Complete risk avoidance eliminates opportunities. Instead, it’s important to learn how to manage risk. That requires taking both processes and people into account.
Mention risk management, and immediately, there is an association with a negative outcome: something that could derail a business and create financial or reputational damage. This may be true in the practical sense. However, it is crucial to appreciate that risk management can create significant business opportunities. Where risks exist, and businesses have sound risk mitigation, tracking and control in place, there is generally enhanced opportunity.
Risks of the times
Consider some of the severe risks present in the modern economy. These include increasingly complex supply chain issues and cyber-attacks, becoming more prevalent and costing companies serious money in prevention and losses. ESG is another important area of focus, considering environmental, social, and governance-related risk issues. Fraud is another area of risk, especially for insurance companies. Indeed, insurance fraud is so widespread that billions of rands are lost every year to people submitting fraudulent insurance claims.
Remembering the fundamentals
These risks aren’t going away; how we deal with them matters. The nature of risks has evolved, and the increased frequency and severity of many risks means we need new risk management methods. However, the tried and trusted methods certainly are still fundamentally important. We must still apply the basic techniques of identifying, risk measurement, evaluation and assessment, risk mitigation and risk reporting effectively. These steps are key to ensuring sustainability and creating business opportunities. Finally, an essential aspect of risk management lies in having proper governance around all the tracking and controls that have been put in place.
With these fundamentals in mind, let’s consider the strategic thinking behind managing risk. One of the easiest ways to manage risk is to avoid it. However, complete risk avoidance eliminates opportunities for a business to grow. Retaining risk is preferable, and managing it will take different forms depending on the company.
In our industry, there are a few methods of retaining risk. The first and fundamental is to spread the risk from the business via reinsurance, which will spread insurance risk worldwide.
Managing risk effectively
More generally, the tried-and-true method for businesses is to transfer risks to an insurance company and implement relevant measures to control risks as part of risk management programmes.
If risk management is to be successful, it is critical to have the support of the executive and senior management, who must set the tone for the rest of the organisation. Risk management must become part of an organisation’s culture, and there needs to be a detailed and transparent communication process. Specific staff must be appointed to manage the risk management programme, including ongoing training where appropriate.
While process issues are fundamental, organisations must recognise the behavioural side. The basic principles of the risk management process are essential to implement, but we must never forget that human behaviours could negate all the good work put in place. Key behaviours to watch out for include nonalignment, disagreement, breach and non-compliance, poor communication, and misunderstanding. Having identified behavioural aspects of risk management, ensuring total alignment between practical risk management techniques and considering behaviours that could negatively affect risk and create leakage becomes critical. Therefore, all elements and factors must be considered and dealt with at the outset, and a test must be conducted regularly to ensure all aspects are considered and documented to provide a solid risk management programme.
Taking human behaviour and processes into account benefits organisations by empowering them to engage in business activities with confidence, achieving their goals and objectives, benefiting customers and employees, and creating a sustainable business for the future.