Speed Review: Integrating Corporate Risk Management

Speed Review: Integrating Corporate Risk Management

Speed Review: Integrating Corporate Risk Management

by Prakash Shimpi

Shimpi and his contributing editors offer new ideas for capital management that connect corporate finance, risk management and insurance.

Review

A Different Vision for Managing Capital and Risk
Business survival is based on investment, and low investment returns can lead to dismal failure. New investment options are increasing for businesses, and corporate managers are looking for alternative ways to increase rates of return for shareholders. If your company needs capital management solutions that move beyond national boundaries and conventional market constraints, Integrating Corporate Risk Management, by Prakash Shimpi, was written for you.

Opportunities in the "And"
Wholesale financial services and risk management services that can benefit corporations are now being offered together by banks and reinsurers. This creates new opportunities for companies to reach better capital efficiency through new ideas that connect corporate finance, risk management and insurance. Shimpi's book, which includes chapters from contributing editors David Durbin, David S. Laster, Carolyn P. Helbling and Daniel Helbling, provides the bridge between these facets of corporate capital strategies.

As Shimpi explains, "This is a book about 'and.'" In other words, when the author writes about capital management andrisk management, the "and," or the link, between the two provides some important information that cannot be overlooked. This also applies to the "and" in corporate finance and insurance; treasurer and risk manager; single risks and integrated risks; and separate markets and converging markets.

Managing the Various Risks
Shimpi notes that "risk is the lifeblood of a corporation" which allows it to turn a profit, but also threatens ruin. He writes that the managers in a corporation do not need to use the same risk management technique, but they do need to "adopt the same framework that embraces a common view of risk." Each manager faces his or her own risks, be they insurance risks, financial risks, commodity risks, operational risks, or others. Shimpi's book explores how all these risks, managed together, revolve around the efficient use of capital. It is broken down into three parts: the foundations, the tools and the future.

The Foundations
Considering how many risks threaten corporate stability, ignoring risk can be fatal. According to David Laster, "The diverse activities of line managers, the treasurer, the risk manager and others should be coordinated so that, through their joint efforts, the company achieves a maximal reduction of risk at minimum cost." Risk mapping can help a company better understand its exposure to risk. Once a company has identified and measured the risks it faces, then, Shimpi writes, "the volatility of earnings due to individual risk exposures is calculated and then combined to describe the company's overall risk profile." A risk profile, and management's appetite for risk, will determine what financial resources are needed to make a business work.

The Tools
Equity, debt and insurance are the conventional financial resources that corporate managers used to manage capital and risk. Now, thanks to deregulation, banks, insurers and reinsurers (including Shimpi's employer, Swiss Re), new techniques are available for capital management.

Intermediary risk consolidators between companies and their sources of capital provide new capital-raising and risk management capabilities. The new techniques, Shimpi writes, "borrow features from both the insurance and the capital markets, hence the term 'integrated risk management solutions.'" New integrated products include those integrated within markets with given capital structures, across markets with given capital structures, across markets with changing capital structures, and across markets with changing market structures (including insurance-linked securities).

The Future
Alternative risk transfer solutions are influenced by many important factors, including risk management culture, the capital market for corporate financing, and industrial structure, write Esther Bauer and Kai-Uwe Schanz. In this section of the book, the writers explore the most important driving forces and hurdles to alternative risk transfer solutions in a variety of global regions and their estimated growth potentials.

Shimpi and his colleagues clearly explore the benefits and barriers of integrated risk management (IRM) with sophistication and frankness. Integrating Corporate Risk Managementoffers a chance for managers to explore a different vision of risk management.