Risk: The Unseen Predator

Risk Management:

I found an article in the Risk Management Magazine which defines risk. It discusses companies which have failed recently and analyzes their risk management strategies. What went wrong? The article makes the case for using effective risk management strategies to hedge your risk.

AIG was a global giant company that specialized in underwriting risk, providing risk management services and training risk professionals. Yet, the company still failed. The confidence in risk managers and the like has been shaken and questioned. The article also discusses that failures and defaults have occurred in companies who investment grade ratings are AAA or AA. AAA and AA ratings are the safest, so is the system of notifying people about risk not working? The AAA and AA ratings were obviously not true if the company defaulted. The ratings should be modified to prevent misleading information. Maybe the rating system could be changed to reflect financial stability and the effectiveness of the risk management practices of the company at the time.

Structure should be more important to the risk management system. Each officer in each department should report to each other about their strategies and progress. For Enron, risk management programs were in place; however, communication about the practices was lacking. Also, risk management should be encouraged and not viewed as a strain on profits. Risk management is supposed to minimize the costs of risk to the company. If the programs are reducing profit too much or making it negative, maybe the programs need adjusting because they are too extensive. You can't eliminate all risk, but you should try effectively and efficiently to minimize the costs of uncertainty in areas where it is possible and still make profits.

http://www.rmmag.com/MGTemplate.cfm?Section=RMMagazine&NavMenuID=128&template=/Magazine/DisplayMagazines.cfm&IssueID=332&AID=3831&Volume=56&ShowArticle=1