Understanding Risk Tolerance Key to Risk Managers Demonstrating Value
October 05 2015 - 5:42AM
A proper understanding of risk tolerance is one of the key factors
that can help the risk function demonstrate that it is much more
than a cost centre, and truly adds value to the organisation. This
is according to John Merkovsky, Head of Willis Risk &
Analytics, writing in the seventh edition of Resilience, the
leadership journal from Willis Group Holdings (NYSE:WSH), the
global risk advisory, re/insurance broking and human capital and
benefits firm.
For risk professionals, there is no more important consideration
than understanding the amount of risk an organisation is a) able to
take, b) willing to take and c) desires to take, according to
Merkovsky in his article entitled Risk Tolerance: The Risk
Manager’s Compass.
The paper goes on to explain that a proper understanding of risk
tolerance can help organisations in a number of ways. It can, for
example, afford a deeper understanding of whether or not the
organisation is adopting the desired level of financial protection.
Additionally it can help the risk function understand whether risk
transfer is supporting the organisation’s overall strategic goals.
“To make better decisions about insurance, an organisation’s risk
tolerance needs to be reflected,” said Merkovsky.
Merkovsky goes on to say that despite the benefits, risk
tolerance is rarely engrained in risk management processes and
structure. This is because the concept is often difficult to apply
in practice and the nomenclature is not used consistently across
the industry. Moreover, executives within the same organisation
often have very different views on the level of risk the
organisation should be willing to take.
Merkovsky commented: “This unsettled environment presents a
terrific opportunity for a truly strategic risk manager to lead.
But first, a risk manager needs to be able to demonstrate the value
accretion that a well-defined view of risk tolerance can add to
decision making.”
He added: “Many organisations are looking to advance their
thinking about their approach to risk tolerance yet they lack the
consistent nomenclature, tools and focus to do so. Risk managers
are well positioned to provide leadership here. Their experience in
thinking across a broad range of risk topics and doing so in both
financial and organisation terms is unique in most
organisations.
“And, if leading an organisational initiative on risk tolerance
is not for every risk manager, it is still a great opportunity to
ensure that their own insurance and risk management activities are
built with a clear alignment of organisational goals. In this way
it will be clear to senior management and other risk stakeholders
that the risk management function is much more than a cost centre,
and truly adds value to the organisation.”
About WillisWillis Group Holdings the global
risk advisory, re/insurance broking and human capital and benefits
firm. With roots dating to 1828, Willis operates today on every
continent with more than 18,000 employees in over 400 offices.
Willis offers its clients superior expertise, teamwork, innovation
and market-leading products and professional services in risk
management and transfer. Our experts rank among the world’s leading
authorities on analytics, modelling and mitigation strategies at
the intersection of global commerce and extreme events. Find more
information at our website, www.willis.com, our leadership journal,
Resilience, or our up-to-the-minute blog on breaking news,
WillisWire. Across geographies, industries and specialisms, Willis
provides its local and multinational clients with resilience for a
risky world.
Contact:
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