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Economy dominates risk thinking, but companies fear the unknown

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According to a new report by Lloyd’s, the smecialist insurance market, business leaders feel comfortable managing internal risks, such as reputation and corporate liability, but are less confident about external risks, such as currency fluctuation and cancelled orders.

The report, Risk priorities and preparedness, produced in conjunction with the Economist Intelligence Unit, is one of the largest ever surveys on risk surveying 570 board level-executives from around the globe to identify their top 20 risks and how prepared they are – or think they are – to deal with them.

The report reveals that there may be great disparity between what companies think threatens them and what their exposure to a particular risk actually may be.

Lloyd’s Chairman, Lord Levene, warned that boards should not discount certain risks simply because they feel they don’t apply to them, saying:

“Business leaders must not be over confident in how prepared they think they may be. While good risk management will help to minimise internal factors, they should recognise that they need to extend their thinking outwards to their suppliers, customers and other stakeholders to ascertain how their behaviour will resonate with the company itself.

“Last year 55 per cent of businesses feel that a US-style compensation culture is spreading around the world, and in a recession the speed at which customers or suppliers will escalate litigation must be considered.”

Lord Levene also warned about risk perceptions, highlighting that recent events, or high impact risks, should not overshadow longer tail risks, such as climate change.

“It is completely understandable that companies focus on the latest problem, but good risk management needs to take in to account the broader risks and potential threats, and keep an eye on the horizon. What will disrupt business tomorrow is just as important as what is faced today,” he said.

The report goes further to highlight the recent ‘rise of the risk manager’. In the wake of the financial crisis, they are now taking centre stage as boards apply more stringent filters to business activities and seek to fully assess threats.

“The importance of someone who can keep a company’s reaction to risk sensible and accurate is essential. Risk is not a dirty word , we just need to understand it to manage it properly,” Lord Levene concluded.

The report will form the basis of a new RiskMap, a ground breaking, interactive online map that will be launched in early 2010, which will display emerging risk hotspots around the world. The map will allow people to track changes in risk priorities and preparedness around the world.