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management is the process of identifying, quantifying, and managing the risks
that an organisation faces. As business
outcomes are uncertain, they have some element of risk that can include
strategic failures, operational failures, financial failures, market
disruptions, environmental disasters, and regulatory violations.
is impossible to remove all risk, it is important that businesses properly
understand and manage the risks that they are willing to accept in the context
of their overall corporate strategy.
Most people seek to transfer risk by buying insurance. Yet, according to PwC and MacTavish,
‘Corporate Risk & Insurance - the
case for placement reform’, there are major flaws in how insurance is
arranged, which poses a real threat to UK firms far greater than almost any
business currently recognises.
risk is the amalgam of all internal and external risk factors, both upside and
downside, which impact upon the profitability and value creation of an
enterprise. It is comprised of four main
Risk - the risk of missed opportunities
Risk - managing exposures and controlling
Risk - the risks inherent in the processes of managing the business
Risk - the risk of losing access to the resources utilised by the business
goes beyond pure business planning and considers a breadth of issues. Formulating a business strategy requires an
understanding of the market it is competing in, where it sits relative to its
competitors and how it will compete with and outperform its rivals.
It is also
the risk to earnings or capital arising from adverse business decisions or
improper implementation of those decisions.
This risk is a function of the compatibility between an organisation’s
strategic goals, the business strategies developed to achieve those goals, the
resources deployed against these goals and, most importantly, the quality of
resources needed to carry out business strategies are both tangible and
intangible. They include communication
channels, operating systems, delivery networks and managerial capacities and
capabilities. The definition of
strategic risk focuses on more than an analysis of the written strategic
plan. Its focus is on how plans, systems
and implementation affect the business value and how management analyses
external factors that impact the strategic direction of the business.
of Strategic Risk might be:-
risk management is a business process that helps a business to avoid losses brought
about by changes in financial product prices or business partner (customers,
suppliers, and distributors) defaults.
Financial risk management tools typically use mathematical and
statistical formulas to identify, assess and control risks, and focus primarily
on market and credit risks. The
management process includes all mechanisms and policies that a business puts
into place to avoid, limit and remediate losses due to market risk or business
major elements of financial risk are market risk and credit risk.
risk is the risk of loss that may arise if security prices vary. For example, Company B, a beer distribution
company, owns £1.5 million worth of stock in its short-term portfolio. After three months, the portfolio's value
fell to £1 million. The loss of £500,000
is due to market risk because security prices in the portfolio dropped.
risk is the risk of loss that arises when a business partner is unable to pay
its debt. For example, Company B may
lose if a major customer (who owes £1 million) then files for bankruptcy.
risk management activities benefit businesses because they help to prevent
major losses. A company may need to make
investments in financial risk management in the short term, but future benefits
almost always exceed initial costs. A
company also may need to hire or engage financial risk management specialists
to ensure that they understand the latest tools and methodologies used in
managing financial risks.
risk is, as its name suggests, a risk arising from the execution of an
enterprises’ business functions within a given field or industry. It is a very broad concept that focuses on
the risks arising from the people, systems and processes through which a business
operates. It also includes other
categories such as fraud risks, legal risks, physical or environmental risks.
risk is the risk that is not inherent in financial, systematic or market-wide
risk. It is the risk remaining after
determining financing and systematic risk, and includes risks resulting from
breakdowns in internal procedures, people, systems, controls, operations or
Operational risk management should comprise of a
framework for risk management which identifies particular events or
circumstances relevant to the business's objectives (risks and opportunities),
assessing them in terms of likelihood and magnitude of impact, and determining
a response strategy and monitoring progress to protect and create value for the
business’s owners, employees, suppliers and customers. For example, it should include analysis of:-
Risk is the risk of losing access to the resources utilised by the business,
such as heat, cooling, fuel, telecommunications, IT, raw materials etc.. Other resources such as people, external
suppliers, the supply chain as a whole, distributors, customers and the market
could also be classified as being a ‘hazard risk’.
real ‘today’ risks are frequently overlooked, with even a short-term outage or
disruption to a third party’s services having immediate and costly
implications. Risk transfer via
insurance is often the most obvious solution, however according to a recent
report by MacTavish and PwC, ‘Corporate Risk & Insurance - the case for placement reform’;
there are major flaws in how insurance is arranged.
flaws pose a real threat to UK firms, far greater than almost any business
currently recognises. The threat is
particularly acute for mid-sized firms, i.e. those businesses with turnovers of
between £50 million and £5 billion.
However, the same threats exist for sub £50 million turnover businesses
and, in many ways, are even more marked as smaller firms do not have the
reserves, ready access to capital, or resources to sustain a major loss.
typical manufacturing business with lean margins, significant existing debt and
available cash of just £5m. Analysis of
their insurance programme and the effect of a protracted claim dispute shows
that raising further debt or equity capital post-loss would be difficult or
costly and, in today’s economic climate, if not impossible.
loss scenarios far outweigh cash reserves, and sensitivity to large cost
fluctuations in expenditure is high. A
disputed or delayed claim settlement, at even a fairly small proportion of the
insurance limit could place the business in severe danger and any sudden change
in insurance cost could wipe out profitability.
Moreover, the report also exposes serious failings on the part of Boards
of British businesses to properly govern their insurance arrangements.
example, standards of risk disclosure are generally poor and inadequate.
Systemic weaknesses existed in almost every case studied which included major
flaws in the information set used to explain risk to insurers and a consistent
level of highly material omissions from disclosures. Perhaps the most significant omission is any
reference to business changes and the accompanying effect these have on
operational risks. This is crucial in
today’s paradigm-shifting, post-recession world.
many powerful examples of material and potentially damaging information gaps in
submissions, which are grouped around the following recurrent themes:-
very limited focus on business changes and the risk impact of
these changes, which often leads the underwriter to make outdated or
cursory and often inaccurate discussion of product or service
details, particularly the end-use to which customers put them which nearly
insufficient engagement with operational complexities, in
particular the underlying drivers of business interruption risk, e.g.:
areas of single source
bottlenecks in the
process which could impede business recovery after a loss
specific details about
business continuity arrangements
lack of discussion of
little or no discussion of critical risk management activities
a common lack of detailed analysis of large, one-off or anomalous
claims, where there is often no consideration of the risk management
current risk assessment process is fundamentally limited and there is evidence
to suggest that submission standards are getting worse through the insurance
cycle. This leaves customers with the risk that policies will not pay out in
the event of a large loss. Thus buyers,
brokers and insurers alike should take the steps necessary to support more
forensic risk assessment.
© Gimple Associates 2011
t: 07974 099221