Economy & Politics

Risk managers in the eye of the storm

The current crisis is taking many companies by surprise and may change the way they manage risk in the future. But was it a totally unpredictable event from a managerial point of view?

The current crisis is taking many companies by surprise and may change the way they manage risk in the future. But was it a totally unpredictable event from a managerial point of view?

(JFC, with Thomas Klein) – In economic lingo, the expression “black Swan” is widely used in discussions of the economic impact of the current health crisis. It refers to extremely rare unpredictable events that have serious consequences for the economy. The question is precisely to determine whether the current covid-19 crisis, which forces many companies to resort to state aid, represents such an event. Experts are divided.

Nassim Nicolas Taleb, the finance expert inventor of the phrase in 2008, recently explained in the Neue Züricher Zeitung that “a pandemic is by no means an unforeseeable event.The expert justifies his point of view by the observation that “several analyzes by the WHO and the Robert Koch Institute have in the past warned against the consequences of a pandemic”. From there, “many companies already take these scenarios into account in their risk analyzes”, adds Ugo Platania, from the management consulting firm KPMG in Luxembourg, which advises production companies on how to implement their risk management.

According to Ugo Platania, “many companies already take into account pandemic scenarios in their risk analyzes”

Photo: KPMG

Financial institutions and listed companies are required by law to have a risk assessment department. This service is responsible for developing plans and measures to reduce the negative impact of possible emergency situations on society and to maintain business activities. But normally risk managers often have a difficult task.

“Their job is to prepare businesses for the storm. They deal with very unlikely events but with extreme consequences. However, it should not be forgotten that too much protection against these risks can be extremely costly and can sometimes have a negative impact on corporate profits. This is why they are often considered as pessimists and spoilers ”, explains Martin Reinhard, partner at KPMG Luxembourg and responsible for risk management in the financial sector. And according to the latter, since “there is an obvious conflict between the minimization of risks and the maximization of profits, many considerations on the risks linked to pandemics have disappeared in the drawers of decision-makers”.

Martin Reinhard explains that there is

Martin Reinhard explains that there is “an obvious conflict between the minimization of risks and the maximization of profits in companies”.

Photo: KPMG

For its part, Ugo Platania considers that “risk management is a very complex task” and that “it is not enough to examine the different risks in isolation, since they are often linked and must be analyzed accordingly”. Even in the best of cases, risk managers cannot establish an emergency plan for every conceivable constellation of events in order to absorb all of the consequences of a crisis.

As for banks, the risks of non-performing loans increase as the crisis progresses. However, if they were to accumulate as was the case in 2008, the health crisis could quickly turn into a financial crisis. And if the financial sector is currently more spared from the crisis than other sectors, we must precisely look for the reasons in “the experience of the 2008 financial crisis”, explains Mr. Reinhard. The financial analyst specifically targets two explanations. “On the one hand, the strengthening of regulations has forced banks to build more capital reserves and maintain liquidity.” He adds that “on the other hand, a lot has been done to mitigate operational risks”.

The contribution of artificial intelligence

In regards to investments, KPMG experts also expect risk management to get a bigger share of the cake in the future. “Right now, this department is often too static within companies. In the future, more flexibility will be needed to be able to run simulations continuously, as needed, “says Martin Reinhard.

In this context, artificial intelligence is a tool that could prove useful. While risk models are now mainly fed by data from the past, new technologies could help improve the real predictive power of calculations by allowing them to recognize and interpret complex models. “Currently, investment in this area is not a priority for most companies, but it could change under the impact of the crisis”, augurs Mr. Platania.


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