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Thursday, 07 November 2013 17:22

Alternatives to Traditional Risk Assessments

There are limitations to traditional risk maps, heat maps and risk rankings based on subjective assessments of the severity of the impact of potential future events and their likelihood of occurrence. These limitations include the influence of individual biases and “group think,” preempting out-of-the-box thinking, failure to address the unique characteristics of the risks the company faces, undue influence from past experience and successes and little insight regarding what to do about exposures to extreme events. Simply stated, an assessment process that subjects all risks to the same analytical grid has shortcomings that need to be recognized if risk management is to advance as a discipline.

While there may be a place for traditional risk assessment approaches when creating awareness and obtaining a “quick and dirty” overview of risk, more sophisticated assessment mechanisms may be necessary to provide the insights needed by management and the Board. If very little happens as a result of an organization’s risk assessment process, it is a clear sign that alternative approaches should be considered. We will explore alternatives for the four categories of risks: strategic, operational, financial and compliance.