Listen to: "Keep Tabs on the Future of Financial Risk Management"
A Brief Look Back at the Earliest Official Development of Financial Risk Management
“Risk has been around forever, but risk management is relatively new.” -David Walter, Vice President of RSA Archer.
Only as recently as the 15th and 16th centuries, during the the Renaissance and Protestant Reformation, was the idea of risk management seriously considered for farming purposes. It was important to understand how to get the highest yield from a crop by considering factors like the health of the soil, the weather conditions and the optimal time to harvest.
Even then, Financial Risk Management (FRM) was largely viewed as a mathematical exercise, without widespread understanding, adoption and implementation by rural farmers. It is likely that farmers organically used their own natural common sense to perform their own FRM in those early days.
However theoretical FRM was more than 500 years ago, our financial forefathers opened up a pathway to risk-avoidance upon which we continue to build today. There is little-to-no-doubt we will continue to adopt FRM adaptations well into the future.
FRM is in no way linear, and it is respective to the times. Take for instance the financial crisis of 2008, centered around the burst of the housing bubble. That financial crisis, along with all of its devastating fallout for people from every walk of life, reminds us that it is important to remain vigilant of not only our own business; we must also remain vigilant of our industry and its risks so that we can apply our own FRM strategy, according to our ethics and values.
Such cases, particularly in hindsight, are important learning models to look toward the future and develop an unbeatable FRM plan.
The Financial Risk Landscape Continues to Shift
FRM has come a long way, barreling into the 20th and 21st centuries. Of course, it has needed to, as financial complexities and stakes have continued to rise. Additionally, business leaders have found ways to overcome the financial crisis from last decade.
It doesn’t stop here, though. Today’s business leaders must look at present risk trends with a sharp and vigilant eye toward future risk trends since just about everything seems to materialize faster than ever these days.
Between the continuing prevalence of vital business technology, and the pulsating drive toward economic globalization, it is crucial that business leaders consider and understand all possible risks to their business. It is perhaps even more important to understand the possible implications of those risks, along with strategies necessary to keep them at bay.
5 Key Risk Considerations That Your Business Will Need to Manage in the Next Few Years?
There is never a shortage of risk-related issues that require your attention. The only problem is that the world of risk—whether detecting it, managing it or preventing it—is not static, so you have to monitor the trends to make sure you’re consistently up to speed.
Take a closer look at five key risk considerations that your business may face in the future. Having an idea of what may be hovering on the horizon gives you the opportunity to prepare a FRM plan to see you through.
1. Artificial Intelligence, Machine Learning, Data Analysis and Other Cognitive Technologies Are Set to Change the Way We Determine Risk
The vast array of emerging and improving cognitive technologies are already changing the way many businesses are assessing risk, as well as how they are fine-tuning their FRMs. Organizations are using smart machines to detect, predict and prevent risks in high-risk scenarios.
Most businesses collect massive quantities of data. Then they must find unique ways to analyze that data to derive invaluable insights, which may cause disruptions with their current staff roster. Companies may consider hiring specialized data analysts and skilled internal auditors to maximize the potential of that data for top-notch FRM.
2. Real-Time and All-Encompassing Risk Management Is on the Horizon with the Internet of Things
Smart devices that make up the Internet of Things (IoT) are set to help businesses catch risk events and determine important risk insights surrounding those risks. More importantly, IoT real-time feedback gives businesses the chance to take instant action within the risk environment.
With this technology, organizations can experience dynamic risk management that promises to improve risk-related decision-making when it comes to cybersecurity, internal audits, supply chain management, finance and controls testing.
As an added bonus, businesses may find that IoT feedback can help reduce cybersecurity and fraud risks quickly and easily.
3. Risk Transfer Expands in Application and Scope to Take on “Mega-Impact” Events
While risk transfer tools like contracts and insurance are old-hat in the industry, they may take on greater importance when it comes to “mega-impact” risk events that include terrorism, cyberattacks, climate change, global financial upheaval and political unrest. These considerations are particularly important when dealing with third party risk management (TPRM).
4. Reputation Risk Is Taking on Increasing Importance
The rapid-fire exchange of ideas and information via email, text messages, social media and telephone calls makes it nearly impossible to make an error without it becoming industry news in an instant. An organization’s reputation could take a massive hit from which they may not easily recover due to missing a risk factor.
Many companies are looking at this type of risk as incentive to constantly stay on their toes, proactively addressing accelerated risks. Even better, they may be able to find value in that risk and turn it into an advantage.
5. Risk Is Increasingly Becoming a Driver for Future Success
Most companies do everything possible to assess risk, manage it, recover from it and put it in the rearview mirror. However, there is a growing number of businesses that are shifting perspective and looking at risk as a performance enabler.
Instead of operating risk management out of a sense of fear, many business leaders are now embracing risk as a means of driving performance and value. With all the tangible and meaningful metrics available to measure risk, organizations can better determine the value of risk. With this strategy, organizations may be more equipped to recognize intelligent risk-taking ventures to nurture and develop a positive risk-focused environment to balance the risks and rewards.
Is Your Business Ready to Take on the Future of Financial Risk Management?
Just like technology and the ever-changing nature of the business world, risk has become a continually evolving component of modern finance. At I.S. Partners, LLC., we regularly work with forward-thinking organizations that want to embrace FRM. They just aren’t quite sure how to do that.
If you are struggling to adopt the technologies and strategies associated with risk listed above, along with many others already here or on their way, you are not alone. Our team can take a closer look at your company’s risks now, as well as risks you may face next year, or even five years from now to develop your ideal FRM strategy.