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The DNA of Risk

Posted By Administration, 18 July 2013

In June, The Cruywagen IRMSA Risk Foundation recently hosted its inaugural sunset session in Johannesburg. The keynote address was delivered by Dr Steven Briers who shared his thoughts on elements that make up the ‘DNA of all risks’.

The purpose of these sunset sessions is to empower members of IRMSA to enable them to grow their skills and to ensure that the standards of risk improve on a continual basis. Usually, the presentations are thought provoking and challenge risk professionals to look at their roles in a different but more insightful manner – this session was no different.

Dr Briers identified elements present in all risks and he wisely began by sharing his definition of risk to ensure that everyone is on the same page. His definition is: "Risk is human behaviour with imperfect knowledge about future outcomes which can vary intended rewards”. Another key definition shared was that of Bill Anderson who says: "A risk is a risk – they affect earnings potential, whether they come from fluctuations in commodity price, [equipment] fire, change in legislation, or adverse media”.

According to Dr Briers the first component of the risk DNA is that risk is always linked to a desired reward. A risk is linked to strategic goals, financial and operational targets as well as business objectives.

The second component is that risk involves interested parties such as shareowners, suppliers, customers, employees, authorities, communities and so on. Therefore the risk manager need to take cognisance of the stakeholders and how they might be affected.

The third component is that risk has a subject matter which is usually some form of assets. The assets can be land, buildings, equipment, legal assets, human assets, intellectual assets, financial reserves, and so on.

The fourth component is that risk affects some kind of value. In a corporate, value can (among others) range from financial value, strategic value, competitive value, time value and replacement value. Dr Brier described the fifth component as follows; that a risk relates to action of some sort on the part of the organisations. Actions may range from incoming processes, purchasing, recruiting, acquisition, outgoing processes, advertising, investments and so on.

The seventh element is that a risk is linked to the change agents such as climate, competition, crime, currency, inflation, interesting rates, labour, legislation, locations, markets and many other change agents which determine the manner and unfolding of a risk for an organisation.

The eight element, according to Dr Brier, is that a risk is realised by some sort of a trigger which may be an accident, breach, breakdown, cancellation, default, delay, emission, failure, fault, interruption, malfunction, negligence, omission and/or shortage.

Furthermore, the ninth and tenth components of risks are that they have a time dimension and some degree of probability. In terms of the time dimension of risk, there are cyclical factors, seasonal dynamics, timing, duration, simultaneity and regional differences. In terms of probabilities, there tends to be statistical measures, likelihood, correlation, volatility, aggregation, timing and relative frequency.

He adds that the eleventh component is that risk is shaped by existing controls, among the many controls are mitigation interventions which may include financial positions, hedging, insurance, securitisation, management positions and compliance.

Dr Brier states that the twelfth component is a lack of perfect information. He points out that lack of perfect information around probability, control, compliance, compliance and market information. Other aspects this component may be lack of perfect information such as liquidity ratios, stability ratios, capital at risk, yield curves, cost of losses, cash flow at risk, earnings at risk and value at risk.

Lastly, the last component of the thirteen elements of the DNA of risk is the human determinants. The human elements may include complacency, compromise, concealment, denial, risk taking, error, negligence, omission, trauma, unauthorised, stress, pride, power and perception.

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Michel H. Sauzier says...
Posted 19 July 2013
The 6th component is missing!
Please provide it to complement this excellent article.
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Michel H. Sauzier says...
Posted 22 December 2014
The last component of the DNA of risk is lack of perfect information shapes every risk situation. Where there is full knowledge of the outcomes, or present causative dynamics, then risk would be absent for the interested party.
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