Magazine article Risk Management

Looking: At Risk Strategically

Magazine article Risk Management

Looking: At Risk Strategically

Article excerpt

Over the years, there have been a number of major debacles, such as the current credit crisis, that might have been prevented or, at least, reduced in scope by looking at risks more strategically. This can be accomplished by conducting a dynamic risk analysis of the past, the future, macro/micro trends, the economy, and the political/regulatory/social environment to search for emerging risks. While it may sound complex, conducting dynamic risk analysis is not as difficult as it might appear. Just follow these steps.

Review past risk issues. Some situations that increase risk happen repeatedly. If the sector does not make fundamental, substantive changes, they leave themselves open should the situation reappear. Insurance brokers and companies, for example, faced the issue of contingent commissions in the 1990s. There was a mild uproar in the industry but no drastic changes occurred. When it resurfaced this decade, the outcry was greater and the government led an intense investigation that hit the largest brokers substantially.

In another example, gasoline price inflation in the 1970s hurt Detroit as consumers opted for more fuel-efficient cars, but the damage was not enough to spur a lasting change in automotive design. The Iraq War signaled the possibility of another gasoline price escalation situation but the path toward an SUV-dominated line-up was still not dramatically adjusted. Auto makers are now feeling the effects of consumer disinterest in these vehicles.


Analyze impending socio/ economic and political/regulatory changes. The savings and loan crisis of the 1980s is a perfect example of the impact of changing socio/economic and regulatory reform. Banks moved from loan portfolios made up of individual mortgages to speculative real estate ventures at a time when banking standards were relaxed and interest rates were climbing. The riskier loans defaulted and led to bank insolvencies.

Analyze competitive intelligence. Being aware of what competitors are doing is critical. If Company A's competitors are hedging the price of a commodity that everyone needs, but Company A is not, how much greater is the risk that Company A will suffer if the commodity becomes scarce and the price escalates overnight? And if Company A does not know that its competitors are hedging, the surprise of being the only one hit with a price escalation would further increase the impact. …

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