4 Managing risk: a brief history of risk management
The word ‘risk’ is thought to derive either from the Arabic word ‘risq’ or the Latin word ‘risicum’. The two possibilities quite neatly combine to give us the meaning for the English term in this context. The Latin word originally referred to the challenge presented to seafarers by a barrier reef and so implied a possible negative outcome. The Arabic word, on the other hand, implies ‘anything that has been given to you (by God) and from which you draw profit’ and has connotations of a potential beneficial outcome.
A twelfth-century Greek derivative of the Arabic risq related to chance outcomes in general with no positive or negative implications. The definitions above can be combined to derive a concept of risk as being ‘an uncertain future outcome that will improve or worsen our position’.
There are two implied elements about this definition that should be noted:
- it is probabilistic – the likely outcome can be assessed, but is not known with certainty
- it is two-sided – the outcome may be favourable or adverse.
Strictly speaking, the ‘favourable or adverse’ aspect of the definition does not necessarily imply ‘symmetry’, where the ‘upside’ and ‘downside’ are of an exact equivalent magnitude. Indeed in many risk situations the outcomes may be skewed – for example, more ‘downside’ than ‘upside’.
The French word ‘entrepreneur’ first appeared in the French dictionary in 1723 to describe a person who organises and operates a business by taking a financial risk. Good risk management isn’t about not taking any risks: it is about taking the right risks where there is an appropriate reward. It is about protecting assets and adding value.
Risk is all around us, and always has been. In that regard it can be considered to have always been a part of human life, and even as a profession its roots go back a long time. Some forms of mutual aid existed in ancient societies and these are considered the forerunners of modern insurance companies, which are fundamentally reliant on risk-based assessments and decisions. Ideas of modern professional ‘risk management’ as a separate discipline grew from the insurance companies of the mid-twentieth century who sought more control over the risks they were insuring against, and branched out into other areas of loss-prevention in their companies, thereby reducing the levels of risk their own businesses faced in other ways than just insurance.
Today risk management is well recognised and widely practised and it takes many different forms. Some of this is driven by regulation – for example, Section 414C of the UK Companies Act, which is applicable to all companies incorporated in the UK, regardless of size, requires that ‘The Directors’ strategic report must contain a description of the principal risks and uncertainties facing the company’. Consequently, many organisations have recognised that value can be derived by managing their risks, reducing the probability of downsides and increasing the probability of upsides. In fact most organisations today have a Chief Risk Officer (or similar role) and many senior roles are, in large part, accountable for managing an organisation’s biggest risks. The Institute of Risk Management (IRM) indicates some of the potential careers open to risk professionals (Institute of Risk Management [Tip: hold Ctrl and click a link to open it in a new tab. (Hide tip)] ).