The Role of Risk Management

• The risk industry and the professionals within it have changed drastically over the last few decades
• Once, risk professionals simply purchased insurance to transfer losses onto another company
• Now, they are expected to monitor the risk environment, identify and predict risks, and implement proactive strategies to prevent issues from occurring or minimize their impact
• Top-leadership positions based on risk management, such as Chief Risk Officer (CRO), are becoming increasingly common
• Skills and competencies necessary for a risk professional to be successful

  • Commitment to continued learning
  • Environmental awareness
  • Influence
  • Collaboration
  • Strategy
  • Integrity
• Risk definitions usually focus only on the downside scenarios
• Others, depending on the context, are more expansive and consider all variability as risk
• Risk (engineers' definition)


  The product of the probability of an event occurring, that is viewed as undesirable, and an assessment of the expected harm from the event occurring
• Risk


  Defined in terms of variability of actual returns/utility on an investment/activity/action around an expected return/utility, even when those returns/utility represent positive outcomes
• The word "risk" itself is derived from ancient Arabic word "rizq" and used till today in the Maltese Language, translated to mean prosperity granted by God (Allah) to a person
• During the Renaissance, in Europe this was given the meaning of an uncertain loss or danger
• The Chinese symbol for risk best captures the duality of risk, representing the downside (danger/crisis) and the upside (opportunity)
• Minimizing risk exposure (or danger) will also reduce the potential for opportunity
• The Italian translation of the word 'Risk' - 'Rischiare' - means 'to dare'
• Risk is a choice, not fate, and the "actions we dare to take, which depend on how free we are to make choices, are what the story of risk is all about
• Risk depends on perception, culture, beliefs, and the environment
• Two ingredients are needed for risk to exist: 1) Uncertainty about the potential outcomes, 2) Outcomes have to matter in terms of providing utility
• Examples of risk


  • A person jumping out of an airplane without a parachute (no risk as certain to die)
  • Drawing balls out of an urn (no risk as unaffected by outcome)
  • Drawing balls out of an urn with different monetary values attached (risk as satisfies the two ingredients)
• Risk


  An uncertainty that matters because it can affect one or more objectives
• Risk exposure arises from any type of activities to reach objectives
• There is a need to effectively manage risks because of potential damage, danger or losses, and to ensure continuity, especially in times of change
• Wider and/or complex risk requires more prudent management
• To survive and gain utility or continue in business or in life and grow, organizations/people need to do something and innovate continuously
• Innovation/achievement/Change however comes with a price; it is changing the world we live in and in turn disrupting the livelihood of workers within organizations and people
• Sources of risk


  • Financial uncertainty
  • Legal liabilities
  • Strategic management errors
  • Accidents
  • Natural disasters
• Types of risk


  • Economic Risk
  • Environmental Risk
  • Geopolitical Risk
  • Pandemic
  • Societal Risks
  • Technological Risks
• Risk Management is a proactive strategy towards meeting objectives (with the least hiccups)
• Sustainability


  Determining ways to maintain 1) natural systems functional, 2) remain diverse and 3) produce everything it needs for the ecology to remain in balance
• Three Pillars of Sustainability

  • Environmental Sustainability
  • Economic Sustainability
  • Social Sustainability
• In Risk Management, uncertainty is defined in three forms of knowledge and non-knowledge
• Economic Sustainability


  Human communities across the globe are able to maintain their independence and have access to the resources that they require, financial and other, to meet their needs. Economic systems are intact and activities are available to everyone, such as secure sources of livelihood.
• Social Sustainability


  Universal human rights and basic necessities are attainable by all people, who have access to enough resources in order to keep their families and communities healthy and secure. Healthy communities have just leaders who ensure personal, labour and cultural rights are respected and all people are protected from discrimination.
• The Three Pillars of Sustainability

  • People
  • Profits
  • Planet
• Known (K) risk


  The corresponding co-risks will usually have been established from prior experience and their usefulness will be understood and appreciated. These events normally occur as a result of incompetence.
• Unknown (u) risk


  These types of events are the most commonly encountered situations - but its extent and full implications remain unclear due to the lack of judgement. These events may be quantifiable but the time of occurrence is unknown.
• Unknowable (U) risk


  These are events which are difficult, if not impossible, to model due to lack of knowledge in hand. This includes all the risks that cannot be identified in advance. No probabilities can be specified for some or all events and no realistic boundaries can be stated for the consequences.
• Disregarded risk


  These are very rare – these are the risks an organization is aware of but is disregarding them, either intentionally or unintentionally. Risks which chosen not to know by forgetting, suppressing (concealing) or repressing them – we do not like to know.
• Knowledge Quadrant


  • Known – Known (Knowledge of occurrence and Impact)
  • Unknown –Knowns (Impact Unknown but Existence Known – e.g. untapped Knowledge)
  • Known–unknowns (risk)
  • Unknown –Unknowns (Unidentified risk)
• Risk Management Process


  1. Establish Objectives

  2. Identify Risks & Controls

  3. Assess Risks & Controls

  4. Evaluate & Take Action

  5. Monitor & Report
• Risk Management Process (AS/NZS 4360:2004)

  1. Establish Context

  2. Identify Risks

  3. Analyse Risks

  4. Treat Risks

  5. Evaluate Risks