Magazine article Risk Management

Converging Risk, Part I: Risk Management as a Divided Profession

Magazine article Risk Management

Converging Risk, Part I: Risk Management as a Divided Profession

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Risk Management as a Divided Profession

The ideal risk manager is often defined as one fluent in risk and capital analysis, well versed in operations management, familiar with the insurance market, comfortable with public communications and experienced in boardroom politics. But do such paragons really exist? The short answer is no-or, at least, not in any great number.

Instead, these qualities are possessed by a variety of individuals within a given company. What is more, different companies devote greater amounts of time to some of these areas than they do to others. The result is a definition of "risk management" that varies between financial and non-financial businesses, with the risk mangers involved in this divide falling into two camps: financial versus corporate.

The gulf between these two camps has been, until recently, a deep one with few bridges. They read different magazines, attend different conferences, follow different educations, shoulder different responsibilities and earn different amounts of money. In short, they are different kinds of people.

Corporate risk has traditionally been a hardheaded discipline that calls for practical business know-how, sharp negotiating skills and an intimate knowledge of the intricacies of the insurance business. Financial risk, on the other hand, is usually practiced by individuals either retired from the front-line-former derivatives traders ("poachers turned gamekeepers") being particularly common-or quantitative specialists who can devise and manipulate statistical models. This kind of risk management relies on a comprehension of the behavior and structure of financial markets and individual companies.

But does it really matter that there are two distinct groups of professionals who just happen to call themselves risk managers? Yes. Because the problems facing the two sides overlap to a greater degree than the professional chasm suggests, and evidence abounds that a piecemeal approach to managing risk does not work.

A succession of banks, most famously Barings, but more recently Allied Irish Bank, have learned-with hefty financial repercussions-that operational problems can be more dangerous than financial risk. …

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