Myth Busters: Risk Management
The Meaning of Risk Management
My financial advisor recently provided me with a copy of a guide to market volatility. What captured my immediate attention was a statement right in the beginning which I’ll paraphrase as: “The key to navigating ups and downs in the market is proper preparation. Planning and risk management can be used to gain proper perspective and stay focused on one’s long-term goals.”
I’m a self-professed “insurance geek” so the fact that this caught my attention isn’t surprising to anyone that knows me. The concept of risk management has been one I’ve thought long and hard on for years, and I also come from a family of insurance and risk management gurus. One of my early questions to family members was “Why don’t more companies directly purchase risk management services?” The answer was that “…they should be buying more of them.” In casual conversation I inquired the same of a business owner and his response was quite different. He asked back “Why pay for advice on how people should use their common sense and for what I already know?” I realized that in many regards risk management is seen as purely an expense and one for which there is not a great return on investment.
My belief is that this couldn’t be further from the truth. Properly understood, the purpose or meaning of risk management is to position a company so that opportunities can be seized as they arise ensuring the company’s success and profitability over the long-term. When risk is properly assessed and also balanced with the company’s ability to handle those risks (its risk bearing capacity), the company is then able to thrive.
Very generally speaking, risk assessment revolves around a number of areas: operational, personnel, hazard (liability and property), financial and strategic. Risk capacity can be analyzed through a rigorous review of operational flexibility, financial strength, management experience, key performance indicator validity, contractual transfer, safety culture and insurance transfer. Until a company understands its balance or more exactly knows where it’s out of balance, it might well face two undesirable outcomes:
1) It becomes competitively irrelevant due to underutilization of its risk capacity and missing important opportunities
2) It eventually collapses under the weight of risks it was unknowingly ill-prepared to take
The question for any company is where might you be out of balance and what must you do to remedy that; should you reduce risk, increase risk capacity or both and how does this fit with your individual appetite for risk? I’ve come to see my role as a risk management and insurance professional as: assisting commercial insurance buyers and business owners in this analysis and in devising strategies to maintain this crucial balance between the risks they face and sometimes knowingly invite, and their ability to fully capitalize on them through preparedness.
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