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Other people's risks can become yours
5 February 2009

Whatever size or type of business you operate, risk management is a vital weapon in your insurance armoury. And in an interconnected world, there’s no hiding place from the risks brought about by global trends and events.

No matter how big or small your business, what happens in another country could well have an effect on your own company in Australia.

Imagine a bird flu outbreak in south-east Asia. What’s the potential impact on your supply chain?

How would a global financial crisis, such as the subprime credit crunch, affect your investments, or your ability to borrow money at a reasonable rate?

If the Australian dollar continues to soar, what’s the effect on your pricing strategy? How is your business protected against fluctuations in foreign exchange rates or interest rates?

And it doesn’t matter where you fit into the supply chain, it’s almost impossible to dodge all the effects of a major problem. Last year’s equine influenza outbreak, for example, affected thoroughbred breeders, the gambling sector, the racing industry, equestrian stud farms, caterers, security providers, equipment retailers, transport providers...

Everyone from multimillionaire trainers to boutique importers took a hit from the cessation of racing.

That’s where enterprise risk management (ERM) comes in. ERM – the new buzzword in the world of risk management – is all about taking a rounded, holistic look at potential risks by thinking outside the box.

ERM provides a framework for asking those difficult risk questions that many business owners prefer to sweep under the carpet.

Ratings agency Standard & Poor’s (S&P), which has been evaluating ERM in Australia for the past three years, rates the local market as fairly well advanced “compared with the rest of the world”.

But there’s no room for complacency in an increasingly complex business environment, says S&P ERM Director David Ingram.

“If [a firm] takes complex risks or has a tight capital structure, then ERM is important,” he says. “And if it takes complex risks and has a tight capital structure, then we think ERM is extremely important.”

That includes the vast majority of companies – large or small.

Of course, implementing an ERM system doesn’t mean you can then put your feet up and relax.

A company can have the most rigorous ERM standards in the world, but if the directors deliberately violate their own internal standards, it’s useless. Failed US energy giant Enron is a classic example of a state-of-the-art ERM framework that was ignored internally.

It’s never too late to change your risk management approach. Whatever sector you operate in, whatever size your business, risk management is an integral component of your overall insurance needs.

Give us a call today for help and advice on the best ways to approach a risk management policy with plenty of peripheral vision.

Standard & Poor’s divides ERM into five categories:

Risk Management Culture
Staffing, infrastructure, reporting to the board.

Risk Control
Pricing, cycle management, tracking, feedback, business continuity.

Strategic Risk Management
Taking information for risk control and rolling it out across the enterprise to establish risk rewards for each part of the business.

Emerging Risks
Influenza pandemic, environmental scanning, contingency planning.

Risk Models and Economic Capital
Are models at the appropriate level of complexity for the complexity of the risk?
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