As globalization and digitization continue to evolve, businesses are increasingly facing interconnected risks that are more frequent and impactful. A new executive report from the Risk and Insurance Management Society (RIMS) outlines how companies are shifting toward sophisticated analysis techniques to better understand and mitigate these risks.
The report emphasizes the limitations of traditional risk management methods and highlights the growing importance of recognizing and addressing interconnected risks in order to prevent potential vulnerabilities within business strategies.
The rise of interconnected risks is largely attributed to the accelerated pace of globalization, economic development, and technological advancements, according to the report. It further underscores that while many risk managers recognize the significance of these risks, the challenge remains in effectively addressing them.
Challenges of Traditional Risk Management Approaches
Historically, risk management has relied on methods that treat risks as isolated and independent events. These traditional approaches often fall short, as they assume risks can be managed in silos by different individuals or departments. This can lead to an underestimation of the total risk and leave businesses vulnerable to unexpected threats.
Examples of interconnected risks are outlined in the report:
- Regulatory Violation and Reputational Damage
A regulatory violation can trigger a series of consequences, starting with financial penalties, but extending to reputational damage, loss of customers, and diminished future earnings. Additionally, it may harm a company’s ability to attract talent and innovate, further compounding the impact. - Technology Vulnerabilities: The Crowdstrike Incident
The Crowdstrike incident in July 2024 illustrates how technology failures can escalate quickly across interconnected systems. A routine software update malfunctioned, causing global disruptions. This highlighted the risks inherent in a digital landscape where businesses rely on a small number of software providers, leading to financial losses, reputational damage, and broader health and safety concerns.
Addressing Interconnected Risks
Risk managers are now exploring more comprehensive analysis methods to manage interconnected risks. One approach gaining traction is the use of a risk interconnection survey. This method evaluates multiple risks—beyond the primary concerns—by targeting subject matter experts (SMEs) for their insights into specific areas of expertise. The survey format allows for more focused input, ensuring that data collected is accurate and efficient, with SMEs contributing to the analysis in manageable timeframes.
Once the survey data is collected, it is often organized using a risk interconnection matrix. This tool plots individual risks against each other to show how connected they are. The matrix allows for an asymmetrical view of risk relationships, acknowledging that the impact between risks may not always be equal.
Visualizing Interconnected Risks
Two key visualization tools are gaining traction for illustrating risk connections: network diagrams and bow tie diagrams.
- Network Diagrams: These high-level visualizations are particularly useful for senior executives and board members, offering a broad view of how various risks are interconnected. They help decision-makers understand the broader implications of risk interconnections.
- Bow Tie Diagrams: For more detailed analysis, risk managers use bow tie diagrams. These diagrams break down the causes of a risk event on the left side and outline preventative and corrective measures on the right side. They are designed to assist executives in assessing risk management strategies and compliance while making informed decisions about investments and mitigation efforts.
As interconnected risks continue to shape the business landscape, companies are turning to these advanced strategies and tools to stay ahead of potential threats and safeguard their operations in an increasingly complex environment.
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