Insurance Article, The Insurance Times 2022, The Insurance Times April 2022

Role of Risk Management Professionals in Emerging Economies

INTRODUCTION

Life is full of risks for example risk is involved in simple things like turning on the gas at home or when dealing with life threatening medical emergency decisions. Risk plays an important role in the way we manage our economy, organization or our family.

The types of risks involved influence decisions on how to manage or invest money in shares, bonds or property. When faced with risks, the challenge is how well prepared are we to overcome risks. Risk awareness may be limited in which case there is a high likelihood of risk turning into hazard -leading to disastrous outcomes.

A well-managed business is also well prepared one and thus able to confront challenges of the modern dynamic business environments. Yet managing risk is rather challenging for the world is mostly unpredictable. The processes are continuously changing and evolving in terms of resources that are available – technology, innovation, human resources and time to name a few. In order to adequately address an impending risk, it is important to gather as much factual information as possible for analysis to help manage and thus minimize risk.

BACKGROUND

“Emerging economies are a dominant strategic business risk for most sectors of the global economy.”

The term emerging economies can be described as the economies of all those countries that are not considered developed. Here developed countries include the major European countries and the US, Canada, Japan, Australia, and New Zealand. Another perspective to look at the meaning behind emerging economies is to consider some of their key attributes. The major ones would be:

  • Level of Income
  • Growth rate
  • Stage of Development
  • Stability

Each country that is generally considered an emerging economy is likely to have some characteristics that will fit with one or more of the above three criteria, but not all. For now let’s consider emerging economies as those countries which have started to grow but have yet to reach a mature stage of development or where there is significant potential for economic or political instability.

Maturity

Maturity is used to describe one of the stages in a continuum or life cycle of development. The stages are birth, growth, maturity and decline which follow a pattern such as that depicted in Figure 2. This pattern is seen in many situations including the launching of new products, the growth and decline of industries, the rise and fall of sports teams and so on.

To measure the stage of development of a country the value generally used is GDP as income and development is closely linked together.

In terms of Figure 2 emerging economies can be placed at growth phase but they could be little past the birth stage or almost reaching maturity (depends). Most developed countries would be at the top of growth stage or in maturity. Few could be considered in decline. As with all classifications there are always some anomalies. Singapore, Hong Kong and Taiwan, for instance, which have GDP per capita levels higher than some developed countries. Despite this apparent anomaly, most people would classify these three countries as emerging markets. To know why, the second key factor i.e., Instability should be considered.

Instability

The concern with many emerging markets is the uncertainty over what might happen in the future. This uncertainty may be political or economic, sometimes it is both. The causes of instability are many and include religious or tribal tensions, repressive regimes, domestic insurrection, war or threat of war, economic problems, etc.

Economic uncertainty may arise as a consequence of government actions or be the result of inherent vulnerabilities – concentration in a few industries or dependency on exports or aid flows, for example. The Asian crisis well illustrates how interdependent some emerging economies have become and how quickly the swing from boom to bust can be.

Emerging economies, therefore, include those which are in the growth phase of the development cycle and are vulnerable to internal or external forces that make them potentially unstable. They do not include those countries which are desperately poor and have little prospect of moving beyond this stage in the foreseeable future.

BODY

Risk is broadly defined as the probability of an unforeseen incident and its resulting penalty. Risk management is the identification, assessment and economic control of those risks that can endanger the assets and earning capacity of a business.

In identifying the risks for a specific business, it’s critical to encompass every facet of the business, from the most obvious risks common to many enterprises to any unique risks a particular business might have. This identification process can include legal, physical, financial, human, intellectual and technology risk issues. It’s also useful to think about business risks as being non-entrepreneurial, such as fires and floods, and entrepreneurial, such as economic forecasting and product development.

Affects of Economy

Although the poor economy makes it more difficult for many businesses to afford the expenses of risk management, the irony is that the need for protection is greater now. Risk management has become more prevalent in the past four or five years because there are so many avenues where business is vulnerable.

To increase the chances of success in today’s tough business climate it’s important to reach for professional help when it’s needed to fill in the gaps in skills. Nobody in small business can physically wear all the hats they need to be successful. There are so many moving parts that require experts that the business may not have. Because most small businesses do not have the luxury of having a qualified risk manager on staff, they need to consider looking outside their business for experts who can do the job. The biggest problem is not having proper personnel to assess the risk. The business owner may not be the best person. It is money well spent to get a professional to do it.

Importance

By implementing a risk management plan and considering the various potential risks or events before they occur, an organization can save money and protect their future. This is because a robust risk management plan will help a company establish procedures to avoid potential threats, minimize their impact should they occur and cope with the results. This ability to understand and control risk enables organizations to be more confident in their business decisions. Furthermore, strong corporate governance principles that focus specifically on risk management can help a company reach their goals.

Other important benefits of risk management are:

⮚     It creates a safe and secure work environment for all staff and customers.

⮚     Increases the stability of business operations while also decreasing legal liability.

⮚     Provides protection from events that are detrimental to both the company and the environment.

⮚     Protects all involved people and assets from potential harm.

⮚     Helps establish the organization’s insurance needs in order to save cash on unnecessary premiums.

Example

One of the examples could be an investor buying stock in an exciting new company with high valuation even though they know the stock could significantly drop. In this situation, risk acceptance is displayed as the investor buys despite the threat, feeling the potential of the large reward outweighs the risk.

CONCLUSION

Role of Risk Management professionals is substantial to a high degree in today’s economies due to the rise in many different types of risks such as GDP, stability of the company, loss, fraud, error by employees and the list goes on.

To safeguard a company and its consumers risk management is must and should never be ignored by the management of the company.

Because of the demand of risk to be managed, risk management professionals are also in high demand and are required in every small to big organization.

It is unfair to say their job is simple because there are some risks which cannot be calculated or interpreted by them, so their focus and concentration is necessary in this field of work. But once they have managed the risks which have taken place or interpreted the likelihood of future risks, both the organization and its consumers are at peace.

Lastly, Risk Management isn’t a one time job, each day there is a new chance of risk and it needs to be managed in time before it causes any loss or harm to the company or the economy so the risk management professionals could never be at rest.

So as economies grow with time, need of risk management professionals does too.

Leave a Reply

Your email address will not be published.