Question

What is the difference between applying risk measures for insurance purposes versus applying risk measures for compliance? Provide an example and explain how both have significant value to a business.

Answer 1

Risk measures for Insurance:

Insurance risk and its coverage is about securing capital investment and operating expenditures, especially about your manufacturing facility, costly equipments and machinery, warehouses, transport vehicles, your employees etc. It helps a company to get assured for some payment return on their investment, if something goes wrong.

Example- a fire accident at manufacturing facility can destroy machines, premises, kill people working, damage and explode vehicles, causing an operational, emotional and financial damage to the company, a hazard, that even can take company to stop operations and business could come at a stake. But if the company has insured everything, then it can pay to the families for their loss/ it can re purchase vehicles and machineries and start the business again in some time duration, that it, it can recover from all it’s losses.

Risk measures for compliance:

Compliance risk is about an organization’s financial, organizational, or market reputation or brand equity which can be a result of damage caused by violating government (state/ central) laws, mis- complying regulatory actions, codes of conduct, or even internal standards of practice. This can cause a serious long term irreparable damage. Hence, it is a big risk which every company in the world fears and should fear, no matter size of the company.

Example- if a company avoids tax payments or shows less tax to be paid to the government, and if these actions are caught under any financial audits, it can cause huge penalties and fines, brand dilution in market and media, expose of any scams/ frauds, high employee attrition, jail for people involved and even company would have to be closed.