Is Financial Risk Management Equivalent to ERM?

Show Notes

Episode: 017

Date: Tue 21 Sep 2021

Title:               Is Financial Risk Management Equivalent to ERM?

EPISODE SUMMARY
Enterprise Risk Management, for some, consists solely of Financial Risk Management. Is this sound? We offer commentary on quantitative modelling and its place in ERM.

SHOW NOTES

Introduction
Financial risk management consists of a suite of quantitative methods. Are they foolproof?

Main points
1. Quantitative analysis as risk management
Value at Risk; Credit Risk
Monte Carlo simulations
Stress testing
Cash flowing projects and investments; IRR and WACC

2. Chief limitations of quantitative models
Forecasts and probability estimates
Proprietary internal risk rating systems

3. 2008-2009 financial crisis: crisis in risk management methods?
Adequacy of methods vs sincerity of application (corruption)

4. Recommendations: 
Bring financial models to the table
Assess their relevance in a well-informed strategic context
Use High Quality RIsk Assessment; in other words, mult-disciplinary risk identification

5. Quotes from the financial experts

6. What constitutes due diligence?

7. What is the worldview that quantitative modeling represents?

Summary
1. Quantitative models are only as valid as the the scope and assumptions built into them.
2. Calculations and estimates often rely upon historical statistical information. Data often does not exist for the given investment candidate, or it lacks credibility or relevance.
3. Improperly specified models cannot display accurate stress test results.
4. Many firms with good financials and sound insurance portfolios have crashed because they ignored strategic risk that could not be discerned in quantitative models.
5. Financial decisions should be considered using the results of quantitative models, subject to a multi-disciplinary round-table review in the process we call High Quality Risk Assessment.

KEY QUOTE

”...a new kind of blindness: the one induced by new technology and elaborate quantitative models.”

(B. Voyles ) Voyles and other financial experts mentioned quoted in Robertson, p.98

LINKS 

”...much more is being underwritten, correlated, and contemplated [by major insurers] than the traditional hazard risks.”

Interview of LoriAnn Lowery-Biggers and colleague Sean Murphy by John Czuba of Legal Talk Network:

https://legaltalknetwork.com/podcasts/insurance-law-podcast-am-best/2019/10/enterprise-risk-management-strategies/

(E. Robertson 2016) Solving the Enterprise Risk Management Puzzle: Secrets to Successful Implementation