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Key areas where a common understanding is needed between risk and finance executives

Posted By Administration, 15 May 2013
Updated: 13 May 2013

by Volker von Widdern,  Director – Marsh Advanced Risk Solutions

The challenge for many Risk executives often revolves around the budgets needed to execute risk management initiatives, and to demonstrate the return on operational or capex spend relating to risk management projects. Once the Finance executives fully understand the motivations and benefits of the risk management initiatives, the organisation’s response to transactional and strategic risk management will improve.

Finance executives cannot be expected to be risk and insurance specialists, and are thus supported by the Risk executives. The key areas where a common understanding is needed include:·       

  • Risk maps vs insurance covers and business resilience capabilities
  • Uninsured risk exposure assessments
  • Risk complexity of the operation vs internal skills (needs) vs broker skills (services delivered)
  • Total Cost of Risk benchmarked to operational performance
  • The impact of risk management spend on risk transfer costs


More than two thirds of all risks are generally not insurable; although some parts of these risks can be insured. Based on extensive research, we know that insured (hazard) risks do not materially impact on share prices because investors expect that the residual risk is low for hazard risks. Thus, how should the Finance exec ensure (vs insure) that the financial sustainability of each of their operations is maintained at optimal levels?

The risk to the Finance exec in these areas starts the "unknown unknown” – thus the first objective is to ensure that insurance covers are adequate and appropriate to the nature of their operations. The really unpleasant surprises relate to losses where insurance cover is assumed to be available, but is not. Black Swan events are not really surprising occurrences – it the scale of their impacts that makes organisations wish that they were better prepared.

Examples of "known unknowns” are the specifically uninsured risks. The challenge here is to evaluate these exposures to develop risk mitigations which achieve real reductions. Insurance based risk transfer is often assumed to be adequate by Finance executives, but there are many complexities in the cover wordings which may not address operational risks.

We should fully examine the Total Cost of Risk in context of the above unknowns – total cost of risk is not the same as cost of insurance / losses, and we need to understand loss scenario’s for operational and strategic risks as well. TCOR should be benchmarked and trended against operational KPI’s, so that Finance executives understand the reasons for changes in exposures, as well as the cash flow effects of risks.

Loss scenarios should be understood in context of the Risk Bearing Capacity / Appetite of the operations – if an uninsured risk occurred, can the loss be sustained by the operation? The wider contexts of strategic risks should be jointly evaluated by the Finance and Risk teams, because in today’s interconnected business environment, the impacts of risks are:

  • Immediate and medium term
  • Direct and indirect as regards impairments or losses
  • Financial and non financial, but similarly strategic

The concept of risk based financial governance can be associated with financial resilience – from the assessment to reporting and delivery of financial returns. Financial resilience needs the comprehensive inputs of risk specialists, from both quantitative and qualitative perspectives.  

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