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The Holy Grail of ERM: An Approach to Quantifying Operational and Strategic Risks

Source: Mash Risk Television

Watson Wyatt & Company
Sim Segal, US Leader of ERM Services

Runtime: 5:38

Segal is U.S. Leader of ERM Services for Watson Wyatt Insurance & Financial Services.

Key Takeaways:

  1. Qualitative Approach is Ineffective: Business people need quantitative data to make decisions, even if it is based on estimates and ranges.
  2. Using Industry Data is Inappropriate: Risks impact companies in different very ways depending on risk culture and mitigation in-place.
  3. Basel II Method is Counter-productive: Most banks must hold 15% of revenue as operational risk capital, but this is arbitrary, not risk-based and often even directionally incorrect.
  4. Failure Modes and Effects Analysis (FMEA) is Best Practice: FMEA is emerging approach that is quantitative, company-specific and risk-based, and is a rapid and practical technique that quantifies the impact of risk scenarios (or stress tests) on enterprise value.
  5. Use the Language of Business Decision-Makers: Quantifying risk in terms of the potential impact to value drives decision-making.
  6. Tangible Risk Scenarios: Using deterministic risk scenarios provides clarity and transparency that drive buy-in and develop risk culture.

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