Tools for Enterprise Risk Management
Compare with Typical Insurance
Definition of Risk
•“Risk” is not simply the “chance of loss.”
•All economic activities involve a certain amount of loss all the time. But if the losses are small and predictable, such “leakage” is not “risk.”
•“Risk” is the possibility that economic impacts will significantly deviate from “average.”
•Volatility, both on the upside and downside, creates uncertainty and lesser predictability of overall results. Such volatility is penalized by investors, who tend to be “risk-averse.”