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Identifying and Managing Risk

By Michael Vincent

26 December, 2006

Getting ahead and making a career  in

Risk Management

Where-ever you look at the moment the words "Risk Management" leap out and attack you.  It is fair to say they are the jargon words of the late 20th century.   Indeed this magazine you are reading is entirely devoted to the issue of risk and it vividly demonstrates the diversity of the name and the inherent difficulty in defining a "typical risk management position"

Therefore before we look at the possibility of developing a career in the area, let us try and define what is meant by "Risk Management" and what will the consideration points be in leading to a decision to embrace the concept of risk management.

What is risk management?

*          Is it risk identification & risk control?

*          Is it a sophisticated form of insurance   management?

*          Is it to do with safety and loss control?

*          Is it the management of cashflow and company assets?

*          Is it the management of legal risks within a structure?

*          Is it the ability to model information to  guarantee others understand the problems faced, both in qualitative and quantitative terms?

*          Is it a management method that ensures a business is managed effectively?

*          Is it something different, indeed something that you are thinking as you read this article?

What Risk Management means to an individual is based on their own perspective.  There are many different views, not all of them compatible to the development of risk management as a recognised discipline within industry and academia.  Therefore it can be compared to marketing in the 1950's as an emerging discipline.  Modeling is difficult because all companies & situations are different,  however the concept of identifying and managing risk is well recognised throughout industry.

It is appropriate to try and define the concept of risk management so that common ground can be set, if  possible.

Collins English Dictionary defines "risk" as "1. Chance of disaster or loss,  2.  Person or thing considered as a potential hazard.  3.  Act in spite of the possibility of (injury or loss).  4. Expose to danger or loss.

The Illustrated Oxford Dictionary defines "management" as " 1. Act of managing. 2. State of being managed.  3.  Body of persons managing a business.  4. Administration of a business concern or public undertaking.

Accordingly we could define "Risk Management" as "The  establishment of effective management techniques and procedures  to minimise the potential for loss arising from the act of incurring risk as a normal function of business"

If you are trying to decide that a career in risk management is appropriate  for you then consider the following points and/or questions to see what facet of the area is of most interest from the perspective of your relevant base discipline:

*          The meaning of risk. How do you define risk and what do you see as the prime  areas of responsibility?

*          The response to risk. Based on your definition what is the effective response level in terms of time and resources to manage the risks?

*          How to identify risk?  What methods are to be used to isolate the areas of risk?

*          What analysis is needed?  What techniques both quantitative and qualitative are necessary to fully evaluate the risk?

*          What controls are necessary and why?

*          The qualifications should a risk manager have?  This will in large part depend on the definition assigned by you to the function.   In other words is the role of a risk manager generic or specialist or indeed both.

*          The structure of the risk management department.   Should there be a separate  department devoted to risk or should the functions be spread according to discipline.  There is emerging evidence that states that there should in fact be a "risk manager"  who acts as a consultant to the board and the organisation.  The primary role of this person may well be the effective co-ordination of all the risk identification functions and the coordination of the response to risk on a corporate wide basis, regardless   of the type or class of risk.   Beware this approach is the most threatening within an organisation.

*          The location and reporting channels of the department.  If the decision is to create a separate department what will the reporting channels be, maybe through the financial controller or potentially direct to the CEO? The location and reporting functions must be defined and constructed at the outset to avoid territorial disputes arising in the establishment stage, support from key and senior management is essential to successful implementation

*          Decision making and how to prepare for the process in career and educational terms.

*          Corporate objectives for decisions.  It is essential that any attempt to manage risk must be within the parameters set by the organisation itself and based on the assumed risk profile of the organisation.

*          Techniques for quantifying and identifying and analysing risks.  It is essential that any person wishing to have a career in risk management be equipped to successfully carry out the functions as defined in the process.

When we consider all the points raised above and have worked our way through the definitional argument it would be probable that a degree of enthusiasm exists and there is a real desire to make a difference, beware of the barriers to entry for a career defined as "risk management".   They will consist in some form or another the following statements:

*          It's what we have done for years

*          We can't afford it

*          A good broker can do the same

*          It's not appropriate for our company

*          It competes with Insurance

*          Its an essential part of Management

*          It's common sense.....and just a gimmick

*          No more than good insurance management

Based on the assumption that you have now moved beyond the basic arguments for and against a discreet risk management function, I will now address the education issues and questions involved in the necessary education of a holistic (or whole) risk manager.

It is now time to declare my agenda and approach to risk management.   I have been involved in the area of risk management educational developments and teaching for the past five years.    It started with an opportunity presented by The Australian Institute of Risk Management, (AIRM) in their quest for an educational provider at tertiary level and came to fulfillment with the support of  The Australiasian Risk and Insurance Managers Association (ARIMA) and the encouragement of my colleagues at Monash University.   I would like to share with you the development of the course and where we are today in the teaching of "holistic risk management".   The course is applied in nature and at the same time educationally rigorous leading to  potential change in the thinking process of the individual participants.   It is not a hands on course that offers checklist solutions to problems, rather is teaches and develops a thought process that leads to solutions that are well thought out and capable of defense at any level.

Five years ago Monash embraced the opportunity presented to it by AIRM, it is important to note we were not the first university to be asked, mainly on geographic grounds I believe but we were the first university to say "yes" and to embrace the concept of a multi-disciplionary course covering the needs of a small but growing number of dedicated individuals who classed themselves as risk managers.  ARIMA made the course happen by funding the development and giving on going support. 

The course is titled "The AIRM Graduate Certificate in Risk Management"  and consists of four subjects studied over 18 months to 2 years, it is an award of the Institute and meets the educational requirements for Associate Fellow status.

The process of development was long because it was necessary to balance sometimes two conflicting agendas, they were, 1. The needs of the industry and 2. The academic requirements of the university for subjects to be seen as graduate level offerings.

The first stage of the process was to examine what the international body defined as risk and what the contents of  any course should consist of.   Once this was established subjects were developed within the university that met the academic requirements for graduate study.   It is important to stress that the course is designed to educate the risk manager and not to train them in the functions, however because it is applied the student will be equipped with skills that form the tool box of the risk manager.

The subjects developed to date are:

1.         Risk Control and the Law:

The aim of this subject is to provide students with an introduction to the concept of physical control of risk and its applicability in risk management within the framework of the law.

The subject consists of an examination of the following areas, using the law as the analytical framework:

Acceptable risk and approaches to its measurement

Due diligence

Staffing risks

Liability and protection

Nuisance and environmental exposures

Workplace - Health and Safety

Contingency and emergency planning

Quality control techniques

Contractual transfer

2.         Risk Financing and Treasury  Management:

The aim of this subject is to provide students with an introduction to the concept of risk financing and to the range of techniques of risk financing that are available in today's markets.

The subject consists of an examination of the following areas, using finance as the conceptual framework:

The evaluation of risk, financing tools, retention and transfer

Insurance, non insurance, pre and post loss funding

Retention and self insurance decisions

Insurance and reinsurance principles and practices for the corporate buyer

Deductible selection models

Management and administration of losses and insurance claims

Institutional factors, accounting factors, including taxation and government incentives

Captive insurance companies

International considerations

Financial transfers by contract

3.         Risk Analysis and Economics:

The aim of this subject is to provide students with an introduction to the concept and application of systematic risk analysis.

The subject consists of an examination of the following areas, using economics as the conceptual framework:

The need for risk analysis and the costs involved

The nature of risk and human behavior

The nature of exposure to risk including, property, earnings, personnel and legal exposures

The range of risk identification and measurement techniques most commonly used in industry, including:

physical inspection check lists

organisational charts flow charts

hazard and operability studies fault trees

hazard indices                                       contract analysis

Fundamental statistical analysis including the use of probability calculations and simulation models

The importance of risk analysis, reports and the techniques of report writing

4.         Research Project in Risk Management:

The aim of this subject is to provide students with the conceptual framework to enable them to undertake a field research project in risk management and to develop the students understanding of organisations and fundamental business concepts

 The subject consists of an examination of the following areas, using research and field studies as the conceptual framework:

Research techniques

Concept and formulation of a research project

Research and development of the project

Analysis and presentation

The nature and objectives of organisations

Security

Project planning

Project management

A course of this nature only succeeds if it meets the needs of its client groups, in this the risk managers and the corporates who employ them. 

Accordingly the benefits that flow to an individual are:

The award of the AIRM Graduate Certificate of Risk Management

A stepping stone to further graduate academic study

The necessary skills to identify and manage areas of risk within corporations and            statutory authorities

Eligibility to apply for Associate Fellowship of the AIRM

Under approved circumstances this course may also lead to an award of an executive certificate of the Faculty of Business and Economics, Monash University

The benefits for a corporation are:

Highly qualified staff in the area of risk management

Motivated staff directed to achievement of goals

Analysis undertaken under controlled conditions

Examination of risk undertaken within the corporate environment

The achievement of a relevant management structure

Pro-active risk management techniques implemented

As I stated before we are judged by our clients, their comments are potentially more revealing than any comment by me.    The comments relate directly to the course as offered but I think are relevant to the development and examination of risk management as a defined and distinct discipline.

1.         "I found the course to be very challenging and at the same time to be most rewarding.  After 30 years in industry I was heartened to find that there are structured methodologies for assessing those risks that we face in our daily business activities.  Our previous techniques seem primitive by comparison and I wish I had done this course 10 years earlier!

This course is suited as much to General Managers as it is to the risk management specialists"

                                                                        Ken Bernie

                                                                        Bernie Consulting Services Pty Ltd

2.         "Undertaking this course has helped me to become a better risk manager and receive greater recognition as a professional in my field.  At the same time I have been able to develop a close relationship with several other course participants who are also risk management practitioners.

Equally important, my employer has benefited through the application of the knowledge I have gained"

                                                                        Jim Gummer

                                                                        Group Insurance and Risk Manager,

                                                                        Finemore Holdings Limited

3.         "We believe at the heart of a good client relationship is our ability to provide the best advice which must translate into profit for our clients.  Risk brings reward.  The axiom, the greater the risk the greater the reward, holds true.  However not all risk is good.  Great risks taken by some may only bring great rewards for their competitors.  What risks are faced by your clients or for that matter your company?

This course has enabled our company to provide an unparalleled level of service and professionalism which was previously only available at great expense from international brokerages.  It has directly generated profits for our company."

                                                                        Ian Parisi

                                                                        Joint Managing Director

                                                                        Exchange Insurance Services

4.         "This is an excellent course for Risk Management practitioners.  It addresses the process of identifying risks of business, evaluating their impact and determining the most appropriate form of protection for the business and indeed the balance that must be obtained for the allocation of resources between loss control and risk financing.

Weekend tutorials are convenient for those with hectic work commitments who are unable to attend university on a regular basis.   The course material is of high academic quality which is delivered by well informed and professional course presenters who share a wealth of practical knowledge with  undergraduates both on and off campus.

Course material presented to date has enhanced  job performance in the areas of risk management and has been of major benefit to departments requiring guidance.

I recommend the course to risk management practitioners who desire  a professional qualification in the challenging area of Risk Management."

                                                                        Hans Buettner

                                                                        National Technical Manager

                                                                        Catholic Church Insurances Ltd

The above comments provide us with the desire to further expand the course and potentially move the offering to Graduate Diploma level and beyond,  subjects either planned or under development are:  1. Public Sector Risk Management, 2.            Insurance Law,  3. Insurance Practice and 4.  Risk Management in theory and practice.

AIRM,  ARIMA and Monash pioneered and developed the first four subjects, but the driving force for subjects listed above was from the students.  They advised and cajoled to ensure their voice was heard.   The most gratifying aspect of the course is the absolute commitment of the students to the process of risk management.  Sometime the going gets tough and things fall behind but the one aspect that never falters is the enthusiasm and commitment for the evolution of the discipline of risk management.

The variety of projects that have been completed or are under completion is truly amazing and only demonstrates the absolute length and depth of the requirement of the risk manager in today's world.  Readers will have the opportunity to experience the range of topics over the coming months as summaries and abstracts are reproduced.

A course of this nature succeed only if the teaching staff are fully committed to the idea and embrace the vision of change and the development of knowledge as a worthy pursuit.   The key success factor to this course after the subjects were developed to conceptual stage was the selection of appropriate lecturers.  By appropriate I mean that they had to have a mixture of qualities,  they had to be academically qualified and recognised academics in their subjects and where appropriate  actual business experience in the area of the subject.

Much of this article has been spent on the conception, development and delivery of one program, however the process of the development of risk management should not stop with one program.  Again I reiterate that risk management is a definitional issue and other programs specialising in the areas of insurance, occupational health and safety and finance are offered under the banner of "risk management'

Accordingly I pose some questions that could be considered appropriate to the development of the discipline and have also supplied some answers that  I hope stimulate individuals and institutions to enter the debate on just what is risk management.

Question One:    Are managerial studies appropriate?   Should these be general MBA studies, or are there more specific studies?

In an ideal world we would see the emergence of risk management as a recognised discipline in its own right, indeed in the UK there  are now undergraduate degrees in risk management.   Potentially our market here is too small to sustain a course like that at present. 

Accordingly specific managerial studies may be appropriate if they address issues like risk and the location of risk management within a structure.    A potential student is the only person who can make the choice of course.   If they are interested totally in the area of risk then they should search out the course that is most appropriate for them,  If they see it as part of a larger whole then they should select electives that enable them to acquire the knowledge they feel is appropriate.

A student should ensure they receive the education they need rather than accept what is offered.  In today's competitive environment this is not only a good idea it is essential.

Question Two:  What is the best way to become educated about risk and risk mechanics?  Is experience still the key, or are there other available options?

The question holds the key to the answer.   Formal study and courses enable a risk manager to jump the experience curve by gaining the knowledge of others over a shorter period of time.   To be an effective manager today it is necessary to gain an education so that you can grasp the issues and learn what is important and what is not.

By attending an educational course a participant grows and develops a thinking process that enable lateral thinking to become their competitive edge.     There will always be a place for experience, indeed sometimes it is the only way but experience can be a very unkind teacher, better to learn and build on the experience of others.

Question Three:     How can a risk manager best combine study and work?

There is more to this question than is apparent.   Any achievement in life is really about balance.   Here the risk manager is no different to any other professional who wishes to uplift his or her qualifications.   Balance means applying the right resources to the problem at the right time, that means we must recognise that we have  a family life, a business life and an educational life.  At certain points in time one will have more time devoted to it than the others but over time a balance must be found to ensure health and happiness.

The first point is that if you are in a relationship gain the support of your partner, indeed whilst you may hold the qualification in name, in fact the qualification may deservedly belong to both.

The second point is the mode of study, examine all options, they could be on campus study, distance education or a combination of both.   We chose to hold classes on the weekend and supplement the weekends with distance education materials to ensure work is a constant throughout the semester.  Find out the options before commencing your studies but  I emphasis success is judged overall of the balance you attain in life.

Question Four:  Are studies such as Accounting,  Marketing and Engineering of use to the modern risk manager?

Yes,   all of the above areas are relevant but so are a host of others, like law, medical and arts.    The student must first define what they perceive as risk management and from that find or construct a course of study to meet their needs.

Question Five:  What kind of computer skills are need and what is the best way to obtain these?

Any manager of today must be computer literate.  A  risk manager should be able to use a word processor package, a spreadsheet package, a database package, a presentation package and a statistical package as a minimum.

Graduate studies assumes the above knowledge, so a prospective student should enroll in short courses provided  by the tertiary sector.  It is unrealistic to expect functions, like learning the computer to form a core part of any risk management course because of the vast amount of material that needs to be covered.

In summary, risk management is a popular concept today but we must learn to harvest the benefits of a highly educated  group of people committed to the concept of risk management as a multi disciplined and faceted occupation that is the umbrella under which the organisation survives and prospers.

It is only by embracing change and managing the change process effectively that we as a nation will prosper and ensure we pass that nation on better and stronger to our children than the one we inherited, risk managers in a corporate sense can be a driving force in that goal.

About the Authors

Australasian Risk Management Unit,

Faculty of Business and Economics,

Monash University