The 2008 crisis certainly revealed the risk-management shortcomings in the financial services sector.

However, the problems in financial services are simply the most visible evidence of ways in which high-danger risks have come to pervade the business arena and now are subtly embedded in all sorts of business processes.

Consider, for example, the way in which the design of today’s performance-based compensation packages, not just in banking but in almost every sector, underestimate risk factors connected to business decisions, a development which gives employees and managers greater incentives to take risks.

… that generate severe adverse consequences with small probability but, in return, offer generous compensation the rest of the time.

… managers collect premiums in ordinary times for what could be called disaster insurance” … Until the disaster strikes, “they can pocket those premiums.”

There’s more discussion of this in the second installment of my three-part Special Report on Enterprise Risk Management (ERM) for Risk & Insurance Magazine.

This includes important points that are made

• by University of Chicago economist Raghuram G. Rajan in his paper “Has Financial Development Made the World Riskier?”
• in a study from Zurich Financial Services “Dealing with the Unexpected: Lessons for risk managers from the credit crisis.”

Here are links to my articles:

Learning From ERM’s Year of Living Dangerously

http://www.riskandinsurance.com/story.jsp?storyId=183204535

Enterprise Risk Management Derailed?
http://www.riskandinsurance.com/story.jsp?storyId=183214881

Ratings Analysts Speak on ERM

http://www.riskandinsurance.com/story.jsp?storyId=183214679

A great example of the double-edge nature of risk and reward is provided by the situation that is confronting risk managers.

“ERM [Enterprise Risk Management] provides an absolutely unbelievable opportunity [for career advancement] for a risk manager” according to an executive recruiter who specializes in risk professionals — but who also warns that, on the other hand,  “I’ve seen situations where … eventually the risk manager ends up losing his or her job.”

There’s more discussion of this and related issues in the third installment of my three-part Special Report on Enterprise Risk Management (ERM) for Risk & Insurance Magazine.

Here are links to articles and sidebars in that installment.

The Double-Edged Gift of ERM

http://www.riskandinsurance.com/story.jsp?storyId=192585755

Raising the Risk Executive’s Profile

http://www.riskandinsurance.com/story.jsp?storyId=193285691