Pick up any newspaper, or turn on any television channel around the world, and you'll get a very one-sided view of risk. It is portrayed as uniformly negative, associated with damaging outcomes and talked about in terms of financial loss. Even insurance risk management professionals can be drawn into viewing risk as something inherently bad that should be reduced as far as possible, or transferred out of the organization.

Yet risk is absolutely fundamental to human life and endeavor. We all personally assess and take hundreds of risks every day of our lives, often almost automatically. Without the ability to take well-judged risks none of us would get very far. Certainly no organization can grow or succeed without the ability to identify which risks to take, and which to avoid.

Opportunity is sometimes seen as the opposite of risk, portrayed in a positive light, talked about solely in terms of potential gain. The language we hear about opportunities is that they are not to be missed … they are there to be seized … they are the key to success.

At one level this is of course true, as organizations that fail to snare their opportunities have a short life. But far from being polar opposites, risk and opportunity are closely interwoven, because an opportunity without risk is an opportunity with limited potential. Alongside the ability to assess risk, the capacity to take on risk is a basic building block of economic success.

Factoring in Volatility into the Risk Insurance Model

For some people, the relationship seems simple: There is no opportunity without risk, but there are risks that do not offer any potential gain, just the chance to avoid loss. Some would view insuring against liability claims, for example, as an exercise in avoiding damage to their organization, not something that inherently creates business opportunities.

When considering Risk Insurance, do not miss the impact that volatility in an organization's performance can have on its capacity to take on new opportunities. Volatility can take two interlinked forms: volatility in operational performance, and volatility in financial results.

Volatility in operational performance means that a firm has to devote more of its manpower to smoothing the effects of variable performance. These might include having a larger quality control function, or more people in the customer service center; higher levels of stock throughout the supply chain, or more favorable terms for customers and distribution chain partners. At its most serious, it means that a disproportionate amount of leadership time and energy is spent dealing with the effects of volatility, rather than directing the future of the organization.

Volatility of financial results is just as damaging. It directly limits the degree to which a firm can leverage its balance sheet, causing shareholders and financial analysts alike to trim price-to-earnings ratios and to discount future cash flows more deeply. Of course, operational and financial volatility are closely related; combined, they have a direct effect on any firm's ability to make the most of its opportunities.

The Importance of Risk Management and Corporate Discipline

Successfully and appropriately managing risk means identifying which individual risks are most likely to cause significant volatility in operational and financial performance. Those are the risks that need to be reduced, transferred or reserved for. In turn, reducing performance and financial volatility gives a firm more capacity to take on risk, freeing up internal resources and leadership time, and enabling more aggressive leverage of the company's financial position. Which, in turn, enhances its ability to exploit opportunities that continue to arise.