Richard L. Clarke, DHA, FHFMA

"Record Bond Sales Show Risk Aversion." "Automaker to Suspend Sales of Some Vehicles for Safety Risk." "What's the Real Risk of Deflation?" "Bank Pay Will Track Risk." "Falling Oil Supply Risks a Price Rise."

Reading The Wall Street Journal over the past few days (yes, I do still read print newspapers, at least while they are still here), I noticed how many times the word risk appeared in a headline-and in how many different contexts.

I suppose that's not surprising. Given the world economic downturn, risk is never far from our minds. For example, recently, the HFMA Audit and Finance Committee considered the need to rebalance the Association's investment portfolio. Like most investors, HFMA recently incurred relatively large unrealized losses on its investments. And like most investors, the Association had to consider whether to maintain its current investment category allocations to equities, fixed income, and other investment categories, or to make fundamental changes.

The Association's investment advisers recommended that the long view is necessary when considering a portfolio that is somewhat like an endowment-that is, with no immediate need for liquidity. And in previous discussions, the committee agreed with the advisers.

But things are different this time. And it all has to do with enterprise risk. The committee's risk appetite, as measured by its willingness to experience the ups and downs of the market, changed as a result of the current status of the investment portfolio. Current unrealized losses are greater than the committee would have expected given the diversification of the portfolio. The committee's appetite for continued risk exposure given the current status of the investments is less than before.

More important, however, the whole enterprise was in a riskier position today than it was a year or so ago. This increased risk comes from an economy in recession with increasing unemployment, financial markets in turmoil creating increased risk in dealing with financial institutions, and federal and state government incurring unprecedented budget deficits, thereby increasing risks related to tax increases and services cutbacks. The environment in which the Association operates is riskier. Given these issues, the risk of decreased revenues and increased costs has grown significantly. The overall risk to the enterprise is greater; therefore, the risk appetite related to investment allocations is less.

Risk is a diverse, omnipresent factor today. So risk assessment of any component of an enterprise must consider the enterprise as a whole.

In this case, the risk inherent in the allocation to equity or fixed income on the asset side of the balance sheet must be considered within the context of the risk to revenues and expenses from operations. In provider organizations, the risks are even more complex and must also consider the risks inherent in the liability side of the balance sheet. Financing structures using swaps, variable rate issues, and credit and liquidity enhancements all carry components of risk.

Decisions that involve risk (and almost all decisions involve some level of risk) must be considered within the context of the entire enterprise. I expect that the word risk will be a fixture in newspaper headlines for a long time to come. It is a risky world.

Publication Date: Friday, May 01, 2009

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