What Do You Mean by Risk?

By Pr. Jean-Paul LOUISOT, Université Paris 1 Panthéon Sorbonne, Dean of curriculum CARM_Institute.
Revised 15 December 2010

Risk management, risk mitigation, risk financing, etc., the word “risk” is used by all risk management professional as well as by everybody in their daily life. But do we really know what we mean by risk? The Australian RM standard states “the chance of something happening that will have an impact on objectives”. And the ISO 31000 Risk Management Guideline declares that Risk is the impact of “Uncertainty on Objectives”. So is that settled? Not so fast here are a few commonly used understandings of the word:

Risk (pure, speculative, mixt)

This are the most commonly used by specialists, compatible with the AS definition depending on the nature of the consequences involved.

Systematic and unsystematic risk

Systematic risk (i.e. non diversifiable) is the result of non hazardous causes that may happen simultaneuously. Tha means that it does not lend itself to diversification. As an example, all economic factors can be affected by a downturn in the economy, a rise in the interest rates.

Unsystematic risk (i.e.diversifiable) is the result of hazardous causes and lends itself to probabilistic appraoaches. They are specific to each individual economic entity and offer the possibility to build « balanced portfolio » of risk sharing. Therefore, it insurance cover might be designed to cover them.

Insurable vs non-insurable risks

This is a more restrictive definition as it refers to events for which there exist an insurance Market. Further more the work “risk” is used commonly by insurance specialists to refer to the entity at risk, the peril covered, the quality of the entity risk management practices (level of risk) and the overall assessment of a site (“good risk for its category”).

 

Perception of Risk

Without falling into the world of “psychological puns” of French psychoanalyst Lacan, one is but forced to cope with the dire “risks” involved in using the word “risk” in a social and economical setting. Indeed, one must be cautious because this commonly used “four letter world” may have totally different meanings for different individuals. This requires from all involved to be aware of that diversity when communicating in a boardroom or with different stakeholders.

This reality must be kept in mind when communicating on risks, whatever the media. Any “risk management” professional should be always aware of one of his main challenge and hazard: how to gain an assurance to be interpreted correctly as risk perception by deciders as well as stakeholders is more important than any “scientific” assessment of risk. My recommendation: Whenever possible avoid using such an uncertain word; another, less common, should be preferred: exposure, threat, opportunity, peril, impact, etc., to name but a few, depending on which facet of “risk” is referred to! It may prove safer to explain a concept not commonly grasped, even professional jargon some will say, than to trust that the communication target will understand, with no guarantee as to what will be practically understood.