How the enterprise risk management function influences decision-making in the organization – A field study of a large,global oil and gas company

Risk management has been a discipline for decades. However, organizations have only recently begun to introduce a separate enterprise risk management (ERM) function. The aim of this study is to examine the transformation of the ERM function's influence in a company over time. We use a historical case study informed by social theory on how to influence others to investigate this phenomenon. The findings show that the construction of risk technologies over time triggers a change in the ERM function's influence on decision-making. Two processes of influence are used by the ERM function: selling new ideas and managing knowledge across boundaries. In the first process, the ERM function attempts to vertically influence top management's decisions regarding acceptance of new risk management technologies. In the second process, the ERM function attempts to horizontally influence decision makers to use risk knowledge in decision processes. Theoretically, our findings contribute to our understanding of how the ERM function influences decision-making in organizations over time.     

Risk selection in the London political risk insurance market: the role of tacit knowledge,trust and heuristics

This study demonstrates that the basis of decision-making and risk selection in the London Political Risk Insurance (PRI) market is a combination of Art and Science with such factors as trust and reputation playing an important role. The study breaks new ground by uncovering and examining different methods and strategies of political risk underwriting employed in the insurance market, which does not rely on statistical tools as seen in more traditional insurance types. Adopting a grounded theory approach, the data was generated through 14 semi-structured and unstructured interviews conducted with PRI experts from five PRI companies and two leading political risk broking houses. The data also included documentation reviews and observations.     

Uncertainty avoidance,risk tolerance and corporate takeover decisions

In this paper, we examine the role of national culture in corporate takeover decisions, by arguing that managerial risk tolerance (a combination of risk aversion and risk perception), at the national level, is a cultural trait and affects the expected net synergies CEOs require. We propose a theoretical framework that links CEO risk tolerance to the expected net synergies. We empirically show that CEOs of firms located in countries with lower levels of risk tolerance, measured by Hofstede’s (1980, 2001) uncertainty avoidance score, require higher premiums on takeovers, and show that uncertainty avoidance plays a greater role in relatively large takeovers. Additional testing reveals that CEOs from high uncertainty avoiding nations engage less in cross-border/cross-industry takeovers, suggesting that uncertainty avoidance captures more the CEO’s risk perception than his/her risk aversion.     

The concept of risk society as a model for risk regulation – its hidden and not so hidden ambitions,side effects,and risks1

Beck’s risk society has become a highly influential theory in sociology and has begun to influence risk policy-making and regulation. The theory has been given too much credit, however. This article identifies and analyzes the troubling features of risk society, and demonstrates that it is a loose set of vague ideas, feelings, and hunches, rather than a theory. Risk society, as distinguished from modern industrial society, is a risk management society concerned with the identification and distribution of risks arising from industrial activities, while downplaying natural and other risks. Devoid of empirical content and analytical tools, it promotes a simplistic precautionary anti-industrial environmental and safety ethic. Risk society involves politicization of science and self-interested activism in risk management decision-making. Due to its unrealistic dogmas, ambitions, and side effects, risk society is unable to manage risks effectively and efficiently, and poses a threat to constitutional democracy. Policy-makers and risk managers, therefore, should not rely on risk society theory in designing and implementing risk management structures and regulations.     

The importance of risk and insurance teaching within the ARIA mission

The American Risk and Insurance Association (ARIA) is a scholarly association devoted to the study of and promotion of risk and insurance economics and has a history of innovative scholarship in fields that are vital to economic development and resiliency throughout the world. Association members have an equally important mission and history of passing along important knowledge to students and the risk professions. The Risk and Insurance Teaching Society (RITS) was established as part of the pedagogical and academic program roles of ARIA. This paper outlines the importance of pedagogy within business higher education and more specifically within the academic discipline of risk and insurance and the increasing role that RITS plays in pedagogical innovation and idea sharing among risk and insurance academics.     

Banks as delegated risk managers

Risk management, although of major importance in the banking industry in practice, plays only a minor role in the theory of banking. We reduce this gap by putting forward a model in which risk managers – specialists that can find out correlations between risky assets – endogenously take over typical functions of banks. They grant loans, they consult on financial questions with firms that are threatened by bankruptcy, and they sign tailor-made hedge transactions with these firms. Delegation costs are innately low if banks assume the function of risk managers in an economy. Risk management can be seen as a core competence of banks.     

Differences in the strengths of evidence matters in risk–risk trade-offs

Making decisions between alternatives are challenging when there is weak or unreliable knowledge about the risks and benefits of the alternatives. This requires a trade-off between risks (and benefits). Here, we comment on a recent paper on risk–risk trade-offs and highlight the difficulties of making such trade-offs when the available evidence is of different strength. One current example of a risk–risk trade-off under weak evidence is the restriction and reevaluation of the risks of neonicotinoid insecticides to bees conducted by the European Food Safety Authority (EFSA). We argue that a risk–risk trade-off is essential in this context. Although considerable research efforts have been focused at determining the risks of neonicotinoids to bees, the evidence base is still limited. However, focus on strengthening evidence on impacts of one substance may lead policy-makers and public to believe that its substitutes are less harmful, when in fact evidence is weak on the impacts of these substitutes as well. We argue that a broader management of uncertainty is needed and that the difference in uncertainty underlying evidence of risk for different alternatives needs to be communicated to policy-makers. We suggest that this can be done, for example, using measures of uncertainty, which take into account strength in evidence, and combine these with principles to guide decision-making.     

The impact of cultural environment on entry-level auditors’ abilities to perform analytical procedures

We focus on the impact of three of Hofstede’s cultural dimensions, power distance, uncertainty avoidance, and individualism, on the results of analytical procedures conducted by entry-level auditors in Mexico and the U.S. Analytical procedures are ideal for this research as they require auditors to use professional judgment and appropriate levels of professional skepticism, abilities related to all three cultural characteristics. We find no other study investigating the impact of culture on the application of auditing procedures similar across the studied cultures.We find cultural characteristics do not affect the participants’ abilities to predict income statement balances, but they may influence the ability to predict changes in balance sheet accounts. We also find culture is associated with differences in risk assessments. Our results indicate that participants rarely differentiate accounts that change according to expectation from those that change contrary to expectation, but rather alter their risk assessments to match the direction of balances that increase or decrease.     

Convex risk measures for the aggregation of multiple information sources and applications in insurance

We propose a novel class of convex risk measures, based on the concept of the Fréchet mean, designed in order to handle uncertainty which arises from multiple information sources regarding the risk factors of interest. The proposed risk measures robustly characterize the exposure of the firm, by filtering out appropriately the partial information available in individual sources into an aggregate model for the risk factors of interest. Importantly, the proposed risks can be expressed in closed analytic forms allowing for interesting qualitative interpretations as well as comparative statics and thus facilitate their use in the everyday risk management process of the insurance firms. The potential use of the proposed risk measures in insurance is illustrated by two concrete applications, capital risk allocation and premia calculation under uncertainty.     

Communities as a risk in mining: managing community legitimacy

Abstract

Using three cases from mining multinational enterprises (MNEs) in Armenia, this article conceptualises community risk, providing an alternative framework to conventional risk management approaches when managing local community relations. These approaches have been struggling to capture the increasingly complex risks originating from communities – both those who are directly affected by mining activities and the ones who have a vested interest in mining. The article defines two types of community relations which mining companies manage: communities of place (CofP), who live near the mine and are directly affected by its operations, and communities of interest (CofI), who are outside interest groups either opposing or supporting a given project. Community risks arise when CofPs create meaning about the legitimacy of the changes introduced into their physical and social environment, leading them to take action that affects the MNEs’ risk exposure to political, cultural or financial risks. The CofP can present these types of risks by acting alone or in cooperation with the CofI, who often have the resources and knowhow to affect corporate decision-making. The article contributes by defining community risk as an increasingly salient source of uncertainty for mining companies and MNEs in particular. Conceptualising community risk as the lack of legitimacy with these important stakeholder groups enables MNEs to strategise and adopt practices which are adapted to the local context. At the same time it assures investors, political and cultural stakeholders that the communities who have a specific interest in the project accept its impact.     

The association between risk disclosure and firm characteristics: a meta-analysis

The empirical literature on the determinants of risk disclosures offers mixed results. This complicates efforts among stakeholders to understand the factors affecting firms’ decision to report risk information. The aim of our paper is to analyze the findings of 42 empirical studies using a meta-analysis technique. We examine whether differences in the findings are attributable to random error or due to legal and institutional systems, uncertainty avoidance, disclosure regime (mandatory vs. voluntary), industry types, and the proxies used to measure corporate characteristics. We find that all moderators affect the relationship between corporate size and risk reporting. Legal system, disclosure regime, industry types, and leverage ratio measurement moderate the association between leverage ratio and risk disclosure. Industry types and uncertainty-avoidance level affect the relationship between profitability and risk disclosure. Finally, the association between risk factor and risk disclosure is moderated by industry types. We discuss the implications of our findings and offer suggestions for future research.     

Challenges and opportunities for pre-crisis emergency risk communication: lessons learned from the earthquake community

Abstract

Prior to the 2009?L’Aquila event, earthquake forecasting and early warning research focused specifically on earthquakes as the crisis events. Although this is still true, the manslaughter convictions of six earthquake scientists and one public official for failed risk communication in 2009 served as a catalyst for expanding these goals to also intentionally examine the challenges of communicating earthquake risk with non-scientific during the pre-crisis stage of the earthquake lifecycle. The Crisis Emergency Risk Communication (CERC) Model developed by the US Centers for Disease Control and Prevention (CDC) provides specific guidelines for doing so. Thus, based on a thematic analysis of interviews with 21 earthquake scientists, this study identifies what those responsible for communicating regularly about earthquake risk see as major communication challenges and the extent to which the CERC model recommendations are useful for addressing them. Results suggest that earthquake risk science communicators are most effective when they translate scientific and technical information simply, respond to competing messages, capitalize on relevant popular culture references, employ risk communication campaigns during ‘quiet periods’, and acknowledge uncertainty. These findings have implications not only for earthquake science risk communicators, but also for expanding the pre-crisis stage best practices proposed in the Crisis Emergency Risk Communication (CERC) model. Essentially, this study reveals that soliciting and responding to feedback in the pre-crisis stage could help spokespersons clarify or correct any messages that are perceived by audiences as unclear or are simply not accurate. Doing so may improve risk communication effectiveness not only during the pre-crisis stage but also throughout the earthquake crisis lifecycle.     

Uncertainty on survival probabilities and solvency capital requirement: application to long-term care insurance

In this paper, we focus on uncertainty issues on disabled lives survival probabilities of LTC insurance policyholders and its consequences on solvency capital requirement. Among the risks affecting long-term care portfolios, special attention is addressed to the table risk, i.e. the risk of unanticipated aggregate mortality, arising from the uncertainty in modeling LTC claimants survival law. The table risk can be thought as the risk of systematic deviations referring not only to a parameter risk but, as well, to any other sources leading to a misinterpretation of the life table resulting for example from an evolution of medical techniques or a change in rules of acceptance. In fine, the idea is to introduce the risk of systematic deviations arising from the uncertainty on the disabled lives death probabilities directly. We analyze the consequences of an error of appreciation on the disabled lives survival probabilities in terms of level of reserves and describe a framework in an Own Risk and Solvency Assessment perspective to measure the gap between the risk profile from the standard formula to the risk analysis specific to the organism.     

Bringing people (back) into risk analysis

Abstract

This paper explores the different ways in which people (i.e. human factors) have been incorporated in extant studies of risk. A preliminary scan of the literature shows that people are not just passive maleficiaries of risk but are also active participants in its inception. People are actors whose biases and behaviors give rise to risk and make an impact on both the degree of its likelihood and the severity of its consequences. Because people themselves undertake risk analysis (either as experts and/or stakeholders), the risk analysis process itself is subject to biases and human error. Therefore, it is argued that human factors must be explicitly brought into risk conceptualization, analysis, and theory development in order to enrich and extend the frontiers of the field. Scholarly contributions by members of the Society for Risk Analysis Australia and New Zealand (SRA-ANZ) investigating the challenges and complexities of incorporating people in risk analysis are introduced in this issue.     

Reflections on the ontological status of risk

In this article we discuss the concept of risk in an ontological perspective. Risk per se is not a self-explaining concept that ‘exists’ by its own virtue. Our discussion is therefore based on existing methodologies and epistemological claims concerning risk. With these claims as our point of departure, we examine risk in relation to the concept of time, state of affairs (the state of the world) and events and discuss relations and constitutional issues for the risk concept. Drawing on a relation between time and state of affairs, we argue that risk is rooted in the transition from the future to the present. Risk is being constituted by the transition from a myriad of future possibilities into one present reality (one actual contingent world). This implies that risk is not ontologically something of the future, but rather something of the present. However, we argue that risk does not exist in any ontological sense. What actually exist are possible (future) states of affairs and these may or may not be interpreted to hold risk. An implication of this is that all risk claims are subjective.     

The impact of national traditions and cultures on national foresight processes

This paper addresses the influence of national traditions, styles or culture on the use of foresight in decision-making processes. Inspired by sociologists’ contributions on national culture, the paper demonstrates that two dimensions of national culture, power distance and uncertainty avoidance, are useful in the characterisation of the context in which national foresight exercises are carried out. The paper is based on two Danish cases: The Danish Government's Globalisation Strategy, from 2005, and the Danish Research 2015 process, from 2008, which focus on priority settings for strategic research.     

On the correlation of self-reported and behavioral risk attitude measures: The case of the General Risk Question and the Investment Game following Gneezy and Potters (1997)

Risk attitudes play a pivotal role to understand economic decision-making, and several measures are used to elicit them in the lab and survey them in the field. We provide a literature review on the most commonly used risk elicitation methods by Holt and Laury (HL) and the Investment Game (IG) by Gneezy and Potters and the General Risk Question (GRQ) utilized in the German Socioeconomic Panel. Based on the metadata from three experiments, we show that the GRQ has a robust and economically relevant association with the IG.     

From precautionary inadequacy to participatory risk management

This paper examines the case of mobile telephone infrastructure as an example of a contemporary risk defined by a lack of scientific evidence and consensus as regards potential or future harm. This uncertainty has led to recourse to the precautionary principle at the European, national, regional and local level of EMF risk management. Local risk governance of mobile telephone infrastructures in Catalonia can be seen as an example of a socio-technical complex system linked to risk perception which highlights the limitations of the precautionary principle in a scientifically uncertain context. Active participation of stakeholders and the public in risk management arenas is required if current technocratic risk management strategies are to be superseded by transparent processes of decision-making in risk management spheres.     

The minimum variance hedge and the bankruptcy risk of the firm

In this paper, we analyze the influence of hedging with forward contracts on the firm's probability of bankruptcy (POB). The minimization of this probability can serve as a substitute for the maximization of shareholders' wealth. It is shown that the popular minimum variance hedge is generally neither necessary nor sufficient for the minimization of the firm's POB. Moreover, our model suggests a correction of the widespread view that a reduction in the variance of the future value of the firm is inevitably accompanied by a reduction in its default risk. We derive an analytical solution for the variance-minimizing hedge ratio of a firm exposed to both input and output price uncertainty that takes into account the issue of correlation. Based on this solution, we provide a graphical analysis to prove our claim that there is a fundamental difference between hedging policies focused on bankruptcy risk and those following conventional wisdom even if positive correlation constitutes a “natural” hedge.     

Factors affecting investment intentions: A consumer behaviour perspective

The purpose of this study is to examine investors’ decision-making from the perspective of a consumer using constructs commonly found in the consumer behaviour field. An investment intentions model incorporating product knowledge, product involvement, risk and uncertainty avoidance, and mediated by perceived risk and uncertainty, was developed and analysed using structural equation modelling. The research found that product knowledge and product involvement had the greatest impact on intentions, suggesting the applicability of these constructs in finance research. Perceived risk was the only mediating construct. The model explained more than 60 per cent of the variation in intentions. A major contribution of this research came from the development of an investment intentions model to examine retail investors’ investment decision-making processes from a consumer behaviour perspective. It helps practitioners to develop a better understanding of the factors that impact on their clients’ intentions to invest in the stock market. This study is the first to include a set of consumer behaviour constructs in an investment intentions model that was not examined before, despite the close relationship between behavioural finance and consumer behaviour that includes elements of psychology and sociology in individual decision-making.