ORLANDO, Fla. — Risk managers must adjust their risk assessment frameworks to accommodate a new era of challenges, an expert said Monday at the Professional Liability Underwriting Society's 26th international conference.
Delivering the keynote address, Erwann Michel-Kerjan, managing director of the Risk Management & Decision Processes Center at The Wharton School at the University of Pennsylvania, said crises ranging from 9/11 to Hurricane Katrina to the Great Recession have served to reveal deficiencies in traditional risk management approaches.
“The risk architecture is changing fast and we are just starting to realize it,” he said.
Mr. Michel-Kerjan said one the most important goals for risk managers is to surmount the widespread human proclivity to think that risks are rare or only happen to other people and therefore don't apply to a given person or organization.
“For many years we have pretended that catastrophes are low-probability events,” he said. “That's not true anymore.”
Risks are interrelated
In addition to acknowledging and helping their organizations prepare for the likelihood of rare events, risk managers also must work to understand the interrelatedness of risks, Mr. Michel-Kerjan said.
A prime example of the connection of seemingly unrelated catastrophic events is the financial crisis and the food riots that gripped the developing world in 2008. As institutional investors fled the securities market in the wake of the meltdown of Lehman Brothers Holdings Inc., many pushed their money into commodity markets, driving up the prices of crops such as rice — thereby exacerbating the food crisis, Mr. Michel-Kerjan said.
“There are growing interdependencies,” he said. “You have to pay more attention to domino effects.”
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