Saturday, April 17, 2010

Term Paper Abstract

Hmmm... new and improved or worse?

What is risk? While risk is known to be an all-encompassing facet of life, the intangibility of the term leaves much to be desired from a casually academic or even practical exploration of its nature. Risk, at least in the proponent’s opinion, is only as significant as the degree to which a party becomes aware of its existence and concerns itself with the possibilities of any threat or undesirable event manifesting; along with the resulting conditions, circumstances and consequences. The essence of risk is perhaps inherently coupled with human nature. Being self-aware and self-conscious beings, we seek purpose. As sentient creatures, a unique purpose is conceived by each person from his psyche. It may not necessarily be of divine or messianic stature, but is still likely above basic animal instincts; from plain survival, physical sustenance, to species propagation and whatnot . It is perhaps because humans have the intellectual capacity that they are able to translate risks and perils beyond the fight-or-flight mechanism of choice. People are able to attribute events and circumstances with gradients of severity that may affect their conceptualized purposes, intentions and endeavors, whether it be as simple as crossing the street or as complex as doing swing trading in financial derivatives.

Moving forward with the discussion, the proponent once again poses the question, what is risk? After having briefly discussed a subject of such abstract quality, has it already become tangible? Does it gain meaning or manifest itself if put in a certain context? In elaborating the concept, the proponent wishes to present a hypothetical Earth where only vegetation exists. If a forest fire broke-out, is there risk? From whom or what sentience does the concern emanate from? Will the vegetation that thrives on this imaginary Earth be able to do something about the fire or will the extinguishment of the blaze be left to the whims of nature and the various converging circumstances and forces at play? Whether the reader sees these as simple rhetorical questions or just irrelevant musings, it can be said that risk is given significance in the context of human conduct and commerce. While the Universe has existed and will continue to exist following all the scientific laws of chemistry and physics, the existence of risk is dependent on how human society gives meaning to it. On a practical level, certain risks will continue to threaten activities and objects of interest to humanity, but there are risks that will be eliminated, mitigated, cushioned or transferred via the tools and solutions that man reacts with. When people think, create, invent, innovate, restructure and optimize aspects of their lives through the use of instruments, systems, institutions, collaborations, syndications and arrangements, that is when it becomes undeniable that a concept man has termed to be known as risk exists. Whether deemed futile or worthwhile, man continues to create protection against risks, for his sake and the welfare of his related interests. One example is the appearance of the AH1N1 virus, initially the public knew little of the hazards it posed, but when the threat of a pandemic loomed, global leaders rushed to organize ways to prevent the disease from spreading worldwide. Pharmaceutical companies developed vaccines against it and although a cure has been found, the risk of viral mutation lingers. Moreover, not all countries or social classes of people are able to afford the medicine. Regardless of tools and solutions, there is still plenty of risk to go around. Although risks can be eliminated, in whole or in part, there are new risks to contend with at every turn. This will remain true as long as man continues to create new tools, conditions and circumstances that he must deal with in his environment.
And so in this contextual concept of risk, the proponent wishes to explore the practice or rather the organizational function known as ERM or Enterprise Risk Management. Implicit from the name of ERM is its application, because it is most relevant in an organizational setting. Organizations represent an amalgam of people working under institutionalized processes and systems. Although the individual purposes, intentions and ambitions of people vary across the spectrum, they are subjected under the unifying objectives of the companies they work for. Organizations, whether for profit or not, have mission and vision statements that guide them in their commercial or charitable endeavors. For all the opportunities that a company can take advantage of, there are also threats and obstacles that must eventually be met and dealt with at every turn. In order for an institution to thrive, it must respond to whatever the environment throws at it, whether the challenge emanates from nature, man or a combination of both.

There is plenty of literature on the topic of risk management, but as far as standardization goes, there is no uniformity on how organizations approach Enterprise Risk Management. Risk Management, after all, is neither an exact science nor a simple practice of arithmetic where 1 + 1 = 2. The rules are fairly flexible in consideration of the myriad factors that different organizations and industries have to take into account. There are frameworks that present a procedural perspective by which a company can establish a basic and operable risk management function, while others discuss rather subjective and philosophical approaches in developing ERM. Unlike the rigorous schools of finance, economics, accounting, and what have you, where there are predefined treatments and rules to concepts, it seems that ERM frameworks are still under the developmental phase towards a more scientific form that academicians and student-practitioners will be accustomed to.

In exploring Enterprise Risk Management, the proponent wishes to further expand this academic paper by exploring its applications in the Insurance Industry. This is of particular interest because insurance companies primarily concern themselves with the business of risk. In view of the voluminous data and studies that all financial institutions and investment houses have and regularly churn-out, it can be said that securities markets, most financial products, assets, liabilities, and whatnot are correlated. As exhibited by the financial debacle of 2008, the development of technology and the integration of financial and economic markets across the globe meant that there was and probably will still be a “domino-effect” risk in the system. Event risk, on the other hand, which is generally the forte of the insurance industry, is an all-encompassing and inherent component of society. Event risk emanates from all conceivable angles. It is present in all industries, in all going concerns, in all human activities of interest.

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