revolution in integrated risk management

revolution in integrated risk management


by Christopher L. Culp,
CP Risk Management LLC and
The University of Chicago*

orld War I, most historians agree, could
easily have been prevented. It was the
calamitous byproduct of overreaction,
miscommunication, and plain bad luck.
But once the spark was thrown into the powder keg
at Sarajevo, the chain of events that became The
Great War was set in motion.
When economic historians get around to telling
the story of the corporate risk management revolution of the 1990s, they will reach a similar conclusion.
The explosion in popularity of “enterprise-wide” risk
management in the early ’90s need not have happened—or at least not the way it did. The spark in
this case was provided by sensational press accounts
of the “great derivatives disasters,” which in turn
prompted hasty, ill-advised reactions by companies
anxious to avoid the fate of Barings and Procter &
Gamble. Thus, rather than evolving gradually and
methodically, the corporate risk management revolution of the ’90s got underway in a disorganized, ad
hoc fashion, producing a curious amalgam of policies
and procedures with no clear link to the corporate
mission of maximizing value. Focused myopically on
loss avoidance and technical risk measurement issues,
the resulting risk management programs often bore
little resemblance to the predictions (or certainly the
prescriptions) of finance theorists.

But as the risk management revolution has
unfolded over the last decade, the result has
been “convergence”—convergence of various perspectives on risk management once divided by
extreme differences in vocabulary, concepts, and
methods; convergence of organizational processes
for managing an extraordinary variety of risks;
convergence of risk management products offered by hitherto completely separate industries
like insurance and capital markets; and, finally,
convergence of...

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