Risk Management in Turbulent Times

By Gilles Bénéplanc; Jean-Charles Rochet | Go to book overview

15
Conclusion:
Some Simple Messages
This last chapter summarizes the main lessons to be drawn from this book through some simple messages; it focuses on the essential points to be remembered for understanding the objectives of risk management in a corporate environment. We also recall the main features of a successful risk management policy.
15.1 MESSAGE # 1: QUANTITATIVE MODELS ARE NEEDED
BUT THEY MUST BE USED WITH PRECAUTION
In short, we believe that if managers and risks practitioners take the time to understand the basics of the economic and actuarial theories that form the academic background of risk theory, they will raise their level of performance. This does not imply a full knowledge of academic work but rather a good understanding on the basic principles underlying models, how and when to use them, and their limits. The leadership of corporations will have more and more pressure from all stakeholders to articulate their vision of risk and how they intend to manage.This book can be a useful tool for facilitating this evolution. We have developed several models giving some ideas and methods on the best practices in risk management. The most important are the following:
Ruin theory, because this powerful tool is key to understand the link between a risk and the amount of capital to cover it. The most popular risk metrics and tools like VaR or RAROC are directly drawn from Ruin Theory.
Risk neutral valuation, because it is the first step to understanding the pricing of derivatives that are widely used in finance and have become a powerful tool of risk management.
Utility functions, because they give a theoretical framework for decisions in uncertain environments. For the officers in charge of the management of risks, these functions are useful to understanding and formalizing the objectives of the firm’s different stakeholders.

15.2 MESSAGE # 2: RISK MANAGEMENT CREATES VALUE
FOR SHAREHOLDERS
They are several reasons why risk management may increase shareholder value.
First, risk managers (inside or outside the firm) bring expertise in risk reduction (frequency or severity). Thus, risk management is not only about risk transfers.

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