What is Risk?

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If you speak to any Banker, Safety Manager or Actuary you will find that they have a very clear understanding of risk. The problem is that the understanding in each case is different.

railway image risk brian mcglynn malpine consultingA banker develops an understanding of risk within the discipline of lending money to projects or individuals, expecting those funds to be paid back with interest in accordance with the contractual arrangements entered into between the bank and the customer. Risk becomes a matter of assessing the possibility that the funds will not be repaid in full. The idea of risk becomes asset driven and focuses on the likelihood of a project being delivered as agreed or an operation rolling out as expected. The banker considers problems that may arise in construction, interest rate variations, operational abnormalities, fraudulent behaviour and market problems.

The response of the banker is to mitigate the risk by analysis of these areas, constantly reviewing them for change over time, making an allowance in pricing of all loans to cover the small proportion that fail and wherever possible passing the risk to others. The risk is managed on a portfolio approach, where diversification is sought across a wide range of asset classes based on the historical performance of those classes.

The idea of risk which emerges from the Occupational Health and Safety community is based on Actions and Conditions. It has come from the construction, oil and gas and mining industries and has as its basic tenant that one event is too many. The mitigation focus is therefore on prevention, hazard analysis, behaviour analysis and situation analysis. The risk is managed at a local geographic area, and that management is built around a culture of compliance and monitoring.

washaway railway line risk image brian mcglynn malpine consultingA different approach again is found in the insurance industry. Risk is event driven. It may be a fire, theft or even death. The mitigation is built around statistical analysis of past events. Unlike the banking industry, the insurance industry seems to shun diversity, and rather groups similar risks into a similar business such as car insurance. The idea is the herd mentality – safety in numbers and sharing the costs.

When it comes to assessing risk for a company, an investment or in a board room, the idea of taking a calculated risk to generate a financial return moves to the foreground. Around the room people will bring their idea of risk to the forum. It may be an ex banker or an insurance person, or more likely someone with exposure to the Occupational Health and Safety community. While each of the viewpoints is valid in its own context, risk at the investment level is sometimes re-characterised as opportunity and none of the viewpoints described really meet the challenge of identifying or managing risk in these circumstances. That is why it is important to start at the beginning and decide what you are talking about. Ask the question “What is Risk?”. The answers may surprise you!

The question has been answered many ways, but I like the one attributed to Chris Furnell, a Melbourne Barrister, by the author of the Queensland PPP guidance paper on Risk. His definition is:-

“Risk is the chance of an event occurring which would cause actual project circumstances to differ from those assumed when forecasting project benefit and costs”.

That about sums it up for me, but that probably exposes my focus on projects and infrastructure, so I urge you to define risk within your own framework of consideration. It makes the conversation more productive.