Features

 

Risk = Danger = Crisis?

2013.01.07
Atsushi Hirasawa

Associate Professor, Faculty of Commerce, Chuo University
Areas of Specialization: Contract theory for non-life insurance contracts
(with an emphasis on marine insurance contracts), crisis management theory


There Are Many Different Synonyms for the Term “Risk”
 

The words “risk” and “crisis” are familiar to everyone and have become a part of our everyday vocabulary. Meanwhile, the need for “risk management” and “crisis management” is being called for in both the public and private sectors.
 

Due to the numerous synonyms and related terms for these words, however, they are not always used accurately. Risk and crisis, and risk management and crisis management, are even used interchangeably at times

 

 
When “risk” is simplistically translated into Japanese as kiken (“danger”), only one aspect of the original meaning is conveyed. As you can see from the figure above, the English word “risk” has many different synonyms. In addition, the variation in the way risk is perceived in different fields has created some confusion over the definition of the term. For example, in the insurance industry, the term “insured peril” may be translated into Japanese as hoken jiko (“insured event”: an event for which an insurer must pay a claim) or tanpo kiken (“covered peril”: a peril covered by insurance). Meanwhile, the term kaijo hoken (“marine insurance”) may be rendered in English as “maritime risk” or “perils of the seas.”
 

So what is the essence of the word “risk”?
 

Does Risk = Danger?
 

Peter L. Bernstein gives a detailed account of how the concept of risk has developed over time in his classic book, Against the Gods: The Remarkable Story of Risk (Japanese title: Risuku: Kamigami e no Hangyaku, trans. by Mamoru Aoyama). He writes that the root of the word “risk” means “to dare,” and so the term originally carried the idea of actively making choices about the future, rather than passively submitting to fate. If we look at the etymology of the word, “risk” comes from the Italian word risicare, which meant “to navigate among the cliffs” or “to run into danger.” Thus, we can see that the word included a sense of uncertainty about how things would turn out. In both Japanese and English, however, the primary meaning of “risk” is “potential danger,” and the word is generally used in a negative sense, indicating the possibility of injury or loss. When you say words like “fire risk,” “earthquake risk,” or “mortality risk,” most people think of risk as something dangerous that only results in loss. In addition, when risk management was first introduced into Japan, it was translated as kiken kanri (“danger management”), limiting its application to what is called “pure risk” in the insurance industry, or risk that can only generate a negative outcome of injury or loss (“loss-only risk”).
 

With recent technological innovations, the globalization of business operations and the development of a highly information-oriented society, however, risk is becoming increasingly diversified, and risk management is no longer applied solely to pure risk, which can only result in loss. There is also, for example, “speculative risk,” sometimes referred to as “loss or gain risk.” A literal translation of “gain risk” into Japanese as moukaru risuku (“profit-yielding risk”), however, only obfuscates the meaning. Speculative risk means a risk you take that can result in either loss or gain.
With stock investments, people buy stocks hoping they will make some amount of profit. Naturally, however, they are uncertain whether the result of the investment will be a gain or loss of money when they purchase the stocks. The effect of this uncertainty is risk.
 

Risk, as Defined by International Standards
 

ISO/IEC Guide 73 was established in 2002 to dispel the confusion surrounding the term “risk,” amid demands for the international standardization of risk management. It defined risk as “the combination of the probability of an event and its consequences.” With the neutral term “consequences,” the definition indicated that the effects of a risk could range from desirable to undesirable ones. Risk was thus not limited to a concept like “danger” that only has an undesirable outcome. ISO/IEC Guide 73:2002 was later reexamined by a working group set up under the ISO, and their work resulted in the publication of ISO 31000—a set of standards and guidelines on risk management—in 2009. In ISO 31000, risk is defined as the “effect of uncertainty on objectives.” The word “effect” in this definition means divergence in a desired and/or undesired direction from the effect you are hoping for. It implies that, to achieve a given objective, people need to aggressively take risks that have potentially undesirable outcomes, despite the fact that they know the risk may result in an undesirable outcome. Risk, as it has been discussed in recent times in risk management efforts to enhance the value of companies, captures this meaning of the word.
 

*ISO is the acronym for the International Organization for Standardization, and IEC is the acronym for the International Electrotechnical Commission.
 

Crisis ≠ Danger
 

Some scholars lament the fact that the term “crisis” is possibly one of the most egregiously misused words in modern society. The word “crisis” comes from the Greek words κρίσις—variously translated into English as “judge,” “criterion” and “discrimination”—and κρίνειν—translated as “to decide” or “to separate.” From these origins the word came to be used as a term for “turning point,” suggesting a decisive change in a situation that determines whether things will take a turn for the worse or the better. The essence of a crisis, therefore, can be regarded as the occurrence of a situation that should be addressed using a completely different set of criteria than the ones that are usually considered.
 

After the occurrence of the Great Hanshin-Awaji Earthquake in 1995, the term “crisis management” suddenly became the focus of a great deal of attention in Japan. Since then, the term has been used in a variety of different contexts. In fact, you could say that not a day goes by in which we do not hear or see the word. It is said that the term “crisis management” was first used in a speech by Robert S. McNamara, then Secretary of Defense under John F. Kennedy, when he said, “There is no longer any such thing as strategy, only crisis management.” The speech was given at the time of the Cuban Missile Crisis, believed to have been the closest the world came to an outbreak of nuclear war during the Cold War period. After this event, many studies on the concept of “crisis,” which is a basis of crisis management, were published in the field of international politics. Some of these studies were applied to the formation of the concept of crisis in other fields, such as business management. For example, Charles F. Hermann, who has provided many insights into the conceptual study of crisis, argues that a crisis is a situation that poses a threat to the most important objectives of a decision-making group, limits the time the group has to respond to the threat before a decision must be made (short time response = time pressure), and catches the group by surprise when it occurs. The elements of “threat” and “time pressure” found in this definition of crisis have been applied to the definitions of crisis in other fields. In any event, crisis has come to refer to a very serious and unusual situation.
 

On the other hand, despite the countless documents that have been published in Japan with the word “crisis management” in the title, only a few discuss the definition and concept of crisis in detail. In fact, there are many frequently used terms like “financial crisis” (that refer to undesirable situations) in which the exact meaning of “crisis” is left ambiguous.
 

Risk and crisis have become very common words. But I wonder how many people would be able to give an accurate answer when asked what these words mean…


 

 

Atsushi Hirasawa
Associate Professor, Faculty of Commerce, Chuo University
Areas of Specialization: Contract theory for non-life insurance contracts (with an emphasis on marine insurance contracts), crisis management theory

 

Professor Hirasawa graduated with a bachelor’s degree from the Accounting Department, Faculty of Commerce, Chuo University in 1990. He earned a master’s degree from the Graduate School of Commerce, Chuo University in 1993 and completed the coursework for the doctoral program at the Graduate School of Commerce and Management, Hitotsubashi University in 1996. He worked as an assistant for the Faculty of Commerce and Management, Hitotsubashi University, and a full-time lecturer and assistant professor on the Faculty of Commerce, Chuo University before assuming his current position as an associate professor on the Faculty of Commerce at the latter university. His publications include Elements of Non-Life Insurance [Songai Hoken Ron] (co-written with Eiichi Kimura and Shuya Nomura, Yuhikaku, 2006) and An Introduction to Non-Life Insurance [Hajimete Manabu Songai Hoken] (co-written with Koichi Otani and Satoshi Nakaide, Yuhikaku, 2012).


 

 

 

 

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