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ICG Risk Blog - [ When clients for risk assessment/risk pricing take on a risk of their own ]

When clients for risk assessment/risk pricing take on a risk of their own

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While virtually every risk client will subscribe to the idea that there is added value in managing risk, i.e., shifting from the default condition of accepting risk to the pricing of risk though such mechanisms as mitigants, offsets, and transfers, the client rarely sees themselves as among the criteria of risk.

Risk clients commonly divide themselves into one of three categories:

  • Finance/risk managers without operations skill
  • Finance/risk managers with operations skill
  • Operations/in-country managers

Finance/risk without operations skill can include screen and securities traders, both of whom can be sophisticated in risk calculation so long as there is a valid pricing mechanism. Problems can emerge when they move beyond known risk market boundaries or the nature of risk calculation changes.

Finance/risk with operations skill are often investors in hard assets whose strength in risk management can vary significantly. Their focus will usually be on a P&L or balance sheet at the parent. Those that are good strategic risk managers see the value added of an early accurate risk pricing when procurement costs remain low.

Operations/in-country managers often place a priority upon being P&L accountable operators.

We have had the opportunity over time to question players in all three categories from both the US and Europe along with members from their operational ranks, as well as their banks, risk committees, and information brokers. The patterns that emerge makes one wonder how risk is effectively priced in many organizations.

The collective pattern that emerges from the Financial/Risk side of the commercial client is breathtaking in five characteristics:

1. Believe that they are well informed even when they are ill informed

This particular culture of decision making can be a difficult barrier to cross as this senior management group can be surrounded by sympathetic staff that can fend off information that competes with received wisdom.

2. Not invented here (NIH)

This is seen frequently when dealing with risks in already established areas, and may or may not extend to the consideration of a new country. My experience is that the entity "with the risk franchise" does not give it up and permit the entry of a more valid estimation or method between it and the ultimate customer.

3. Arrogance

4. Inability to distill

The actual condition is that they can’t analyze what they have, so they become, as we like to say, better informed without the ability to act. In such cases, one of the greatest services that we can render is to offer counterintuitive facts and data with the means to back them up.

5. Competitive bad advice

Headquarters staff can have a high degree of relationship with banks and pseudo-forecasters. This link can continue even when both are considering a new country outside their prior expertise. It is striking how may clients are unhappy with the recommendations from banks, noting that banks did not have a high capability in risk assessment, but rather gravitated to such areas as economic forecasts and foreign exchange (FX) rates. Their reports were said to be studded with caveats such as, "assuming the shah remains in power..."

To be continued in part 2

Gordon Housworth



InfoT Public  Risk Containment and Pricing Public  

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