Financial services firms create value for shareholders and clients by intermediating, underwriting and advising on risk. It should not come as any surprise therefore that a large part of a bank's or insurer's performance ultimately depends on how well it manages risk. As illustrated in Figure 20.1, risk underwriting is a core skill for making loans and issuing insurance policies.
However, risk underwriting has to be seen in the context of a broader Enterprise Risk Management (ERM) framework, beginning with the basic activities of risk identification, evaluation, underwriting, monitoring and management, all governed by a well-defined risk strategy and appetite. This chapter outlines the most important aspects of a comprehensive ERM framework for banks and insurers, going into greater detail in the area of risk underwriting.
CFOs and CROs need to ask, and answer, the “right” questions – questions which have the potential to substantially influence the value of their firm.
In terms of risk management, the “right” questions can be phrased as a hierarchy similar in spirit to Maslow's (1943)1 hierarchy of needs: only by sufficiently satisfying the lower levels can a CRO begin to address those needs at a higher level. However, whereas ...