Proactive Risk Management - The Key to Stay on Top of Emerging Risks

Organizations today are forced to deal with multiple internal and external challenges. Stricter regulations, compliance requirements, and cut-throat competition have only put more pressure on the organizations leaving them with very less space for profit. This brings to the fore a high level of uncertainty, adding to the organization's risk exposure. Organizations need to relook at their approaches and perspectives to be able to manage unavoidable risks in a controlled and effective manner as well as make faster and better business decisions. To achieve effective risk management, organizations must focus on being proactive with an ability to look at what the risks of the near future are, rather than being merely reactive. This proactive approach to risk management can help drive competitive advantage as well as ensure sustainability and growth.
 

What is Proactive Risk Management?

Proactive risk management is a forward-looking approach that aims to identify and address risks before they occur. It involves looking at risk trends and patterns based on historical data to anticipate potential risks and developing plans to mitigate them.

This proactive approach improves an organization’s ability to avoid or manage both existing and emerging risks and helps adapt quickly to unwanted events or crisis. It helps build an understanding required to measure and manage emerging risks which give organizations a better view of tomorrow’s risk and how it impacts their business.

Proactive vs. Reactive Risk Management

What differentiates a proactive risk management approach from a reactive approach is the way risks are assessed, reported and mitigated. It involves carefully analyzing a situation or assessing processes to determine the potential risks, identifying drivers of risks to understand the root cause, assessing probability and impact to prioritize risks and accordingly preparing a contingency plan. To do so, risk managers need to learn to assess the strength of the innovation component of the organization and use that information effectively to combat known and emerging risks. Also, focus on using the expertise of experienced risk managers to engage in strategic risk utilization.
 

The Need for Proactive Enterprise Risk Management

Organizations across industries and geographies today struggle with an ever-changing risk profile in today’s dynamic and disparate world. They can no longer rely on reactive, wait-and-watch risk management measures that cause a decline in shareholder value and corporate goodwill. A proactive risk management approach is a must-have today for improving risk foresight and preparedness.

A wealth of risk data exists today, waiting to be tapped. How can organizations turn this data into actionable risk intelligence? It requires aggregating, filtering, and interpreting the data. To do so efficiently, organizations need to establish standardized risk taxonomies, methodologies, and platforms across the lines of defense.

Going a step further, risk teams can leverage predictive analytics, that is, using data analysis, artificial intelligence, statistical models, etc., to anticipate risks effectively. AI holds a lot of promise to identify risk trends and patterns to stay ahead of the curve. These advanced technologies enable organizations to piece together risk information scattered across the enterprise and then slice and dice it to identify critical risk areas.

The proactive approach equips risk managers to effectively identify emerging risks, understand their root cause and potential impact, and define and implement controls to minimize potential losses. It improves an organization’s agility to address the unknown unknowns before it is too late.
 

Benefits of Proactive Risk Management

The implementation of a proactive risk management program, in conjunction with streamlined and well-defined processes for capturing, assessing, and mitigating identified risks, augments a cultural shift to a risk-smart workforce and environment. It enables an organization to efficiently stay on top of emerging risks and ensure that critical risks are being addressed in a timely manner.

This forward-looking approach helps firms bring out organizational sustainability and competitive advantages; an enhanced sense of corporate goals and objectives, talent management, and significant reductions of exposure and losses. When done right, it empowers them to:

• Prioritize and manage risks and opportunities across a firm in a way that generates greater business value
• Turn risk into a strategic advantage
• Improve risk preparedness by providing actionable insights
• Gain necessary visibility into the right priorities at the right time for improving business performance.

Examples of Proactive Risk Management

The global financial crisis of 2008 is a classic example of why proactive risk management is a must-have for organizations. Case in point – an investment management giant, which was once a market leader for mortgage-backed collateralized debt obligations in the early 2000s, failed to identify and mitigate risks in a timely manner, ultimately leading to billions of dollars in losses. While it may seem that the bursting of the housing bubble preceding the 2008 crisis was the reason behind it, the lack of proactive risk management and effective controls impeded the firm’s ability to identify its over-exposure to subprime lending activities. 

The proactive approach enables  risk managers to tell if there has been an uptick in foreclosures for a particular region, determine where the next potential defaults lie, etc. These insights help them steps to address the issue before it snowballs into a larger problem. 

Implementing Proactive Risk Management

Proactive Risk Management is not a process or an initiative but a discipline that an organization has to practice and make an integral part of the overall business strategy. It cannot be defined in a day and cannot be performed in isolation. It is a continuous process until it becomes an integral part of organization’s risk culture.

Developing and implementing a preventive risk identification and management program helps businesses limit exposure, save costs, and enhance value for stakeholders. However, there are challenges that need to be managed before seeing the results of such approach, for example, lack of clear understanding about the spectrum of risks and consequences, lack of relevant tools and techniques, availability of data in silos, limited resources, and absence of tone-at-the-top.

Delivering effective and proactive risk management requires an organization to have more clarity about the breadth of risks facing the business and understand the potential threats and opportunities in alignment with the overall business strategy in order to plan appropriate mitigation action. Also, ensuring proper communication between all stakeholders across functions and harnessing the benefits of technology are crucial elements to create greater business value.

Leveraging Technology to Build a Strong Risk Management Program

Technology plays an intrinsic role in building effective and proactive risk management and governance approaches at an enterprise level. Many organizations leverage software solutions to minimize risk inconsistencies and silos and to establish a single risk taxonomy and culture across the organization, enabling better understanding with clear roles and responsibilities. Others use sophisticated reporting tools and analytics to manage and transform risk data into valuable business intelligence, which enables risk managers to spend more time on deeper analysis of data turning them to meaningful insights rather than just collecting and managing it. This, in turn, enables organizations to take informed business decisions proactively and act quickly to avoid or control unexpected losses.

Conclusion

For many organizations, risk management is rapidly developing into a more forward-looking, enterprise-wide approach in order to avoid unexpected events and expenses down the line. Companies are making deliberate efforts to improve their risk management programs to meet both business and regulatory demands and to create greater business value as well as ensure sustainability. Having the right tools and capabilities to prepare and respond appropriately to emerging, unforeseen risks too has become crucial.