LONDON-Risk managers must think about the protection of shareholder value in addition to protection of asset values these days.

That's why "holistic risk management" is becoming fashionable and important to understand, according to speakers at a seminar on corporate risk management Aon Risk Services held in London last week.

Holistic risk management "is the process by which an organization first identifies and quantifies all of the threats to its objectives and, having done so, manages those threats within, or by adapting, its existing management structure," said David Davies, director of Aon Worldwide Resources in London, part of Aon Corp.

Holistic risk management differs from conventional risk management in two key ways, he said:

The range of risks is not limited to those that are insurable or fortuitous.

The process of minimizing risk and the impact of risk must be a mainstream management function, with the risk manager acting as a catalyst to spread the control of risk throughout the company.

The uninsurable risks Mr. Davies referred to can include the loss of the reputation of a company and the tarnishing of its brand name; the theft of intellectual property; or the risks that arise from the organization's reliance on information technology, he said.

Other such risks can include financial risks, such as interest rate fluctuations, or declines in equity and commodity prices, according to Tony Clifford, a partner in Ernst & Young's International Capital Markets Group in London.

Also, operational risks can burn financial institutions more than financial losses, said Mr. Clifford, referring to financial traders who have lost millions for their organizations because managers didn't supervise their transactions.

"Behind every financial disaster is an unsupervised genius," such as Nicholas Leeson, whose allegedly fraudulent trades brought down British investment bank Barings P.L.C. in 1995, according to Mr. Clifford. Barings' 864 million pounds ($1.4 billion) loss was not insured (BI, Oct. 13, 1995).

One way to identify these risks within a company is through a "collective management brainstorm" among key employees, said Mr. Davies of Aon. Such a group should identify "intangible" risks within the company and prioritize them. Managers should make sure controls are in place to protect the company from these risks, and procedures should be reviewed regularly.

Only then should risk managers look at financing these high-priority risks, such as through integrated risk financing mechanisms that include insurance, said Mr. Davies. "It has been estimated that by the year 2000, less than 50% of risk financing for large organizations will be by conventional insurance," he said.

Risk financing to protect shareholder value rather than asset value is a recent phenomena, according to Kevin R. Callahan, president and chief executive of Aon Capital Markets Inc. in Chicago. The idea of tapping capital markets to finance risks resulted from the $65 billion to $70 billion of catastrophe losses in the United States in the 1990s, said Mr. Callahan. These losses accounted for about 15% to 20% of the insurance industry's combined capital of between $400 billion and $500 billion, he said.

Insurers and reinsurers have been the first to tap the financial capital markets-which in the United States alone totals more than $20 trillion-to boost their catastrophe capacity, said Mr. Callahan.

But if risk managers think of the financial capital markets and insurance market as interchangeable, "then you can think of all kinds of new products" to protect risks, he said.

It is still early in holistic risk management, Mr. Callahan admitted. "Largely more people are still interested in the topic and want to know about the topic."

Only the top 15 or 20 corporations in the United States are starting to act, "but beyond those companies, most are still at the exploratory stage," he said. In those top companies that have embraced holistic risk management, however, the move has come from risk managers and not from other managers, added Mr. Callahan. "The hard part is not understanding the capital market piece of the puzzle. Bonds are very simple. Most securities are straightforward. . .the much tougher piece of the puzzle is understanding the risks of a company and understanding how insurance and reinsurance companies dealt with those risks.'