Where is risk management going?

Where is risk management going?

Where is risk management going? Risk management as a function is in a state of constant evolution. Since the 2008 global financial crisis, which caught many organizations off-guard, the ‘traditional’ risk management model has been questioned. The traditional focus on insurance and operational risks has become insufficient for many organizations, and the evolution of risk management into a more strategic role has been underway.

There are three primary trends driving this evolution. The first is the introduction of new technology. Big data and the use of algorithms are introducing new risk management techniques that enable organizations to make better and faster decisions at an increasingly lower cost. Computing power is getting faster and cheaper, which allows organizations to quickly process increasing amounts of data from a wide range of sources. This can provide better and timelier information upon which to detect problems earlier, make better decisions and predict problems before they happen. This, in turn, can give an organization a competitive advantage.

The second trend is the globalization of risk. As our economy, supply chains and networks become more globalized, sociopolitical, macroeconomic or disaster events abroad have a ripple effect like no other time in history. This comes with an increasing realization that we can no longer insulate ourselves entirely. We now understand that the risk exposures and prearedness of our key suppliers and customers in areas such as business continuity planning, labour practices and concentration of assets in natural catastrophe-exposed zones can make an impact far and wide across the globe when something goes wrong.

To respond to this trend, an organization must commit to an enterprise-wide risk management approach. This means risk managers will need to develop a much broader skill set and potentially form an internal risk committee to access the knowledge required for better initial risk assessment that contemplates the compounding effects of interrelated risks, and how these relate to the corporate financial materiality threshold. The result might lead to a recalibration of the risk management atrategic plan that achieves greater awareness and influence on management decisions versus the more conventional model, which focuses on a silo top-down approach.

The last trend that will impact risk management moving forward is the focus on creating a strong risk culture. The increasing speed in the evolution of risk means that it will become more difficult for organizations to adjust their risk management plans and insurance programs at a speed that keeps pace with this change. Decisions will need to be made quickly and changes implemented rapidly. Insurance products often lag behind the evolution of new risks, which will force organizations to increasingly self-insure in the short-term. Having a strong risk culture that starts at the top and filters down to all levels creates a level of preparedness to mitigate risk when insurance is not available, affordable or feasible.

To create a strong risk culture, organizations must establish a few key elements. First, buy-in at the C-suite or board level will ensure that risk management becomes an important component of the business planning process. Second, it requires a risk appetite and philosophy that is well understood across the organization. This is because it becomes the measuring stick by which people will make their day-to-day decisions. Lastly, the culture needs to be reinforced with sound metrics for measuring effectiveness and incentives that promote risk-intelligent behaviours.

To effectively deal with these three trends, successful risk managers will have broad skill sets that include knowledge of financials, operations, technology, marketing and others. These skills will need to be coupled with strong interpersonal skills that will enable them to be true change agents within an organization, translating vast amounts of information into meaningful risk strategies that can be effectively communicated and implemented. In the end, this will separate the winners from the losers in Canada and around the world.

Michael Loeters is vice-president and risk management practice leader at BFL Canada. BFL Canada helps its clients become resilient organizations by taking a strategic approach to insurance and risk.