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Fast Fast Forward

Let's Talk about Risk

Regis Coccia


A staggering variety of tools designed to provide insight and help improve decision-making is available to risk managers today. Most of them utilize advanced technology and are costly, yet one of the simplest and most effective tools is free and available to almost everyone.

That simple tool to better understand risk is – drum roll, please – talking. Have conversations. Gaining knowledge about risks inside an organization as well as those residing externally can be done effectively by talking with people who have perspectives on those risks.

The 1971 Motown hit, “What’s Goin’ On,” offers sensible and simple advice: “Talk to me so you can see what’s goin’ on….” The song was penned during protests of the Vietnam War, but its ultimate message is valid today and applicable to managing risk. It’s about trying to understand differences in perspective.

Who we talk to has a lot to do with our awareness and understanding of risk. People see risks differently. It is those different views that can lead to a clearer picture of risk and what to do about it. Another benefit of having conversations on risk is that it helps create rapport through which loss-inducing behaviors can be changed.

Identifying exposures is best done with a risk-level view; that is, at the places where they occur. From a property risk perspective, there are few, if indeed any, good substitutes for onsite inspections and just looking around to see the state of things. Casualty risk is a bit more abstract, but observing behaviors and asking about practices are good ways to glean insights.

A common mistake is outlining desired behaviors in operational manuals and expecting those to be implemented consistently. Often, paper-based procedures are modified or ignored, especially by those too skeptical of their value or too busy to comply with them.

One simple and effective solution to this sort of problem was developed by a risk manager for a retail company. The risk manager had achieved an impressive record of reducing worker injuries. His secret: Don’t rely on manuals; in fact, don’t even print them.

Instead, spread loss prevention personally by training managers and talking to them about the impact the losses are having on their divisions. Loss allocation and chargebacks for each division provided another effective strategy that reinforced appropriate behavior. Because the managers had incentives to prevent loss, they were eager to tell their direct reports about how to do likewise – they spread the message. The risk manager understood the value of conversations in managing risk, and his company and colleagues all benefited from that.

In some cases, talking with the right people can raise awareness of exposures that weren’t known previously.
Talk to your agent, broker or risk consultant. Talk to your underwriters. Talk to your colleagues and understand what they do and how it relates to the business you’re in.

One area where asking the right questions of the right people can pay enormous dividends for organizations is their supply chain.
Risk managers around the globe today are challenged in mitigating risk among their firms’ suppliers. Contractual risk management is a useful technique, but it may not be enough to prevent massive disruption to business plans and loss of income. Shifting responsibility for managing risk is not quite the same as ensuring the risk is managed.

Today, highly interconnected and interdependent businesses partner to produce and distribute goods and services (labor, thanks to modern technology, is also a form of supply, and that must be considered in supply chain risk too) at an ever-faster pace. Alas, it’s also possible that the risk to a supplier of a critical component is far greater than it appears.

I’m reminded of a textbook example of poor supply chain risk management from 2000, but it bears remembering because the consequences were so severe. It’s a tale of two Scandinavian mobile phone manufacturers that both used the same microchip supplier. A chip is a small but critical component of many electronics. A brief fire at the supplier’s plant, caused by a lightning strike, resulted in a loss of chips. One manufacturer had alternate suppliers, while the other had a single-supplier strategy.

Guess which manufacturer recovered faster? For one, the event was a temporary setback; their mobile phones are widely available today. For the other, well, they reported a massive loss on their balance sheet and are no longer selling handsets under their own brand.

For many risks, identification and mitigation begins with answering the question, “What if…?” It’s a great conversation starter.

Regis Coccia is an insurance journalist and content strategist. His columns on insurance and risk topics appear periodically on Fast Fast Forward.

The views expressed in this column are the opinions of the author and do not necessarily reflect the opinions of XL Group.

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AXA XL is the P&C and specialty risk division of AXA.