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Essays - Risk Management: The Current Financial Crisis, Lessons Learned and Future Implications

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Introduction

Explanations, Causes, Cures:
These essays address the philosophies and origins of how the crisis began, with anecdotes about what has happened and insight into encouraging thought leadership going forward.

Prudent Enterprise Risk Management Strategy:
Some discussion of the crisis has reflected on the perceived failure of enterprise risk management. The consensus of these authors is that the crisis is not a result of a failure of the enterprise risk management process, per se, but rather a failure to implement enterprise risk management processes at all. These authors point out that the key to prudent enterprise risk management is in the enactment of a corporate culture that aligns desired performance with incentives and the matching of the authority to make decisions with accountability for the decisions made. Currently, most incentive compensation rewards returns, but without reflecting the risk undertaken to achieve the returns.

Culture

Aligning Incentives

Managing/Matching Authority and Accountability

Managing Liquidity

Societal Themes:
These essays center on the behavior of society and provide interesting and thought-provoking commentary on the interconnectivity of individuals' behavior with the resultant behavior and roles of the markets, regulation and the inherent responsibilities to society. Given the existing limited liability laws, the role of regulation, and imperfect (and at times) "wild" interconnected and correlated markets, how and where does society put the costs and responsibilities of such a crisis?

Limited Liability Laws

Markets: Regulation Of, Efficiency Of, Interconnectivity Of

Behavioral/Personal Economics

Effective Risk Modeling:
These essays cover the reliance and overreliance on models. Models that tend to break down under "crisis mode" and society's reactions are discussed. Efficient models must reflect correlation and the domino effect that can occur when bad things happen.

Insights from the Insurance Industry:
The actuarial profession has served as the enterprise risk management backbone of the insurance industry over the centuries. The authors of these essays share their insight on what has worked and what has not in the insurance industry and suggest how these learnings could be applied to other industry sectors in terms of analytical tools, regulation, contractual obligations and prudent risk trading schemes.