Risk managers increasingly need to be able to understand and interpret two very different organizational languages: insurable risk and finance.
“Bilingual” skills are becoming necessary because of where risk management sits in an organization. In most organizational charts, risk management departments are somewhere in the middle, usually reporting to the head of the finance function, i.e. the chief financial officer or treasurer. That’s a logical place to be, because the ability to manage risk well has significant financial benefits. The reach of risk management, however, needs to be organization-wide.
To make an organization-wide impact, good communications skills are a must. A risk manager who can understand and translate the unique lingo of finance and risk management has a special advantage.
During my career as a professional risk manager and as a broker working with corporate clients, I have seen many CFOs get confused by insurance terminology or view the financial impact of a loss as less significant than the risk manager and his or her broker do. That suggests an opportunity for risk professionals to demonstrate a clearer understanding of the insured operations. Inability to bridge the language gap — by the risk manager and his or her insurance industry partners — and to demonstrate business savvy makes some financial executives skeptical of the value of insurance, and it doesn’t enhance the credibility of the risk management department, either.
To overcome this problem, risk professionals should consider:
What topics get your CFO’s attention?
- Most, if not all, CFOs and treasurers are focused on improving capital efficiency, increasing profitability and generating stable revenue growth. Many financial executives also are rigorous about financial risks, e.g. foreign exchange risk, interest rate risk and overall access to capital. Insurance is sometimes viewed as a pure expense, rather than a business enabler. Don’t just analyze the impact that hazard risk management and relevant lines of insurance can have on the areas important to your organization. Be sure to express them in terms that others can absorb.
How can risk management increase the spread between revenue growth and expense growth?
- The real key to sustainable growth is careful control of expenses. Losses and unresolved claims are a drag on both growth and profitability. Is your department doing all it can to prevent and mitigate loss? Is your organization prepared for a catastrophic loss? Look closely at opportunities to provide more value to your organization’s balance sheet.
How can your department better support your organization’s business plan and facilitate its growth strategies?
- Risk is everywhere in business. From acquiring talent and assets to opening new facilities to expanding product and service lines, there are a multitude of exposures to loss and liability. Make sure your department has a seat at the table to ensure that business decisions are informed about relevant risks.
What risk and insurance terms need translating for your organization?
- Every risk manager sooner or later will be asked, “Are we covered for that?” But a knowledgeable risk professional will also seek to educate his or her senior management and board about the organization’s total cost of risk, the difference between risk retention and risk transfer — and the importance of risk control. It’s always better to anticipate questions and have answers ready than to scramble for explanations triggered by a surprise occurrence. In addition, taking the time to explain how the insurance industry works can shed light on an underwriter’s perspective or why rates go up and down, which can cause havoc in your organization’s budgeting. A risk manager’s ability to anticipate an underwriter’s perception of the risk his or her company presents is powerful.
The fact is that insurance simply isn’t top of mind for a lot of financial executives. According to Duke University’s Fuqua School of Business/CFO Magazine Global Business Outlook survey, the top five concerns for U.S. businesses are: economic uncertainty, attracting and retaining qualified employees, regulatory requirements, cost of benefits, and weak demand for products and services.
To properly articulate the value of risk management, risk professionals need to understand the dynamics of their organizations’ businesses and what they deem important. Have conversations throughout the organization to gain understanding and insight into what makes the business run effectively and what its challenges may be. Once risk professionals do that, they can begin to communicate what’s acceptable and attainable when it comes to retaining or transferring risk. That’s a great way toward becoming bilingual when it comes to risk and finance.
Ryan W. Brown is Vice President and Client Advocate at Lockton Companies, where he develops specialized solutions for clients with complex risk profiles. Before joining Lockton, he led risk management departments at global and regional companies.