Risk is a Diamond Business

I recently asked a sightholder how he was identifying and managing risk.  He responded that his diamonds, buildings, factories and equipment are fully insured and that he has regular meetings with his insurance broker.  He also has good insurance for accidents at work and, oh yes, an outstanding travel insurance policy.  All of his risks are comprehensively insured, he asserted.

He gave me his full attention as I explained his list is incomplete and nodded in agreement as I pointed out that some risks are not controlled through insurance but good management. Then he retorted to reassure me that his partner manages the insurance broker extremely well and he sees no cause for concern.

The identification and management of risk is becoming more developed, and a required skill for businesses managers all around the world. The diamond industry is no exception.  The conversation described above actually occurred and it shows that in our industry there is much room for improvement.

In an analysis of a diamond business risk portfolio it becomes plain that loss and theft are the risks most easy to identify and manage. All you need to do is call your broker and take out a block policy.

Much of the risk that must be considered is less tangible though. Rather than its inventory, bank balance or sightholder status perhaps the most important factor in determining the value of a diamond company is its reputation. A company can comply with all the applicable regulations, laws and ethical standards and yet have a bad reputation. 

Reputation includes information on the company's trading achievements and failures, as well as its dispute resolving history. A minor contestation at a critical time can potentially result in enormous damage to a company's reputation, far in excess of the disputed sum. Still, pitifully few diamond companies actively and strategically manage their reputation.

Another example of risk could be the loss of the electricity supply in your factory. Many will remember the power outages in China two years ago while South Africa and Botswana are currently suffering from power cuts.  This is a type of risk which should be managed rather than insured against, by investment in generators or the scheduling of production during off-peak hours.

The main concept of Basel II is the message that the banks have a responsibility to more clearly identify their clients' risk exposure, and oversee the implementation of programs to manage them.

There are many other types of risk, some easier to determine than others but far too many to be covered by this editorial.  In future issues we shall look at more areas of risk and how small, medium and large companies can manage them or insure against them.

Adopting a good risk management strategy in your diamond or jewellery business does not guarantee success nor does the lack of a risk management policy mean you will not succeed.  But that is the definition of risk - a potential negative impact - something the industry must work harder to consider.

editor@diamondfinance.info