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Q: In pursuing a broader approach to managing risk, how do risk language, terminology and communications play into the success of such an initiative?
A: Like in just about every aspect of life, clarity of communications is critical to effectively understanding and meeting objectives. One need only recall the controversy over insurance coverage for the Sept. 11, 2001, World Trade Center catastrophe to realize the magnitude of problems that can result from a failure to communicate accurately and in a timely fashion. In fact, most coverage disputes that end up in court are battles over "understandings."
Just as in the insurance world, clearly understood terminology is critical to achieving a meeting of the minds, so clear communications are equally if not more important in the broader realm of managing all risks to an enterprise. Most serious players agree that a common risk language is the starting point for any consensus reachable around a risk framework. Such frameworks are central to codifying and getting consensus around the risk strategy and tactics to achieve agreed-upon objectives. As such, objectives are well understood only when they consist of a language that is consistent and easily interpretable by all stakeholders. Thus, risk frameworks should include a section that sets forth the definition of the most common terms used to communicate about risk in the entity.
Another common characteristic sought after in these initiatives is applying simple labels to what are often technically complex concepts. You've heard the complaint many times from senior management: "Just keep it simple," or "Can't you make it plain?" It's as if the capability of management for linguistic complexity is limited by their intellect, but in fact, it is limited only by their capacity for volume. In other words, most senior teams these days have much on their plates, so crowding conversations with technical complexity only causes frustration and impatience. There is often little patience in today's senior suite for those who can't get their messages across quickly and simply, no matter the complexity of the subject.
In the midst of this subject, the issue of standards arises. Many risk-related organizations across the globe have attempted, and some actually succeeded, in establishing standards for the practice of risk management. Examples include: AS/NZ 4360 Standard on Risk Management; ISO/IEC Guide 73 IRM/AIRMIC/ALARM 2002; JIS Q 2001, Japanese Industrial Standards Committee; Canadian BIP 2012, CAN/CSA Q850-07. You can see in the naming of these standards a level of confusing jargon that isn't helpful. Of course, with a standard typically comes a vernacular that, by default, establishes a risk language that may or may not fit the culture of your company. And often, because these standards arise from specific parts of the globe, they often are germane only to that region, leaving many who attempt to use them at risk of communication confusion.
This is not to say that risk standards aren't valuable. But because they are often fashioned and marketed by supporters with very narrow or specific views of the world, they will often not work for the broadest of users, let alone those who recognize the value of creating a consistent risk language that first and foremost fits the needs of their company and only secondarily, others. While this fit must be the priority, all should recognize that this will make benchmarking a greater challenge for those that require third-party benchmarks to validate their strategies, tactics and results. Standards will help ensure risks are addressed with consistency and so all good standards are focused around process, structure, objectives and terminology.
A starting point for many is the very definition of risk. You might not consider this important in the scheme of your strategy and plan, but there are enough different ways to view risk that it would be wise to get an early consensus on what "risk" is within any entity. In an informal survey conducted at the 2006 Risk & Insurance Management Society Inc. conference in Honolulu, the following results were collected in answer to the question, "What is your definition of risk?" Ten percent of those questioned said it was "likelihood times impact"; 20% said it was "chance of loss or gain"; 50% said it was "uncertainty"; 10% said it was "an adverse event"; and 10% said it was a "variation from what was expected." Each one is an important nuance in understanding what risk is to the user and his or her company. The variations are often perceived as minor, but where they are more significant, they revolve around whether a company's focus is on the downside, the upside, or both. Regardless of your focus, getting this definition understood up front will be critical to your ultimate success in implementing an effective framework.
Since effective communications are centered on the words used to communicate, it is critical to the success of any risk management effort that the terminology is clear, unambiguous and well understood. Without such clarity, management will be frustrated and confused and your plans will falter on the hotbed of technical jargon. So, define the terminology early in your efforts. Get agreement on what terms make the most sense. Codify your language. Communicate often, simply, clearly and with impact.
Ask A Risk Manager, Ask A Benefit Actuary and Ask A Casualty Actuary answer written questions from readers on risk and benefits management issues and actuarial problems.
This month's column on the language of risk is written by Christopher E. Mandel, assistant vp, enterprise risk management at USAA Group in San Antonio; 2004 Risk Manager of the Year; and past president of the Risk & Insurance Management Society Inc.
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