What’s your stance on strategic risk management?

Johannesburg,  March 2011

That the world is a dangerous and unpredictable place has been driven home through 2010 with massive earthquakes, the lingering effects of the global financial crisis and the BP oil spill in the Gulf of Mexico. But even with these stark reminders of the dangers of doing business in a tumultuous environment, have you looked at your approach to strategic risk management?

Your answer is ‘probably not’.

Mike Durek, CEO of ACE Insurance South Africa, says a recent study by The Economist Intelligence Unit shows that companies which take a genuinely strategic approach to risk management remain few and far between. “The good thing is that risk management is enjoying an unprecedented level of authority and visibility. However, that hasn’t translated into strategic implementations of risk management,” he states.

Sponsored by ACE Insurance and KPMG, the report is titled ‘Fall guys: Risk management in the front line’ and is based on a global survey of senior executives, from both the risk function and general management.

Key findings, says Durek, are that communication between risk functions and the broader business can sometimes be fragmented, while an enterprise‐wide culture and awareness of risk can be difficult to achieve.

Many companies have still not grasped strategic risk management, he continues. Senior executives regard the identification of new and emerging risks – such as weak demand and market volatility – as the key goal of risk management. But just 35% say that their company is effective at anticipating and measuring emerging risks.

Only a minority of companies involve risk functions in key business decisions, says Durek. “While risk managers have long hoped to play a more prominent role in strategic decision‐making, this survey suggests that this remains an aspiration. Indeed, risk functions are typically not expected to play a supporting role in decision‐making, with just 41% saying they expect risk managers to provide analysis to help management set corporate strategy.”

This situation effectively neuters the value that risk management could be adding to strategic direction. Instead of informing strategy, Durek says it is a rather unfortunate reality that risk management retains a ‘rear-view’. “That rear-view results in preventative measures being implemented, such as controls and monitoring. It curtails what could be a far more beneficial role of risk management.”

That’s further reflected in the finding of the report that there is limited appetite for investment in risk. “Companies don’t spend on this discipline. Less than half of survey respondents have invested in risk processes, while less than a quarter have allocated funds to headcount or training of managers in the central risk function,” Durek says.

What’s perhaps worse is that risk management appears to have come into vogue on account of the global financial crisis – and is likely to fade into the background once its effects have passed. Durek is of the view that there is always another disaster around the corner. “Whether man made or natural, the lasting lesson should be that the world is always unpredictable, it is always prone to rapid and often dramatic change. Strategic risk management acknowledges this reality and provides a level of control and assurance in steering the company through the unexpected.”

The risk expertise – and willingness to acknowledge the input of the risk manager – of those in charge also requires attention, Durek notes.

He points to the comment of senior editor at the Economist Intelligence Unit, Iain Scott, who says: "In the wake of the financial crisis, there were plenty of stories about risk managers whose legitimate concerns about the business were ignored and regarded as a brake on growth.”

Scott adds: "Three years on, the incentive to ensure that there is a clear and consistent approach to managing risk across the enterprise has never been greater. But while strategic risks dominate companies' concerns about the year ahead, many clearly find it difficult to link risk management with overall company strategy. Often, the barriers to effective strategic risk management appear to be corporate culture and poor communication."

Fall guys: Risk management in the front line is available for download at: http://www.businessresearch.eiu.com/fall-guys.html

Contact Information
wendy van den Heever 011 722 5700 wendy.vandenheever@acegroupx.com