From the April 2011 issue of Treasury & Risk magazine

The Sky Is Falling--Top 5 Threats

What a world! In just the last few months, businesses across the globe have been shaken by a series of unprecedented events, many of which reverberated to the bottom line. For corporate risk managers, whose job is to identify the value-killer risks to their organizations' operations, financial soundness, people and strategy, discerning such events and devising ways to soften the blows is tantamount to predicting next month's weather in Florida.

Indeed, few risk managers anticipated the extent of the tragic events in Japan that are sure to disrupt their organizations in ways that only now are beginning to be understood. The same applies to spreading political instability in the Middle East. Earthquakes in Haiti, Chile and New Zealand; huge snowstorms in the Northeastern United States; a massive oil spill in the Gulf of Mexico; a global financial crisis and consequent recession; swine flu pandemic; and a horde of recent hackings against major companies are just a few of the other out-of-the-blue events ripping carefully prepared strategic plans in half. Add widespread fears of reputational disasters caused by WikiLeaks-type revelations, rising inflation in China and India, and the numbing effect of regulation-after-regulation-after-regulation, and the job of the risk manager becomes one for the more resilient among us.

Supply UnChained
The devastating events in Japan are sure to disrupt global supply chains, given the great number of companies in the country that manufacture parts for consumer electronics devices like Apple's iPad and Toshiba's flat-screen TV. Japanese companies also make parts for automobiles and jet airliners, among others. Small wonder risk managers at companies that rely on overseas manufacturing and sales selected supply chain risk as a top concern. Indeed, there are myriad ways in which just-in-time manufacturing can become "when-it-arrives" manufacturing. As John Merkovsky, global leader of Marsh Risk Consulting, puts it, "There is a very large, complex series of interdependencies that drive a product from raw material to the finished goods. The issue is not supply chain risk, it's supply chain risks."

It's not just Mother Nature that can slow the delivery of a key component to a manufacturer. For example, the liquidity problems in the wake of the global financial crisis whipped up concerns over supplier solvency. If a vital sole-source supplier went belly up, its buyers would confront manufacturing delays affecting their relations with their own buyers. "Whether it's political instability in the Caribbean and the Middle East or an earthquake in New Zealand, there are supply chain repercussions," says Eric Andersen, CEO of Aon Risk Solutions U.S. "With the Chinese government getting very itchy about developments in Egypt, Tunisia and other countries--and so many U.S. and European manufacturers depending on goods from China--supply chain risks are heightened for many risk managers."

Irregular Regulations
Ever see the Federal Register? At 80,000 pages and counting, this official registry of federal laws and regulations is about the size and weight of a small Buick. By the end of this year, it might be mistaken for an SUV, thanks to the regulation-loving Obama administration. Complying with the sheer number and variety of the rules has pushed regulatory risks into the top five. "It's a big one," says Merkovsky from Marsh Risk Consulting. "Everyone I talk to is worried about it--viscerally, in some cases."

Two pieces of recent legislation causing much distress are healthcare reform and the Dodd-Frank financial services reform acts, both subject to change now that Republican lawmakers have a more solid footing in Congress. The problem for risk managers like Carmelo Casella at Bank of New York Mellon is interpreting the impact of all the new rules. "We just don't know what restrictions will be put in place or their effect on things like capital requirements," says Casella, the bank's longtime manager of corporate insurance. "Whatever impositions arise may affect the types and amount of insurance policies we buy."

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