risks and ensure a better corporate safety. Risk tolerance threshold is assessed in terms of figures.
  • Programs and budgets to achieve defined objectives.

Typology of corporate risks

We can distinguish two types of risks:

  • Speculative risks: having positive effects, these risks are designed to stimulate production and engender more profit.
  • Pure or negative risks: they are fortuitous events such as natural, technical or human catastrophes, fires and other losses. Causing damages to properties, these risks hamper the due course of corporate operations.

We may also rank risks into:

  • Endogenous risks when they are directly triggered by corporate activities.
  • Exogenous risks if they emanate from pressure related to corporate external environment.
  • Mixed or intermediate risks: that is, those risks which encompass social, supply, customer and country risks.

The definition and the classification of risks is a task entrusted to the risk manager.

The risk manager

The risk manager is a qualified person whose task is to integrate the risk management within the company. He is regarded as:

  • Image provided to Microsoft by Fotolia. Used with permission from MicrosoftA field man: he is called upon to carry out inspections in the subsidiaries and factories belonging to the company. At the end of the visit, he should establish a statement which enables him to avoid the potentially incurred risk.
  • A manager: the risk manager is authorized to establish concepts and objectives which enable him to carry out one's mission in due process. He should, therefore, possess a risk management culture which allows him to adopt the appropriate scientific approach in his risk management.
  • A communicator: the risk manager is able to establish ties with his environment. He has command over communication techniques which allow him to get information.

The position of the risk manager within the company

At the level of the company, the risk manager works in collaboration with all of the executives to institute a risk culture.
For some companies, he depends on the top management, in others on the financial department. In any case, he must be part of the executive board. The risk manager plays the role of:

  • Coordinator: he should elaborate and oversee risk processing .
  • Moderator: the risk manager raises awareness among staff members of the company about the risks they run, or the risks they themselves create.
  • A stakeholder: he ensures the link between the company and the insurance market.

The risk manager's missions are the following:

  • Diagnosing and analyzing risks.
  • Processing risks by devising prevention and protection programs as well as adopting survival and risk management plans.
  • Defining self insurance and/or insurance programs.

The risk manager's approach

Risk analysis goes through four stages:

  • The establishment of an inventory: the risk manager adopts an exhaustive approach in order to identify and list the possible risks incurred by the company. Risk classification is carried out through the calculation of the company's frequency and exposure rates to risks.
  • Risk assessment: the risk manager proceeds to the simulation of the losses to which the company is exposed: estimated damage sums, operational stoppage time, ...
  • Risk processing: the risk manager supervises preventive safety. He has to prevent the occurrence of risks and minimize their gravity.
  • Funding: this stage presupposes the elaboration of a funding strategy for the listed risks. Three options are on the table:
    • Non insurance: the manager chooses acceptance of some risks. The company, therefore, assumes the costs resulting from a minor or recurrent loss. However, it has to take measures in order to prevent the occurrence of any major loss. This solution enables the company to save 10 to 15% of insurance taxes and 20 to 30% of premium loadings.
    • Self insurance: the company decides to assume risk and to finance it out of its own resources without having recourse to external transfer. Self insurance, also called retention, regards risks whose frequency and gravity are known and rules out fortuitous risks such as natural catastrophes.
    • Insurance: the company chooses an external financial cover and contracts an insurance policy. The risk manager would enter into negotiations with brokers so as to choose the best insurance offers.

The importance of insurance for risk management

Used with permission from MicrosoftThe risk manager resorts to insurance when the risk incurred by the company rises above the estimated threshold. Insurance, therefore, is part of the risk transfer solutions. As the risk manager makes recourse to insurance, he proceeds to the selection of the brokers and insurance companies that are most fit to handle risks. He must be endowed with a good knowledge of international programs and capable of managing an insurance captive.

In light of risks recrudescence and the probable rise of insurance tariffs, risk management professionals are called upon to show more innovation and caution in their search for appropriate solutions. A comprehensive management approach encompassing all insurable and non-insurable, strategic or operational risks is more than ever required for any company keen on its corporate image and sustainability.

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