Polish terrorist plot highlights threat of ‘black swans’ says expert

The terrorist plot highlights the need for risk managers to help their organisations manage the threat of unpredicted 'black swan' risks, Betty Simkins, Professor of Finance in the Department of Finance at Oklahoma State University told delegates as she set out how to best achieve this goal and implement first class risk management. "Are you prepared for the unexpected?" she asked the gathered risk managers, many of whom work for energy companies such as Energa or Ideon and may now fear a terrorist attack According to the Polish authorities the arrested terrorist had planned the attack for a long time. His motives were a crude mixture of nationalism, anti-Semitism and xenophobia, they said. He was preparing the attack for a day in November when the Polish president, prime minister and other main leaders were in parliament.hideUntil now Poland has not had major problems with terror attacks on government or private institutions and thus the news came as a surprise. Ms Simkins presentation on the risks of 'black swans' and the need for top-notch risk management systems to protect organsiations from such threats was therefore timely. She invited Polish risk managers to check their company's risk management approach and pleaded for holistic implementation whereby the risk manager is closely linked to the management board. "We have to leave behind the 'silo-thinking'," she said in the first part of her presentation entitled 'Enterprise Risk Budgeting: Bringing Risk Management Into the Financial Planning Process'. One crucial aspect when implementing enterprise wide risk management systems is company culture, Ms Simkins told over 50 risk managers, risk management consultants and insurers gathered in Warsaw. "There has to be an open working atmosphere, employees should not be afraid of criticising the management," she said. She quoted Patrick Burns, a former chairman of now liquidated Canadian insurer Confederation Life who said: "I have been trying to train people that this is an early warning sign of trouble anywhere, it does not matter what the company, what the industry. When you see a CEO who brooks no opposition inside - watch out." However, this attitude did not help Mr Burns when Confederation Life was declared insolvent and liquidated in 1994. Ms Simkins argued that gender diversity on Board of Directors can improve the risk governance of a company. "There are several scientific theories showing that gender diversity improves risk management," she said. One of the main reasons is that women tend to question traditional and conventional procedures. "We do not need a line of people saying yes to every suggestion the CEO has made, but a discussion to find out about risks and avoid wrong decisions," said Ms Simkins. She is also convinced that enterprise risk management reaching the financial planning processes has many positive effects for a company. "It can enhance shareholder value," she said. "Another advantage is that rating agencies incorporate whether a firm has a risk management programme in place or not," she continued. It takes several steps to go from a silo-approach to a holistic model for risk budgeting, Ms Simkins told delegates. The first step is to develop an enterprise financial plan and risk model by identifying risk exposures and describing factors that could have the biggest impact on the company. In order to get reliable facts and figures on this topic companies have to create a simulation system with numerous risk scenarios. Such a simulation enables the company to calculate the probability of risks. The second step is to define the risk capacity based on key financial parameters like credit rating, cost positions and the debt to equity ratio, Ms Simkins continued. This step is about understanding how the company's financial resources will develop in the best scenario, the anticipated scenario and the worst case scenario and how a company can manage its commitments in volatile markets or in situations in which things turn out for the worse. "In the third step companies now can evaluate and manage the risk," she said. Polrisk currently has about 100 members, of which 50 are risk managers. The others members are risk consultants, insurers and chief financial officers.

Polish terrorist plot highlights threat of ‘black swans’ says expert

Want to read this article?

Read Next

AstraZeneca places innovative outcomes based policy that covers interconnected risks

40% of ESG investment funds in Europe accused of greenwashing

Talanx brings forward targets in new sustainability strategy

German insurers brace for rising fraud cases

FM Global reveals record $1.4bn renewal credits

AstraZeneca places innovative outcomes based policy that covers interconnected risks

40% of ESG investment funds in Europe accused of greenwashing

Talanx brings forward targets in new sustainability strategy

German insurers brace for rising fraud cases

FM Global reveals record $1.4bn renewal credits

Want to read this article?

Read Next

AstraZeneca places innovative outcomes based policy that covers interconnected risks

40% of ESG investment funds in Europe accused of greenwashing

Talanx brings forward targets in new sustainability strategy

German insurers brace for rising fraud cases

FM Global reveals record $1.4bn renewal credits

Related Articles