The bulk of risks faced by the corporate sector is comparatively easily identified, assessed and mitigated. But there is a class of risks with often severe consequences that is, at times, difficult to grasp, even more difficult to assess, and most difficult to manage. The challenge arises from the presence of uncertainty which, in contrast to simple quantifiable risk, can be elusive and difficult to model. But uncertainty cannot be neglected; it must be on the plate of corporate risk management.
A new report “Pushing the boundary – Risk management beyond insurance”, published today by Zurich Financial Services Group (Zurich), shows that by adhering to some basic principles and applying good common sense the challenges caused by uncertainty can be managed. The report looks at the class of seemingly intractable risks, such as reputation risk or supply chain risk that have a high potential to thwart corporate plans and destroy shareholder value. What makes these risks even more of a challenge is the fact that they are largely uninsurable, leaving firms to work out for themselves how to monitor, mitigate and manage them.
The report provides practical guidelines for risk management under high doses of uncertainty. Five insights for implementation are:
1. Uncertainty can be assessed and measured.
2. Emerging risks radars must be built and systems for continuous scanning established.
3. Even under uncertainty, prudent forecasting is possible and necessary.
4. Contingency planning is indispensable.
5. Establishing resilience buffers will dilute adverse impact.