Standard & Poor's initiated agreat deal of activity surrounding enterprise risk management (ERM)when it announced that it was going to specifically rate insurers'ERM functions and that those ratings would influence insurers'credit and financial-strength ratings. At the time, S&P offeredspecific ERM criteria from a variety of perspectives, one of whichwas termed strategic risk management (SRM).
The word “strategic” is much used, but implicit is the act ofinvestment: allocating capital to a given product or line ofbusiness intended to generate a profitable return. The foundationof corporate investment is the business plan, which frequentlycontains a detailed description of the proposed investment as wellas pro forma results.
Because a pro forma is a forecast and the future could developunfavorably, some level of risk adjustment to that forecast isnecessary. There are a number of ways to accomplish this—one ofwhich is through a model.
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