Financial Risk Manager Part 2
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The board of directors of the insurance company has identified several potential pathways for the organization's expansion that require thorough evaluation. To assess these opportunities and devise an optimal risk management framework for the entire firm, the risk committee has recommended the adoption of an Enterprise Risk Management (ERM) initiative. Considering the options listed below, which objective would be the most appropriate for the company to define as part of its ERM strategy?
The board of directors of the insurance company has identified several potential pathways for the organization's expansion that require thorough evaluation. To assess these opportunities and devise an optimal risk management framework for the entire firm, the risk committee has recommended the adoption of an Enterprise Risk Management (ERM) initiative. Considering the options listed below, which objective would be the most appropriate for the company to define as part of its ERM strategy?
Explanation:
The correct answer for the question is A: Determine a risk-return trade-off that reflects the company's target credit rating and ensure that business unit managers evaluate new projects with this firm-wide target in mind. This is because one of the key goals of implementing an Enterprise Risk Management (ERM) program is to determine the appropriate amount of risk that aligns with the company's risk tolerance and target credit rating. By establishing a firm-wide risk-return trade-off, the company can ensure that all business units are working towards a common risk management strategy when evaluating new projects. This approach helps to balance risk and reward, aiming to minimize financial distress while maximizing shareholder value, which is a more effective strategy than attempting to eliminate risk entirely or guarantee a minimum level of earnings.