10 Predictions for the Future of Risk Management (Chapter 19)

Book: Enterprise Risk Management: From Incentives to Controls
Author: James Lam
ISBN: 978-1-118-41361-6

Chapter 19 is where James Lam steps back from the technical stuff and talks about where risk management is headed. He also looks back at predictions he made in the first edition and checks how accurate they were.

Balance Is the Whole Theme

Lam opens by tying the chapter back to the book’s core idea: risk management needs balance. You balance downside control with upside growth. You balance internal controls with external risk transfer (insurance, derivatives, alternative risk transfer). And you balance the hard side (systems, reports, limits) with the soft side (culture, people, skills, incentives).

He uses the yin and yang idea here. The hard and soft sides of risk management eventually overlap. Same with the human side (careers, culture, education) and the technology side (tools, convergence, analytics).

Risk Management as a Real Career Path

Back in the day, risk jobs were siloed. You were an actuary, auditor, credit analyst, or market risk manager. Each group had its own training, language, and professional association. You could rise to head a function, but you rarely made it to the executive committee. And your pay was a fraction of what line managers earned.

That changed in the mid-1990s. Risk management became a recognized profession with shared core skills, like accounting or law. Companies needed people who could protect shareholder value and help manage change. The Chief Risk Officer role emerged. CROs now sit on executive committees, report to CEOs, and earn seven-figure packages.

The profile of a successful risk professional changed too. It used to be the number cruncher. Now it’s the business partner who thinks about strategy, product development, performance measurement, and compensation. In a 2000 poll of 175 risk professionals, nearly 70% said they wanted to become a CRO.

But elevating risk managers isn’t enough. Companies also need to spread risk awareness across the whole organization. Just like people know something about tax and legal issues, they should understand how risk affects their work.

Education and Evangelism

A fancy risk tool is useless if nobody knows how to use it. Lam argues that risk education programs are critical. A good program covers:

• Market risk (limits, asset/liability management)
• Credit risk (ratings, exposure measurement)
• Operational risk (control self-assessments, process mapping)
• Enterprise risk management (frameworks, economic capital, VaR)
• Risk transfer (derivatives, insurance, ART)

The catch: risk management sounds boring to most employees. So educators need real stories. Case studies of both wins and disasters keep people engaged. Training should use multiple formats: formal certification programs, intranet reference materials, and forums where people share lessons learned.

Technology and Convergence

Technology has pushed risk management forward in four ways:

1. Community. The internet united siloed risk groups. GARP started in 1996 as a virtual meeting place and grew to 15,000+ members worldwide.
2. Standards. Common terminology and methodologies spread faster online. JP Morgan posting RiskMetrics on the web made VaR a de facto benchmark.
3. Education. Online courses, videos, and conferences filled gaps that associations alone couldn’t cover.
4. Analytics. Real-time risk aggregation, 24/7 dashboards, and web-enabled models brought enterprise-wide risk views to smaller firms that couldn’t afford big IT budgets.

The 10 Predictions

Lam made these predictions in the first edition. Here’s the quick version:

1. ERM becomes the industry standard. Silo risk management keeps failing. Boards and investors demand transparency. Companies with strong ERM weather downturns better.
2. CROs become common in risk-heavy businesses. If you don’t have a CRO, who owns risk? The CEO? The CFO? Can you attract top talent without a CRO career path?
3. Audit committees evolve into risk committees. Boards need oversight beyond financial reporting. Chase and Export Development Corporation of Canada already had board risk committees.
4. Economic capital rises; VaR fades. VaR misses tail risks and doesn’t measure return. Economic capital and RAROC give a common currency across all risk types. Basel adopted this framework.
5. Risk transfer happens at the enterprise level. Portfolio hedging and multi-risk insurance policies save money. Companies compare cost of retention vs. cost of transfer.
6. Technology transforms risk management. Faster computing, the internet, wireless alerts, and ASP models move reporting from monthly to real time.
7. An operational risk measurement standard emerges. Methods range from judgment to extreme value theory to neural networks. Data will eventually converge on a standard.
8. Mark-to-market accounting becomes the reporting basis. Accrual accounting misleads on financial assets. Shareholders want risk sensitivity in financial statements.
9. Risk education enters corporate training and college programs. Professional certifications (like the CFA for finance) will emerge for risk management.
10. The salary gap among risk professionals widens. Generalists with cross-functional skills get paid more. Narrow specialists get left behind.

Looking Back from 2013

Bill Scotti of GARP reviewed these predictions in 2012. Eight out of ten came true.

Confirmed: ERM adoption was growing (80%+ of Accenture survey respondents had or planned ERM programs). CROs were widespread (66% had one, another 20% had someone doing CRO work without the title). Board risk committees were forming. Economic capital was replacing VaR as the primary measure. Enterprise-level risk transfer was happening. Technology had transformed the field. Risk education expanded at universities and through GARP/PRMIA. The salary gap between specialists and generalists was widening.

Still uncertain: No cross-industry operational risk standard had emerged (Basel rules helped banks, but not everyone else). Mark-to-market accounting stalled after the 2008 crisis, with ongoing conflict between FASB and IFRS.

Lam’s takeaway: the profession moved faster than most people expected. But measurement standards and accounting transparency still had a long way to go.

Why This Chapter Matters

Chapter 19 isn’t a how-to guide. It’s a vision statement. Lam is saying risk management isn’t a back-office function anymore. It’s a career, a discipline, and a board-level priority. Technology and education will keep pushing it forward.

The Everlast Financial case study in Chapter 20 gives you a fictional peek at what that future might look like in practice.

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