Thinking pessimistically can help identify plausible, but credible risks

Getting a handle on emerging risks that can hit an organization hard is aided by adopting a mindset of pessimism, Susan Meltzer, vice president of enterprise risk management (ERM) for Aviva North America, suggested to workshop attendees at Horizons: 2012 RIMS Canada Conference in Saskatoon on Sept. 10.

That pessimism is best applied not only to risks that are already well-known, but also to those that could occur. She recommended that organizations ask themselves if something is plausible, but still credible.

“That takes us away from the domain of fear,” Meltzer noted. “We spend an awful lot of time worrying about risks that just don’t happen.”

Some possible questions to ask include the following:

• What are the events that keep you up at night?
• Which events could trigger a very large loss to the franchise?
• How could your company’s name get into the news in an unflattering way?
• What events is the organization unprepared for?
• What events will fundamentally change the ways the business operates?

Some perceived risks lack concrete information or are based “on a couple of stories,” Meltzer told attendees. “That’s not the kind of information you can use to really predict what the future might be.”

That said, focusing solely on quantification and what is predictable (based on history) are among the key reasons an ERM program might fail, she added.

It is essential to entertain the types of risk that create crossover between operational risks and insurance risks, as well as to keep an eye out for signs that may signal an issue down the road, Meltzer told attendees.