The importance of Risk Capacity in the Face of Growing Uncertainty

Businesses are dealing with major hurdles in today's market. The economic impact of the Covid-19 pandemic is still tangible, while geopolitical risks are looming large. Disrupted supply chains and uncertain access to key resources are causing significant disruptions. With all this uncertainty, the importance of risk aggregation and risk capacity for companies is becoming increasingly evident.

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Author
Marcin Fijalkowski

How Much Risk Can My Company Handle?

Businesses are facing unprecedented levels of uncertainty. These uncertainties need to be factored into both future strategic planning and day-to-day operations. But how well-prepared are companies for the challenges ahead? Here are some key questions to consider:

  • What is our overall risk level, and how well can we manage risks?
  • Do we have enough financial resources to respond to these risks without putting our company in danger?
  • Are we resilient enough to thrive in today's competitive market?

These questions highlight the vital role of understanding risk aggregation and risk capacity in making strategic decisions for companies. At the same time, they are gaining increasing importance from a regulatory standpoint, forming the foundation for the new IDW Audit Standard 340. It is only when we understand our company's overall risk situation and its capacity to bear risks that we can determine which risks we can afford to take without jeopardizing the survival of our business.

 

Navigating Crises with Effective Risk Management: The Power of Risk Aggregation

The COVID-19 pandemic and geopolitical crises have clearly revealed that many organizations have gaps in their risk management practices. Despite repeated warnings from the World Economic Forum about the risks posed by pandemics and geopolitical shifts in its annual Global Risk Reports, these factors have, at best, received little attention in risk management efforts so far. However, globally disruptive events greatly influence both the current risk landscape and the future success of companies.

Given these significant developments and their potential effects on businesses, the spotlight is now on risk aggregation and assessing individual risk capacity. Without evaluating risk capacity and without a systematic approach to aggregating individual risks while considering their interdependencies, it is hard to provide reliable insights into a company's exposure. By carefully balancing aggregated risks and returns, however, businesses can determine how overall risk aligns with their financial security, and provide a solid foundation for strategic decisions.

Key Concepts for Success: Understanding Risk Aggregation and Risk Capacity

Besides the evident business benefits of concepts related to risk aggregation and risk capacity, the updated version of IDW PS 340 raises the bar for their design and verifiability. These guidelines provide a framework for calculating risk capacity and implementing risk aggregation while still allowing companies the flexibility to tailor their concepts to their specific needs.

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To analyze risk capacity effectively, companies first need a thorough, realistically evaluated, and combined portfolio of risks. Many companies still have room to improve here, especially when it comes to measuring risks quantitatively. This requires a reliable and systematic aggregation method for evaluating and combining risks. Only with a proper way to group risks can businesses compare the overall risk situation with their actual risk capacity. In this regard, it is important to consider how individual risks influence each other to see to see if they are strengthening or lessening each other's impact.

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To analyze risk capacity, it is important to use clear and measurable criteria, such as equity, liquidity, or ratings. In practice, the liquidity-based approach is mostly used for calculating risk capacity.

When analyzing risk capacity, it is crucial to tailor the approach to each company. This means aligning the timeframe with the company's planning period and regularly updating analysis criteria based on industry, company status, and economic conditions. Actively involving the management board, as recommended in IDW PS 340, in determining the company's risk capacity helps strengthen the connection between risk management and corporate governance.

Aligning Risk Management and Corporate Governance

To better align risk management with corporate governance, companies should extend the scope of their enterprise risk management. This means not just focusing on risks related to geopolitics, the environment, and health, but also those stemming from global supply chains. The aim should be to respond swiftly, purposefully, and consistently once these risks have been identified and analyzed.

For effective company management, subjective risk assessments should be backed up with solid data from both internal and external sources. Creating risk scenarios and running simulations help lay the groundwork for developing strategies and plans to deal with future crises. Putting in place well-thought-out approaches to risk aggregation and risk capacity is essential for integrating risk management with overall corporate governance.

Using GRC Software for Clear Insights and Comprehensive Risk Assessment in Your Business

To effectively manage risks in today's dynamic business landscape, using advanced software such as BIC Enterprise Risk is essential. The solution seamlessly brings together all relevant risk data, facilitating a comprehensive understanding of the company's risk profile. Such understanding is vital for recognizing the company's risk capacity, and lays the groundwork for informed decision-making in an uncertain market.

BIC Enterprise Risk offers transparent presentation of available risk information. Through risk scenario simulations, the tool aggregates data to provide a clear overview of the company's overall risk exposure. Decision-makers can then compare these insights with the company's individual risk capacity. With this integrated risk management system, they can always access all the important risk details and respond quickly and effectively to crises.

Which Risk Management Software Is Right for Me?

Whether you prefer a custom design or pre-built solution, GBTEC offers the right software for your needs.
See for yourself and discover our BIC GRC Solutions for professional risk management.

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BIC Custom GRC

BIC Custom GRC offers customizable, flexible custom solutions that can be tailored to the client’s unique processes.

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BIC Enterprise Risk

BIC Enterprise Risk is our user-friendly, quick-to-deploy solution that meets top standards.

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About the Expert

Marcin Fijałkowski

GRC Solution Architect

Marcin is part of the Solution Development Team, specializing in creating advanced simulation solutions and delivering custom simulation projects. With over 8 years of experience in R programming, stochastic modeling, and data management, he's a trusted expert in simulation methodology. Marcin excels at designing innovative and sophisticated simulation use cases that integrate seamlessly with BIC GRC, helping to drive cutting-edge advancements in the field.

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