Five risk trends to watch.

• Author: Langsdale, Gary

As the risk manager of a major manufacturer, I've long been an observer of the changes sweeping both the insurance industry and corporate risk management. Today, many of the most important trends are linked in some way to the growing tendency to roll pure risk and financial (or speculative) risk into one risk-management program. Here's my take on the most important changes in risk management today and why I think it's important to keep pure risk and financial risk separate functions.

Pure vs. financial risk. In some risk-management corners, it's now fashionable to merge "pure" risks (those with only downside potential, such as property losses or civil liability) and financial risks, such as currency hedging and derivative trading. The latest theory is that regardless of the source, risk represents a single exposure to the corporation.

But mergers are for corporations, not for risk managers. Successfully managing pure and speculative risk requires two very different skill sets. In most corporations, there's some convergence at the senior management level. In other words, the treasurer or CFO often oversees both pure and speculative risk management. But the promoters of merging the two areas, mostly purveyors of products or services trying to broaden their markets, often imply that one small staff group can manage both functions if given the right computer software and consultant tools (guess whose?).

The essence of successful pure risk management is minimizing negative results by actively avoiding losses, through fire prevention, fleet auto safety and favorable contractual indemnity terms. Speculative risk management involves seeking the best passive results for events usually beyond the company's control, such as geopolitical or macroeconomic events that could cause unpredictable currency value swings. These risks are best managed by judgment, prudent hedging and, in some cases, just good luck. Clearly, these two areas of risk management are different animals, and the danger of having one generalist staff address both functions is that they'll do neither well.

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