Sunday 19 April 2015

Creating Your Own Risk Wave

During a recent family vacation, I had the opportunity to watch something unusual in the Mediterranean Sea.  The sea was rough and I saw people surfing at a beach where one usually sees children paddling.  There were about twenty surfers in the sea waiting for a wave.  When a wave came, a few would successfully ride it.  Then they had to paddle back to the ‘line’ and wait for the next wave.

It reminded me of blogging (in general, not just this one).  You start by identifying a number of ideas, like the surfer’s positioning to wait for a wave.  You develop one of them into a post and publish it.  You then need to start all over again, like the surfers paddling back out to sea after they have caught a wave.  As with surfing (I guess) that’s the fun of it.

But it also reminded me of risk management: you implement an enterprise risk management (ERM) system, then wait for the events (or the wave) which will come sooner or later and learn about the effectiveness of ERM implementation. 

It occurred to me that the differences between surfing and risk managements are more revealing.  Firstly, surfers look for the best opportunity to ride a wave.  Risk management, on the other hand, usually aims to protect a business franchise rather than embrace risk taking. But see this post for an alternative view.

Secondly, the existence of a back book in banking and insurance means that there is not an obvious notion of going back to the beginning as there is in surfing and paddling back out to sea.  

Finally, building up a banking or insurance back book, or acquiring one, involves more choice than a surfer has in choosing a wave.  Indeed, it may be the equivalent of creating your own wave.  In some cases, it would be a wave of longevity risks.  In other cases, it would be a wave of ‘interest rate risk mismatch’. 

So next time you happen to see a surfer, think like one of them and consider how risk management can help your business thrive.  But also remember that if surfers have dreams, they probably dream of creating their own wave.

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