A new report from Zurich Financial Services notes that in contrast to the “bulk of risks faced by the corporate sector,” which are more or less “easily identified,” and can thus be dealt with, “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.”
Zurich identifies these types of risk as due to the “presence of uncertainty which, in contrast to simple quantifiable risk, can be elusive and difficult to model.” However, even though it may be difficult to assess, this type of risk should not be “neglected; it must be on the plate of corporate risk management.”
The report “Pushing the boundary – Risk management beyond insurance” demonstrates that “by adhering to some basic principles and applying good common sense the challenges caused by uncertainty can be managed.”
It examines 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.” In addition Zurich describes these types of risks as “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 listed as follows:
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.
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