Why companies should leverage IT to enhance risk management | Investera | Investment Management Solution

Why companies should leverage IT to enhance risk management

27April, 2020

In a world full of opportunities, there comes risk associated with every decision taken in this life, and the same applies to business. Whether in the finance industry or oil and gas industry, the factor of risk can not be eliminated completely nor ignored. Therefore, the term risk management emerged to life in order to address or “manage” the risks affiliated with each industry. Before diving into the definition of risk management and how it has been influenced by information technology, let’s first give a brief overview of the history of risk management and when it first emerged. 

History and Definition

The study of risk management began after World War II where studies showed that the date of risk management origins goes back to 1955-1964 [1]. Modern risk management emerged after 1955 where the concept of financial risk management evolved considerably in the early 1970s. After World War II, large companies with diversified portfolios of physical assets began developing self-insurance against risks, which they covered as effectively as insurers for many small risks [1].

Now that we’ve introduced a brief history of risk management background, let’s dig deeper into the definition of risk management and how is it defined in the financial industry. Risk management in the financial world is the identification, analysis, and mitigation of uncertainties in investment decisions [3]. It is mainly used when an investor or fund manager attempts to quantify and analyze potential losses in an investment or an organization as well as taking the appropriate action or inaction while keeping in mind the fund’s investment objectives and risk tolerance [3]. Incompetent or inadequate risk management can result in severe consequences for companies, individuals, and the economy. A good example of that is the 2007 Great Recession which was a result of the subprime mortgage meltdown and bad risk-management decisions, such as lenders extending mortgages to individuals with poor credit, or investment firms who bought, packaged, and resold these mortgages or the funds that heavily invested in the repackaged and risky mortgage-backed securities or MBS [3].

Risk Management and Information Technology (IoT, Cybersecurity and AI)

So, how did information technology affect risk management and influence the strategies of companies in assessing their risks? Information technology evolved the automation of processes from risk identification up to monitoring. Emerging technologies such as Big Data, cloud computing, enterprise resource planning (ERP), and governance, risk, and compliance (GRC) systems, have offered major technical advancements for risk managers and those in management or outside the organization [2].

In this article, we’ll be studying how risk management was influenced by the evolution of information technology, specifically with the revolution of Internet of Things (IoT), cybersecurity, and artificial intelligence (AI).

Firstly, IoT has introduced risk managers to a layer of technology on top of the business where operations no longer need to be reinvented [2]. Companies are now equipped with more sensors and devices that are linked to the internet which enables organizations to gather significantly more real-time data to drive business value.  Taking radio frequency identification (RFID) tags for example, which assist in monitoring everything from the service intervals on equipment like cranes to ensuring that generators have the correct fuel levels [2]. 

Emerging technologies such as the IoT have helped in collecting and analyzing massive volumes of data from an unlimited number of sources across multiple locations. This results in enhanced operational processes that work on improving the timeliness of reporting and utilizing data [2].

On the other hand, cybersecurity is considered to be the backbone of technologies, processes, and practices, as it was designed to protect networks, computers, programs, and data from attacks, damage, and unauthorized access [2]. Risk managers can benefit from leading cybersecurity companies that work on providing them with more knowledge about risks which can occur when using technologies. This causes the organizations to be more aware of the latest risks and helps in choosing appropriate security defenses to prevent such risks [2].

Finally, artificial intelligence is the latest revolution in technology which can be basically defined as a “cognitive technology” that extends what used to be considered as human processes, such as thinking, learning, and predicting, and embeds them in networked machines. This technology is freely available today from major developers such as Google, IBM, and Microsoft which enable start-up companies to disrupt industries as large, cash-rich organizations [2]. In the field of risk management, artificial intelligence can be used to merge policies, procedures, and controls with the regulators and regulatory changes to improve their organizations’ compliance [2].

To sum up, this article aimed to study risk management, its history, and its definition. The article also aimed to address how risk management was affected by the evolution of information technology specifically in the field of IoT, cybersecurity, and AI. In fact, these technologies revolutionized risk management in organizations from different aspects and domains. In conclusion, risk management is an important factor that helps organizations in delivering and increasing stakeholder value over time. A well-performed risk management plan comes with better data and information that enables organizations to take action on an ever-evolving inventory of risks. Organizations that leverage such technologies benefit from improving their risk management and business reliability. 

 

Farah Al Aina

Fintech Solution Advisor at Investera

 

References

[1] Dionne, George. (March, 2013).  “Risk Management: History, Definition & Critique.’” Cirrelt.com,  https://www.cirrelt.ca/DocumentsTravail/CIRRELT-2013-17.pdf

[2] Fadlallah, Hadi. (November, 2018).  “How Information Technologies influenced Risk Management?” towardsdatascience.com, https://towardsdatascience.com/how-information-technologies-influenced-risk-management-7eb3a38d253

[3] Kenton, Will. (March, 2016).  “Risk Management in Finance” Investopedia.com, https://www.investopedia.com/terms/r/riskmanagement.asp