Speaking the same language as senior colleagues and understanding their business terms are essential risk management skills, a recent meeting of the Airmic Academy heard.

Speaking the same language - the value of understanding financial jargon

Most risk managers and insurance buyers need to up their game when it comes to understanding financial terminology. It will help them to interact more effectively within their own organisations and communicate better with their insurers, according to Andrew Tunnicliffe of Aon speaking at a recent Airmic Academy.

To wield the influence that their expertise deserves, risk managers need to broaden and develop their softer skills; helping them do so has been an Airmic priority for several years. The ability to speak the same language as the CFO and Treasurer is an important example of this, and was the subject of a recent Airmic Academy.

It’s interesting to look at the parallels. “For example, Financial people often talk about ‘basis points’ when discussing a transaction, whereas insurance buyers refer to ‘rate on line’. Yet they mean exactly the same thing,” pointed out Andrew Tunnicliffe. “Understanding the jargon will help risk managers, whether on the insurance buying or risk management side, relate to their organisations in a more effective way.”

Attendees were given a list of financial words and terminologies that might seem impenetrable at first sight, but actually relate to concepts that most risk managers would readily understand. They were also given an overview of important financial performance ratios enabling the user to better understand the sensitivities specific to your organisation.

Do you understand Financial Reporting Standards?

There is more to understanding financial terminology, however, than simply choice of words.  There are areas where many risk managers need to increase their knowledge. For example, how well do you understand International Financial Reporting Standards? 

“The international standards should be of interest to insurance and risk managers. They’re a global common language understood equally by the board room and influential stakeholders,” says Tunnicliffe. “Familiarity with them can assist in articulating better the risk profile of your organisation, understanding the accounting and economic consequences of a loss and the associated requirements in setting out the balance sheet and income statement..”

He also highlighted pensions and employee benefits as a growing area for risk managers to become involved with, and an example of where they would benefit from a greater understanding of its impact of reporting standards on a company’s wider financial position and performance.

Is your organisation risk mature?

A greater knowledge of financial terminology will help risk managers understand an enterprise’s main drivers. He also discussed the Aon Risk Maturity Index from a top down perspective, an online survey tool which has now been carried out on over 600 organisations focusing on 10 key characteristics of risk.

There is, said Tunnicliffe, a correlation between risk maturity and stock price performance. The index enables firms to compare themselves with others of similar size and sector and, by studying the underlying data, to identify areas for improvement. For example, if an organisation identifies an issue with regard to risk communication this may lead you to question the impact and role of your risk committee.

Jargon – how many of these terms do you understand?

• Organic vs inorganic
• YoY comparable
• phasing
• marginal cost
• spread management
• capitalised cost,
• contribution margin
• PINOI
• PTI
• Basis points
• run rate
• performance vs health