Loss Controlling as ERM

In the recent post, Rational Adaptability, four types of ERM programs are mentioned. One of those four types of ERM is Loss Controlling.

Loss Controlling in one of the traditional forms of Risk Management.  A firm with a focus on Loss Controlling will be seeking to do exactly that with their ERM program.  They will look for the most efficient ways to limit their losses.  They will be focused first on their largest possible losses, those major catastrophic situations.  Exactly what those situations might be will differ from industry, to sector, to firm.  But management of firms with a Loss Controlling focus will most often know where their major catastrophic loss exposures are.

Firms with a Loss Controlling point of view do not think of taking risks to make rewards.  They may have business models that are not particularly susceptible to risks, except for one or two big risks that they may well be totally blind to.  Most often their big risk is of a failure of their business model.

For example, a firm that has a monopoly for some product in some market will sometimes have a Loss Controlling risk management approach.  They may have an exclusive distribution agreement with an organization that has a tight membership.  Their biggest risk is the end of that relationship.  But otherwise, they may shun all other risks through a Loss Controlling system.

Many Life Insurers will operate an ALM system for controlling interest rate risks as a Loss Controlling system by setting a zero net risk (or zero duration mismatch) target.  It is nothing less than amazing that while insurers will operate with this approach to interest rate risk, banks will take the exact opposite approach, obtaining a major part of their profits from taking interest rate risks.

A firm operating under the Loss Controlling system is always prepared for a total collapse of the markets where they are trying to totally control their losses.  In the interest rate risk example above, banks will be severely disrupted when there is a major regime change in interest rates, while insurers with good ALM programs will only be minimally impacted. So this approach to risk management is the best approach in a situation when a market hits a Bust stage.  Firms are most likely to adopt this approach if they hold a Conservator attitude towards risk.  Many firms will adopt a Conservator risk attitude after they have had major losses that significantly restrict their ability to absorb future losses, or even if they see many other firms taking such major losses.

Loss Controlling is the main approach to risk management in non-financial firms. This approach was historically common in financial firms as well, but has been pushed aside in recent decades with the development of better systems for Risk Trading and Risk Steering.

Loss Controlling can become an Enterprise-wide risk management system when a firm sets out to look at all of their risks at the same time and in a similar manner.  Risk Management systems such as COSO or ISO31000 are Enterprise-wide Loss Controlling Risk Management systems.  Some people who are very highly tied to the Risk Steering approach to ERM find these systems to be highly flawed.  That is not really the case, they are simply oriented towards a different point of view about risk.

Loss Controlling systems are less likely to focus a high amount of resources on risk measurement.  They are more likely to focus on risk elimination.  No need to measure it if it is gone.

This post is a part of the Plural Rationalities and ERM project.

Explore posts in the same categories: Cultural Theory of Risk


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2 Comments on “Loss Controlling as ERM”

  1. […] COSO process seems to be totally a Loss Controlling approach to ERM.  This approach would appeal to companies and managers of companies who have the […]

  2. […] 7. Provides information that is consistent across different Broad Classes of Risk – this would allow a firm to actually do Risk Steering.  And to more quantitatively assess their Diversification.  So this quality is needed to support two of the four key ERM Strategies and is also needed to  apply an enterprise view to Risk Trading and Loss Controlling. […]

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